Registration No.333-107463
As filed with the Securities and Exchange Commission on September 17, 2003
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------------
PRE-EFFECTIVE AMENDMENT NO.2 TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GRANITE MORTGAGES 03-3 PLC
(Exact name of Registrant 1 as specified in its charter)
Fifth Floor, 100 Wood Street, London EC2V 7EX (011 44 20) 7606 5451
(Address and telephone number of Registrant 1's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8600
(Name, address and telephone number of Registrant 1's agent for service)
GRANITE FINANCE FUNDING LIMITED
(Exact name of Registrant 2 as specified in its charter)
4 Royal Mint Court, London EC3N 4HJ, United Kingdom (011 44 20) 7073 7869
(Address and telephone number of Registrant 2's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8600
(Name, address and phone number of Registrant 2's agent for service)
GRANITE FINANCE TRUSTEES LIMITED
(Exact name of Registrant 3 as specified in its charter)
22 Grenville Street, St Helier, Jersey JE4 8PX,
Channel Islands (011 44 1534) 609892
(Address and telephone number of Registrant 3's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8600
(Name, address and phone number of Registrant 3's agent for service)
-----------------------------
Copies to:
Phil Robinson, Esq. Robert Torch, Esq. Thomas Jones, Esq.
Northern Rock plc Sidley Austin Brown & Wood Allen & Overy
Northern Rock House 1 Threadneedle Street 1 New Change
Gosforth London EC2R 8AW London EC4M 9QQ
Newcastle upon Tyne NE3 4PL United Kingdom United Kingdom
United Kingdom
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
-------------------------------
The Registrants hereby amend this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrants shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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CALCULATION OF REGISTRATION FEE
- -------------------------------- ---------------- -------------------- -------------------- --------------------------
Title of Securities Being Amount Being Proposed Maximum Proposed Maximum Amount of Registration
Registered Registered Offering Price Per Aggregate Offering Fee
Unit (1) Price(1)
- -------------------------------- ---------------- -------------------- -------------------- --------------------------
$[750,000,000] series 1 class $[750,000,000] [ ]% $[750,000,000] $[60,675.00]
A1 floating rate notes due
January 2019
- -------------------------------- ---------------- -------------------- -------------------- --------------------------
$[750,000,000] series 1 class $[750,000,000] [ ]% $[750,000,000] $[60,675.00]
A2 floating rate notes due
January 2024
- -------------------------------- ---------------- -------------------- -------------------- --------------------------
$[500,000,000] series 1 class $[500,000,000] [ ]% $[500,000,000] $[40,450.00]
A3 floating rate notes due
January 2044
- -------------------------------- ---------------- -------------------- -------------------- --------------------------
$[72,000,000] series 1 class B $[72,000,000] [ ]% $[72,000,000] $[5,824.80]
floating rate notes due
January 2044
- -------------------------------- ---------------- -------------------- -------------------- --------------------------
$[27,000,000] series 1 class M $[27,000,000] [ ]% $[27,000,000] $[2,184.30]
floating rate notes due
January 2044
- -------------------------------- ---------------- -------------------- -------------------- --------------------------
$[62,100,000] series 1 class C $[62,100,000] [ ]% $[62,100,000] $[5,023.89]
floating rate notes due
January 2044
- -------------------------------- ---------------- -------------------- -------------------- --------------------------
Intercompany loan(2) __ __ __ __
- -------------------------------- ---------------- -------------------- -------------------- --------------------------
Funding interest in the __ __ __ __
mortgages trust(2)
- -------------------------------- ---------------- -------------------- -------------------- --------------------------
Total $[2,161,100,000] [ ]% $[2,161,100,000] $[174,832.99](3)
- -------------------------------- ---------------- -------------------- -------------------- --------------------------
- ---------------------------------
(1) Estimated solely for the purposes of computing the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act of
1933, as amended.
(2) These items are not being offered directly to investors. Granite Finance
Trustees Limited is the registrant for Granite Finance Funding Limited's
interest in the mortgages trust and is holding that interest in the
mortgages trust on behalf of Granite Finance Funding Limited. The interest
of Granite Finance Funding Limited in the mortgages trust will be the
primary source of payment on the intercompany loan listed. Granite Finance
Funding Limited is the registrant for the intercompany loan and is
providing the intercompany loan to Granite Mortgages 03-3 plc. The
intercompany loan will be the primary source of payments on the notes.
(3) The amount of $133,080.50 was previously paid in connection with the
initial public filing of this registration statement on July 30, 2003. An
additional filing fee of $41,752.49 has been paid in connection with the
filing of this Pre-Effective Amendment No.1 to this registration statement
on Form S-11.
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.
SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 2003
GRANITE MORTGAGES 03-3 PLC
Issuer
CLASS INTEREST RATE PRICE TO PUBLIC PER NOTE PROCEEDS TO ISSUER PER FINAL
CLASS OF NOTE MATURITY DATE
$[750,000,000] series 1 class A1 notes Three-month USD [__] $[__] January 2019
LIBOR + [__]% p.a.
$[750,000,000] series 1 class A2 notes Three-month USD [__] $[__] January 2024
LIBOR + [__]% p.a.
$[500,000,000] series 1 class A3 notes Three-month USD [__] $[__] January 2044
LIBOR + [__]% p.a.
$[72,000,000] series 1 class B notes Three-month USD [__] $[__] January 2044
LIBOR + [__]% p.a.
$[27,000,000] series 1 class M notes Three-month USD [__] $[__] January 2044
LIBOR + [__]% p.a.
$[62,100,000] series 1 class C notes Three-month USD [__] $[__] January 2044
LIBOR + [__]% p.a.
* The principal asset from which we will make payments of interest on, and
principal of, the notes is an intercompany loan to an affiliated company
called Granite Finance Funding Limited.
* The principal asset from which Granite Finance Funding Limited will make
payments on the intercompany loan is its interest in a pool of UK
residential mortgage loans originated by Northern Rock plc and held in a
master trust by Granite Finance Trustees Limited.
* Northern Rock plc originated the residential mortgage loans that are
being held in the master trust. Each mortgage loan is secured by a
mortgaged property located in England or Wales. All of the transaction
documents are either governed by the laws of England, Jersey or New York.
* Granite Finance Funding Limited, our parent, is also the parent of each
of the previous issuers, Granite Mortgages 01-1 plc, Granite Mortgages
01-2 plc, Granite Mortgages 02-1 plc, Granite Mortgages 02-2 plc, Granite
Mortgages 03-1 plc and Granite Mortgages 03-2 plc which issued the
previous notes referred to in this prospectus. We share with the previous
issuers the security granted by Granite Finance Funding Limited to secure
its obligations to each of us and the previous issuers under our
respective intercompany loans.
PLEASE CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 37 OF THIS
PROSPECTUS.
THE NOTES OFFERED BY THIS PROSPECTUS WILL BE THE OBLIGATIONS SOLELY OF THE
ISSUER. THE NOTES WILL NOT BE OBLIGATIONS OF NORTHERN ROCK PLC, ANY OF ITS
AFFILIATES OR ANY OF THE OTHER PARTIES NAMED IN THIS PROSPECTUS OTHER THAN THE
ISSUER.
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the Financial
Services and Markets Act 2000 for the notes to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for each class of the notes to be admitted to trading
by the London Stock Exchange plc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE NOTES OR DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
JOINT UNDERWRITERS FOR THE SERIES 1 CLASS A NOTES
JPMORGAN LEHMAN BROTHERS
CITIGROUP MERRILL LYNCH & CO. UBS INVESTMENT BANK
JOINT UNDERWRITERS FOR THE SERIES 1 CLASS B NOTES, THE SERIES 1 CLASS M
NOTES
AND THE SERIES 1 CLASS C NOTES
JPMORGAN LEHMAN BROTHERS
Prospectus dated September [19], 2003
You should note that Granite Finance Funding Limited ("FUNDING") has
established previous issuers which have made previous intercompany loans to
Funding, and that Funding may establish from time to time new issuers which
will make new intercompany loans to Funding. Each previous issuer made a
previous intercompany loan from the proceeds of the previous notes that were
issued by that previous issuer, and any new issuer will make a new intercompany
loan from the proceeds of new notes that are issued by that new issuer. The
previous notes issued by the previous issuers ultimately are, and any new notes
issued by a new issuer ultimately will be, secured by the same trust property
(primarily consisting of the mortgage portfolio) as the notes issued by us
under this prospectus.
Funding will repay each outstanding intercompany loan in proportion to the
relevant issuer's allocable interest in the Funding share of the trust
property, principally consisting of principal receipts and revenue receipts on
the underlying mortgage loans. The amount and timing of payments under an
intercompany loan are determined by the amount and timing of payments on the
notes issued by the relevant issuer and by the priorities for payment
applicable to those notes. The terms of the previous notes issued by the
previous issuers and of any new notes issued by a new issuer may therefore
result in those previous notes and the related previous intercompany loans or
those new notes and the related new intercompany loan being repaid prior to the
repayment of the notes issued by us under this prospectus and our related
intercompany loan regardless of the ratings of such previous notes or new notes
relative to the notes.
A note is not a deposit and none of the notes, payments under the
intercompany loan or the underlying mortgage loans are insured or guaranteed by
any United Kingdom or United States governmental agency or authority.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements including, but not
limited to, statements made under the captions "RISK FACTORS", "THE MORTGAGE
LOANS", "THE ADMINISTRATOR AND THE ADMINISTRATION AGREEMENT" and "MATURITY AND
REPAYMENT CONSIDERATIONS". These forward-looking statements can be identified
by the use of forward-looking terminology, such as the words "BELIEVES",
"EXPECTS", "MAY", "INTENDS", "SHOULD" or "ANTICIPATES", or the negative or
other variations of those terms. These statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results and performance of the notes, Northern Rock plc or the UK residential
mortgage industry to differ materially from any future results or performance
expressed or implied in the forward-looking statements. These risks,
uncertainties and other factors include, among others: general economic and
business conditions in the UK; currency exchange and interest fluctuations;
governmental, statutory, regulatory or administrative initiatives affecting
Northern Rock plc; changes in business strategy, lending practices or customer
relationships; and other factors that may be referred to in this prospectus.
Some of the most significant of these risks, uncertainties and other factors
are discussed under the caption "RISK FACTORS", and you are encouraged to
carefully consider those factors prior to making an investment decision.
2
TABLE OF CONTENTS
SUMMARY OF PROSPECTUS.................................................................. 9
Overview of the transaction........................................................... 9
Summary of the notes.................................................................. 14
The issuer............................................................................ 15
Funding............................................................................... 15
The mortgages trustee................................................................. 15
The seller, the administrator, the cash manager, the issuer cash manager and the
account bank........................................................................ 15
The notes............................................................................. 16
Relationship between the notes and the intercompany loan.............................. 17
Operative documents concerning the notes.............................................. 17
Payment priority and ranking of notes................................................. 17
Optional redemption of the notes for tax and other reasons............................ 20
Withholding tax....................................................................... 21
The closing date...................................................................... 21
The note trustee...................................................................... 21
The paying agents and agent bank...................................................... 21
The registrar and transfer agent...................................................... 21
The mortgage loans.................................................................... 21
Assignment of the mortgage loans...................................................... 23
The mortgages trust................................................................... 24
The intercompany loan................................................................. 29
The security trustee.................................................................. 30
Security granted by Funding and the issuer............................................ 30
Swap providers........................................................................ 31
Swap agreements....................................................................... 31
Post-enforcement call option.......................................................... 32
Ratings of the series 1 notes......................................................... 32
Listing............................................................................... 33
The previous issuers and new issuers.................................................. 33
United Kingdom tax status............................................................. 34
United States tax status.............................................................. 35
Jersey (Channel Islands) tax status................................................... 35
ERISA considerations for investors.................................................... 35
Fees.................................................................................. 36
RISK FACTORS........................................................................... 37
DEFINED TERMS.......................................................................... 65
US DOLLAR PRESENTATION................................................................. 66
Sterling/US dollar exchange rate history.............................................. 66
THE ISSUER............................................................................. 67
Introduction.......................................................................... 67
Directors and secretary............................................................... 67
Capitalization and borrowings......................................................... 69
Management's discussion and analysis of financial condition of the issuer............. 69
USE OF PROCEEDS........................................................................ 70
THE NORTHERN ROCK GROUP................................................................ 71
The seller............................................................................ 71
Mortgage business..................................................................... 71
Subsidiaries of the seller............................................................ 71
FUNDING................................................................................ 72
Introduction.......................................................................... 72
Directors and secretary............................................................... 72
Capitalization and borrowings......................................................... 73
3
Management's discussion and analysis of financial condition of Funding................ 74
THE MORTGAGES TRUSTEE.................................................................. 75
Introduction.......................................................................... 75
Directors and secretary............................................................... 75
HOLDINGS............................................................................... 77
Introduction.......................................................................... 77
Directors and secretary............................................................... 77
GPCH LIMITED........................................................................... 78
Introduction.......................................................................... 78
Directors and secretary............................................................... 78
THE CURRENCY RATE SWAP PROVIDERS....................................................... 79
DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS.................................................................. 81
First issuer.......................................................................... 81
Second issuer......................................................................... 82
Third issuer.......................................................................... 82
Fourth issuer......................................................................... 83
Fifth issuer.......................................................................... 83
Sixth issuer.......................................................................... 84
Previous issuers -- general........................................................... 84
THE MORTGAGE LOANS..................................................................... 86
Introduction.......................................................................... 86
Characteristics of the mortgage loans................................................. 87
Origination of the mortgage loans..................................................... 100
Buildings insurance policies.......................................................... 104
The cut-off date mortgage portfolio................................................... 106
CHARACTERISTICS OF UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET.......................... 114
CPR rates............................................................................. 114
Repossession rate..................................................................... 117
Arrears information................................................................... 117
House price to earnings ratio......................................................... 117
House price index..................................................................... 118
THE ADMINISTRATOR AND THE ADMINISTRATION AGREEMENT..................................... 121
The administrator..................................................................... 121
Administration of mortgage loans...................................................... 121
Arrears and default procedures........................................................ 121
Arrears experience.................................................................... 124
The administration agreement.......................................................... 127
Governing law......................................................................... 132
ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY.................................. 133
The mortgage sale agreement........................................................... 133
The additional assigned mortgage portfolio............................................ 133
Representations and warranties........................................................ 134
Repurchase by the seller.............................................................. 135
Product switches and further advances................................................. 136
Re-draws under flexible mortgage loans................................................ 138
Assignment of new mortgage loans and their related security........................... 138
Transfer of legal title to the mortgages trustee...................................... 141
Title deeds........................................................................... 142
Governing law......................................................................... 142
THE MORTGAGES TRUST.................................................................... 143
General legal structure............................................................... 143
Fluctuation of the seller share/Funding share of the trust property................... 145
Funding share of trust property (distribution date recalculation)..................... 146
Funding share of trust property (assignment date recalculation)....................... 147
Funding share of trust property (Funding contribution date recalculation)............. 147
4
Adjustments to trust property......................................................... 148
Weighted average Funding share percentage............................................. 149
Seller share of trust property (distribution date recalculation)...................... 150
Seller share of trust property (assignment date recalculation)........................ 151
Seller share of trust property (Funding contribution date recalculation).............. 151
Weighted average seller share percentage.............................................. 151
Minimum seller share.................................................................. 152
Cash management of trust property -- revenue receipts................................. 153
Mortgages trust allocation of revenue receipts........................................ 153
Cash management of trust property -- principal receipts............................... 155
Mortgages trust allocation and distribution of mortgages trustee principal receipts
prior to the occurrence of a trigger event.......................................... 156
Mortgages trust allocation and distribution of mortgages trustee principal receipts
on or after the occurrence of a trigger event....................................... 158
Overpayments.......................................................................... 158
Losses................................................................................ 159
Disposal of trust property............................................................ 159
Additions to, and reductions from, the trust property................................. 159
Arrears............................................................................... 160
Increasing and decreasing the seller share of the trust property...................... 160
Increasing the Funding share of the trust property.................................... 161
Termination of the mortgages trust.................................................... 161
Retirement of mortgages trustee....................................................... 161
Governing law......................................................................... 161
THE INTERCOMPANY LOAN AGREEMENT........................................................ 162
The facility.......................................................................... 162
Conditions precedent to drawdown...................................................... 162
The intercompany loan................................................................. 162
Representations, warranties and covenants............................................. 162
Payment of interest................................................................... 163
Repayment of the intercompany loan.................................................... 164
Allocation of losses.................................................................. 164
Limited recourse...................................................................... 164
Intercompany loan events of default................................................... 165
Other intercompany loan agreements.................................................... 165
Funding's bank accounts............................................................... 166
CASHFLOWS.............................................................................. 168
Distributions of Funding available revenue receipts................................... 168
Distribution of Funding available revenue receipts prior to enforcement of the
Funding security.................................................................... 170
Distribution of issuer available revenue receipts prior to enforcement of the issuer
security............................................................................ 172
Distribution of Funding available principal receipts prior to the enforcement of the
Funding security.................................................................... 178
Distribution of issuer available principal receipts................................... 181
Distribution of issuer available principal receipts prior to enforcement of the issuer
security and/or the occurrence of a trigger event................................... 181
Distribution of issuer available principal receipts following the occurrence of a non-
asset trigger event and prior to the occurrence of the asset trigger event.......... 188
Distribution of issuer available principal receipts following the occurrence of an
asset trigger event................................................................. 190
Distribution of Funding available principal receipts and Funding available revenue
receipts following enforcement of the Funding security.............................. 193
Distribution of issuer available principal receipts and issuer available revenue
receipts following enforcement of the issuer security............................... 193
5
CREDIT STRUCTURE....................................................................... 198
Credit support for the notes provided by mortgages trustee available revenue
receipts............................................................................ 198
Funding reserve fund.................................................................. 199
Issuer reserve fund................................................................... 200
Issuer liquidity reserve fund......................................................... 201
Issuer principal deficiency ledger.................................................... 202
Funding principal deficiency ledger................................................... 204
Use of principal receipts to pay issuer income deficiency............................. 204
Issuer basis and currency swaps....................................................... 204
Priority of payments among the class B notes, the class M notes and the class C
notes............................................................................... 205
Mortgages trustee GIC account/Funding GIC account/Funding (Granite 03-3) GIC
account............................................................................. 206
Start-up loan......................................................................... 206
THE SWAP AGREEMENTS.................................................................... 208
General............................................................................... 208
The basis rate swap................................................................... 208
The dollar currency swaps............................................................. 210
The euro currency swaps............................................................... 211
Ratings downgrade of swap providers................................................... 212
Termination of the swaps.............................................................. 214
Taxation.............................................................................. 216
Limited recourse and swap payment obligation.......................................... 216
CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING.................................. 217
Cash management services to be provided in relation to the mortgages trust............ 217
Cash management services to be provided to Funding.................................... 217
Compensation of cash manager.......................................................... 218
Resignation of cash manager........................................................... 219
Termination of appointment of cash manager............................................ 219
Governing law......................................................................... 219
CASH MANAGEMENT FOR THE ISSUER......................................................... 220
Cash management services to be provided to the issuer................................. 220
Issuer's bank account................................................................. 220
Compensation of issuer cash manager................................................... 221
Resignation of issuer cash manager.................................................... 221
Termination of appointment of issuer cash manager..................................... 221
Governing law......................................................................... 221
SECURITY FOR FUNDING'S OBLIGATIONS..................................................... 222
Covenant to pay....................................................................... 222
Funding security...................................................................... 222
Nature of security -- fixed charge or floating charge................................. 223
Funding pre-enforcement and post-enforcement priority of payments..................... 224
Enforcement........................................................................... 224
Conflicts............................................................................. 225
Delegation by the security trustee to an authorized third party....................... 225
No enforcement by Funding secured creditors........................................... 226
Modification and waiver, fees, retirement and responsibilities of the security trustee 226
Governing law......................................................................... 227
SECURITY FOR THE ISSUER'S OBLIGATIONS.................................................. 228
Covenant to pay....................................................................... 228
Issuer security....................................................................... 228
Issuer pre-enforcement and post-enforcement priority of payments...................... 229
Enforcement........................................................................... 229
Conflicts............................................................................. 229
No enforcement by issuer secured creditors............................................ 230
6
Modification and waiver, fees, retirement and responsibilities of the note trustee.... 230
Governing law......................................................................... 232
DESCRIPTION OF THE TRUST DEED.......................................................... 233
Trust Indenture Act prevails.......................................................... 234
Governing law......................................................................... 234
THE NOTES.............................................................................. 235
Payment............................................................................... 236
Clearance and settlement.............................................................. 236
Individual note certificates.......................................................... 239
DESCRIPTION OF THE OFFERED NOTES....................................................... 240
RATINGS OF THE SERIES 1 NOTES.......................................................... 261
MATURITY AND REPAYMENT CONSIDERATIONS.................................................. 262
MATERIAL LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE RELATED SECURITY.................. 264
General............................................................................... 264
Registered title...................................................................... 264
Unregistered title.................................................................... 265
Taking security over land............................................................. 265
The seller as mortgagee............................................................... 266
Enforcement of mortgages.............................................................. 266
MATERIAL UNITED KINGDOM TAX CONSEQUENCES............................................... 268
Taxation of US residents.............................................................. 268
Withholding tax....................................................................... 269
Direct assessment of non-UK resident holders of notes to UK tax on interest........... 269
Taxation of returns: companies within the charge to UK corporation tax................ 270
Taxation of returns: other noteholders................................................ 270
Stamp duty and stamp duty reserve tax................................................. 270
UK taxation of Funding and the issuer................................................. 270
UK taxation of the mortgages trustee.................................................. 271
MATERIAL UNITED STATES TAX CONSEQUENCES................................................ 272
General............................................................................... 272
Tax status of the issuer, Funding, mortgages trustee and mortgages trust.............. 273
Characterization of the US notes...................................................... 273
Taxation of US holders of the US notes................................................ 273
Backup withholding.................................................................... 275
MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSIDERATIONS................................... 276
Tax status of the mortgages trustee and the mortgages trust........................... 276
Tax status of Funding................................................................. 276
ERISA CONSIDERATIONS................................................................... 277
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES.................................. 280
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS.......................................... 281
EXPERTS................................................................................ 281
LEGAL MATTERS.......................................................................... 281
UNDERWRITING........................................................................... 282
United States......................................................................... 282
United Kingdom........................................................................ 285
Netherlands........................................................................... 285
Italy................................................................................. 285
Spain................................................................................. 286
General............................................................................... 286
Reports to noteholders................................................................ 288
Where investors can find more information............................................. 288
LISTING AND GENERAL INFORMATION........................................................ 289
Authorization......................................................................... 289
Listing of notes...................................................................... 289
Clearing and settlement............................................................... 289
Litigation............................................................................ 289
7
Accounts.............................................................................. 290
Consents.............................................................................. 290
Significant or material change........................................................ 290
Documents available................................................................... 290
GLOSSARY............................................................................... 292
ANNEX A -- Extract of Current Report Describing Mortgage Loans in Mortgages Trust during
the period from July 1, 2003 through July 31, 2003................................... 337
INDEX OF APPENDICES.................................................................... 340
Appendix A -- Granite Mortgages 03-3 plc -- Report of Independent Accountants......... 341
Appendix B -- Granite Mortgages 03-3 plc -- Balance Sheet............................. 342
Appendix C -- Granite Mortgages 03-3 plc -- Notes to the Balance Sheet................ 343
Appendix D -- Granite Finance Funding Limited -- Report of Independent
Accountants......................................................................... 344
Appendix E -- Granite Finance Funding Limited -- Consolidated statements of
Income.............................................................................. 345
Appendix F -- Granite Finance Funding Limited -- Consolidated Balance Sheets.......... 346
Appendix G -- Granite Finance Funding Limited -- Consolidated statements of
Changes in shareholders' equity..................................................... 347
Appendix H -- Granite Finance Funding Limited -- Consolidated Statements of Cash
Flows............................................................................... 348
Appendix I -- Granite Finance Funding Limited -- Notes to the Financial Statements.... 349
8
SUMMARY OF PROSPECTUS
The information on pages 9 to 36 is a summary of the principal features of
the notes, including a description of the mortgage loans that will generate the
income for us to make payments on the notes and the contracts that document the
transaction. This summary does not contain all of the information that you
should consider before investing in the notes. You should read the entire
prospectus carefully, especially the risks of investing in the notes discussed
under "RISK FACTORS".
OVERVIEW OF THE TRANSACTION
The following is an overview of the transaction as illustrated by the
"STRUCTURAL DIAGRAM OF THE SECURITIZATION PROGRAM". The numbers in the diagram
refer to the numbered paragraphs in this section.
(1) On March 26, 2001, the seller assigned the initial mortgage portfolio
and the other initial trust property to the mortgages trustee pursuant
to the mortgage sale agreement and retained an interest for itself in
the trust property. Since March 26, 2001 the seller has assigned
further mortgage portfolios and the other further trust property
(including the additional assigned mortgage portfolio) to the
mortgages trustee pursuant to the mortgage sale agreement, while
continuing to retain an interest for itself in the trust property. For
a further description of the assignment of the initial mortgage
portfolio, the further mortgage portfolios and the additional assigned
mortgage portfolio, see "SUMMARY OF THE NOTES -- ASSIGNMENT OF THE
MORTGAGE LOANS". The trust property consists of the mortgage loans in
the mortgage portfolio, their related security, any accrued interest
on those mortgage loans and other amounts derived from those mortgage
loans. The mortgage loans are residential mortgage loans originated by
Northern Rock plc and secured over mortgaged properties located in
England and Wales.
(2) The mortgages trustee holds the trust property in trust for the
benefit of the seller and Funding pursuant to a mortgages trust deed.
The seller and Funding each has a joint and undivided interest in the
trust property, but their entitlement to the proceeds from the trust
property is in proportion to their respective shares of the trust
property.
(3) Unless otherwise expressly provided in the mortgages trust deed, the
cash manager on behalf of the mortgages trustee distributes interest
and principal payments on the mortgage loans and allocates losses in
relation to the mortgage loans to the seller and Funding according to
the share that each of them then has in the trust property, expressed
as a percentage. These percentages fluctuate as described under
"SUMMARY OF THE NOTES -- THE MORTGAGES TRUST".
(4) Funding currently owns a beneficial interest in the trust property,
which it purchased on prior dates by making initial contributions to
the mortgages trust from the proceeds of the previous intercompany
loans made to Funding by the previous issuers. The seller has already
increased the trust property (and the seller share of the trust
property) by the assignment on August 18, 2003 of the additional
assigned mortgage portfolio. Therefore, rather than assigning new
mortgage loans to the mortgages trust on the closing date, Funding on
the closing date will pay to the mortgages trustee the proceeds of the
intercompany loan from the issuer as a further contribution to
increase its beneficial interest in the trust property. Upon receipt
of Funding's further contribution, the mortgages trustee will pay
these funds to the seller as initial consideration. The initial
consideration from the mortgages trustee to the seller will
correspondingly decrease the seller share of the trust property. From
time to time Funding will make deferred contributions to the mortgages
trustee pursuant to the mortgages
9
trust deed in respect of the Funding share of the trust property and
from such deferred contributions the mortgages trustee will from time
to time make corresponding payments of deferred purchase price to the
seller.
(5) In addition to paying certain of its own fees and expenses, Funding
will use amounts received from its share in the trust property to meet
its obligations to pay interest, principal and fees due to the issuer
under the intercompany loan, to pay interest, principal and fees due
to the previous issuers under the previous issuers' intercompany loans
and to any new issuer under any new intercompany loan, to allocate for
the issuer amounts to replenish the issuer reserve fund and to fund
and/or replenish the issuer liquidity reserve fund, if any (and, in
respect of the previous issuers and any new issuer, to allocate for
such issuer amounts to replenish such issuer's reserve fund and to
fund and/ or replenish such issuer's liquidity reserve fund, if any)
and to replenish the Funding reserve fund. Funding's obligations to
the issuer under the intercompany loan will be secured under the
Funding deed of charge by, among other things, Funding's rights to its
share of the trust property. Funding's rights to its share in the
trust property also secures its obligations to the previous issuers
under the previous intercompany loans and will secure its obligations
to any new issuer under any new intercompany loan.
(6) The issuer's obligations to pay interest on, and principal of, the
notes will be funded primarily from the payments of interest and
principal received by it from Funding under the intercompany loan. The
issuer's primary asset will be its rights under the intercompany loan
agreement. Neither you nor the issuer will have any direct interest in
the trust property, although the issuer will have a security interest
(which it will share with the previous issuers and any new issuer)
under the Funding deed of charge in Funding's rights to its share of
the trust property.
(7) The issuer will sell the notes to you and then lend the proceeds to
Funding under the intercompany loan on the closing date.
(8) The accounts, reserve funds and swaps, and their function in the
transaction structure are described later in this prospectus. They are
included in the following diagram so that you can refer back to see
where they fit into the structure.
10
[ LOGO Structural diagram of the Securitisation Program ]
11
[ LOGO Diagram of ownership structure ]
This diagram illustrates the ownership structure of the principal parties to
the transaction. The purpose of this diagram is to draw your attention to two
facts:
* Firstly, the seller has no ownership interest in any of the entities
in the above diagram. As a result, the financial condition of the
seller should not directly affect the mortgages trustee, Funding, the
issuer or, ultimately, investors in the notes, although the seller
still has a connection with the transaction for other reasons (such as
acting as administrator of the mortgage loans and as basis rate swap
provider); and
* Secondly, Funding has established previous issuers which have made
previous intercompany loans to Funding, and Funding may establish from
time to time new issuers which will make new intercompany loans to
Funding, as described under "SUMMARY OF THE NOTES -- THE PREVIOUS
ISSUERS AND NEW ISSUERS". Each previous issuer made a previous
intercompany loan from the proceeds of
12
the previous notes that were issued by that previous issuer, and any
new issuer will make a new intercompany loan from the proceeds of new
notes that are issued by that new issuer. The previous notes issued by
the previous issuers ultimately are, and any new notes issued by a new
issuer ultimately will be, secured by the same trust property
(primarily consisting of the mortgage portfolio) as the notes issued
by us under this prospectus. Subject to certain exceptions, payments
by Funding to new issuers under any new intercompany loans will rank
equally in priority with payments made by Funding to the previous
issuers under the previous intercompany loans and to us under our
intercompany loan. However, you should note that the amount and timing
of payments under an intercompany loan are determined by the amount
and timing of payments on the notes issued by the relevant issuer and
by the priorities for payment applicable to those notes. The terms of
the previous notes issued by the previous issuers and of any new notes
issued by a new issuer may therefore result in those previous notes
and the related previous intercompany loans or those new notes and the
related new intercompany loan being repaid prior to the repayment of
the notes issued by us under this prospectus and our related
intercompany loan regardless of the ratings of such previous notes or
new notes relative to the notes.
The following is a description of the above diagram:
* Each of the mortgages trustee, Funding and GPCH Limited is a
wholly-owned subsidiary of Granite Finance Holdings Limited.
* We are a wholly-owned subsidiary of Funding.
* The entire issued share capital of Holdings is held on trust by a
professional trust company under the terms of a discretionary trust
for the benefit of one or more charities. The professional trust
company is not affiliated with the seller. Any profits received by
Holdings, after payment of the costs and expenses of Holdings, will be
paid for the benefit of the Down's Syndrome North East Association
(UK) and for other charitable purposes selected at the discretion of
the professional trust company. The payments on your notes will not be
affected by this arrangement.
13
SUMMARY OF THE NOTES
In addition to the series 1 class A1 notes, series 1 class A2 notes, series
1 class A3 notes, series 1 class B notes, series 1 class M notes and series 1
class C notes, the issuer will issue series 2 class A notes, series 2 class B
notes, series 2 class M notes, series 2 class C notes, series 3 class A notes,
series 3 class B notes, series 3 class M notes and series 3 class C notes. The
series 1 notes, series 2 notes and series 3 notes will each be secured by the
issuer security, comprising our interest in our intercompany loan and our
interest in the security granted by Funding, including Funding's beneficial
interest in the mortgage loans. The series 2 notes and the series 3 notes have
not been registered with the United States Securities and Exchange Commission
and are not being offered by this prospectus. However, the term "NOTES" when
used in this prospectus includes all of the series 1 notes, series 2 notes and
series 3 notes, certain features of which are summarized in this section.
CLASS OF NOTES
------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 1
CLASS A1 CLASS A2 CLASS A3 CLASS B
------------------ ------------------ ------------------ ------------------
Principal amount: $[750,000,000] $[750,000,000] $[500,000,000] $[72,000,000]
Credit enhancement: Subordination of Subordination of Subordination of Subordination of
the class B notes, the class B notes, the class B notes, the class M notes,
the class M notes, the class M notes, the class M notes, the class C notes
the class C notes the class C notes the class C notes and the issuer
and the issuer and the issuer and the issuer reserve fund
reserve fund reserve fund reserve fund
Interest rate: Three-month Three-month Three-month Three-month
USD LIBOR + USD LIBOR + USD LIBOR + USD LIBOR +
margin margin margin margin
Margin until payment date falling [__]% p.a. [__]% p.a. [__]% p.a. [__]% p.a.
January 2009:
Margin after payment date falling in [__]% p.a. [__]% p.a. [__]% p.a. [__]% p.a.
January 2009:
Interest accrual method: Actual/360 Actual/360 Actual/360 Actual/360
Payment dates: For all of the notes, interest and principal will be payable quarterly in
arrears on the payment dates falling in January, April, July and October of
each year, beginning in January 2004.
First payment date (payment date January 2004 January 2004 January 2004 January 2004
occurring in):
Final maturity date: January 2019 January 2024 January 2044 January 2044
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
"MATERIAL UNITED "MATERIAL UNITED "MATERIAL UNITED "MATERIAL UNITED
STATES TAX STATES TAX STATES TAX STATES TAX
CONSEQUENCES" CONSEQUENCES" CONSEQUENCES" CONSEQUENCES
ERISA eligible: Yes, subject to Yes, subject to Yes, subject to Yes, subject to
the the the the
considerations in considerations in considerations in considerations in
"ERISA "ERISA "ERISA "ERISA
CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS"
Stock Exchange Listing: London London London London
ISIN: US38741UAA51 US38741UAB35 US38741UAC18 US38741UAD90
Common Code: 017696513 017696564 017696777 017696831
CUSIP Number: 38741UAA5 38741UAB3 38741UAC1 38741UAD9
Expected rating Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aa3/AA/AA
(Moody's/S&P/Fitch):
CLASS OF NOTES
----------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 2 SERIES 2
CLASS M CLASS C CLASS A CLASS B
----------------- ----------------- ------------------ ------------------
Principal amount: $[27,000,000] $[62,100,000] [e][500,000,000] [e][25,200,000]
Credit enhancement: Subordination of The issuer Subordination of Subordination of
the class C notes reserve fund the class B notes, the class M notes,
and the issuer the class M notes, the class C notes
reserve fund the class C notes and the issuer
and the issuer reserve fund
reserve fund
Interest rate: Three-month Three-month Three-month Three-month
USD LIBOR + USD LIBOR + EURIBOR + EURIBOR +
margin margin margin margin
Margin until payment date falling [__]% p.a. [__]% p.a. [__]% p.a. [__]% p.a.
January 2009:
Margin after payment date falling in [__]% p.a. [__]% p.a. [__]% p.a. [__]% p.a.
January 2009:
Interest accrual method: Actual/360 Actual/360 Actual/360 Actual/360
Payment dates: For all of the notes, interest and principal will be payable quarterly in
arrears on the payment dates falling in January, April, July and October of
each year, beginning in January 2004.
First payment date (payment date January 2004 January 2004 January 2004 January 2004
occurring in):
Final maturity date: January 2044 January 2044 January 2044 January 2044
Tax treatment: Debt for United Debt for United N/A (these notes N/A (these notes
States federal States federal are not being are not being
income tax income tax offered or sold in offered or sold in
purposes, subject purposes, subject the United States) the United States)
to the to the
considerations considerations
contained in contained in
"MATERIAL UNITED "MATERIAL UNITED
STATES TAX STATES TAX
CONSEQUENCES CONSEQUENCES"
ERISA eligible: Yes, subject to Yes, subject to N/A (these notes N/A (these notes
the the are not being are not being
considerations in considerations in offered or sold in offered or sold in
"ERISA "ERISA the United States) the United States)
CONSIDERATIONS" CONSIDERATIONS"
Stock Exchange Listing: London London London London
ISIN: US38741UAE73 US38741UAF49 XS0176409927 XS0176410180
Common Code: 017696882 017696939 017640992 017641018
CUSIP Number: 38741UAE7 38741UAF4 N/A N/A
Expected rating A2/A/A Baa2/BBB/ BBB Aaa/AAA/AAA Aa3/AA/AA
(Moody's/S&P/Fitch):
CLASS OF NOTES
------------------------------------------------------------------------------
SERIES 2 SERIES 2 SERIES 3 SERIES 3
CLASS M CLASS C CLASS A CLASS B
------------------ ------------------ ------------------ ------------------
Principal amount: [e][9,400,000] [e][21,700,000] [GBP][250,000,000] [GBP][18,900,000]
Credit enhancement: Subordination of The issuer Subordination of Subordination of
the class C notes reserve fund the class B notes, the class M notes,
and the issuer the class M notes, the class C notes
reserve fund the class C notes and the issuer
and the issuer reserve fund
reserve fund
Interest rate: Three-month Three-month Three-month Three-month
EURIBOR + EURIBOR + sterling LIBOR + sterling LIBOR +
margin margin margin margin
Margin until payment date falling [__]% p.a. [__]%p.a. [__]% p.a. [__]% p.a.
January 2009:
Margin after payment date falling in [__]% p.a. [__]% p.a. [__]% p.a. [__]% p.a.
January 2009:
Interest accrual method: Actual/360 Actual/360 Actual/365 Actual/365
Payment dates: For all of the notes, interest and principal will be payable quarterly in
arrears on the payment dates falling in January, April, July and October of
each year, beginning in January 2004.
First payment date (payment date January 2004 January 2004 January 2004 January 2004
occurring in):
Final maturity date: January 2044 January 2044 January 2044 January 2044
Tax treatment: N/A (these notes N/A (these notes N/A (these notes N/A (these notes
are not being are not being are not being are not being
offered or sold in offered or sold in offered or sold in offered or sold in
the United States) the United States) the United States) the United States)
ERISA eligible: N/A (these notes N/A (these notes N/A (these notes N/A (these notes
are not being are not being are not being are not being
offered or sold in offered or sold in offered or sold in offered or sold in
the United States) the United States) the United States) the United States)
Stock Exchange Listing: London London London London
ISIN: XS0176410347 XS0176410420 XS0176410693 XS0176410776
Common Code: 017641034 017641042 017641069 017641077
CUSIP Number: N/A N/A N/A N/A
Expected rating A2/A/A Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA
(Moody's/S&P/Fitch):
CLASS OF NOTES
--------------------------------------
SERIES 3 SERIES 3
CLASS M CLASS C
------------------ ------------------
Principal amount: [GBP][7,100,000] [GBP][16,300,000]
Credit enhancement: Subordination of The issuer
the class C notes reserve fund
and the issuer
reserve fund
Interest rate: Three-month Three-month
sterling LIBOR + sterling LIBOR +
margin margin
Margin until payment date falling [__]% p.a. [__]% p.a.
January 2009:
Margin after payment date falling in [__]% p.a [__]% p.a.
January 2009:
Interest accrual method: Actual/365 Actual/365
Payment dates:
First payment date (payment date January 2004 January 2004
occurring in):
Final maturity date: January 2044 January 2044
Tax treatment: N/A (these notes N/A (these notes
are not being are not being
offered or sold in offered or sold in
the United States) the United States)
ERISA eligible: N/A (these notes N/A (these notes
are not being are not being
offered or sold in offered or sold in
the United States) the United States)
Stock Exchange Listing: London London
ISIN: XS0176410859 XS0176411071
Common Code: 017641085 017641107
CUSIP Number: N/A N/A
Expected rating A2/A/A Baa2/BBB/BBB
(Moody's/S&P/Fitch):
14
THE ISSUER
Granite Mortgages 03-3 plc is a public limited company incorporated in
England and Wales. Its registered office is at Fifth Floor, 100 Wood Street,
London EC2V 7EX. Its telephone number is +44 020 7606 5451. References in this
document to "WE" or "US" mean the issuer and references to "YOU" mean potential
investors in the notes.
We are a newly created special purpose company and a wholly-owned subsidiary
of Funding. Our purpose is to issue the notes which represent our asset-backed
obligations and to lend an amount equal to the proceeds of the notes to
Funding. We will not engage in any activities that are unrelated to these
purposes.
FUNDING
Granite Finance Funding Limited is a private limited company incorporated in
Jersey, Channel Islands. Its registered office is at 22 Grenville Street, St.
Helier, Jersey JE4 8PX. Its telephone number is 01534-609892.
Funding has been registered under Schedule 21A to the Companies Act 1985 as
having established a branch in England and Wales. Its branch address is 4 Royal
Mint Court, London EC3N 4HJ. Its telephone number is +44 020 7073 7861.
Funding is a special purpose company. Funding currently owns a share of the
trust property that it acquired with the proceeds of the previous intercompany
loans from the previous issuers in connection with the issuance of the previous
notes. Funding will borrow money from us pursuant to the terms of our
intercompany loan agreement. Funding will use the money borrowed from us to pay
to the mortgages trustee a further contribution for an increased Funding share
of the trust property pursuant to the mortgages trust deed which, upon receipt
by the mortgages trustee, will be paid to the seller as initial consideration
for Funding increasing its beneficial interest in the trust property. Funding's
further contribution to the mortgages trustee will increase the Funding share
of the trust property and the initial consideration from the mortgages trustee
to the seller will correspondingly decrease the seller share of the trust
property. Funding and the seller together are beneficially entitled to all of
the trust property in accordance with their respective shares in the trust.
THE MORTGAGES TRUSTEE
Granite Finance Trustees Limited is a private limited company incorporated
in Jersey, Channel Islands. Its registered office is at 22 Grenville Street,
St. Helier, Jersey JE4 8PX. Its telephone number is 01534-609891.
The mortgages trustee is a special purpose company. The purpose of the
mortgages trustee is to acquire from time to time additional trust property
from the seller and to hold all of the trust property on trust for the seller
and Funding under the terms of the mortgages trust deed.
THE SELLER, THE ADMINISTRATOR, THE CASH MANAGER, THE ISSUER CASH MANAGER AND
THE ACCOUNT BANK
Northern Rock plc is a bank incorporated in England and Wales as a public
limited company. It is regulated by the Financial Services Authority. Its
registered office is at Northern Rock House, Gosforth, Newcastle upon Tyne NE3
4PL. Its telephone number is +44 191 285 7191.
The seller originated each of the additional assigned mortgage loans which
it assigned to the mortgages trustee according to the seller's lending criteria
applicable at the time such mortgage loan was offered, which lending criteria
were the same as or substantially similar to the criteria described later in
this prospectus.
The seller acts as administrator of the mortgage portfolio under the terms
of the administration agreement, pursuant to which it has agreed to continue to
perform administrative functions in respect of the mortgage loans on behalf of
the mortgages
15
trustee and the beneficiaries, including collecting payments under the mortgage
loans and taking steps to recover arrears. The seller may not resign as
administrator unless a successor administrator has been appointed. In addition,
the administrator may be replaced by a new administrator if it defaults in its
obligations under the administration agreement.
The seller has also been appointed as the cash manager for the mortgages
trustee and Funding to manage their bank accounts, determine the amounts of and
arrange payments to be made by them and keep certain records on their behalf.
The seller will also be appointed as the issuer cash manager to manage our
bank account, determine the amounts of and arrange payments to be made by us
and keep certain records on our behalf.
Citibank, N.A. will be appointed as account bank to provide banking services
to us.
Lloyds TSB Bank plc has also been appointed as account bank to provide
banking services to Funding. Lloyds TSB Bank plc Jersey International Branch
has been appointed as Jersey account bank to provide banking services to the
mortgages trustee. Lloyds TSB Bank plc Jersey International Branch is a branch
of Lloyds TSB Bank plc. Its activities currently include currency exchange,
fund management, private banking, investment advice and treasury operations.
The address of Lloyds TSB Bank plc Jersey International Branch is 25 New
Street, St. Helier, Jersey JE4 8ZE.
The seller has a continuing interest in the mortgage loans as one of the
beneficiaries of the mortgages trust.
THE NOTES
CLASSES OF NOTES
In this prospectus, we are offering the following series of notes:
$[750,000,000] series 1 class A1 floating rate notes due January 2019;
$[750,000,000] series 1 class A2 floating rate notes due January 2024;
$[500,000,000] series 1 class A3 floating rate notes due January 2044;
$[72,000,000] series 1 class B floating rate notes due January 2044;
$[27,000,000] series 1 class M floating rate notes due January 2044; and
$[62,100,000] series 1 class C floating rate notes due January 2044.
In addition, we are issuing the following separate series of notes, which
are not being offered by this prospectus:
[e][500,000,000] series 2 class A floating rate notes due January 2044;
[e][25,200,000] series 2 class B floating rate notes due January 2044;
[e][9,400,000] series 2 class M floating rate notes due January 2044;
[e][21,700,000] series 2 class C floating rate notes due January 2044;
[GBP][250,000,000] series 3 class A floating rate notes due January 2044;
[GBP][18,900,000] series 3 class B floating rate notes due January 2044;
[GBP][7,100,000] series 3 class M floating rate notes due January 2044; and
[GBP][16,300,000] series 3 class C floating rate notes due January 2044.
The series 1 class A1 notes, the series 1 class A2 notes and the series 1
class A3 notes are collectively referred to as the series 1 class A notes. The
series 1 class A notes, the series 1 class B notes, the series 1 class M notes
and the series 1 class C notes are collectively referred to as the series 1
notes. The series 2 class A notes, the series 2 class B notes, the series 2
class M notes and the series 2 class C notes are collectively referred to as
the series 2 notes. The series 3 class A notes, the series 3 class B notes, the
series 3 class M notes and the series 3 class C notes are collectively referred
to as the series 3 notes. The series 1 class A notes, the series 2 class A
notes
16
and the series 3 class A notes are collectively referred to as the class A
notes and you should construe references to the class B notes, class M notes
and class C notes in an analogous manner.
The series 2 notes and the series 3 notes are not being offered to the
public in the United States by this prospectus. Instead, they will be offered
to institutional investors outside the United States in transactions exempt
from the registration requirements of the Securities Act.
The series 1 notes, the series 2 notes and the series 3 notes collectively
represent our asset-backed obligations.
RELATIONSHIP BETWEEN THE NOTES AND THE INTERCOMPANY LOAN
On the closing date we will make an intercompany loan to Funding from the
proceeds of the issue of the notes. For more information on the intercompany
loan, see "THE INTERCOMPANY LOAN". Subject to the various swap agreements and
the payments to be made to us by the various swap providers as described under
"THE SWAP AGREEMENTS", we will repay the notes from payments made to us by
Funding under the intercompany loan. If Funding does not have enough money to
pay amounts due under the intercompany loan to enable us to pay interest or
repay principal amounts on the notes, then in certain circumstances Funding may
access funds standing to the credit of the issuer reserve fund and/or the
issuer liquidity reserve fund, although Funding will only be required to
establish the issuer liquidity reserve fund in limited circumstances. For more
information on the issuer reserve fund, see "CREDIT STRUCTURE -- ISSUER RESERVE
FUND", and for more information on the issuer liquidity reserve fund and the
circumstances in which Funding will be required to establish the issuer
liquidity reserve fund, see "CREDIT STRUCTURE -- ISSUER LIQUIDITY RESERVE
FUND". The ability of Funding to make payments on the intercompany loan will
depend on Funding receiving its share of collections on the trust property,
which will in turn depend principally on the collections the mortgages trustee
receives on the mortgage loans and their related security.
OPERATIVE DOCUMENTS CONCERNING THE NOTES
We will issue the notes under the trust deed. The notes will also be subject
to a paying agent and agent bank agreement. The security for the notes will be
created under the issuer deed of charge between us, the note trustee and our
other secured creditors. Operative legal provisions relating to the notes will
be included in the trust deed, the paying agent and agent bank agreement, the
issuer deed of charge, the issuer cash management agreement and the notes
themselves.
PAYMENT PRIORITY AND RANKING OF NOTES
Payments of interest on the notes will be made from issuer available revenue
receipts available to the issuer following payment of amounts owing to the
security trustee, the note trustee, the agent bank and paying agents, the
transfer agent, the registrar, third party creditors of the issuer, the issuer
cash manager and the corporate services provider.
Among the series 1 notes, payments of interest will be made on the series 1
class A1 notes, the series 1 class A2 notes and the series 1 class A3 notes in
no order of priority among them but in proportion to the respective amounts due
on the series 1 class A notes, payments of interest on the series 1 class A
notes will be made ahead of payments of interest on the series 1 class B notes,
the series 1 class M notes and the series 1 class C notes, payments of interest
on the series 1 class B notes will be made ahead of payments of interest on the
series 1 class M notes and the series 1 class C notes and payments of interest
on the series 1 class M notes will be made ahead of payments of interest on the
series 1 class C notes.
Among the series 2 notes, payments of interest on the series 2 class A notes
will be made ahead of payments of interest on the series 2 class B notes, the
series 2 class M notes and the series 2 class C notes, payments of interest on
the series 2 class B notes
17
will be made ahead of payments of interest on the series 2 class M notes and
the series 2 class C notes and payments of interest on the series 2 class M
notes will be made ahead of payments of interest on the series 2 class C notes.
Among the series 3 notes, payments of interest on the series 3 class A notes
will be made ahead of payments of interest on the series 3 class B notes, the
series 3 class M notes and the series 3 class C notes, payments of interest on
the series 3 class B notes will be made ahead of payments of interest on the
series 3 class M notes and the series 3 class C notes and payments of interest
on the series 3 class M notes will be made ahead of payments of interest on the
series 3 class C notes.
Among the series 1 notes, the series 2 notes and the series 3 notes,
payments of interest on the series 1 class A1 notes, the series 1 class A2
notes, the series 1 class A3 notes, the series 2 class A notes and the series 3
class A notes will be made in no order of priority among them but in proportion
to the respective amounts due on the class A notes (such payments to be made
ahead of payments of interest on the class B notes), payments of interest on
the series 1 class B notes, the series 2 class B notes and the series 3 class B
notes will be made in no order of priority among them but in proportion to the
respective amounts due on the class B notes (such payments to be made ahead of
payments of interest on the class M notes), payments of interest on the series
1 class M notes, the series 2 class M notes and the series 3 class M notes will
be made in no order of priority among them but in proportion to the respective
amounts due on the class M notes (such payments to be made ahead of payments of
interest on the class C notes) and payments of interest on the series 1 class C
notes, the series 2 class C notes and the series 3 class C notes will be made
in no order of priority among them but in proportion to the respective amounts
due on the class C notes.
For more information on the priority of interest payments to you, see
"CASHFLOWS".
If not already paid in full in accordance with the paragraph below or
redeemed earlier, the principal amount outstanding of each class of notes will
be repaid by the issuer on the final maturity date for that class of notes.
On each payment date prior to the final maturity date, however, we will be
obliged to make payments of principal of the notes to the extent of issuer
available principal receipts subject to and in accordance with the relevant
issuer priority of payments applicable to us on that date.
Subject to there being no trigger event and no enforcement of the Funding
security and/or the issuer security, no class of notes will be repaid an amount
of principal which is greater than the controlled amortization amount in
respect of that class of notes for the relevant payment date and, subject also
to the satisfaction of certain conditions in relation to the repayment of
principal of the class B notes, the class M notes and the class C notes at any
time when any class A notes are outstanding as specified below, repayment of
principal will be made in accordance with the following priority. Repayment of
principal in respect of the series 1 class A1 notes will be made ahead of
repayment of principal in respect of the series 1 class A2 notes, the series 1
class A3 notes, the series 2 class A notes and the series 3 class A notes.
Repayment of principal in respect of the series 1 class A2 notes will be made
ahead of repayment of principal in respect of the series 1 class A3 notes, the
series 2 class A notes and the series 3 class A notes. Repayment of principal
in respect of the series 1 class A3 notes, the series 2 class A notes and the
series 3 class A notes will be made in no order of priority between them but in
proportion to the respective amounts due on the series 1 class A3 notes, the
series 2 class A notes and the series 3 class A notes. However, repayment of
principal in respect of the class A notes will be made ahead of repayment of
principal in respect of the class B notes. Repayment of principal in respect of
the series 1 class B notes, the series 2 class B notes and the series 3 class B
notes will be made in no order of priority among them but in proportion to the
respective amounts due on the class B notes. However, repayment of principal in
respect of the class B notes will be made ahead of repayment of principal in
respect of the class M notes. Repayment of principal in respect of the series 1
class M
18
notes, the series 2 class M notes and the series 3 class M notes will be made
in no order of priority among them but in proportion to the respective amounts
due on the class M notes. However, repayment of principal in respect of the
class M notes will be made ahead of repayment of principal in respect of the
class C notes. Repayment of principal in respect of the series 1 class C notes,
the series 2 class C notes and the series 3 class C notes will be made in no
order of priority among them but in proportion to the respective amounts due on
the class C notes.
If any class A note remains outstanding and any of the issuer arrears test,
the issuer reserve requirement or the subordinated principal test are not
satisfied on the relevant payment date, no amount of principal will be payable
in respect of the class B notes, the class M notes or the class C notes.
The controlled amortization amount payable in respect of each class of notes
is determined by a schedule that indicates the target balance for that class of
notes on the relevant payment date, as set forth under "CASHFLOWS --
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY AND/OR OCCURRENCE OF A TRIGGER EVENT". However, you should be
aware that not all classes of notes are scheduled to receive payments of
principal on each payment date. The controlled amortization amount payable on
some classes of notes will be zero, which means that, despite the principal
priority of payments described above, lower ranking classes of notes may
nevertheless be repaid principal before higher ranking classes of notes. You
should note that the controlled amortization amount for the series 3 class A
notes from the closing date to the payment date falling in January 2009 is
zero. This means that, subject to there being no trigger event, no enforcement
of either the Funding security and/or the issuer security, the series 3 class A
notes will not be scheduled to be repaid an amount of principal until the
payment date falling in January 2009 at the earliest. Payments of principal are
expected to be made to each class of notes in scheduled amounts up to the
amounts set forth under "CASHFLOWS -- DISTRIBUTION OF ISSUER AVAILABLE
PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY AND/OR
OCCURRENCE OF A TRIGGER EVENT".
Following the occurrence of a trigger event, the enforcement of the Funding
security and/or the enforcement of the issuer security, the above priority of
payments will change and we will make repayments of principal in accordance
with and subject to the relevant issuer priority of payments as described under
"CASHFLOWS".
The issuer reserve fund provides credit enhancement for the class C notes.
The issuer reserve fund and the class C notes provide credit enhancement for
the class M notes. The issuer reserve fund, the class C notes and the class M
notes provide credit enhancement for the class B notes. The issuer reserve
fund, the class C notes, the class M notes and the class B notes provide credit
enhancement for the class A notes. You should note, however, that the series 2
notes as a group do not provide credit enhancement for the series 1 notes and
the series 3 notes as a group do not provide credit enhancement for the series
1 notes or the series 2 notes.
For more information on the priority of principal repayments to you, see
"CASHFLOWS". For more information on the redemption of the notes, including a
description of asset trigger events, non-asset trigger events and seller share
events, see "THE MORTGAGES TRUST -- CASH MANAGEMENT OF TRUST PROPERTY --
PRINCIPAL RECEIPTS" and "CASHFLOWS".
You should note that Funding has established previous issuers, each of which
has made a previous intercompany loan to Funding, and that Funding may
establish from time to time new issuers which will make new intercompany loans
to Funding, as described under "-- THE PREVIOUS ISSUERS AND NEW ISSUERS" and
"THE INTERCOMPANY LOAN AGREEMENT -- OTHER INTERCOMPANY LOAN AGREEMENTS". Each
previous issuer made a previous intercompany loan from the proceeds of the
previous notes that were issued by that previous issuer, and any new issuer
will make a new intercompany loan from the proceeds of new notes that are
issued by that new issuer. The previous notes issued by
19
the previous issuers ultimately are, and any new notes issued by a new issuer
ultimately will be, secured by the same trust property (primarily consisting of
the mortgage portfolio) as the notes issued by us under this prospectus.
You should also note that payments by Funding to the previous issuers under
the previous intercompany loans and to new issuers under any new intercompany
loans will rank equally in priority with payments made by Funding to us under
our intercompany loan, other than in respect of the priority made in the
allocation of principal receipts to an issuer (such as the fifth issuer) that
issued a money market note, as described under "CASHFLOWS -- DISTRIBUTION OF
FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT OF THE FUNDING
SECURITY -- RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS". In
other words, subject to the foregoing exception, interest and principal
payments under our intercompany loan will not have priority over interest and
principal payments on the previous intercompany loans or any new intercompany
loans that are made at later dates. Instead, subject to the exception described
above, Funding will initially allocate interest and principal to make payments
under each outstanding intercompany loan in no order of priority among them but
in proportion to each relevant issuer's allocable interest in the Funding share
of the trust property (or, if provided under the relevant intercompany loan
agreement, will set aside that allocable interest in the Funding share of
principal receipts for that issuer). However, prior to the enforcement of the
issuer security, the amount and timing of payments under an intercompany loan
are determined by the amount and timing of payments on the notes issued by the
relevant issuers and by the priorities for payment applicable to those notes.
The terms of the previous notes issued by the previous issuers and of any new
notes issued by a new issuer may therefore result in those previous notes and
the related previous intercompany loans or those new notes and the related new
intercompany loan being repaid prior to the repayment of the notes issued by us
under this prospectus and our related intercompany loan regardless of the
ratings of such previous notes or new notes relative to the notes.
OPTIONAL REDEMPTION OF THE NOTES FOR TAX AND OTHER REASONS
We may redeem all of the notes at their principal amount outstanding in the
event of particular tax changes affecting the notes or the intercompany loan
which cannot be avoided by us or Funding, as the case may be, taking reasonable
measures available to us or Funding if (a) we give not more than 60 nor less
than 30 days' notice to you and the note trustee in accordance with the terms
and conditions of the notes, and (b) we have, prior to giving that notice,
provided all necessary opinions to the note trustee and certified to the note
trustee that, among other things, we will have the necessary funds to pay
principal and interest due in respect of the notes on the relevant payment
date.
In addition, we may redeem in principally the same manner all of the notes
outstanding:
* on the payment date falling in January 2009 and on any payment date
thereafter. This gives us the option to redeem the notes on or
after the January 2009 step-up date for interest; or
* on the payment date falling in July 2008 and any payment date
thereafter if the New Basel Capital Accord has been implemented in
the United Kingdom, whether by rule of law, recommendation or best
practice or by any other regulation, provided that a note
enforcement notice has not been served; or
* on any payment date on which the aggregate principal amount
outstanding of the notes is less than 10% of the aggregate
principal amount outstanding of the notes as at the closing date;
or
* on any payment date after it has become unlawful for us to make,
fund or allow to remain outstanding the intercompany loan and we
have required Funding to prepay the intercompany loan.
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Any notes that we redeem under these circumstances will be redeemed at their
principal amount outstanding together with accrued but unpaid interest on that
principal amount.
For a detailed description of the circumstances in which the notes may be
redeemed see "DESCRIPTION OF THE OFFERED NOTES".
WITHHOLDING TAX
Payments of interest and principal with respect to the notes will be subject
to any applicable withholding taxes and we will not be obliged to pay
additional amounts in relation thereto. The applicability of any UK withholding
tax is discussed under "MATERIAL UNITED KINGDOM TAX CONSEQUENCES".
THE CLOSING DATE
We will issue the notes on or about September 24, 2003.
THE NOTE TRUSTEE
The Bank of New York is the note trustee. Its address is 48th Floor, One
Canada Square, London E14 5AL. The note trustee will act as trustee for you
under the trust deed.
THE PAYING AGENTS AND AGENT BANK
Citibank, N.A. is the principal paying agent. Its address is
5 Carmelite Street, London EC4Y 0PA. Citibank, N.A. is the US paying agent and
its address is 14th Floor Zone 3, 111 Wall Street, New York, New York 10043.
The paying agents will make payments on the notes to you.
Citibank, N.A. is the agent bank. Its address is 5 Carmelite Street, London
EC4Y 0PA. The agent bank will calculate the interest rate on the notes.
THE REGISTRAR AND TRANSFER AGENT
Citibank, N.A. is the registrar and transfer agent. Its address is 5
Carmelite Street, London EC4Y 0PA. The registrar will maintain a register in
respect of the notes. The transfer agent is responsible for administering any
transfer of notes.
THE MORTGAGE LOANS
In describing the characteristics of the mortgage loans, references in this
prospectus to:
* "INITIAL MORTGAGE PORTFOLIO" mean the portfolio of mortgage loans,
their related security, accrued interest and other amounts derived
from such mortgage loans that the seller assigned to the mortgages
trustee on March 26, 2001;
* "FURTHER MORTGAGE PORTFOLIOS" mean the portfolios of further
mortgage loans, their related security, accrued interest and other
amounts derived from such further mortgage loans that the seller
has assigned to the mortgages trustee after March 26, 2001 and
before August 18, 2003;
* "ADDITIONAL MORTGAGE PORTFOLIO" mean the portfolio of additional
mortgage loans, their related security, accrued interest and other
amounts derived from such additional mortgage loans that the
seller, as of the cut-off date, anticipated assigning to the
mortgages trustee on August 18, 2003;
* "CUT-OFF DATE MORTGAGE PORTFOLIO" mean, as of the cut-off date, the
initial mortgage portfolio and the further mortgage portfolios
(taking account of, among other things, amortization of mortgage
loans in that portfolio and the addition and/or removal of any
mortgage loans to or from that portfolio since March 26, 2001)
combined with the additional mortgage portfolio;
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* "ADDITIONAL ASSIGNED MORTGAGE PORTFOLIO" mean the portfolio of
additional assigned mortgage loans, their related security, accrued
interest and other amounts derived from such additional assigned
mortgage loans that the seller actually assigned to the mortgages
trustee on August 18, 2003; and
* "MORTGAGE PORTFOLIO" mean the initial mortgage portfolio, the
further mortgage portfolios and the additional assigned mortgage
portfolio as it is constituted as of any date of determination
since August 18, 2003, taking account of, among other things,
amortization of mortgage loans in that portfolio and the addition
and/or removal of any mortgage loans to or from that portfolio
since August, 18, 2003.
The mortgage loans in the mortgage portfolio on the closing date will
comprise:
* mortgage loans which are subject to variable rates of interest set
by the seller or by reference to a specified market rate from time
to time; and
* mortgage loans which are subject to fixed rates of interest set by
reference to a pre-determined rate or series of rates for a fixed
period or periods.
134,991 mortgage loans in the cut-off date mortgage portfolio (or 68.37% of
the aggregate current balance of the mortgage loans as of the cut-off date) are
flexible mortgage loans. Flexible mortgage loans that are included in the
mortgage portfolio are subject to variable or fixed rates of interest, and
generally allow the borrower to make larger repayments than are due on a given
monthly payment date (which may reduce the life of the mortgage loan). These
flexible mortgage loans may also allow the borrower, in certain circumstances,
to make authorized underpayments or take payment holidays under the mortgage
loan (collectively referred to in this prospectus as "NON-CASH RE-DRAWS") and
to make cash re-draws of amounts previously overpaid (which together with non-
cash re-draws ultimately may reduce the amount of money available to make
payments under the notes and may extend the life of the related mortgage loan).
Cash re-draws and non-cash re-draws under flexible mortgage loans are
collectively referred to in this prospectus as "RE-DRAWS". Additional features
of the mortgage loans in the cut-off date mortgage portfolio are described
under "THE MORTGAGE LOANS -- CHARACTERISTICS OF THE MORTGAGE LOANS".
In addition to the mortgage loans in the mortgage portfolio on the closing
date, after the closing date the trust property may also include new mortgage
loans, including re-draws under flexible mortgage loans. The mortgage portfolio
already includes re-draws under flexible mortgage loans. In all cases, re-draws
have been or will be funded solely by the seller. This means that for any cash
re-draw under a flexible mortgage loan, the seller has paid the amount of that
cash re-draw to the borrower, and both the size of the trust property and the
seller share of the trust property has increased by the amount of that cash
payment. It also means that for any non-cash re-draw under a flexible mortgage
loan, the seller has paid to the mortgages trustee an amount equal to the
unpaid interest associated with that non-cash re-draw, and both the size of the
trust property and the seller share of the trust property has increased by the
amount of that payment. The seller will make the foregoing payments (which will
result in a corresponding increase in the overall size and seller share of the
trust property described above) for future re-draws under flexible mortgage
loans.
The seller currently intends to repurchase from the mortgages trustee
mortgage loans that become subject to further advances (which represent new
mortgage loans made to existing borrowers that are secured by a first priority
legal charge on the existing borrower's mortgaged property). However, in the
future these mortgage loans may remain within (and the further advances may be
assigned to and form part of) the trust property.
New mortgage loans that the seller assigns to the mortgages trustee will be
required to comply with specified criteria (see "ASSIGNMENT OF THE MORTGAGE
LOANS AND RELATED SECURITY -- ASSIGNMENT OF NEW MORTGAGE LOANS AND THEIR
RELATED SECURITY"). These new mortgage loans may include mortgage loans that
are currently being offered to borrowers and have some of the characteristics
described in this prospectus, but may also include mortgage loans with other
characteristics that the seller currently is not offering to
22
borrowers or that the seller has not yet developed. Any new mortgage loans that
the seller assigns to the mortgages trustee will increase the total size of the
trust property, and will increase the Funding share of the trust property only
to the extent that Funding has provided a contribution (excluding any deferred
contribution) to the mortgages trustee for those new mortgage loans. To the
extent that Funding does not provide a contribution for the new mortgage loans,
only the seller share of the trust property will increase by a corresponding
amount.
All of the mortgage loans in the mortgage portfolio on the closing date, and
any new mortgage loans added to the trust property in the future, will be
secured by first priority legal charges over freehold or leasehold mortgaged
properties located in England or Wales.
The mortgage loans have been originated in accordance with the seller's
lending criteria applicable at the time each mortgage loan was offered, which
lending criteria in the case of each mortgage loan included in the mortgage
portfolio were the same as or substantially similar to the criteria described
later in this prospectus under "THE MORTGAGE LOANS -- ORIGINATION OF THE
MORTGAGE LOANS -- LENDING CRITERIA". The seller has given warranties to the
mortgages trustee in the mortgage sale agreement that, among other things, the
mortgage loans have been originated in accordance with the seller's lending
criteria in effect at the time of origination of the relevant mortgage loan. If
a mortgage loan or its related security does not materially comply with these
warranties, then the seller will have 28 days in which to remedy the situation.
If the breach cannot be or is not remedied to the satisfaction of Funding and
the security trustee within that period, then the seller will be required to
repurchase the mortgage loan or mortgage loans under the relevant mortgage
account and their related security from the mortgages trustee. If the seller
does not repurchase those mortgage loans and their related security, then the
trust property will be deemed to be reduced by an amount equal to the aggregate
current balances of those mortgage loans. The size of the seller share of the
trust property will be deemed to be reduced by that amount but the size of the
Funding share of the trust property will not alter, and the respective
percentage shares of the seller and Funding in the trust property will alter
accordingly.
ASSIGNMENT OF THE MORTGAGE LOANS
The seller assigned the initial mortgage portfolio to the mortgages trustee
on March 26, 2001, and since March 26, 2001 has assigned further mortgage
portfolios and the other further trust property (including the additional
assigned mortgage portfolio) to the mortgages trustee, in each case subject to
the terms of the mortgage sale agreement. After the closing date, the seller
may assign new mortgage loans and their related security to the mortgages
trustee in order to increase or maintain the size of the trust property. The
seller also may increase the size of the trust property from time to time in
connection with an issue of new notes by any new issuer, the proceeds of which
are applied ultimately to fund the assignment of the new mortgage loans and
their related security to the mortgages trustee as described under "ASSIGNMENT
OF THE MORTGAGE LOANS AND RELATED SECURITY -- ASSIGNMENT OF NEW MORTGAGE LOANS
AND THEIR RELATED SECURITY". Any new issuer will be a wholly-owned subsidiary
of Funding.
The mortgage loans and their related security were assigned by the seller to
the mortgages trustee by way of an English law equitable assignment. This means
that the beneficial interest in the mortgage loans and the related security
passes to the mortgages trustee in its capacity as trustee for and on behalf of
the beneficiaries of the mortgages trust. However, unless certain events have
occurred and certain additional steps have been taken (including the execution
and (where necessary) registration of certain transfers and the giving of
notices of the assignment to the relevant borrowers), legal title to the
mortgage loans and their related security will remain with the seller. More
information on equitable assignments is described under "ASSIGNMENT OF THE
MORTGAGE LOANS AND RELATED SECURITY -- TRANSFER OF LEGAL TITLE TO THE MORTGAGES
TRUSTEE".
23
The seller may, from time to time, change its lending criteria and any other
terms applicable to the new mortgage loans or their related security assigned
to the mortgages trust after the closing date so that all new mortgage loans
originated after the date of that change will be subject to the new lending
criteria. Notwithstanding any change to the lending criteria or other terms
applicable to new mortgage loans, those new mortgage loans and their related
security may only be assigned to the mortgages trust if those new mortgage
loans comply with the seller's representations and warranties set out in the
mortgage sale agreement, including a representation that those new mortgage
loans were originated in accordance with the seller's lending criteria
applicable at the time of their origination.
When new mortgage loans are assigned to the mortgages trustee, the amount of
the trust property will increase. Depending on the circumstances, the increase
in the trust property may result in an increase in the seller share of the
trust property and/or the Funding share of the trust property. For a
description of how adjustments are made to the seller share of the trust
property and the Funding share of the trust property, see "THE MORTGAGES
TRUST".
Under the terms of the mortgage sale agreement, the amount of any early
repayment charges which may become payable on any mortgage loans that have been
assigned to the mortgages trustee will be paid by the mortgages trustee to the
seller as deferred purchase price. For more information on the mortgage sale
agreement, see "ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY".
THE MORTGAGES TRUST
The mortgages trust was established on March 26, 2001 among the mortgages
trustee, the seller, Funding and Law Debenture Corporate Services Limited. The
mortgages trustee holds the trust property on trust for both Funding and the
seller. Funding and the seller each has a joint and undivided beneficial
interest in the trust property. Unless otherwise expressly provided in the
mortgages trust deed, payments of interest and principal arising from the
mortgage loans in the trust property are allocated to Funding and the seller as
described later in this section. The only beneficiaries of the trust are
Funding and the seller.
The trust property currently consists of, among other things, the mortgage
portfolio. After the closing date, the trust property will consist of the
mortgage portfolio (including the additional assigned mortgage portfolio) and
each new mortgage portfolio, including any permitted replacement mortgage loan
in respect of any permitted product switch and any income generated by the
mortgage loans or their related security on or after the relevant assignment
date (excluding third party amounts). In addition, re-draws that have been made
under flexible mortgage loans that were assigned to the mortgages trustee also
form part of the existing trust property, and future re-draws that are made
under flexible mortgage loans that are assigned to the mortgages trustee will
also form part of the trust property. The trust property also includes any
contribution paid by either beneficiary to the mortgages trustee (until the
relevant funds are applied by the mortgages trustee in accordance with the
mortgages trust deed) and includes any money in the mortgages trustee
transaction account and the mortgages trustee guaranteed investment contract,
or GIC, account. The mortgages trustee GIC account is the bank account in which
the mortgages trustee holds any cash that is part of the trust property until
it is distributed to the beneficiaries.
The administrator has agreed to ensure that all payments due under the
mortgage loans which are included in the trust property will be made by direct
debit or, if that payment is late or borrowers choose not to pay by direct
debit, by check or other means into collection accounts in the name of the
administrator. Amounts standing to the credit of the collection accounts
representing receipts or recoveries in respect of the mortgage loans in the
mortgage portfolio are transferred by the administrator to the mortgages
trustee transaction account for further transfer to the mortgages trustee GIC
account in the
24
manner and in the time limits described under "THE ADMINISTRATOR AND THE
ADMINISTRATION AGREEMENT -- THE ADMINISTRATION AGREEMENT -- COLLECTION OF
PAYMENTS". The administrator may, from time to time, change its administration
policy in respect of the mortgage loans.
If the administrator and the mortgages trustee are notified or are otherwise
aware that a borrower has requested a further advance or a product switch and
the mortgages trustee has received confirmation of the seller's election to
repurchase the mortgage loan and its related security from the mortgages
trustee, the mortgages trustee shall sell and the seller shall repurchase that
mortgage loan together with its related security at any time at a price not
less than the current balance as of the date of completion of the repurchase
together with all unpaid interest (including all accrued interest and arrears
of interest) and other sums. The administrator may not itself make any offer of
a further advance or a product switch (other than a re-fixed mortgage loan)
without first having received confirmation of the seller's election to
repurchase the mortgage loan. The administrator may, however, agree to a
borrower's request for a re-fixed mortgage loan if so required by the terms of
that mortgage loan notwithstanding the seller's election not to repurchase the
relevant mortgage loan. Any such application for a further advance or a product
switch may result from a solicitation made by the seller, as the seller may
periodically contact borrowers in respect of the seller's total portfolio of
mortgage loans in order to offer to a borrower the opportunity to apply for a
further advance or switch to an alternative mortgage product.
Although the seller is entitled, but not obliged, to repurchase any mortgage
loans that are the subject of a further advance, this arrangement may change if
the seller decides at a later date to retain these mortgage loans within the
trust property and to assign these further advances to the mortgages trustee.
Any further advance made to an existing borrower (in respect of a mortgage loan
within the mortgages trust) that the seller at a later date decides to assign
to the mortgages trustee will be funded solely by the seller, will comply with
the applicable conditions to the assignment of new mortgage loans and their
related security to the mortgages trust as described in this prospectus, will
be secured by the same mortgaged property securing that borrower's mortgage
loan, will form part of the trust property, and will increase only the seller
share of the trust property, unless at the time of assignment Funding provides
a contribution (excluding any deferred contribution) to the mortgages trustee
in respect of that new trust property.
The seller is solely responsible for funding re-draws under flexible
mortgage loans. This means that for any cash re-draw under a flexible mortgage
loan, the seller will pay the amount of that cash re-draw to the borrower, and
both the size of the trust property and the seller share of the trust property
will increase by the amount of that cash payment. It also means that for any
non-cash re-draw under a flexible mortgage loan, the seller will pay to the
mortgages trustee an amount equal to the unpaid interest associated with that
non-cash re-draw, and both the size of the trust property and the seller share
of the trust property will increase by the amount of that payment.
The composition of the trust property fluctuates as re-draws under flexible
mortgage loans, future further advances and new mortgage loans are added to the
mortgages trust and as the mortgage loans that are already part of the trust
property are repaid or mature, or are repurchased by the seller.
As of the date of this prospectus, the amount of Funding's beneficial
interest in the trust property is approximately [GBP]11,151,200,000, which
corresponds to 74.1% of the trust property, and the amount of the seller's
beneficial interest in the trust property is approximately [GBP]3,903,400,000,
which corresponds to 25.9% of the trust property.
25
On the closing date:
* immediately following Funding's further contribution to the
mortgages trustee in connection with Funding's purchase of an
additional beneficial interest in the trust property, Funding's
beneficial interest in the trust property is expected to be
approximately [GBP][__], representing approximately [__]% of the
trust property; and
* immediately following the payment by the mortgages trustee to the
seller of the initial consideration (which sum is payable from
amounts received by the mortgages trustee from Funding as a further
contribution in connection with Funding's purchase of an increased
beneficial interest in the trust property), the seller's beneficial
interest in the trust property is expected to be approximately
[GBP][__], representing approximately [__]% of the trust property.
The amounts of the Funding share of the trust property and the seller share
of the trust property as of the closing date are only an approximation and the
actual amounts of the Funding share of the trust property and the seller share
of the trust property as of the closing date will depend, among other things,
on the actual amortization of the mortgage loans in the mortgage portfolio
between July 31, 2003 and the closing date. The actual amounts of the Funding
share of the trust property and the seller share of the trust property as of
the closing date will not be determined until the day before the closing date,
which will be after the date of this prospectus.
The Funding share of the trust property and the seller share of the trust
property, and the percentage of the total which each represents, will be
recalculated on each distribution date to take into account:
* principal payments on the mortgage loans distributed to Funding
and/or the seller on that distribution date (in general, a
principal payment made to a party will reduce that party's share of
the trust property);
* losses arising on the mortgage loans;
* a borrower making a re-draw under a flexible mortgage loan, which
will be funded by the seller and the seller share of the trust
property will increase accordingly;
* the capitalization of arrears in respect of any mortgage loan; and
* the seller making a further advance to an existing borrower and the
seller electing to repurchase that relevant mortgage loan in
accordance with the mortgage sale agreement. Although the seller
does not currently intend to assign further advances made in
respect of mortgage loans included in the trust property to the
mortgages trustee, it may do so in the future.
The Funding share of the trust property and the seller share of the trust
property, and the percentage of the total which each represents, also will be
recalculated (1) on each date on which a new mortgage portfolio is assigned by
the seller to the mortgages trust to take account of the new mortgage loans and
their related security assigned to the mortgages trust on that assignment date,
and (2) on any date (including, in connection with the issuance of the notes,
the closing date) on which Funding makes a further contribution to the
mortgages trustee in connection with Funding's purchase of an increased
beneficial interest in the trust property, on which date the mortgages trustee
will also pay to the seller an initial consideration equal to the amount of
such further contribution, as described under "THE MORTGAGES TRUST -- FUNDING
SHARE OF TRUST PROPERTY (ASSIGNMENT DATE RECALCULATION)".
On each distribution date, income from the trust property (less certain
third party payments) is distributed to Funding and the seller in no order of
priority between them but in proportion to the respective amounts due to
Funding and the seller. This income generally is distributed:
26
* to the seller in an amount determined by multiplying the total
amount of the remaining mortgages trustee available revenue
receipts by the seller share percentage of the trust property (as
determined on the immediately preceding distribution date or, in
the case of the first distribution date immediately following the
closing date, as of the closing date);
* to Funding in an amount equal to the lesser of:
(x) an amount determined by multiplying the total amount of the
remaining mortgages trustee available revenue receipts by
the Funding share percentage (as determined on the
immediately preceding distribution date or, in the case of
the first distribution date immediately following the
closing date, as of the closing date), and
(y) the aggregate of the amounts to be applied on the
immediately succeeding payment date as set forth under the
Funding pre- enforcement revenue priority of payments or the
Funding post- enforcement priority of payments, as the case
may be (but excluding any principal amount due under any
intercompany loan (save that, for the avoidance of doubt,
such exclusion shall not apply in respect of any Funding
available revenue receipts which are applied by an issuer to
credit that issuer's principal deficiency ledgers and
thereby reduce the principal payable under that issuer's
intercompany loan) and any amount of deferred contribution
under item (P) of the Funding pre-enforcement revenue
priority of payments and/or item (F) of the Funding
post-enforcement priority of payments), less all other
amounts (not derived from the distribution of mortgages
trustee available revenue receipts under the mortgages
trust) that will constitute Funding available revenue
receipts on the immediately succeeding payment date, such
amount not to be less than zero.
For a more detailed description of how the cash manager calculates the
distributions to be made on each distribution date, and for a description of
how the foregoing calculations may vary on a distribution date following a
trust calculation period during which the seller has assigned new mortgage
loans to the mortgages trustee or during which Funding has made a further
contribution to the mortgages trustee, see "THE MORTGAGES TRUST -- FLUCTUATION
OF THE SELLER SHARE/FUNDING SHARE OF THE TRUST PROPERTY".
Certain excess amounts of income to which Funding is entitled from time to
time on distribution dates will be paid by the mortgages trustee to the seller
as deferred purchase price for the purchase of the mortgage portfolio, which
payments will satisfy Funding's obligation to pay deferred contributions from
time to time to the mortgages trustee in respect of the Funding share of the
trust property. See "THE MORTGAGES TRUST -- MORTGAGES TRUST ALLOCATION OF
REVENUE RECEIPTS" for a detailed description of the distribution of income from
the trust property on each distribution date.
Mortgages trustee principal receipts are distributed on each distribution
date (other than a seller share event distribution date) to each of Funding and
the seller prior to the occurrence of a trigger event as described under "THE
MORTGAGES TRUST -- MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF MORTGAGES
TRUSTEE PRINCIPAL RECEIPTS PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT". In
general and subject to the provisos referred to in that section dealing with,
for example, reductions for amounts recorded on each issuer's principal
deficiency ledgers and other matters, prior to the occurrence of a trigger
event and/or enforcement of the Funding security and/or enforcement of the
issuer security, the mortgages trustee distributes mortgages trustee principal
receipts:
* first, to the seller to the extent of any initial consideration
then payable to the seller;
* second, to Funding an amount in respect of each issuer equal to the
lesser of:
27
* the principal amount due on the intercompany loan of that issuer
equal to the controlled amortization amounts due, if any, on the
payment date immediately succeeding such distribution date (in
each case determined on the assumption that each such amount will
not be restricted and/or deferred on that payment date in any of
the circumstances described under "CASHFLOWS"); and
* the product of (i) the amount of principal receipts received on
the mortgage loans during the immediately preceding trust
calculation period and available for distribution, (ii) the
Funding share percentage (as calculated on the immediately
preceding distribution date or, in the case of the first
distribution date immediately following the closing date, as of
the closing date) or, in certain circumstances, the weighted
average Funding share percentage as calculated on the relevant
distribution date, and (iii) a percentage equal to the
outstanding principal balance on that issuer's intercompany loan
divided by the aggregate outstanding principal balance on all
outstanding intercompany loans;
* third, to Funding an amount in respect of each issuer towards any
principal amount remaining which will be due and payable (following
the payment to Funding set forth above) on the immediately
succeeding payment date under any such issuer's intercompany loan
(in each case determined on the assumption that each such principal
amount will not be restricted and/or deferred on that payment date
in any of the circumstances described under "CASHFLOWS") plus an
amount equal to the amount which Funding will be required to apply
on that payment date under item (A) of the Funding
pre-enforcement principal priority of payments; and
* last, if such distribution date is not a seller share event
distribution date, all remaining mortgages trustee principal
receipts to the seller.
Following the occurrence of a seller share event, the mortgages trustee will
not distribute the remaining mortgages trustee principal receipts to the seller
and instead the remaining mortgages trustee principal receipts will be
deposited in the mortgages trustee GIC account and referred to as the
"MORTGAGES TRUSTEE RETAINED PRINCIPAL RECEIPTS".
See "THE MORTGAGES TRUST -- MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF
MORTGAGES TRUSTEE PRINCIPAL RECEIPTS PRIOR TO THE OCCURRENCE OF A TRIGGER
EVENT" for a detailed description of the distribution of mortgages trustee
principal receipts on each distribution date prior to a trigger event.
Funding is entitled to receive distributions of principal received on the
mortgage loans after the occurrence of certain trigger events in the following
amounts:
* following the occurrence of an asset trigger event, mortgages
trustee principal receipts will be paid to Funding in proportion to
its percentage share of the trust property and to the seller in
proportion to its percentage share of the trust property; and
* following the occurrence of a non-asset trigger event and until the
occurrence of an asset trigger event, all principal receipts on the
mortgage loans will be distributed to Funding until the Funding
share of the trust property is zero.
In addition, Funding will be entitled on a distribution date to receive all
of the mortgages trustee retained principal receipts after the occurrence of an
asset trigger event if the immediately preceding distribution date was a seller
share event distribution date.
See "THE MORTGAGES TRUST -- MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF
MORTGAGES TRUSTEE PRINCIPAL RECEIPTS AFTER THE OCCURRENCE OF A TRIGGER EVENT"
for a detailed description of the distribution of principal received on the
mortgage loans on each distribution date following a trigger event.
28
Losses on the mortgage loans generally are allocated to each of Funding and
the seller in accordance with each of Funding's and the seller's respective
percentage share of the trust property calculated on the immediately preceding
distribution date (or, in certain circumstances, each of Funding's and the
seller's respective weighted average percentage share of the trust property as
calculated on the relevant distribution date). However, certain losses related
to re-draws and/or set-off by borrowers may, in limited circumstances, be
allocated solely to the seller. For a detailed description of how losses on the
mortgage loans are allocated to the intercompany loan of each issuer, see "THE
INTERCOMPANY LOAN AGREEMENT -- ALLOCATION OF LOSSES".
THE INTERCOMPANY LOAN
On the closing date, we will lend an amount in sterling equal to the
proceeds of the issue of the notes to Funding. Funding will use the proceeds of
the intercompany loan to pay to the mortgages trustee a further contribution
for an increased Funding share of the trust property pursuant to the mortgages
trust deed which, upon receipt by the mortgages trustee, will be paid to the
seller as initial consideration for Funding increasing its beneficial interest
in the trust property. Funding's further contribution to the mortgages trustee
will increase the Funding share of the trust property and the initial
consideration from the mortgages trustee to the seller will correspondingly
decrease the seller share of the trust property.
Funding will repay the intercompany loan from payments received from the
mortgages trustee, as described under "-- THE MORTGAGES TRUST". We will make
payments of interest on, and principal of, the notes principally from payments
of interest and principal made by Funding to us under the intercompany loan. We
do not intend to accumulate surplus cash. Under the terms of the intercompany
loan agreement and prior to the occurrence of a trigger event and enforcement
of the Funding security and/or the issuer security, Funding is required to
distribute to us:
* an amount up to our allocable share of all of the revenue receipts
and other income from the trust property that Funding received from
the mortgages trustee prior to the relevant payment date (our
allocable share being equal to the outstanding principal balance of
our intercompany loan divided by the aggregate outstanding
principal balance of our intercompany loan, the previous
intercompany loans and any new intercompany loans, after
subtracting certain fees and expenses payable by Funding in
priority to us); and
* an amount equal to the principal amount due on our intercompany
loan or an amount up to our allocable share (as described in the
previous bullet point) of all of the principal receipts from the
trust property that Funding received from the mortgages trustee
prior to the relevant payment date.
In certain circumstances, our allocable share may be increased by the amount
standing to the credit of the issuer reserve fund and/or the issuer liquidity
reserve fund, if any, held by Funding in respect of our intercompany loan. In
other circumstances (for example, to the extent of amounts recorded on our
issuer principal deficiency ledger) we may receive less than our allocable
share.
For a detailed description of Funding's payments of interest and principal
under the intercompany loan, see "THE INTERCOMPANY LOAN AGREEMENT -- PAYMENT OF
INTEREST" and "THE INTERCOMPANY LOAN AGREEMENT -- REPAYMENT OF THE INTERCOMPANY
LOAN".
The circumstances under which we can take action against Funding if it does
not make a payment under the intercompany loan are limited. In particular, it
will not be an event of default in respect of the intercompany loan if Funding
does not pay some or all amounts due in respect of the intercompany loan where
Funding does not have the money to make the relevant payment. However, the
occurrence of an event of default under the previous intercompany loans and/or
any new intercompany loan may trigger an acceleration of the intercompany loan
between Funding and us, because each previous
29
issuer and any new issuer will share in the same security as us under the
Funding deed of charge. For more information on events of default under the
intercompany loan generally, see "THE INTERCOMPANY LOAN AGREEMENT".
THE SECURITY TRUSTEE
The Bank of New York is the security trustee. Its address is One Canada
Square, 48th Floor, London E14 5AL.
SECURITY GRANTED BY FUNDING AND THE ISSUER
To secure its obligations to the previous issuers under the previous
intercompany loans and to secure its obligations to its other secured
creditors, Funding entered into a Funding deed of charge on March 26, 2001
(with respect to the first issuer) and entered into deeds of accession to the
Funding deed of charge on September 28, 2001 (with respect to the second
issuer), on March 20, 2002 (with respect to the third issuer), on September 23,
2002 (with respect to the fourth issuer), on January 27, 2003 (with respect to
the fifth issuer) and on May 21, 2003 (with respect to the sixth issuer). On
the closing date, Funding will enter into a deed of accession with us and the
other parties that entered into the original deed of charge on March 26, 2001
to secure its obligations to us under the intercompany loan and to the start-up
loan provider under the start-up loan agreement. Together, we refer to the deed
of charge and the deeds of accession as the Funding deed of charge. Pursuant to
the Funding deed of charge, Funding grants security under English law and (in
relation to any property situated in Jersey) Jersey law over all of its assets
in favor of the security trustee for itself and on behalf of the Funding
secured creditors. Funding will also grant a security interest to the security
trustee for our benefit (but not for the benefit of any other Funding secured
creditor) in respect of the Funding (Granite 03-3) GIC account. Besides the
previous issuers (in relation to the issuance of the previous notes) and
ourselves, Funding's secured creditors are the account bank, the Funding GIC
provider, the mortgages trustee, the corporate services provider, the security
trustee, each start-up loan provider, Northern Rock, in its capacity as cash
manager, and any new Funding secured creditor who accedes to the Funding deed
of charge from time to time (including any new issuer).
Save as otherwise provided in relation to any Funding (Issuer) GIC account,
the security trustee will hold that security for the benefit of Funding's
secured creditors, including us, the previous issuers and, after the closing
date, any new issuers or other creditors who accede to the Funding deed of
charge. This means that Funding's obligations to us under the intercompany loan
and to the other secured creditors will be secured substantially over the same
assets. Except in very limited circumstances, only the security trustee will be
entitled to enforce the security granted by Funding. For more information on
the security granted by Funding, see "SECURITY FOR FUNDING'S OBLIGATIONS". For
details of the Funding post-enforcement priority of payments, see "CASHFLOWS".
As the Funding deed of charge was created prior to September 15, 2003, the
prohibition in Section 72A of the Insolvency Act 1986 on the appointment of an
administrative receiver under charges created after that date will not apply to
any appointment made pursuant to the Funding deed of charge.
To secure our obligations to you and to our other secured creditors, we will
grant security under English law and (in relation to any property situated in
Jersey) Jersey law over all of our assets in favor of the note trustee. Our
secured creditors are the note trustee, the issuer cash manager, the issuer
account bank, the paying agents, the agent bank, the transfer agent, the
registrar, the dollar currency swap provider, the euro currency swap provider,
the basis rate swap provider, the corporate services provider and you.
The note trustee will hold that security for the benefit of our secured
creditors. This means that our obligations to our other secured creditors will
be secured over the same assets that secure our obligations under the notes.
Except in very limited circumstances, only the note trustee will be entitled to
enforce the security granted by us, and as the note
30
trustee will not be entitled to assign to a third party its or our rights under
the intercompany loan agreement following the service of a note enforcement
notice, the most likely consequence of the issuer security becoming enforceable
will be that monies received by the note trustee from Funding will be applied by
the note trustee (or the issuercash manager on its behalf) to make payments on
the notes in accordance with the issuer post-enforcement priority of payments.
For more information on the security granted by us, see "SECURITY FOR THE
ISSUER'S OBLIGATIONS". For details of post-enforcement priority of payments, see
"CASHFLOWS".
We expect that an appointment of an administrative receiver by the note
trustee under the issuer deed of charge will not be prohibited by Section 72A of
the Insolvency Act 1986 as the appointment will fall within the exception set
out under Section 72B of the Insolvency Act 1986 (First Exception: Capital
Market). SWAP PROVIDERS
The basis rate swap provider is Northern Rock plc. Its registered office is
at Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL England. The
dollar currency swap provider is Swiss Re Financial Products Corporation of 55
East 52nd Street, 39th Floor, New York, New York 10055, and the euro currency
swap provider is Citibank, N.A., acting through its London branch of Citigroup
Centre, Canada Square, Canary Wharf, London E14 5LB.
The basis rate swap provider will enter into a basis rate swap agreement
with us and the note trustee. The dollar currency swap provider will enter into
the dollar currency swap agreements with us and the note trustee. The euro
currency swap provider will enter into the euro currency swap agreements with
us and the note trustee.
SWAP AGREEMENTS
Borrowers make payments under the mortgage loans in pounds sterling. Some of
the mortgage loans carry variable rates of interest, some of the mortgage loans
pay interest at a fixed rate or rates of interest and some of the flexible
mortgage loans pay interest at variable rates of interest no higher than the
rate offered by a basket of UK mortgage lenders or pay interest at a rate which
tracks the Bank of England base rate. However, these interest rates on the
mortgage loans which will fund the interest payable under the intercompany loan
will not necessarily match the floating rates on the notes. To deal with this
potential mismatch, we will enter into a basis rate swap documented under the
basis rate swap agreement. Under the basis rate swap, we will make payments to
the basis rate swap provider based on the weighted average of each of the
variable rates from several UK mortgage lenders, the different rates of
interest payable on the fixed rate mortgage loans and the different rates of
interest payable on the seller's flexible mortgage loans, and the basis rate
swap provider will make payments to us based on a margin over 3-month sterling
LIBOR.
Payments made by the mortgages trustee to Funding under the mortgages trust
deed are, and payments made by Funding to us under the intercompany loan and by
the basis rate swap provider to us under the basis rate swap will be, made in
pounds sterling. So that you can receive payments on the series 1 notes in US
dollars, we will enter into the dollar currency swap agreements with the dollar
currency swap provider and the note trustee. Under the dollar currency swaps,
we will pay to the dollar currency swap provider a portion of sterling amounts
received on the intercompany loan and the basis rate swap in the same priority
as payments on the related class of notes, and the dollar currency swap
provider will pay to us amounts in US dollars that are in proportion to the
amounts paid by us to fund the payment of the relevant classes of series 1
notes.
Similarly, to enable us to make payments on the series 2 notes in euro, we
will enter into the euro currency swap agreements with the euro currency swap
provider and the note trustee. Under the euro currency swaps, we will pay to
the euro currency swap provider a portion of sterling amounts received on the
intercompany loan and the basis
31
rate swap in the same priority as payments on
the related class of notes, and the euro currency swap provider will pay to us
amounts in euro that are in proportion to the amounts paid by us to fund the
payment of the relevant classes of series 2 notes.
POST-ENFORCEMENT CALL OPTION
The post-enforcement call option agreement will be entered into between us,
the note trustee (as agent for the noteholders) and by a subsidiary of Holdings
called GPCH Limited. The terms of the option will require, upon exercise of the
option granted to GPCH Limited by the note trustee, the transfer to GPCH Limited
of all (but not some only) of the notes. The option may be exercised upon the
earlier of (1) within 20 days following the final maturity date of the latest
maturing notes, the note trustee certifying that there is no further amount
outstanding under the related intercompany loan, and (2) the enforcement by the
note trustee of the security granted by us under the issuer deed of charge as
certified by the note trustee (following the note trustee's determination that
there are no further assets available to pay amounts due and owing to the
noteholders). If the earlier of the foregoing two events is the enforcement of
the security under the issuer deed of charge, the option may only be exercised
if the note trustee has determined that there is not enough money to pay all
amounts due to the noteholders and has distributed to the noteholders their
respective shares of the remaining proceeds. The noteholders will be bound by
the terms of the notes to transfer the notes to GPCH Limited in these
circumstances. The noteholders will not be paid more than a nominal sum for that
transfer.
As the post-enforcement call option may only be exercised in the two
situations described above, the economic position of the noteholders will not
be further disadvantaged. In addition, exercise of the post-enforcement call
option and delivery by the noteholders of the notes to GPCH Limited will not
extinguish any other rights or claims that these noteholders may have against
us other than the rights to payment of interest and repayment of principal
under the notes.
RATINGS OF THE SERIES 1 NOTES
The series 1 class A notes are expected to be assigned an "AAA" rating by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc., an "Aaa" rating by Moody's Investors Service Limited and an "AAA" rating
by Fitch Ratings. The series 1 class B notes are expected to be assigned an
"AA" rating by Standard & Poor's, an "Aa3" rating by Moody's and an "AA" rating
by Fitch. The series 1 class M 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. The
series 1 class C notes are expected to be assigned a "BBB" rating by Standard &
Poor's, a "Baa2" rating by Moody's and a "BBB" rating by Fitch.
The ratings assigned to each class of notes address the likelihood of full
and timely payment to you of all payments of interest on each payment date
under those classes of notes. The ratings also address the likelihood of
ultimate repayment of principal on or before the final maturity date of each
class of notes. The ratings do not address the likely actual rate of
prepayments on the mortgage loans. The rate of prepayments, if different than
originally anticipated, could adversely affect the yield realized on your
notes.
A credit rating is not a recommendation to buy, sell or hold securities and
may be subject to revision, suspension or withdrawal at any time by the
assigning rating organization if, in its judgement, circumstances in the future
so warrant.
Standard & Poor's, Moody's and Fitch are collectively referred to in this
document as the "RATING AGENCIES", which term includes any further or
replacement rating agency of similar standing in the international market
appointed by us to give a credit rating to the notes or any class of the notes.
32
LISTING
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the Financial
Services and Markets Act 2000 for the notes to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for each class of the notes to be admitted to trading
by the London Stock Exchange plc.
THE PREVIOUS ISSUERS AND NEW ISSUERS
On March 26, 2001, the first issuer, which is a wholly-owned subsidiary of
Funding, issued series of notes and from those issue proceeds made an
intercompany loan to Funding. The second issuer, the third issuer, the fourth
issuer, the fifth issuer and the sixth issuer, each of which is also a wholly-
owned subsidiary of Funding, issued separate series of notes and from those
issue proceeds each made a separate intercompany loan to Funding between
September 28, 2001 and May 21, 2003. Funding's obligations under those previous
intercompany loans are secured by the same security that secures our
intercompany loan. In addition, it is expected that in the future, subject to
satisfaction of certain conditions, Funding will establish additional
wholly-owned subsidiary companies to issue new notes to investors. One of these
conditions is that the ratings of your notes will not be downgraded or otherwise
adversely affected at the time a new issuer issues new notes. Any new issuers
will loan the proceeds of any issue of new notes to Funding pursuant to the
terms of a new intercompany loan agreement. Funding will use the proceeds of the
new intercompany loan (less any amount utilized to fund any issuer reserve fund
for any new issuer) to do one or more of the following:
* pay to the mortgages trustee Funding's initial contribution for the
Funding share in respect of any new mortgage loans to be assigned
by the seller to the mortgages trustee (which funds the mortgages
trustee will pay to the seller in satisfaction of the initial
purchase price payable for the assignment of the new mortgage loans
and their related security to the mortgages trustee) and that
payment by Funding to the mortgages trustee will result in an
increase in the Funding share of the trust property;
* pay to the mortgages trustee a further contribution to increase the
Funding share of the trust property; or
* refinance an existing intercompany loan or intercompany loans,
which will not result in a change in the size of the Funding share
of the trust property. In this circumstance (subject to the terms
of the relevant notes permitting optional redemption), Funding will
use the proceeds of the new intercompany loan to repay an existing
intercompany loan, which the relevant issuer will use to repay the
relevant noteholders. If our intercompany loan to Funding is
refinanced, you could be repaid early.
Regardless of which of these uses of proceeds is selected, the previous
notes issued by the previous issuers and any new notes issued by a new issuer
ultimately will be secured by the same trust property (primarily consisting of
the mortgage portfolio) as the notes issued by us described in this prospectus.
Funding will apply amounts it receives from the trust property to pay
amounts it owes under the intercompany loan, the previous intercompany loans
and any new intercompany loan without regard to when the Funding share of the
trust property increased or when the relevant intercompany loan was made. You
should note that payments by Funding to the previous issuers under the previous
intercompany loans and to new issuers under any new intercompany loans will
rank equally in priority with payments made by Funding to us under our
intercompany loan, other than in respect of the priority made in the allocation
of principal receipts to an issuer (such as the fifth issuer) that will have
issued a money market note, as described under "CASHFLOWS -- DISTRIBUTION OF
FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT OF THE FUNDING
SECURITY -- RULES FOR
33
APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS". In other words, subject to
foregoing exception, interest and principal payments under our intercompany loan
will not have priority over interest and principal payments on the previous
intercompany loans or any new intercompany loans that are made at later dates.
Instead, subject to the exception described above, Funding will initially
allocate principal to repay each outstanding intercompany loan in no order of
priority among them but in proportion to each relevant issuer's allocable
interest in the Funding share of the trust property (or, if provided under the
relevant intercompany loan agreement, will set aside that allocable interest in
the Funding share of principal receipts for that issuer). However, the amount
and timing of payments on an intercompany loan are determined by the amount and
timing of payments on the notes issued by the relevant issuer and by the
priorities for payment applicable to those notes. The terms of the previous
notes issued by the previous issuers and of any new notes issued by a new issuer
may therefore result in those previous notes and the related previous
intercompany loans or those new notes and the related new intercompany loan
being repaid prior to the repayment of the notes issued by us under this
prospectus and our related intercompany loan regardless of the ratings of such
previous notes or new notes relative to the notes.
Ultimately, our obligations to pay interest and principal to you broadly
reflect the corresponding obligations of Funding to us under the intercompany
loan.
UNITED KINGDOM TAX STATUS
Subject to important qualifications and conditions set out under "MATERIAL
UNITED KINGDOM TAX CONSEQUENCES", including as to final documentation and
assumptions, Sidley Austin Brown & Wood, our UK tax advisers, are of the
opinion that:
* if and for so long as the offered notes are listed on a "RECOGNISED
STOCK EXCHANGE", no UK withholding tax will be required on interest
payments to any offered noteholder. If the notes cease to be so
listed at the time of the relevant interest payment, UK withholding
tax at the current rate of 20% will be imposed on interest paid on
the notes. US residents may be able to reclaim this withholding tax
under the double taxation treaty between the US and the UK;
* US persons who are not and have never been either resident or
ordinarily resident in the UK and who are not carrying on a trade,
profession or vocation through a branch or agency (or, in
the case of a noteholder which is a company and for accounting
periods beginning on or after January 1, 2003, which is not
carrying on a trade through a permanent establishment) in the UK
will not be subject to UK taxation in respect of payments of
principal and interest on the offered notes, except to the extent
that any withholding or deduction from interest payments is
required, as described in the paragraph above;
* US resident noteholders will not be liable to UK tax in respect of
a disposal of the notes provided they are not within the charge to
UK corporation tax and (i) are not resident or ordinarily resident
in the UK, or (ii) do not carry on a trade, profession or vocation
in the UK through a branch or agency in connection with which
interest is received or to which the notes are attributable;
* no UK stamp duty or stamp duty reserve tax is payable on the issue
or transfer of any offered note;
* Funding and the issuer generally will be subject to UK corporation
tax, currently at a rate of 30%, on the profit reflected in their
respective profit and loss accounts as increased by the amounts of
any non-deductible expenses or losses. Examples of non-deductible
expenses and losses include general provisions for bad debts. In
respect of Funding, the profit in the profit and loss account will
not exceed 0.01% of the Funding available revenue receipts. In
respect of the issuer, the profit in the profit and loss account
will not exceed 0.01% of the interest
34
received under the intercompany loan. Any liability to UK
corporation tax will be paid out of the available revenue receipts
of Funding and the issuer, respectively; and
* the mortgages trustee will have no liability to UK tax in respect
of any income, profit or gain arising under these arrangements.
Accordingly, the mortgages trustee will have no liability to UK tax
in relation to amounts which it receives on behalf of Funding or
the seller under the mortgages trust.
UNITED STATES TAX STATUS
While not free from doubt, in the opinion of Sidley Austin Brown & Wood LLP,
our US tax advisers, the series 1 notes will be treated as debt for US federal
income tax purposes. See "MATERIAL UNITED STATES TAX CONSEQUENCES".
Our US tax advisers have also provided their opinion that, assuming
compliance with the transaction documents, the mortgages trustee acting in its
capacity as trustee of the mortgages trust, Funding and the issuer will not be
subject to US federal income tax.
JERSEY (CHANNEL ISLANDS) TAX STATUS
It is the opinion of Jersey (Channel Islands) tax counsel that the mortgages
trustee is resident in Jersey for taxation purposes and will be liable to
income tax in Jersey at a rate of 20% in respect of the profits it makes from
acting as trustee of the mortgages trust. The mortgages trustee will not be
liable for any income tax in Jersey in respect of any income it receives in its
capacity as mortgages trustee on behalf of the beneficiaries of the mortgages
trust.
Subject to paying an annual exempt company charge and certain other
considerations, Funding will have "EXEMPT COMPANY" status within the meaning of
Article 123A of the Income Tax (Jersey) Law, 1961, for so long as such status
is available under Jersey law. As an "EXEMPT COMPANY", Funding will not be
liable to Jersey income tax other than on Jersey source income (except bank
deposit interest on Jersey bank accounts). The income of Funding will not be
Jersey source income insofar as the income of Funding arises only from the
trust property and that property is either situated outside Jersey or is
interest on bank or building society deposits in Jersey. It is the opinion of
Jersey (Channel Islands) tax counsel that for so long as Funding is an "EXEMPT
COMPANY", payments in respect of the intercompany loan will not be subject to
Jersey taxation and no withholding in respect of taxation will be required on
such payments to the issuer under the intercompany loan. See "MATERIAL JERSEY
(CHANNEL ISLANDS) TAX CONSEQUENCES".
On June 3, 2003, the European Union Council of Economic and Finance
Ministers reached political agreement on the adoption of a Code of Conduct on
Business Taxation. Although Jersey is not a member of the European Union, the
Policy & Resources Committee of the States of Jersey has announced that, in
keeping with Jersey's policy of constructive international engagement, it
intends to propose legislation to replace the Jersey exempt company regime by
the end of 2008 with a general zero rate of corporate tax.
ERISA CONSIDERATIONS FOR INVESTORS
The series 1 notes will be eligible for purchase by employee benefit and
other plans subject to Section 406 of ERISA or Section 4975 of the Code and by
governmental plans that are subject to any state, local or other federal law of
the United States that is substantially similar to Section 406 of ERISA or
Section 4975 of the Code, subject to consideration of the issues described in
this prospectus under "ERISA CONSIDERATIONS". Each purchaser of any such notes
(and all subsequent transferees thereof) will be deemed to have represented and
warranted that its purchase, holding and disposition of such notes will not
result in a non-exempt prohibited transaction under ERISA or the Code (or in
the case of any governmental plan, any substantially similar state, local or
other federal law of
35
the United States). In addition, any fiduciary of a plan
subject to the fiduciary responsibility provisions of ERISA or similar
provisions of state, local or other federal laws of the United States should
consult with their counsel to determine whether an investment in the notes
satisfies the prudence, investment diversification and other applicable
requirements of those provisions.
FEES
The table below sets out the on-going fees to be paid by the issuer, Funding
and the mortgages trustee to transaction parties.
TYPE OF FEE AMOUNT OF FEE PRIORITY IN CASHFLOW FREQUENCY
- ---------------------------------- ---------------------- ---------------------------- ----------------------
Administration fee 0.12% per year of the Ahead of all revenue Each distribution date
Funding share of trust amounts payable to
property Funding by the mortgages
trustee
Funding cash management fee [GBP]100,000 each year Ahead of all revenue Each payment date
amounts payable by
Funding and allocable to
an issuer
Previous issuers' cash Estimated [GBP]780,000 Ahead of all interest Each payment date
management fees, corporate each year payments on the notes
expenses and fees payable to the
note trustee and each previous
issuer's principal paying agent,
paying agent, transfer agent,
registrar and agent bank
Issuer cash management fee [GBP]117,500 each year Ahead of all interest Each payment date
payments on the notes
Corporate expenses of Estimated [GBP]13,000 Ahead of all revenue Each payment date
mortgages trustee each year amounts payable to
Funding by the mortgages
trustee
Corporate expenses of Funding Estimated [GBP]10,500 Ahead of all revenue Each payment date
each year amounts payable by
Funding and allocable to
an issuer
Corporate expenses of issuer Estimated [GBP]6,000 Ahead of all interest Each payment date
each year payments on the notes
Fee payable by Funding to Estimated [GBP]6,500 In respect of the security Each payment date
security trustee, by issuer to the each year trustee, ahead of all
note trustee and by issuer to the revenue amounts payable
principal paying agent, paying by Funding and allocable to
agent, transfer agent, registrar an issuer, and in respect of
and agent bank the note trustee and the
agents, ahead of all
interest payments on the
notes
Each of the above fees is inclusive of value added tax ("VAT"), which is
currently assessed at 17.5%. The VAT-exclusive amount of the fees will be
subject to adjustment if the applicable rate of VAT changes so that the actual
amount of each fee (inclusive of VAT and regardless of the VAT rate assessed)
will be the amount as set out above.
36
RISK FACTORS
This section describes the principal risk factors associated with an
investment in the notes. If you are considering purchasing our notes, you
should carefully read and think about all the information contained in this
document, including the risk factors set out here, prior to making any
investment decision.
The risks and uncertainties described below are not the only ones relating
to the notes. Additional risks and uncertainties not presently known to us may
also impair your investment. In addition, this prospectus contains forward-
looking statements that involve risks and uncertainties. Actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including the risks described below and elsewhere
in this prospectus.
YOU CANNOT RELY ON ANY PERSON OTHER THAN US TO MAKE PAYMENTS ON THE NOTES
We are the only party responsible for making payments on the notes. The
notes do not represent an interest in or obligation of, and are not insured or
guaranteed by, any of Northern Rock plc, the underwriters, Funding, the
previous issuers, the mortgages trustee, the security trustee, the note
trustee, any swap provider or any of their respective affiliates or any other
party to the transaction other than us.
WE HAVE A LIMITED AMOUNT OF RESOURCES AVAILABLE TO US TO MAKE PAYMENTS ON THE
NOTES
Our ability to make payments of interest on, and principal of, the notes and
to pay our operating and administrative expenses will depend primarily on funds
being received under the intercompany loan. In addition, we will rely on the
basis rate swap to provide payments on all the notes and on the dollar currency
swaps and the euro currency swaps to provide payments on the notes denominated
in US dollars and in euro, respectively.
We will not have any other significant sources of funds available to meet
our obligations under the notes and/or any other payments ranking in priority
to the notes. If the resources described above cannot provide us with
sufficient funds to enable us to make required payments on the notes, you may
incur a loss of interest and/or principal which would otherwise be due and
payable on your notes.
FUNDING IS NOT REQUIRED TO MAKE PAYMENTS ON THE INTERCOMPANY LOAN IF IT DOES
NOT HAVE ENOUGH MONEY TO DO SO, WHICH COULD ADVERSELY AFFECT PAYMENT ON THE
NOTES
Funding's ability to pay amounts due on the intercompany loan will depend
upon:
* Funding receiving enough funds from the Funding share of the trust
property, including revenue receipts and principal receipts on the
mortgage loans included in the mortgages trust on or before each
payment date;
* on any payment date, Funding's entitlement to access funds standing
to the credit of the issuer reserve fund and/or the issuer
liquidity reserve fund, if any, subject to certain limitations (as
described under "CREDIT STRUCTURE -- ISSUER RESERVE FUND" and
"CREDIT STRUCTURE -- ISSUER LIQUIDITY RESERVE FUND"); and
* (in the case of interest due under the intercompany loan) the
amount of funds credited to the Funding reserve fund (as described
under "CREDIT STRUCTURE -- FUNDING RESERVE FUND").
According to the terms of the mortgages trust deed, the mortgages trustee is
obliged to pay to Funding on each distribution date (a) that portion of revenue
receipts on the mortgage loans which is payable to Funding in accordance with
the terms of the mortgages trust deed and (b) that portion of principal
receipts on the mortgage loans which is payable to Funding in accordance with
the terms of the mortgages trust deed.
On each payment date, however, Funding will only be obliged to pay amounts
due to us under the intercompany loan to the extent that it has funds available
to it after making payments ranking in priority to us, such as payments of
certain fees and expenses of
37
Funding. Furthermore, Funding is obliged to make payments to the previous
issuers under the previous intercompany loans and, if Funding subsequently
enters into a new intercompany loan with a new issuer, Funding will also be
obliged to make payments due to such new issuer under such new intercompany
loan. These payments will rank equally with payments to us, other than in
respect of the priority made in respect of the allocation of principal receipts
to an issuer (such as the fifth issuer) that issued a money market note, all in
accordance with the relevant Funding priority of payments. If Funding does not
pay amounts to us under the intercompany loan because it does not have
sufficient funds available, those amounts will be due but not payable until
funds are available to pay those amounts in accordance with the relevant
Funding priority of payments. Funding's failure to pay those amounts to us when
due in such circumstances will not constitute an event of default under the
intercompany loan.
If there is a shortfall between the amounts payable by Funding to us under
the intercompany loan agreement and the amounts payable by us on the notes,
then depending on the other sources of funds available to Funding referred to
above, you may not receive the full amount of interest and/or principal which
would otherwise be due and payable on the notes.
OUR RECOURSE TO FUNDING UNDER THE INTERCOMPANY LOAN IS LIMITED, WHICH COULD
ADVERSELY AFFECT PAYMENT ON THE NOTES
If, on the final repayment date of the intercompany loan, there is a
shortfall between the amount required by us to pay all outstanding interest
and/or principal in respect of the notes and the amount available to Funding to
pay amounts due under the intercompany loan to fund repayment of such amounts,
then Funding shall not be obliged to pay that shortfall to us under the
intercompany loan agreement. Any claim that we may have against Funding in
respect of that shortfall will then be extinguished. If there is a shortfall in
interest and/or principal payments under the intercompany loan agreement, we
may not have sufficient funds to make payments on the notes and you may incur a
loss on interest and/or principal which would otherwise be due and payable on
your notes.
ENFORCEMENT OF THE ISSUER SECURITY IS THE ONLY REMEDY FOR A DEFAULT IN OUR
OBLIGATIONS, AND THE NOTE TRUSTEE WILL NOT BE ABLE TO ASSIGN ITS OR OUR RIGHTS
UNDER THE INTERCOMPANY LOAN AGREEMENT
The only remedy for recovering amounts due on the notes is through the
enforcement of the issuer security. If Funding does not pay amounts due under
the intercompany loan because it does not have sufficient funds available,
those amounts will be deemed to be not due and payable, there will not be an
event of default under the intercompany loan and we will not have recourse to
the assets of Funding in that instance. We will only have recourse to the
assets of Funding if Funding has also defaulted on its obligations under the
intercompany loan and the security trustee (on our behalf and on behalf of the
other Funding secured creditors) has enforced the Funding security.
As the note trustee will not be entitled to assign to a third party its or
our rights under the intercompany loan agreement following the service of a
note enforcement notice, the most likely consequence of the issuer security
becoming enforceable will be that monies received by the note trustee from
Funding will be applied by the note trustee (or the issuer cash manager on its
behalf) to make payments on the notes in accordance with the issuer post-
enforcement priority of payments. However, the proceeds of that enforcement may
be insufficient to pay all interest and principal due on the notes.
THERE MAY BE A CONFLICT BETWEEN THE INTERESTS OF THE HOLDERS OF THE VARIOUS
CLASSES OF NOTES, AND THE INTERESTS OF OTHER CLASSES OF NOTEHOLDERS MAY PREVAIL
OVER YOUR INTERESTS
The trust deed, the issuer deed of charge and the terms of the notes will
provide that the note trustee is to have regard to the interests of the holders
of all the classes of notes. There may be circumstances, however, where the
interests of one class of the
38
noteholders conflict with the interests of another class or classes of the
noteholders. In general, the note trustee will give priority to the interests
of the holders of the most senior class of notes such that:
* the note trustee is to have regard only to the interests of the
class A noteholders in the event of a conflict between the
interests of the class A noteholders on the one hand and the class
B noteholders and/or the class M noteholders and/or the class C
noteholders on the other hand;
* (if there are no class A notes outstanding) the note trustee is to
have regard only to the interests of the class B noteholders in the
event of a conflict between the interests of the class B
noteholders on the one hand and the class M noteholders and/or the
class C noteholders on the other hand; and
* (if there are no class A notes or class B notes outstanding) the
note trustee is to have regard only to the interests of the class M
noteholders in the event of a conflict between the interests of the
class M noteholders on the one hand and the class C noteholders on
the other hand.
THERE MAY BE A CONFLICT BETWEEN THE INTERESTS OF THE HOLDERS OF NOTES OF ANY
CLASS OF THE SERIES 1 NOTES AND THE HOLDERS OF THE SAME CLASS OF THE SERIES 2
NOTES AND/OR SERIES 3 NOTES, AND THE INTERESTS OF OTHER NOTEHOLDERS MAY PREVAIL
OVER YOUR INTERESTS
There may also be circumstances where the interests of a class of
noteholders of one series of notes conflict with the interests of the
noteholders of the same class of a different series of notes and/or, in
relation to the series 1 class A notes, the interests of the noteholders of the
series 1 class A1 notes conflict with the interests of the noteholders of the
series 1 class A2 notes, the interests of the noteholders of the series 1 class
A1 notes conflict with the interests of the series 1 class A3 notes and the
interests of the noteholders of the series 1 class A2 notes conflict with the
interests of the series 1 class A3 notes. In general, the trust deed, the
issuer deed of charge and the terms of the notes will require a single meeting
of the holders of all series of the relevant class of notes whether or not
there is a conflict of interest between the holders of those different series
of that class of notes. As there will be no provision for separate meetings of
the holders of a class of notes of one series, a resolution may be passed by
holders of notes of one series of a relevant class which will bind the holders
of each other series of that same class.
THERE MAY BE CONFLICTS BETWEEN US, THE PREVIOUS ISSUERS AND ANY NEW ISSUERS,
AND OUR INTERESTS MAY NOT PREVAIL, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE
NOTES
The security trustee will exercise its rights under the Funding deed of
charge only in accordance with directions given by the note trustee. If
resolutions of holders of the previous notes and any new notes result in
conflicting directions being given to the note trustee (and, ultimately, from
the note trustee to the security trustee), the security trustee shall have
regard only to the directions of the noteholders of the issuer, each previous
issuer or new issuers that has or have the highest ranking class of notes
outstanding at such time (meaning the class A notes so long as there are any
class A notes outstanding and thereafter the class B notes so long as there are
no class A notes outstanding and thereafter the class M notes so long as there
are neither class A notes nor class B notes outstanding and thereafter the
class C notes so long as there are no class A notes, class B notes or class M
notes outstanding and thereafter special repayment notes so long as there are
no class A notes, class B notes, class M notes or class C notes outstanding).
However, if more than one issuer has notes outstanding that are the highest
ranking notes outstanding among all issuers, the note trustee shall instead
have regard to the resolutions of the holders of notes of that issuer that has
the greatest aggregate principal amount of notes outstanding at such time. If
there is a conflict between us and any previous issuer and/or any new issuers
and we do not have the highest ranking notes outstanding among
39
all issuers (or the greatest aggregate principal amount of notes outstanding at
such time), our interests may not prevail. This could ultimately cause a
reduction in the payments that you receive on your notes.
IF FUNDING ENTERS INTO NEW INTERCOMPANY LOANS, THESE NEW INTERCOMPANY LOANS AND
ACCOMPANYING NEW NOTES MAY RANK AHEAD OF THE INTERCOMPANY LOAN AND THE NOTES AS
TO PAYMENTS
It is expected that in the future, subject to satisfaction of certain
conditions, Funding will establish additional wholly-owned subsidiary companies
to issue new notes to investors. The proceeds of each new issue of new notes
will be used by the new issuer to make a new intercompany loan to Funding.
Funding will use the proceeds of the new intercompany loan (less any amount
utilized to fund any applicable reserve fund for any new issuer) to do one or
more of the following:
* pay to the mortgages trustee Funding's initial contribution for the
Funding share in respect of any new trust property to be assigned
by the seller to the mortgages trustee;
* pay to the mortgages trustee a further contribution to increase the
Funding share of the trust property; and/or
* refinance an existing intercompany loan or intercompany loans
outstanding at that time (and if our intercompany loan to Funding
is refinanced, you could be repaid early).
Funding will apply amounts it receives from the trust property to pay
amounts it owes under the intercompany loan, the previous intercompany loans
and any new intercompany loan without regard to when the relevant intercompany
loan was made. You should note that payments by Funding to the previous issuers
under the previous intercompany loans and to new issuers under any new
intercompany loans will rank equally in priority with payments made by Funding
to us under our intercompany loan, other than in respect of the priority made
in the allocation of principal receipts to an issuer (such as the fifth issuer)
that issued a money market note, as described under "CASHFLOWS -- DISTRIBUTION
OF FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT OF THE FUNDING
SECURITY -- RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS".
Subject to the foregoing exception, Funding will initially allocate principal
to repay each outstanding intercompany loan in no order of priority among them
but in proportion to each relevant issuer's allocable interest in the Funding
share of the trust property (or, if provided under the relevant intercompany
loan agreement, will set aside that allocable interest in the Funding share of
principal receipts for that issuer).
The amount and timing of payments on an intercompany loan are determined by
the amount and timing of payments on the notes issued by the relevant issuer
and by the priorities for payment applicable to those notes. The terms of the
previous notes issued by the previous issuers and of any new notes issued by a
new issuer may therefore result in those previous notes and the related
previous intercompany loans or those new notes and the related new intercompany
loan being repaid prior to the repayment of the notes issued by us under this
prospectus and our related intercompany loan.
If Funding establishes new issuers to make new intercompany loans to
Funding, you will not have any right of prior review or consent with respect to
those new intercompany loans or the corresponding issuance by new issuers of
new notes. Similarly, the terms of the Funding transaction documents (including
the mortgage sale agreement, the mortgages trust deed, the Funding deed of
charge, the definitions of the trigger events and the seller share event and
the criteria for the assignment of new loans to the mortgages trustee) may be
amended to reflect the new issue. Your consent to these changes will not be
required. There can be no assurance that these changes will not affect the
cashflow available to pay amounts due on your notes.
40
Before issuing new notes, however, a new issuer will be required to satisfy
a number of conditions, including that the ratings of your notes will not be
downgraded or otherwise adversely affected at the time a new issuer issues new
notes.
NEW ISSUERS WILL SHARE IN THE SAME SECURITY GRANTED BY FUNDING TO US, AND THIS
MAY ULTIMATELY CAUSE A REDUCTION IN THE PAYMENTS YOU RECEIVE ON THE NOTES
A new issuer will become party to the Funding deed of charge and will be
entitled to share, on an equal ranking, in the security granted by Funding for
our benefit (and the benefit of the other Funding secured creditors) under the
Funding deed of charge. If the Funding security is enforced and there are
insufficient funds to make the payments that are due to all issuers, each
issuer will only be entitled to its proportionate share of those limited funds.
This could ultimately cause a reduction in the payments you receive on your
notes.
THE PREVIOUS ISSUERS AND THE OTHER FUNDING SECURED CREDITORS ALREADY SHARE IN
THE SAME SECURITY GRANTED BY FUNDING TO US, AND THIS MAY ULTIMATELY CAUSE A
REDUCTION IN THE PAYMENTS YOU RECEIVE ON THE NOTES
Funding has entered into previous intercompany loan agreements and it has
also entered into various agreements with other Funding secured creditors in
connection with the issuance of the previous intercompany loans. These Funding
secured creditors are already parties to the Funding deed of charge and are
entitled to share, on an equal ranking, in the security granted by Funding for
our benefit. If the Funding security is enforced and there are insufficient
funds to make the payments that are due to the previous issuers and to us, we
will only be entitled to our proportionate share of those limited funds. This
could ultimately cause a reduction in the payments you receive on your notes.
AS NEW MORTGAGE LOANS ARE ASSIGNED TO THE MORTGAGES TRUSTEE AND AS MORTGAGE
LOANS ARE IN CERTAIN CIRCUMSTANCES REMOVED FROM THE MORTGAGES TRUST, THE
CHARACTERISTICS OF THE TRUST PROPERTY MAY CHANGE FROM THOSE EXISTING AT THE
CLOSING DATE, AND THOSE CHANGES MAY DELAY OR REDUCE PAYMENTS ON THE NOTES
We do not guarantee that the characteristics of any new mortgage loans
assigned to the mortgages trustee will have the same characteristics as the
mortgage loans in the mortgage portfolio as of the closing date. In particular,
new mortgage loans may have different payment characteristics than the mortgage
loans in the mortgage portfolio as of the closing date. The ultimate effect of
this could be to delay or reduce the payments you receive on your notes or
increase the rate of repayment of the notes. However, the new mortgage loans
will be required to meet the conditions described under "ASSIGNMENT OF THE NEW
MORTGAGE LOANS AND THEIR RELATED SECURITY".
In addition, in order to promote the retention of borrowers, the seller may
periodically contact certain borrowers in respect of the seller's total
portfolio of outstanding mortgage loans in order to encourage a borrower to
review the seller's other mortgage products and to discuss shifting that
borrower to an alternative Northern Rock mortgage product. The seller also may
periodically contact borrowers in the same manner in order to offer to a
borrower the opportunity to apply for a further advance. The employee of the
seller who contacts a borrower will not know whether that borrower's original
mortgage loan has been sold to the mortgages trust. However, if the relevant
original mortgage loan made to that borrower happens to have been sold to the
mortgages trust and that borrower decides to switch mortgage products or take a
further advance, the seller then has the option of repurchasing that original
mortgage loan from the mortgages trust.
Generally, the borrowers that the seller may periodically contact are those
borrowers whose mortgage loans are not in arrears and who are otherwise in good
standing. To the extent that these borrowers switch to a different Northern
Rock mortgage product or take a further advance and their original mortgage
loans are repurchased by the seller, the
41
percentage of fully performing mortgage loans in the mortgage portfolio may
decrease, which could delay or reduce payments you receive on your notes.
However, as described above, the seller's decision as to which borrowers to
target for new mortgage products and/or further advances and the decision
whether to approve a new mortgage product and/or further advance for a
particular borrower will be made without regard to whether a borrower's
mortgage loan is included in the mortgage portfolio.
THE SELLER MAY CHANGE THE LENDING CRITERIA RELATING TO MORTGAGE LOANS WHICH ARE
SUBSEQUENTLY ASSIGNED TO THE MORTGAGES TRUSTEE WHICH COULD AFFECT THE
CHARACTERISTICS OF THE TRUST PROPERTY, AND WHICH COULD LEAD TO A DELAY OR A
REDUCTION IN THE PAYMENTS RECEIVED ON YOUR NOTES OR COULD INCREASE THE RATE OF
REPAYMENT OF THE NOTES
Each of the mortgage loans was originated in accordance with the seller's
lending criteria applicable at the time of origination, which lending criteria
in the case of each mortgage loan included in the mortgage portfolio as of the
closing date were the same as or substantially similar to the criteria
described later in this prospectus under "THE MORTGAGE LOANS -- ORIGINATION OF
THE MORTGAGE LOANS -- LENDING CRITERIA". These lending criteria consider a
variety of factors such as a potential borrower's credit history, employment
history and status and repayment ability, as well as the value of the property
to be mortgaged. In the event of the assignment of any new mortgage loans and
new related security to the mortgages trustee, the seller will warrant to the
mortgages trustee, Funding and the security trustee that those new mortgage
loans and new related security were originated in accordance with the seller's
lending criteria applicable at the time of their origination. However, the
seller retains the right to revise its lending criteria as determined from time
to time, and so the lending criteria applicable to any new mortgage loan at the
time of origination may not be the same as those set out in the section "THE
MORTGAGE LOANS -- ORIGINATION OF THE MORTGAGE LOANS -- LENDING CRITERIA".
If new mortgage loans that have been originated under revised lending
criteria are assigned to the mortgages trustee, the characteristics of the
trust property could change. This could lead to a delay or a reduction in the
payments received on your notes or it could increase the rate of repayment of
the notes.
IF PROPERTY VALUES DECLINE PAYMENTS ON THE NOTES COULD BE ADVERSELY AFFECTED
The security granted by Funding in respect of the intercompany loan, which
is the principal source of funding for your notes, consists, among other
things, of Funding's interest in the mortgages trust. Since the value of the
mortgage portfolio held by the mortgages trustee may increase or decrease, the
value of that security may decrease and will decrease if there is a general
decline in property values. We cannot guarantee that the value of a mortgaged
property will remain at the same level as on the date of origination of the
related mortgage loan. If the residential property market in the United Kingdom
experiences an overall decline in property values, the value of the security
created by the mortgage loans could be significantly reduced and, ultimately,
may result in losses to you if the security is required to be enforced.
THE TIMING AND AMOUNT OF PAYMENTS ON THE MORTGAGE LOANS COULD BE AFFECTED BY
GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS
To the extent that specific geographic regions have experienced or may
experience in the future weaker regional economic conditions and housing
markets than other regions, a concentration of the mortgage loans in such a
region may be expected to exacerbate all of the risks relating to the mortgage
loans described in this section. We can predict neither when and where such
regional economic declines may occur nor to what extent or for how long such
conditions may continue. See "THE MORTGAGE LOANS -- THE CUT-OFF DATE MORTGAGE
PORTFOLIO".
42
THE TIMING AND AMOUNT OF PAYMENTS ON THE MORTGAGE LOANS COULD BE AFFECTED BY
VARIOUS FACTORS WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES
Various factors influence mortgage delinquency rates, prepayment rates,
repossession frequency and the ultimate payment of interest and repayment of
principal. These factors include changes in the national or international
economic climate, regional economic or housing conditions, changes in tax laws,
interest rates, inflation, the availability of financing, yields on alternative
investments, political developments and government policies. Other factors in
borrowers' personal or financial circumstances may affect the ability of
borrowers to repay mortgage loans. Loss of earnings, illness, divorce and other
similar factors may lead to an increase in delinquencies by and bankruptcies of
borrowers, and could ultimately have an adverse impact on the ability of
borrowers to repay mortgage loans.
In addition, the ability of a borrower to sell a property given as security
for a mortgage loan at a price sufficient to repay the amounts outstanding
under the mortgage loan will depend upon a number of factors, including the
availability of buyers for that property, the value of that property and
property values and the property market in general at the time.
The intercompany loan is our principal source of income for repayment of the
notes. The principal source of income for repayment by Funding of the
intercompany loan is its interest in the mortgage loans held on trust by the
mortgages trustee for the benefit of Funding and the seller. If the timing and
payment of the mortgage loans is adversely affected by any of the risks
described above, the payments on your notes could be reduced or delayed.
THE YIELD TO MATURITY OF THE NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENTS
OR REDEMPTIONS ON THE MORTGAGE LOANS OR REPURCHASES OF MORTGAGE LOANS BY THE
SELLER
The yield to maturity of the notes of each class will depend mostly on (a)
the amount and timing of the repayment of principal on the mortgage loans and
(b) the price paid by the noteholders of each class of notes. The yield to
maturity of the notes of each class may be adversely affected by a higher or
lower than anticipated rate of prepayments on the mortgage loans.
The rate of prepayment of mortgage loans is influenced by a wide variety of
economic, social and other factors, including prevailing mortgage market
interest rates, the availability of alternative financing programs, local and
regional economic conditions and homeowner mobility. For instance, prepayments
on the mortgage loans may be due to borrowers refinancing their mortgage loans
and sales of mortgaged properties by borrowers (either voluntarily or as a
result of enforcement action taken), as well as the receipt of proceeds from
buildings insurance and life insurance policies. The rate of prepayment of
mortgage loans may also be influenced by the presence or absence of early
repayment charges. You should note that certain of the seller's flexible
mortgage loan products allow the borrower to make overpayments or repay the
entire current balance under the flexible mortgage loan at any time without
incurring an early repayment charge. See "THE MORTGAGE LOANS -- CHARACTERISTICS
OF THE MORTGAGE LOANS -- EARLY REPAYMENT CHARGES".
Variation in the rate and timing of prepayments of principal on the mortgage
loans may affect each class of notes differently depending upon amounts already
repaid by Funding to us under the intercompany loan and whether a trigger event
has occurred or the security granted by us under the issuer deed of charge has
been enforced. If prepayments on the mortgage loans occur less frequently than
anticipated, then the actual yields on your notes may be lower than you
anticipate and the amortization of the notes may take much longer than is
presently anticipated.
43
The yield to maturity of the notes may be affected by the repurchase of
mortgage loans subject to product switches, further advances or for breaches of
representations and warranties. If the seller is required to repurchase from
the mortgages trustee a mortgage loan or mortgage loans under a mortgage
account and their related security because one of the mortgage loans does not
comply with the mortgage loan representations and warranties in the mortgage
sale agreement, then the payment received by the mortgages trustee will have
the same effect as a prepayment of such mortgage loan or mortgage loans.
Because these factors are not within our control or the control of Funding or
the mortgages trustee, we cannot give any assurances as to the level of
prepayments that the mortgage portfolio may experience.
In addition, if a mortgage loan is subject to a product switch or a further
advance, the seller may repurchase the mortgage loan or mortgage loans and
their related security from the mortgages trustee. In the case of any such
repurchase, the payment received by the mortgages trustee will have the same
effect as a prepayment of such mortgage loan or mortgage loans.
In order to promote the retention of borrowers, the seller may periodically
contact certain borrowers in respect of the seller's total portfolio of
outstanding mortgage loans in order to encourage a borrower to review the
seller's other mortgage products and to discuss shifting that borrower to an
alternative Northern Rock mortgage product. The employee of the seller who
contacts a borrower will not know whether that borrower's original mortgage
loan has been sold to the mortgages trust. However, if the relevant original
mortgage loan made to that borrower happens to have been sold to the mortgages
trust and that borrower decides to switch mortgage loan products, the seller's
retention policy may ultimately result in that mortgage loan becoming the
subject of a product switch which ultimately may result in a prepayment as
described in the preceding paragraph. Furthermore, the seller also may
periodically contact certain borrowers in respect of the seller's total
portfolio of outstanding mortgage loans in order to offer to a borrower the
opportunity to apply for a further advance. If the borrower decides to take a
further advance and the seller decides to repurchase the mortgage loan subject
to that further advance, the mortgage loan will be prepaid.
As the decision by the seller whether to repurchase a mortgage loan subject
to a product switch or a further advance is not within our control or the
control of Funding or the mortgages trustee, we cannot give any assurance as to
the level of effective prepayments that the mortgage portfolio may experience.
THE INCLUSION OF FLEXIBLE MORTGAGE LOANS MAY AFFECT THE YIELD TO MATURITY OF
AND THE TIMING OF PAYMENTS ON THE NOTES
134,991 mortgage loans in the cut-off date mortgage portfolio (or 68.37% of
the aggregate current balance of the mortgage loans as of the cut-off date) are
flexible mortgage loans. Flexible mortgage loans provide the borrower with a
range of options that gives that borrower greater flexibility in the timing and
amount of payments made under the mortgage loan. Subject to the terms and
conditions of the mortgage loans (which may require in some cases notification
to the seller and in other cases the consent of the seller), under a flexible
mortgage loan a borrower may "OVERPAY" or prepay principal on any day or make a
re-draw in specified circumstances. For a detailed summary of the
characteristics of the flexible mortgage loans, see "THE MORTGAGE LOANS --
CHARACTERISTICS OF THE MORTGAGE LOANS -- FLEXIBLE MORTGAGE LOANS". In addition,
certain of the seller's flexible mortgage loan products allow the borrower to
make overpayments or repay the entire current balance under the flexible
mortgage loan at any time without incurring an early repayment charge. See "THE
MORTGAGE LOANS -- CHARACTERISTICS OF THE MORTGAGE LOANS -- EARLY REPAYMENT
CHARGES".
The inclusion of Together Connections mortgage loans and Connections
mortgage loans, which are another type of flexible mortgage loan, in the
mortgages trust may also affect the yield to maturity of and the timing of
payments on the notes. Application of the
44
Together Connections Benefit, a feature of Together Connections mortgage loans,
and Connections Benefit, a feature of Connections mortgage loans, will reduce
the principal amount outstanding on a Together Connections mortgage loan and a
Connections mortgage loan, respectively. As a result, less of a related
borrower's contractual monthly payment (which the borrower is nevertheless
obligated to continue making in full) will be required to pay interest, and
proportionately more of that contractual monthl y payment will be allocated as a
repayment of principal. This reallocation may lead to amortization of the
related mortgage loan more quickly than would otherwise be the case. For a
description of the Together Connections mortgage loans and the Together
Connections Benefit and the Connections mortgage loans and the Connections
Benefit, see "THE MORTGAGE LOANS -- CHARACTERISTICS OF THE MORTGAGE LOANS --
MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER".
If the notes are not repaid on or before the step-up date, then to the
extent that borrowers under flexible mortgage loans consistently prepay
principal or to the extent that Together Connections mortgage loans and
Connections mortgage loans amortize more quickly than otherwise expected, the
timing of payments on your notes may be adversely affected.
THE OCCURRENCE OF AN ASSET TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER SECURITY
MAY ACCELERATE THE REPAYMENT OF CERTAIN NOTES AND/OR DELAY THE REPAYMENT OF
OTHER
NOTES
If no trigger event has occurred and the issuer security has not been
enforced, then payments of principal of a class of notes on any payment date
will not be greater than the controlled amortization amount for that class on
that payment date. If an asset trigger event has occurred, the mortgages
trustee will distribute principal receipts on the mortgage loans to Funding and
the seller proportionally based on their percentage shares (or, in certain
circumstances, their weighted average percentage shares) of the trust property
and Funding will on each payment date apply those principal receipts to repay
the previous intercompany loans, our intercompany loan and each new
intercompany loan (if any) in proportion to the outstanding principal balance
of the relevant intercompany loan.
Following the occurrence of an asset trigger event or enforcement of the
issuer security, we will apply these principal repayments of our intercompany
loan which are available for payment to noteholders on each payment date to
repay the class A notes, in no order of priority among them but in proportion
to the respective amounts due on the class A notes, until their outstanding
principal balances have been reduced to zero, without regard to their
controlled amortization amounts, then the class B notes, in no order of
priority among them but in proportion to the respective amounts due on the
class B notes, until their outstanding principal balances have been reduced to
zero, without regard to their controlled amortization amounts, then the class M
notes, in no order of priority among them but in proportion to the respective
amounts due on the class M notes, until their outstanding principal balances
have been reduced to zero, without regard to their controlled amortization
amounts, and finally, the class C notes, in no order of priority among them but
in proportion to the respective amounts due on the class C notes, until their
outstanding principal balances have been reduced to zero, without regard to
their controlled amortization amounts.
As the priority of payment in respect of the series 1 class A1 notes, the
series 1 class A2 notes, the series 1 class A3 notes, the series 2 class A
notes and the series 3 class A notes rank equally after the occurrence of an
asset trigger event or enforcement of the issuer security, and as repayments of
principal in these circumstances will not be limited to or controlled by the
respective controlled amortization amounts for the relevant class of notes,
this may result in certain noteholders being repaid more rapidly than if an
asset trigger event or enforcement of the issuer security had not occurred, and
may result in other noteholders being repaid less rapidly than if an asset
trigger event had not occurred.
45
THE OCCURRENCE OF A NON-ASSET TRIGGER EVENT MAY ACCELERATE THE REPAYMENT OF
CERTAIN NOTES AND/OR DELAY THE REPAYMENT OF OTHER NOTES
If a non-asset trigger event has occurred, the mortgages trustee will
distribute all principal receipts to Funding until the Funding share percentage
of the trust property is zero. Funding will on each payment date apply these
principal receipts to repay the previous intercompany loans, our intercompany
loan and each new intercompany loan (if any) equally and in proportion to the
outstanding principal balance of the relevant intercompany loan.
Following the occurrence of a non-asset trigger event, we will apply these
principal repayments of the intercompany loan which are available for payment
to noteholders on each payment date to repay the series 1 class A1 notes until
the outstanding principal balance of the series 1 class A1 notes has been
reduced to zero, without regard to their controlled amortization amounts, then
the series 1 class A2 notes until the outstanding principal balance of the
series 1 class A2 notes has been reduced to zero, without regard to their
controlled amortization amounts, then the series 1 class A3 notes, the series 2
class A notes and the series 3 class A notes, in no order of priority between
them but in proportion to the respective amounts due on the series 1 class A3
notes, the series 2 class A notes and the series 3 class A notes, until the
outstanding principal balance of each of the series 1 class A3 notes, the
series 2 class A notes and the series 3 class A notes has been reduced to zero,
without regard to their controlled amortization amounts, then the class B
notes, in no order of priority among them but in proportion to the respective
amounts due on the class B notes, until their outstanding principal balances
have been reduced to zero, without regard to their controlled amortization
amounts, then the class M notes, in no order of priority among them but in
proportion to the respective amounts due on the class M notes, until their
outstanding principal balances have been reduced to zero, without regard to
their controlled amortization amounts and finally, the class C notes, in no
order of priority among them but in proportion to the respective amounts due on
the class C notes, until their outstanding principal balances have been reduced
to zero, without regard to their controlled amortization amounts.
As the repayments of principal in these circumstances will not be limited to
or controlled by the respective controlled amortization amounts for the
relevant class of notes, this may result in certain noteholders being repaid
more rapidly than if a non-asset trigger event or enforcement of the issuer
security had not occurred, and may result in other noteholders being repaid
less rapidly than if a non-asset trigger event had not occurred.
COMPETITION IN THE UK MORTGAGE LOAN INDUSTRY COULD INCREASE THE RISK OF AN
EARLY REDEMPTION OF YOUR NOTES
The mortgage loan industry in the United Kingdom is highly competitive. Both
traditional and new lenders use heavy advertising, targeted marketing,
aggressive pricing competition and loyalty schemes in an effort to expand their
presence in or to facilitate their entry into the market and compete for
customers. For example, certain of the seller's competitors have implemented
loyalty discounts for long-time customers to reduce the likelihood that these
customers would refinance their mortgage loans with other lenders such as the
seller.
This competitive environment may affect the rate at which the seller
originates new mortgage loans and may also affect the level of attrition of the
seller's existing borrowers. If the rate at which new mortgage loans are
originated declines significantly or if existing borrowers refinance their
mortgage loans with lenders other than the seller then the risk of a trigger
event occurring increases, which could result in an early redemption of your
notes.
46
IF THE SELLER DOES NOT REPURCHASE FIXED RATE MORTGAGE LOANS UNDER WHICH THE
BORROWER EXERCISES HIS OR HER RE-FIX OPTION THEN WE MAY NEED TO ENTER INTO NEW
HEDGING ARRANGEMENTS AND WE MAY NOT FIND A COUNTERPARTY AT THE RELEVANT TIME
If the seller does not elect within 30 days of the end of the relevant fixed
rate period to repurchase the relevant mortgage loan from the mortgages trustee
if it becomes a re-fixed mortgage loan, then this will necessitate the entry by
us into further hedging arrangements with an alternative basis rate swap
counterparty satisfactory to the rating agencies. Entering into additional
hedging arrangements may increase our obligations on any payment date which may
adversely affect payments on your notes. In addition, we cannot provide
assurance that an alternative basis rate swap counterparty will be available at
the relevant time.
TERMINATION PAYMENTS ON THE BASIS RATE SWAP MAY ADVERSELY AFFECT THE FUNDS
AVAILABLE TO MAKE PAYMENTS ON THE NOTES
The amount of revenue receipts that Funding receives will fluctuate
according to the interest rates applicable to the mortgage loans in the
mortgages trust. However, the amount of interest payable by Funding to us under
the intercompany loan will depend upon the aggregate amount payable by us to
the basis rate swap provider in exchange for payments which will depend upon
the variable interest rates at which interest accrues on the notes.
To hedge our exposure against the possible variance between the foregoing
interest rates, we will enter into the basis rate swap with the basis rate swap
provider and the note trustee on the closing date (see "THE SWAP AGREEMENTS --
THE BASIS RATE SWAP").
If the basis rate swap is terminated, we may be obliged to pay a termination
payment to the basis rate swap provider. The amount of the termination payment
will be based on the cost of entering into a replacement basis rate swap. Under
the intercompany loan agreement, Funding will be required to pay us an amount
equal to any termination payment due by us to the basis swap provider. Funding
will also be obliged to pay us any extra amounts which we may be required to
pay to enter into a replacement swap.
We cannot give you any assurance that Funding will have the funds available
to make that payment or that we will have sufficient funds available to make
any termination payment under the swap or to make subsequent payments to you in
respect of the relevant series and class of notes. Nor can we give you any
assurance that we will be able to enter into a replacement swap, or if one is
entered into, that the credit rating of the replacement basis rate swap
provider will be sufficiently high to prevent a downgrading of the then current
ratings of the notes by the rating agencies.
Except where the basis rate swap provider has caused the basis rate swap to
terminate by its own default, any termination payment due by us will rank
equally with payments due on the notes. Any additional amounts required to be
paid by us following termination of the basis rate swap (including any extra
costs incurred (for example, from entering into "spot" interest rate swaps) if
we cannot immediately enter into a basis rate swap), will also rank equally
with payments due on the notes.
Therefore, if we are obliged to make a termination payment to the basis rate
swap provider or to pay any other additional amount as a result of the
termination of the swap, this may affect the funds which we have available to
make payments on the notes of any class and any series.
RATINGS ASSIGNED TO THE NOTES MAY BE LOWERED OR WITHDRAWN AFTER YOU PURCHASE
THE NOTES, WHICH MAY LOWER THE MARKET VALUE OF THE NOTES
The ratings assigned to each class of notes address the likelihood of full
and timely payment to you of all payments of interest on each payment date
under those classes of notes. The ratings also address the likelihood of
ultimate repayment of principal on the final maturity date of each class of
notes. The expected ratings of each class of notes
47
offered by this prospectus on the closing date are set out in "RATINGS OF THE
SERIES 1 NOTES". Any rating agency may lower its rating or withdraw its rating
if, in the sole judgement of the rating agency, the credit quality of the notes
has declined or is in question. If any rating assigned to the notes is lowered
or withdrawn, the market value of the notes may be reduced.
SUBORDINATION OF OTHER NOTE CLASSES MAY NOT PROTECT YOU FROM ALL RISK OF LOSS
Each of the class B notes of each series, the class M notes of each series
and the class C notes of each series are subordinated in right of payment of
interest to the class A notes of each series. Each of the class M notes of each
series and the class C notes of each series are subordinated in right of
payment of interest to the class B notes of each series. Each of the class C
notes of each series are subordinated in right of payment of interest to the
class M notes of each series.
Each of the class B notes of each series, the class M notes of each series
and the class C notes of each series are subordinated in right of payment of
principal to the class A notes of each series. Each of the class M notes of
each series and the class C notes of each series are subordinated in right of
payment of principal to the class B notes of each series. Each of the class C
notes of each series are subordinated in right of payment of principal to the
class M notes of each series.
However, the controlled amortization amount payable in respect of each class
of notes is determined by a schedule that indicates the target balance for that
class of notes on the relevant payment date, as set forth under "CASHFLOWS --
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY AND/OR OCCURRENCE OF A TRIGGER EVENT". You should be aware that
not all classes of notes are scheduled to receive payments of principal on each
payment date. The controlled amortization amount payable on some classes of
notes will be zero, which means that, despite the principal priority of
payments described above, lower ranking classes of notes may nevertheless be
repaid principal before higher ranking classes of notes. YOU SHOULD NOTE THAT
THE CONTROLLED AMORTIZATION AMOUNT FOR THE SERIES 3 CLASS A NOTES FROM THE
CLOSING DATE TO THE PAYMENT DATE FALLING IN JANUARY 2009 IS ZERO. THIS MEANS
THAT, SUBJECT TO THERE BEING NO TRIGGER EVENT, NO ENFORCEMENT OF EITHER THE
FUNDING SECURITY AND/OR THE ISSUER SECURITY, THE SERIES 3 CLASS A NOTES WILL
NOT BE SCHEDULED TO BE REPAID AN AMOUNT OF PRINCIPAL UNTIL THE PAYMENT DATE
FALLING IN JANUARY 2009 AT THE EARLIEST. Payments of principal are expected to
be made to each class of notes in scheduled amounts up to the amounts set forth
under "CASHFLOWS -- DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS PRIOR
TO ENFORCEMENT OF THE ISSUER SECURITY AND/OR OCCURRENCE OF A TRIGGER EVENT".
There is no assurance that these subordination rules will protect the class
A noteholders from all risk of loss, the class B noteholders from all risk of
loss or the class M noteholders from all risk of loss. If the losses allocated
to the class C notes, the class M notes and the class B notes, as evidenced on
each of the class C, class M and class B principal deficiency subledgers,
respectively, plus any other debits to each of the class C, class M and class B
principal deficiency subledgers, as the case may be, are in an aggregate amount
equal to the aggregate outstanding principal balances of the class C notes, the
class M notes and the class B notes, then losses on the mortgage loans will
thereafter be allocated to the class A notes at which point there will be an
asset trigger event. If the losses allocated to the class C notes and the class
M notes, as evidenced on each of the class C and class M principal deficiency
subledgers, respectively, plus any other debits to each of the class C and
class M principal deficiency subledgers, as the case may be, are in an
aggregate amount equal to the aggregate outstanding principal balances of the
class C notes and the class M notes, then losses on the mortgage loans will
thereafter be allocated to the class B notes. Similarly, if the losses
allocated to the class C notes as evidenced on the class C principal deficiency
subledger plus any other
48
debits to the class C principal deficiency subledger are in an aggregate amount
equal to the aggregate outstanding principal balance of the class C notes, then
losses on the mortgage loans will thereafter be allocated to the class M notes.
PRINCIPAL PAYMENTS ON THE CLASS B NOTES, THE CLASS M NOTES AND THE CLASS C
NOTES WILL BE DEFERRED IN CERTAIN CIRCUMSTANCES
On any payment date, our obligation to pay principal of the class B notes,
the class M notes and the class C notes will be subject to the satisfaction as
of the related determination date of the issuer arrears test, the issuer
reserve requirement and the subordinated principal test (each as defined in the
glossary) to the extent that any class A notes are outstanding on that date.
If any class A note remains outstanding on that date and any of the above
conditions is not satisfied on the related determination date, payments of
principal which would otherwise have been made to the class B notes and/or the
class M notes and/or the class C notes will not be payable on that payment
date.
YOU MAY NOT BE ABLE TO SELL THE NOTES
There currently is no secondary market for the notes. The underwriters
expect, but are not obliged, to make a market in the notes. If no secondary
market develops, you may not be able to sell the notes prior to maturity. We
cannot offer any assurance that a secondary market will develop or, if one does
develop, that it will continue.
YOU MAY BE SUBJECT TO EXCHANGE RATE AND INTEREST RATE RISKS
Repayments of principal and payments of interest on the series 1 notes will
be made in US dollars but the intercompany loan to be made by us to Funding and
repayments of principal and payments of interest by Funding to us under the
intercompany loan will be in sterling.
To hedge our currency exchange rate exposure, including any interest rate
exposure connected with that currency exposure, on the closing date we will
enter into the dollar currency swaps for the series 1 notes with the dollar
currency swap provider (see "THE SWAP AGREEMENTS -- THE DOLLAR CURRENCY
SWAPS").
If we fail to make timely payments of amounts due under a dollar currency
swap, then we will have defaulted under that currency swap. The dollar currency
swap provider is obliged only to make payments under a dollar currency swap as
long as we make payments under it. If the dollar currency swap provider is not
obliged to make payments of, or if it defaults in its obligations to make
payments of, amounts in US dollars equal to the full amount to be paid to us on
the payment dates under the dollar currency swap (which are the same dates as
the payment dates under the 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 dollar currency swap is entered into, we may
have insufficient funds to make payments due on the notes of any class and any
series.
In addition, some of the mortgage loans carry variable rates of interest,
some of the mortgage loans pay interest at a fixed rate or rates of interest
and some of the flexible mortgage loans pay interest at variable rates of
interest no higher than the rate offered by a basket of UK mortgage lenders or
pay interest at a rate which tracks the Bank of England base rate. However,
these interest rates on the mortgage loans which will fund the interest payable
under the intercompany loan will not necessarily match the floating rates on
the notes. If the basis rate swap provider defaults in its obligation to make
payments under the basis rate swap, we will be exposed to the variance between
the rates of interest payable on the mortgage loans and the rate of interest
payable on the notes. Unless a replacement basis rate swap is entered into, we
may have insufficient funds to make payments due on the notes of any class and
any series.
49
TERMINATION PAYMENTS ON THE DOLLAR CURRENCY SWAPS AND THE EURO CURRENCY SWAPS
MAY ADVERSELY AFFECT THE FUNDS AVAILABLE TO MAKE PAYMENTS ON THE NOTES
If any of the currency swaps terminate, we may be obliged to pay a
termination payment to the relevant currency rate swap provider. The amount of
the termination payment will be based on the cost of entering into a
replacement currency swap. Under the intercompany loan agreement, Funding will
be required to pay us an amount required by us to pay any termination payment
due by us to the relevant currency rate swap provider. Funding will also be
obliged to pay us any extra amounts which we may be required to pay to enter
into a replacement swap.
We cannot give you any assurance that Funding will have the funds available
to make that payment or that we will have sufficient funds available to make
any termination payment under any of the currency swaps or to make subsequent
payments to you in respect of the relevant series and class of notes. Nor can
we give you any assurance that we will be able to enter into a replacement
currency swap, or if one is entered into, that the credit rating of the
replacement currency rate swap provider will be sufficiently high to prevent a
downgrading of the then current ratings of the notes by the rating agencies.
Except where the relevant currency rate swap provider has caused the
relevant currency swap to terminate by its own default, any termination payment
due by us will rank equally with payments due on the notes. Any additional
amounts required to be paid by us following termination of the relevant
currency swap (including any extra costs incurred (for example, from entering
into "spot" currency or interest rate swaps if we cannot immediately enter into
a replacement currency swap), will also rank equally with payments due on the
notes.
Therefore, if we are obliged to make a termination payment to the relevant
currency rate swap provider or to pay any other additional amount as a result
of the termination of the relevant currency swap, this may affect the funds
which we have available to make payments on the notes of any class and any
series.
IF THE BANK OF ENGLAND BASE RATE FALLS BELOW A CERTAIN LEVEL, WE COULD SUFFER A
REVENUE SHORTFALL WHICH COULD ADVERSELY AFFECT OUR PAYMENTS ON THE NOTES
The seller guarantees that for variable rate mortgage loans that are
eligible to be charged at the seller's standard variable rate (including fixed
rate mortgage loans which become variable after the fixed period), during the
period in which the seller may impose an early repayment charge, the actual
gross interest rate that the seller charges will be the lower of:
(a) the seller's standard variable rate; or
(b) the Bank of England base rate plus a margin which is determined by
Northern Rock.
If the Bank of England base rate plus the appropriate margin (as described
above) falls to a level below the seller's standard variable rate it is
possible that there would be a shortfall of income on the mortgage loans and
that, as a result, either or both of Funding and we would suffer a revenue
shortfall.
IF BORROWERS BECOME ENTITLED TO THE LOYALTY DISCOUNT OFFERED BY THE SELLER, WE
COULD SUFFER A REVENUE SHORTFALL WHICH COULD ADVERSELY AFFECT OUR PAYMENTS ON
THE NOTES
The seller currently offers a loyalty discount on each mortgage loan (other
than a Together mortgage loan, a Together Connections mortgage loan and a CAT
standard mortgage loan) which currently provides for a reduction of 0.25%
(although the seller may in the future allow for a discount of between 0.25%
and 0.75%) of the applicable interest rate on that mortgage loan once the
borrower has held that mortgage loan for at least
50
seven years, subject to certain conditions. If the loyalty discount becomes
applicable to a significant number of borrowers it is possible that there would
be a shortfall of income on the mortgage loans and that, as a result, either or
both of Funding and we would suffer a revenue shortfall.
WE RELY ON THIRD PARTIES AND YOU MAY BE ADVERSELY AFFECTED IF THEY FAIL TO
PERFORM THEIR OBLIGATIONS
We are a party to contracts with a number of other third parties that have
agreed to perform services in relation to the notes. For example, the dollar
currency swap provider and the euro currency swap provider have agreed to
provide their respective swaps, the corporate services provider has agreed to
provide corporate services and the paying agents and the agent bank have agreed
to provide payment and calculation services in connection with the notes. In
the event that any relevant third party was to fail to perform its obligations
under the respective agreements to which it is a party, you may be adversely
affected.
PAYMENTS BY FUNDING TO THIRD PARTIES IN RELATION TO THE PREVIOUS ISSUERS MAY
AFFECT PAYMENTS DUE TO US AND ACCORDINGLY OUR ABILITY TO MAKE PAYMENTS ON THE
NOTES
Under the previous intercompany loan agreements, Funding is required to make
payments to each previous issuer in respect of that previous issuer's
obligations to make payments to the security trustee and its own note trustee,
agent bank, paying agents, cash manager, corporate services provider and
account bank and to other third parties to
whom that previous issuer owes money. These payments, in addition to the
payments that we are required to make to our third party creditors, rank in
priority to amounts due by Funding to us under the intercompany loan that we may
use to make payments under the notes. For further information regarding
Funding's payment obligations, see "CASHFLOWS".
Funding's obligations to make the third-party payments described above to
the previous issuers may affect Funding's ability to make payments to us under
the intercompany loan. This in turn may affect our ability to make payments on
your notes.
EXCESS REVENUE RECEIPTS MAY NOT BE SUFFICIENT TO REPLENISH PRINCIPAL THAT HAS
BEEN USED TO PAY INTEREST, WHICH MAY RESULT IN YOUR NOTES NOT BEING REPAID IN
FULL
If, on any payment date, revenue receipts available to us are insufficient
to enable us to pay interest on the notes and our other expenses ranking in
priority to interest due on notes, then we may use principal receipts from the
intercompany loan to make up that revenue shortfall.
During the term of the transaction, however, it is expected that these
principal deficiencies will be recouped from subsequent excess issuer available
revenue receipts. However, if subsequent excess issuer available revenue
receipts are insufficient to recoup those principal deficiencies, then you may
receive later than anticipated, or you may not receive in full, repayment of
the principal amount outstanding on your notes.
For more information on principal deficiencies, see "CREDIT STRUCTURE --
ISSUER PRINCIPAL DEFICIENCY LEDGER".
THE SELLER SHARE OF THE TRUST PROPERTY DOES NOT PROVIDE CREDIT ENHANCEMENT FOR
THE NOTES
Subject to certain exceptions as described under "THE MORTGAGES TRUST --
ADJUSTMENTS TO TRUST PROPERTY", any losses from mortgage loans included in the
trust property will be allocated to Funding and the seller on each distribution
date in proportion to the then current Funding share percentage and the then
current seller share percentage of the trust property.
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The seller share of the trust property does not provide credit enhancement
for the Funding share of the trust property. Losses on the mortgage loans in
the trust property are generally allocated proportionately between the seller
and Funding depending on their respective percentage shares (or, in certain
circumstances, their weighted average percentage shares) of the trust property.
WE WILL ONLY HAVE RECOURSE TO THE SELLER IF THERE IS A BREACH OF WARRANTY BY
THE SELLER, AND OTHERWISE THE SELLER'S ASSETS WILL NOT BE AVAILABLE TO US AS A
SOURCE OF FUNDS TO MAKE PAYMENTS ON THE NOTES
After an intercompany loan enforcement notice under the intercompany loan,
any previous intercompany loan or any new intercompany loan is given (as
described under "SECURITY FOR FUNDING'S OBLIGATIONS"), the security trustee may
sell the Funding share of the trust property. There is no assurance that a
buyer would be found or that such a sale would realize enough money to repay
amounts due and payable under the intercompany loan agreement, the previous
intercompany loan agreements and any new intercompany loan agreements.
We will not, and Funding and the mortgages trustee will not, have any
recourse to the seller of the mortgage loans, other than in respect of a breach
of warranty under the mortgage sale agreement.
We will not, and the mortgages trustee, Funding and the security trustee
will not, undertake any investigations, searches or other actions on any
mortgage loan or its related security and we and each of them will rely instead
on the warranties given in the mortgage sale agreement by the seller.
If any of the warranties made by the seller is materially untrue on the date
on which the relevant mortgage loan is assigned to the mortgages trustee, then,
in the first instance, the seller will be required to remedy the breach within
28 days of the seller becoming aware of the same or of receipt by it of a
notice from the mortgages trustee.
If the seller fails to remedy the breach within 28 days, then the seller
will be required to repurchase the mortgage loan or mortgage loans and their
related security at their current balance as of the date of completion of such
repurchase together with all interest (whether due or accrued but not due) and
arrears of interest payable thereon to the date of repurchase. There can be no
assurance that the seller will have the financial resources to repurchase the
mortgage loan or mortgage loans and their related security. However, if the
seller does not repurchase those mortgage loans and their related security when
required, then the seller share of the trust property will be deemed to be
reduced by an amount equal to the principal amount outstanding of those
mortgage loans together with any arrears of interest and accrued and unpaid
interest and expenses.
Other than as described here, none of the mortgages trustee, Funding, you,
the holders of the previous notes, the previous issuers or we will have any
recourse to the assets of the seller.
THERE CAN BE NO ASSURANCE THAT A BORROWER WILL REPAY PRINCIPAL AT THE END OF
THE TERM ON AN INTEREST-ONLY LOAN (WITH OR WITHOUT A CAPITAL REPAYMENT VEHICLE)
OR A COMBINATION LOAN
Each mortgage loan in the cut-off date mortgage portfolio was advanced on
one of the following bases:
* Repayment basis, with principal and interest repaid on a monthly
basis through the mortgage term; or
* An interest-only basis with or without a capital repayment vehicle;
or
* A combination basis, that is, a combination of the repayment and
interest-only arrangements where only part of the principal will be
repaid by way of monthly payments.
52
Of the mortgage loans in the cut-off date mortgage portfolio, 14,808
mortgage loans (or 10.87% of the aggregate current balance of the mortgage
loans as of the cut-off date) are interest-only basis with or without a capital
repayment vehicle and 191,064 mortgage loans (or 89.13% of the aggregate
current balance of the mortgage loans as of the cut-off date) are combination
or repayment mortgage loans. Neither the interest-only mortgage loans nor the
interest-only portion of any combination mortgage loan includes scheduled
amortization of principal. Instead the principal must be repaid by the borrower
in a lump sum at maturity of the mortgage loan.
For interest-only mortgage loans with a capital repayment vehicle or a
combination loan with a capital repayment vehicle the borrower is recommended
to put in place an investment plan or other repayment mechanism forecast to
provide sufficient funds to repay the principal due at the end of the term.
The ability of a borrower to repay the principal on an interest-only
mortgage loan or the final payment of principal on a combination mortgage loan
at maturity depends on such borrower's responsibility to ensure that sufficient
funds are available from an investment plan or another source, such as ISAs,
pension policies, personal equity plans or endowment policies, as well as the
financial condition of the borrower, tax laws and general economic conditions
at the time. However, there can be no assurance that there will be sufficient
funds from any investment plan to repay the principal or (in the case of a
combination loan) the part of the principal that it is designed to cover.
The seller does not (and in certain circumstances cannot) take security over
investment plans. Consequently, in the case of a borrower in poor financial
condition the investment plan will be an asset available to meet the claims of
other creditors. The
seller also recommends the borrower to take out term life insurance cover in
relation
to the mortgage loan, although the seller again does not take security over
such
policies.
In the case of interest-only mortgage loans, there can be no assurance that
the borrower will have the funds required to repay the principal at the end of
the term. If a borrower cannot repay the mortgage loan and a loss occurs on the
mortgage loan, then this may affect payments on the notes if that loss cannot
be cured by the application of excess issuer available revenue receipts.
THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE MORTGAGES TRUSTEE HAS NO
LEGAL TITLE TO THE MORTGAGE LOANS AND THEIR RELATED SECURITY WHICH MAY
ADVERSELY AFFECT PAYMENTS ON THE NOTES
Each assignment by the seller to the mortgages trustee of the benefit of the
mortgage loans and their related security takes effect in equity only. This
means that legal title to the mortgage loans and their related security in the
trust property remains with the seller, but the mortgages trustee has all the
other rights and benefits relating to ownership of each mortgage loan and its
related security (which rights and benefits are subject to the trust in favor
of the beneficiaries). The mortgages trustee has the right to demand the seller
to give it legal title to the mortgage loans and the related security in the
circumstances described under "ASSIGNMENT OF THE MORTGAGE LOANS AND THEIR
RELATED SECURITY -- TRANSFER OF LEGAL TITLE TO THE MORTGAGES TRUSTEE" and until
then the mortgages trustee will not apply to H.M. Land Registry or the H.M.
Land Charges Registry to register or record its equitable interest in the
mortgages. In addition, except in the limited circumstances set out in
"ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY -- TRANSFER OF LEGAL
TITLE TO THE MORTGAGES TRUSTEE", the seller will not give notice of the
assignment of the mortgage loans and related security to any borrower.
At any time during which the mortgages trustee does not hold the legal title
to the mortgage loans and their related security or has not notified its
interest in the mortgage loans and their related security to the borrowers,
there are risks, as follows:
53
* firstly, if the seller wrongly sold to another person a mortgage
loan and that mortgage loan has already been assigned to the
mortgages trustee, and that person acted in good faith and did not
have notice of the interests of the mortgages trustee or the
beneficiaries in the mortgage loan and that person notified the
borrower of that sale to it of the mortgage loan and its related
security or registered its interest in that mortgage, then she or
he might obtain good title to the mortgage loan, free from the
interests of the mortgages trustee and the beneficiaries. If this
occurred then the mortgages trustee would not have good title to
the affected mortgage loan and its related security and it would
not be entitled to payments by a borrower in respect of such a
mortgage loan. This may affect our ability to repay the notes;
* secondly, the rights of the mortgages trustee and the beneficiaries
may be subject to the rights of the borrowers against the seller,
such as the rights of set-off (see in particular "-- THERE ARE
RISKS IN RELATION TO FLEXIBLE MORTGAGE LOANS WHICH MAY ADVERSELY
AFFECT THE FUNDS AVAILABLE TO PAY THE NOTES") which occur in
relation to transactions or deposits made between certain borrowers
and the seller and the rights of borrowers to redeem their
mortgages by repaying the mortgage loan directly to the seller. If
these rights were exercised, the mortgages trustee may receive less
money than anticipated from the mortgage loans, which may affect
our ability to repay the notes; and
* finally, the mortgages trustee would not be able to enforce any
borrower's obligations under a mortgage loan or mortgage itself but
would have to join the seller as a party to any legal proceedings.
However, once notice has been given to a borrower of the transfer of the
related mortgage loan and its related security to the mortgages trustee, any
independent set-off rights which that borrower has against the seller will
crystallize, further rights of independent set-off would cease to accrue from
that date and no new rights of independent set-off could be asserted following
that notice. Set-off rights arising under transaction set-off (which are set-
off claims arising out of a transaction connected with the mortgage loan) will
not be affected by that notice.
Additionally, if a borrower exercises any set-off rights then an amount
equal to the amount set off will reduce the total amount of the seller share of
the trust property only. For more information on the risks of transaction set-
off, see "-- THERE ARE RISKS IN RELATION TO FLEXIBLE MORTGAGE LOANS WHICH MAY
ADVERSELY AFFECT THE FUNDS AVAILABLE TO PAY THE NOTES".
THERE ARE RISKS IN RELATION TO FLEXIBLE MORTGAGE LOANS WHICH MAY ADVERSELY
AFFECT THE FUNDS AVAILABLE TO PAY THE NOTES
As described under "-- THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE
MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGE LOANS AND THEIR RELATED
SECURITY, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES", the seller has
made an equitable assignment of the relevant mortgage loans and mortgages to
the mortgages trustee, with legal title being retained by the seller.
Therefore, the rights of the mortgages trustee may be subject to the direct
rights of the borrowers against the seller, including rights of set-off
existing prior to notification to the borrowers of the assignment of the
mortgage loans and the mortgages. Such set-off rights may occur if the seller
fails to advance a cash re-draw to a borrower under a flexible mortgage loan
when the borrower is entitled to such cash re-draw.
If the seller fails to advance the cash re-draw in accordance with the
relevant mortgage loan, then the relevant borrower may set off any damages
claim arising from the seller's breach of contract against the seller's (and,
as equitable assignee of the mortgage loans and the mortgages, the mortgages
trustee's) claim for payment of principal and/or interest under the mortgage
loan as and when it becomes due. Such set-off claims will constitute
transaction set-off as described in the immediately preceding risk factor.
54
The amount of the claim in respect of a cash re-draw will, in many cases, be
the cost to the borrower of finding an alternative source of funds. The
borrower may obtain a mortgage loan elsewhere in which case the damages would
be equal to any difference in the borrowing costs together with any
consequential losses, namely the associated costs of obtaining alternative
funds (for example, legal fees and survey fees). If the borrower is unable to
obtain an alternative mortgage loan, he or she may have a claim in respect of
other losses arising from the seller's breach of contract where there are
special circumstances communicated by the borrower to the seller at the time
the borrower entered into the mortgage or which otherwise were reasonably
foreseeable.
A borrower may also attempt to set off against his or her mortgage payments
an amount greater than the amount of his or her damages claim. In that case,
the administrator will be entitled to take enforcement proceedings against the
borrower although the period of non-payment by the borrower is likely to
continue until a judgement is obtained.
The exercise of set-off rights by borrowers would reduce the incoming cash
flow to the mortgages trustee during such exercise. However, the amounts set
off will be applied to reduce the seller share of the trust property only.
Further, there may be circumstances in which:
* a borrower may seek to argue that certain re-draws are
unenforceable by virtue of non-compliance with the Consumer Credit
Act 1974; or
* certain re-draws may rank behind liens created by a borrower after
the date upon which the borrower entered into its mortgage with the
seller.
The minimum seller share has been sized in an amount expected to cover these
risks, although there is no assurance that it will. If the minimum seller share
is not sufficient in this respect then there is a risk that you may not receive
all amounts due on the notes or that payments may not be made when due.
IF THE ADMINISTRATOR IS REMOVED, THERE IS NO GUARANTEE THAT A SUBSTITUTE
ADMINISTRATOR WOULD BE FOUND, WHICH COULD DELAY COLLECTION OF PAYMENTS ON THE
MORTGAGE LOANS AND ULTIMATELY COULD ADVERSELY AFFECT PAYMENTS ON THE NOTES
The seller has been appointed by the mortgages trustee and the beneficiaries
as administrator to service the mortgage loans. If the administrator breaches
the terms of the administration agreement, then the mortgages trustee, Funding
and the security trustee will be entitled to terminate the appointment of the
administrator and to appoint a substitute administrator.
There can be no assurance that a substitute administrator would be found who
would be willing and able to service the mortgage loans on the terms of the
administration agreement. In addition, as described under the third risk factor
immediately succeeding this risk factor, any substitute administrator may be
required to be authorized under The Financial Services and Markets Act 2000
once mortgage lending becomes a regulated activity. The ability of a substitute
administrator fully to perform the required services would depend, among other
things, on the information, software and records available at the time of the
appointment. Any delay or inability to appoint a substitute administrator may
affect payments on the mortgage loans and hence our ability to make payments
when due on the notes.
You should note that the administrator has no obligation itself to advance
payments that borrowers fail to make in a timely fashion.
55
THE MORTGAGES TRUSTEE MAY NOT RECEIVE THE BENEFIT OF CLAIMS MADE ON THE
BUILDINGS INSURANCE WHICH COULD ADVERSELY AFFECT PAYMENTS ON THE NOTES
The practice of the seller in relation to buildings insurance is described
under "THE MORTGAGE LOANS -- BUILDINGS INSURANCE POLICIES". As described in
that section, we cannot provide assurance that the mortgages trustee will
always receive the benefit of any claims made under any applicable insurance
contracts or that the amount received in the case of a successful claim will be
sufficient to reinstate the property. This could reduce the principal receipts
received by Funding according to the Funding share and could adversely affect
our ability to make payments on the notes. You should note that buildings
insurance is normally renewed annually.
THE MORTGAGES TRUSTEE IS NOT REQUIRED TO MAINTAIN MORTGAGE INDEMNITY INSURANCE
WITH THE CURRENT INSURER, AND THE SELLER IS NOT REQUIRED TO MAINTAIN THE
CURRENT LEVEL OF MORTGAGE INDEMNITY INSURANCE COVERAGE FOR NEW MORTGAGE LOANS
THAT IT ORIGINATES IN THE FUTURE, WHICH MAY ADVERSELY AFFECT THE FUNDS
AVAILABLE TO PAY THE NOTES
The mortgages trustee is not required to maintain a mortgage indemnity
policy with the current insurer. The mortgages trustee has the discretion to
contract for mortgage indemnity guarantee protection from any insurer then
providing mortgage indemnity insurance policies or not at all, subject to prior
agreement with the rating agencies and their confirmation that this will not
affect the then current ratings of the notes.
In addition, the seller is not required to maintain the same level of
coverage under mortgage indemnity insurance policies for mortgage loans that it
may originate in the future and assign to the mortgages trust. See "THE
MORTGAGE LOANS -- BUILDINGS INSURANCE POLICIES -- MIG POLICIES".
POSSIBLE REGULATORY CHANGES BY THE OFFICE OF FAIR TRADING, THE FINANCIAL
SERVICES AUTHORITY AND ANY OTHER REGULATORY AUTHORITIES MAY HAVE AN IMPACT ON
THE SELLER, THE ISSUER AND/OR THE MORTGAGE LOANS AND MAY ADVERSELY AFFECT OUR
ABILITY TO MAKE PAYMENTS WHEN DUE ON THE NOTES
In the United Kingdom, the Office of Fair Trading (the "OFT") is responsible
for the issue of licenses under and the enforcement of the Consumer Credit Act
1974 (the "CCA"), related consumer credit regulations and other consumer
protection legislation. The OFT may review businesses and operations, provide
guidelines to follow and take actions when necessary with regard to the
mortgage market in the United Kingdom.
It is currently expected that mortgage lending in the United Kingdom will
become a regulated activity under The Financial Services and Markets Act 2000
("FSMA"). Although the date for implementation of a scheme to regulate mortgage
related activities ("N3") had initially been August 2002, announcements by H.M.
Treasury in December 2001 that the Financial Services Authority ("FSA") will
also be responsible for the regulation of mortgage sales (including advising
and arranging mortgages) has delayed N3. Under a revised timetable published by
the FSA, N3 is now anticipated to be October 31, 2004.
The first draft of the Mortgage Sourcebook, which ultimately will set
specific rules for mortgage lending, was issued by the FSA in June 2001. The
consultation period for the Mortgage Sourcebook ended on September 14, 2001. In
August 2002, the FSA published its feedback on the draft Mortgage Sourcebook,
which includes its "near final" rules on mortgage lending and administration.
These rules cover start of contract disclosures, post- sale disclosures (annual
statements), rules on contract changes, charges (such as early repayment
charges) and arrears and repossessions. Simultaneously, the FSA published its
first consultative paper on the FSA's approach to regulating mortgage sales,
which sets out for comment key elements of the FSA's proposals for regulating
mortgage sales and variations (such as further advances). The closing date for
comments on this consultation was November 11, 2002. In March 2003, the FSA
published a consultation paper covering the changes the FSA is proposing to
make to the FSA Handbook relating to the prudential and authorization-related
requirements for regulated mortgage activities. The deadline for
56
response to this consultation was June 13, 2003. The FSA published a further
consultation paper in May 2003, which sets out draft rules and guidance on how
the FSA will regulate the way that mortgage firms conduct their business. The
closing date for this consultation was August 22, 2003. Final FSA rules are
expected to be published in the fourth quarter of 2003.
In addition, H.M. Treasury published on February 28, 2002 a paper seeking
comments upon the implementation of the FSA regulation of mortgage sale
activities. The comment period for this paper ended on April 30, 2002. In
August 2002, H.M. Treasury published "final" versions of statutory instruments
amending, inter alia, the Financial Services and Markets Act 2000 (Regulated
Activities) Order 2001, the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2001 and the Financial Services and Markets Act 2000
(Misleading Statements and Practices) Order 2001 implementing the new
regulatory regime for mortgage related activities. These statutory instruments
were laid before Parliament in June 2003 and will come into force on October
31, 2004.
The FSMA will apply to a "REGULATED MORTGAGE CONTRACT". A mortgage loan
contract will be a regulated mortgage contract if, at the time it is entered
into: (a) the borrower is an individual or trustee, (b) the contract provides
for the obligation of the borrower to repay to be secured by a first legal
mortgage on land (other than timeshare accommodation) in the UK, and (c) at
least 40% of that land is used, or is intended to be used, as or in connection
with a dwelling by the borrower or (in the case of credit provided to trustees)
by an individual who is a beneficiary of the trust, or by a related person.
When mortgage lending becomes a regulated activity after N3, persons
carrying on any specified mortgage-related activity by way of business will
ordinarily need to be authorized by the FSA under the FSMA. The specified
activities currently are (a) entering into a regulated mortgage contract as
lender, (b) administering a regulated mortgage contract (administrating in this
context means notifying borrowers of changes in mortgage payments and/or
collecting payments due under the mortgage loan), (c) advising on regulated
mortgage contracts, and (d) arranging regulated mortgage contracts. Agreeing to
carry on any of these activities will also be a regulated activity. If
requirements as to authorization of lenders and brokers and as to advertising
are not complied with, the regulated mortgage contract may be unenforceable
against the borrower except with the approval of a court.
An unauthorized person who administers a regulated mortgage contract entered
into after N3 may commit an offense, although this will not render the contract
unenforceable against the borrower. An unauthorized person may arrange for an
authorized person to administer regulated mortgage contracts but if that
arrangement comes to an end, that unauthorized person may commit an offense if
it administers the mortgage contracts for more than one month after the
arrangement comes to an end.
The regime under the FSMA regulating financial promotion will cover the
content and manner of promotion of regulated mortgage products, and by whom
such promotion can be issued or approved.
Authorized persons engaged in relevant specified activities relating to
regulated mortgage contracts will be obliged to comply with the rules contained
in the final Mortgage Sourcebook when it is published by the FSA. The exact
form of these is not yet certain but they are likely to include detailed
requirements as to the standardized disclosure of information to customers
(before selling a mortgage, on the issue of a mortgage offer and throughout the
term of a mortgage) and the manner in which regulated mortgage contracts are
promoted, originated and administered, including the sale, transfer or
securitization of mortgage contracts. They are also likely to impose capital
and/or credit rating requirements both on administrators of regulated mortgage
contracts and on any person on whose behalf any regulated mortgage contract is
administered. In addition, the new regulations could affect the seller's
ability to contribute or withdraw mortgage loans from the mortgage portfolio.
57
Currently in the United Kingdom, self-regulation of mortgage business is
under the Mortgage Code (the "CML CODE") issued by the Council of Mortgage
Lenders (the "CML"). The seller currently subscribes to the CML Code.
Membership of the CML and compliance with the CML Code are voluntary. The CML
Code sets out a minimum standard of good mortgage business practice, from
marketing to lending procedures and dealing with borrowers experiencing
financial difficulties. Since April 30, 1998, lender-subscribers to the CML
Code may not accept mortgage business introduced by intermediaries who are not
registered with (before November 1, 2000) the Mortgage Code Register of
Intermediaries or (on and after November 1, 2000) the Mortgage Code Compliance
Board.
In March 2001, the European Commission published a Recommendation to member
states urging their lenders to subscribe to the code issued by the European
Mortgage Federation. On July 26, 2001 the CML decided to subscribe to the code
collectively on behalf of its members. Lenders had until September 30, 2002 to
implement the code, an important element of which is provision to consumers of
a "European Standardised Information Sheet" (an "ESIS") similar to the pre-
application illustration proposed by the FSA. Following postponement of the
regulation by the FSA of mortgage business, UK lenders generally cannot begin
to provide ESISs to consumers until N3. The CML has discussed this with the
European Commission and the European Mortgage Federation. While compliance with
the code is voluntary, if the code is not effective, the European Commission is
likely to see further pressure from consumer bodies to issue a Directive on
mortgage credit or to extend its proposal for a Directive on consumer credit
(as to which, see the second next paragraph below) to all mortgage credit.
In September 2002, the European Commission published a proposal for a
directive of the European Parliament and of the Council on the harmonization of
the laws, regulations and administrative provisions of the member states
concerning credit for consumers and surety agreements entered into by
consumers. In its current form, the proposal requires specified requirements to
be met and restrictions observed in respect of certain mortgage loan products,
including new credit agreements for further drawings under certain flexible
mortgages and for further advances and amortization tables for repayment
mortgages. If the proposal comes into force in its current form, mortgage loans
which do not comply with these requirements and restrictions may be subject to
penalties, potentially including loss of interest and charges by the mortgagee
coupled with continuation of the right of repayment in instalments by the
borrower. Significantly, the proposal provides that it does not apply
retrospectively (subject to certain exceptions including in respect of new
drawings or further advances made in respect of existing agreements) and does
not apply to residential mortgage loans except those which include an equity
release component. The proposal is unlikely to come into force before 2006 as
the co-decision procedures of the European Parliament and of the Commission,
from the publication of the proposal to the coming into force of the new
consumer credit directive, is likely to take at least two years and member
states will then have a further two years in which to bring national
implementing legislation regulations and administrative provisions into force.
The UK Department of Trade and Industry (the "DTI") is currently in
consultation with consumer and industry organizations in relation to this
proposal. As a result, the effect of the ultimately implemented directive on
our ability to make payments when due on the notes cannot be fully determined
at this stage.
Currently, a credit agreement is regulated by the CCA where: (a) the
borrower is or includes an individual, (b) the amount of "credit" as defined in
the CCA does not exceed the financial limit, which is [GBP]25,000 for credit
agreements made on or after May 1, 1998, or lower amounts for credit agreements
made before that date, and (c) the credit agreement is not an exempt agreement.
In November 2002, the DTI announced its intention that a credit agreement will
be regulated for credit agreements made after this change is implemented: (a)
where the borrower is or includes an individual, save for partnerships of four
or more partners, (b) irrespective of the amount of credit (although in July
2003, the DTI announced its intention that the financial limit will remain for
certain
58
business-to-business lending), and (c) where the credit agreement is not an
exempt agreement. If this change is implemented (which is expected by October
2004), then any loan or further advance originated or varied bilaterally after
this time, other than a regulated mortgage contract under the FSMA or an exempt
agreement under the CCA, will be regulated by the CCA. Such loan or further
advance will have to comply with requirements as to form and content of the
credit agreement and, if it does not comply, will be unenforceable against the
borrower. Further consultation on exempt agreements, and consultation on
requirements as to form and content of regulated agreements, are expected to be
published by the DTI in the latter part of 2003.
No assurance can be given that additional regulations from the OFT, the FSA
or any other regulatory authority will not arise with regard to the mortgage
market in the United Kingdom generally, the seller's particular sector in that
market or specifically in relation to the seller. Any such action or
developments, in particular, but not limited to, the cost of compliance, may
have a material adverse effect on the seller, the issuer and/or the servicer
and their respective businesses and operations. This may adversely affect our
ability to make payments in full when due on the notes.
REGULATIONS IN THE UNITED KINGDOM COULD LEAD TO SOME TERMS OF THE MORTGAGE
LOANS BEING UNENFORCEABLE, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES
In the United Kingdom, the Unfair Terms in Consumer Contracts Regulations
1994 apply to all of the mortgage loans that were entered into between July 1,
1995 and September 30, 1999, and the Unfair Terms in Consumer Contracts
Regulations 1999 ("UTCCR") apply to all of the mortgage loans that have been
entered into on and after October 1, 1999. These regulations generally provide
that:
* a borrower may challenge a term in an agreement on the basis that
it is an "unfair" term within the regulations and therefore not
binding on the borrower; and
* the OFT and any "qualifying body" (as defined in the regulations,
such as the FSA) may seek to prevent a business from relying on
unfair terms.
This will not generally affect "core terms" which set out the main subject
matter of the contract, such as the borrower's obligation to repay principal.
However, it may affect terms that are not considered to be core terms, such as
the right of the lender to vary the interest rate. For example, if a term
permitting a lender to vary the interest rate is found to be unfair, the
borrower will not be liable to pay the increased rate or, to the extent that
she or he has paid it, will be able, as against the lender or the mortgages
trustee, to claim repayment of the extra interest amounts paid or to set off
the amount of such claim against the amount owing by the borrower under the
mortgage loan. Any such non- recovery, claim or set-off ultimately may
adversely affect our ability to make payments on the notes such that the
payments on your notes could be reduced or delayed.
On February 24, 2000, the OFT issued a guidance note on what the OFT
considers to be fair and unfair terms for interest variation in mortgage
contracts. Where the interest variation term does not provide for precise and
immediate tracking of an external rate outside the lender's control, and if the
borrower is locked in, for example by an early repayment charge that is
considered to be a penalty, the term is likely to be regarded as unfair under
the UTCCR unless the lender (i) notifies the borrower in writing at least 30
days before the rate change and (ii) permits the borrower to repay the whole
loan during the next three months after the rate change, without paying the
early repayment charge. The seller has reviewed the guidance note and has
concluded that its compliance with it will have no material adverse effect on
the mortgage loans or its business. The guidance note has been withdrawn from
the OFT website and is currently under review by the OFT and the FSA, but there
is no indication as to when this review is likely to be concluded or what
changes, if any may arise from it.
59
In August 2002 the Law Commission for England and Wales and the Scottish Law
Commission published a Joint Consultation Paper proposing changes to the UTCCR,
including harmonizing provisions of the UTCCR and the Unfair Contract Terms Act
1977, applying the UTCCR to business-to-business contracts and revising the
UTCCR to make it "clearer and more accessible". The closing date for comments
on this consultation was November 8, 2002 and a final report (together with a
Bill) is expected early in 2004. No assurances can be given that changes to the
UTCCR, if implemented, will not have an adverse effect on the seller, the
issuer and/or the administrator.
Under the FSMA, the Financial Ombudsman Service (the "OMBUDSMAN") is
required to make decisions on (among other things) complaints relating to the
terms in agreements on the basis of what, in the Ombudsman's opinion, would be
fair and reasonable in all circumstances of the case, taking into account
(among other things) law and guidance. Complaints brought before the Ombudsman
for consideration must be decided on a case-by-case basis, with reference to
the particular facts of any individual case. Each case would first be
adjudicated by an adjudicator. Either party to the case may appeal against the
adjudication. In the event of an appeal, the case proceeds to a final decision
by the Ombudsman.
THE MORTGAGES TRUSTEE'S ENTITLEMENT TO BE INDEMNIFIED FOR LIABILITIES
UNDERTAKEN DURING THE ENFORCEMENT PROCESS MAY ADVERSELY AFFECT THE FUNDS
AVAILABLE TO FUNDING TO PAY AMOUNTS DUE UNDER THE INTERCOMPANY LOAN, WHICH MAY
IN TURN ADVERSELY AFFECT THE FUNDS AVAILABLE TO PAY THE NOTES
In order to enforce a power of sale in respect of a mortgaged property, the
relevant mortgagee (which may be Northern Rock, the mortgages trustee or any
receiver appointed by the security trustee) must first obtain possession of the
mortgaged property unless the property is vacant. Possession is usually
obtained by way of a court order although this can be a lengthy process and the
mortgagee must assume certain risks. Each of the mortgages trustee and the
security trustee and any receiver appointed by it is entitled to be indemnified
to its satisfaction against personal liabilities which it could incur if it
were to become a mortgagee in possession before it is obliged to seek
possession, provided that it is always understood that the security trustee is
never obliged to enter into possession of the mortgaged property.
THE EUROPEAN UNION DIRECTIVE ON THE TAXATION OF SAVINGS INCOME MAY PREVENT YOU
FROM RECEIVING INTEREST ON THE NOTES IN FULL
On June 3, 2003, the Council of the European Union adopted a directive on
the taxation of savings income (the "DIRECTIVE") under which member states will
generally be required to provide to the tax authorities of another member state
details of payments of interest or other similar income paid by a person within
its jurisdiction to or for an individual resident in that other member state.
Exceptionally (and for a transitional period only which will end after
agreement on exchange of information is reached between the European Union and
certain non-European Union states) Belgium, Luxembourg and Austria will instead
be required to withhold tax from such payments unless the noteholder authorises
the person making the payment to report the payment or presents a certificate
from the relevant tax authority establishing exemption therefrom. The Directive
will, subject to certain conditions being satisfied, apply from January 1,
2005. If any payment of interest on the notes is made or collected through a
member state which opts for a withholding system, this may prevent you from
receiving interest on your notes in full.
TAX PAYABLE BY FUNDING AND THE ISSUER MAY ADVERSELY AFFECT OUR ABILITY TO MAKE
PAYMENTS ON THE NOTES
As explained under "MATERIAL UNITED KINGDOM TAX CONSEQUENCES", Funding and
the issuer will generally be subject to UK corporation tax, currently at a rate
of 30%, on the profit reflected in their respective profit and loss accounts as
increased by the amount of any expenses or losses which are not deductible for
the purposes of UK corporation tax. If
60
the tax payable by Funding or the issuer is greater than expected because, for
example, expenses or losses which are not so deductible are greater than
expected, the funds available to make payments on your notes could be
materially reduced and this could have a material adverse effect on our ability
to make payments on the notes.
IF THE UNITED KINGDOM JOINS THE EUROPEAN MONETARY UNION PRIOR TO THE MATURITY
OF THE NOTES, WE CANNOT ASSURE YOU THAT THIS WOULD NOT ADVERSELY AFFECT
PAYMENTS ON YOUR NOTES
It is possible that prior to the maturity of the notes the United Kingdom
may become a participating member state in the European economic and monetary
union and the euro may become the lawful currency of the United Kingdom. In
that event, (a) all amounts payable in respect of any notes denominated in
pounds sterling may become payable in euro; (b) applicable provisions of law
may allow or require us to re-denominate such notes into euro and take
additional measures in respect of such notes; and (c) the introduction of the
euro as the lawful currency of the United Kingdom may result in the
disappearance of published or displayed rates for deposits in pounds sterling
used to determine the rates of interest on such notes or changes in the way
those rates are calculated, quoted and published or displayed. The introduction
of the euro could also be accompanied by a volatile interest rate environment
which could adversely affect a borrower's ability to repay its loan as well as
adversely affect investors. It cannot be said with certainty what effect, if
any, adoption of the euro by the United Kingdom will have on investors in the
notes.
CHANGES OF LAW MAY ADVERSELY AFFECT YOUR INTERESTS
The structure of the issue of the notes and the ratings which are to be
assigned to them are based on English law in effect as at the date of this
prospectus. We cannot provide assurance as to the impact of any possible change
to English law or administrative practice in the United Kingdom after the date
of this prospectus. In particular, you should note that significant changes to
the English corporate insolvency regime have recently been enacted and brought
into effect. This includes the Insolvency Act 2000, and, in particular, the
exception of the moratorium provisions (as described below), which came into
force in January 2003. The Insolvency Act 2000 allows certain "small" companies
(which are defined by reference to certain tests relating to a company's
balance sheet, turnover and average number of employees) to seek protection
from their creditors for a period of 28 days for the purpose of putting
together a company voluntary arrangement with the option for the creditors to
extend the moratorium for a further two months. The position as to whether or
not we are a "small" company may change from period to period and consequently
no assurance can be given that we, the mortgages trustee or Funding will, at
any given time, be determined to be a "small" company. The Secretary of State
for Trade and Industry may by regulation modify the eligibility requirements
for "small" companies and can make different provisions for different cases. In
this respect, the Government White Paper, "Modernising Company Law," issued on
July 16, 2002 included a proposal to increase the limits for the definition of
a small company to the EU maximum [GBP]2.8 million turnover, [GBP]1.4 million
balance sheet total, 50 employees). No assurance can be given that any such
modification or different provisions will not be detrimental to the interests
of investors. The Government has published Regulations (the Insolvency Act 1986
(Amendment) (No.3) Regulations 2002) (the "REGULATIONS") which excludes certain
companies from the optional moratorium provisions. Under the Regulations a
company will be excluded from the optional moratorium provisions if (a) it is
party to an agreement which is or forms part of a capital market arrangement
(as defined in the Regulations), it incurs or is expected to incur a debt of at
least [GBP]10 million under the arrangement and the arrangement involves the
issue of a capital market investment (as defined in the Regulations) or (b) it
incurs a liability (which is broadly defined) under an agreement of at least
[GBP]10 million.
61
In addition, on November 7, 2002, the Enterprise Act (the "ENTERPRISE ACT")
received Royal Assent. This legislation contains significant reforms of
personal and corporate and insolvency law. These reforms, which were brought
into force on September 15, 2003, restrict the right of the holder of a
floating charge to appoint an administrative receiver and instead 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. Previously, the holder of a floating charge over the
whole or substantially the whole of the assets of a company had the ability to
block the appointment of an administrator by appointing an administrative
receiver, who primarily acts in the interests of the floating charge holder,
though there are residual duties to the company and others interested in the
equity of redemption.
The Enterprise Act states that the holder of a valid and enforceable
floating charge over the whole or substantially the whole of a company's
property will be able to appoint an administrator of his choice, and that (if
no winding-up order had been made or provisional liquidator appointed) such
appointment can be made without going to court. However, the administrator will
be acting for the creditors generally and not just his appointor.
Directors of companies will also be able to use the out of court route to
place the company in administration. There will be a notice period during which
the holder of the floating charge can either agree to the proposed appointment
by the directors or appoint an alternative administrator, although the
moratorium will take effect immediately after notice was given. If the floating
charge holder does not respond to the notice of intention to appoint, the
company's appointee will automatically take office after the notice period has
elapsed.
The Enterprise Act states that the purpose of administration will be to
rescue the company, or, where that is not reasonably practicable, to achieve a
better result for the company's creditors as a whole than would be likely if
the company were wound up, or, where neither of the above purposes are
reasonably practicable, to realize property in order to make a distribution to
one or more secured or preferential creditors. These purposes could conflict
with the wishes or interests of noteholders. Nevertheless, the Enterprise Act
makes it clear that the administrators' statement of proposals cannot include
an action that affects the right of a secured creditor to enforce his security.
The Enterprise Act provides that the abolition of administrative
receivership will not extend to certain capital market arrangements. The
relevant exemption provides that, in broad terms, to fall within this capital
markets exemption, the arrangement must involve a party incurring or expecting
to incur a debt of at least [GBP]50 million (or, when the agreement was entered
into, it was expected to incur a debt of at least [GBP]50 million) and the
issue of a capital market investment that is rated, listed or traded or
designed to be rated, listed or traded. The exemption provides that an
arrangement is a "capital market arrangement" if (a) it involves a grant of
security to a person holding it as a trustee for a person who holds a capital
market investment issued by a party to the arrangement; (b) it involves a grant
of security to (i) a party to the arrangement who issues a capital market
investment, or (ii) a person who holds the security as trustee for a party to
the arrangement in connection with the issue of a capital market investment;
(c) it involves a grant of security to a person who holds the security as
trustee for a party to the arrangement who agrees to provide finance (including
the provision of an indemnity) to another party; (d) at least one party
guarantees the performance of obligations of another party; (e) at least one
party provides security in respect of the performance of obligations of another
party; or (f) the arrangement involves an investment of a kind described in
articles 83 to 85 of the Financial Services and Markets Act 2000 (Regulated
Activities) Order 2001 (options, futures and contracts for differences).
62
As the security granted by Funding to the security trustee in the Funding
deed of charge was created prior to September 15, 2003, the right of the
security trustee to appoint an administrative receiver under that security will
be preserved notwithstanding the relevant provisions of the Act coming into
force. The security which we will grant to the note trustee will only be created
on the closing date when the issuer issues the notes which will be after
September 15, 2003. However, we expect that the capital markets exemption, as
described above, will apply. The right of the note trustee to appoint an
administrative receiver under that security is therefore unlikely to be affected
by the Enterprise Act coming into force as the grant of security to the note
trustee will likely be considered the grant of security to a person (i.e., the
note trustee) who will hold it as trustee for a person who holds a capital
market investment (i.e., the notes) issued by a party (i.e., the issuer) to an
arrangement involving the incurrence of debt (i.e., the notes) exceeding [GBP]50
million and as the notes are expected to be rated and listed. However, as the
Enterprise Act has never been considered judicially, no assurance can be given
as to whether the Enterprise Act could have a detrimental effect on the
transaction described in this prospectus or on the interests of noteholders.
YOUR INTERESTS MAY BE ADVERSELY AFFECTED BY A CHANGE OF LAW IN RELATION TO UK
WITHHOLDING TAX
In the event that amounts due under the notes are subject to withholding
tax, we will not be obliged to pay additional amounts in relation thereto. The
applicability of any UK withholding tax under current English law is discussed
under "MATERIAL UNITED KINGDOM TAX CONSEQUENCES".
PROPOSED CHANGES TO THE BASEL CAPITAL ACCORD AND THE RISK WEIGHTED ASSET
FRAMEWORK MAY RESULT IN CHANGES TO THE RISK-WEIGHTING OF YOUR NOTES
The Basel Committee on Banking Supervision (the "BASEL COMMITTEE") 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 Basel Committee
published its second consultation document, the "NEW BASEL CAPITAL ACCORD", on
January 16, 2001. The consultation period on the further proposals contained in
the New Basel Capital Accord ended on May 31, 2001. On October 1, 2002 the
Basel Committee launched a comprehensive field test for banks, known as the
quantitative impact study, or QIS3, to gauge the impact of its revised
proposals on minimum capital requirements under pillar one of the New Basel
Capital Accord before finalization of the third consultative paper. The survey
period ended on December 20, 2002 and the results were issued on May 5, 2003.
The third consultative paper on the New Basel Capital Accord was issued on
April 29, 2003. Comments on the third consultative paper were published on
August 20, 2003. The Basel Committee intends to finalize the New Basel Capital
Accord in the fourth quarter of 2003, allowing for implementation of the new
framework in each country at year end 2006. If adopted in their current form,
the proposals could affect risk weighting of the notes in respect of certain
investors if those investors are regulated in a manner which will be affected
by the proposals. Consequently, you should consult your own advisers as to the
consequences to and effect on you of the potential application of the New Basel
Capital Accord proposals. We cannot predict the precise effects of potential
changes which might result if the proposals were adopted in their current form.
YOU WILL NOT RECEIVE PHYSICAL NOTES, WHICH MAY CAUSE DELAYS IN DISTRIBUTIONS
AND HAMPER YOUR ABILITY TO PLEDGE OR RESELL THE NOTES
Unless the global note certificates are exchanged for individual note
certificates, which will only occur under a limited set of circumstances, your
beneficial ownership of the notes will only be registered in book-entry form
with DTC, Euroclear or Clearstream, Luxembourg. The lack of physical notes
could, among other things:
63
* result in payment delays on the notes because we will be sending
distributions on the notes to DTC instead of directly to you;
* make it difficult for you to pledge or otherwise grant security
over the notes if physical notes are required by the party
demanding the pledge or other security; and
* hinder your ability to resell the notes because some investors may
be unwilling to buy notes that are not in physical form.
IF YOU HAVE A CLAIM AGAINST US IT MAY BE NECESSARY FOR YOU TO BRING SUIT
AGAINST US IN ENGLAND TO ENFORCE YOUR RIGHTS
We have agreed to submit to the non-exclusive jurisdiction of the courts of
England, and it may be necessary for you to bring a suit in England to enforce
your rights against us.
64
DEFINED TERMS
We have provided an index of defined terms at the end of this prospectus
under "GLOSSARY". Terms used in this prospectus have the meaning set out in the
glossary unless they are defined where they first appear in this prospectus.
For purposes of this prospectus, the term "BORROWER" has the meaning set out in
the glossary, but generally means a person or persons who have borrowed money
under a mortgage loan.
Because this transaction is related, by virtue of its master trust
structure, to previous transactions and because it may be related to future
transactions, it is necessary in this prospectus to refer to any or all of
these transactions. In respect of notes, intercompany loans, issuers and terms
derived from or relating to these terms, we use the word "PREVIOUS" when
referring to the Granite Mortgages 01-1 plc transaction that closed on March
26, 2001, the Granite Mortgages 01-2 plc transaction that closed on September
28, 2001, the Granite Mortgages 02-1 plc transaction that closed on March 20,
2002, the Granite Mortgages 02-2 plc transaction that closed on September 23,
2002, the Granite Mortgages 03-1 plc transaction that closed on January 27,
2003 and the Granite Mortgages 03-2 plc transaction that closed on May 21, 2003
and persons and matters connected to those transactions, and "NEW" when
referring to future potential transactions. References to "THE ISSUER", "WE" or
"US" refer to Granite Mortgages 03-3 plc, and references to "THE NOTES" and
"THE INTERCOMPANY LOAN" refer to the notes that we are issuing under this
prospectus and the intercompany loan that we will enter into with Funding on
the closing date.
65
US DOLLAR PRESENTATION
Translations of pounds sterling into US dollars, unless otherwise stated in
this prospectus, have been made at the rate of [GBP]0.6215 = $1.00, which
reflects the noon buying rate in the City of New York for cable transfers in
sterling per US$1.00 as certified for customs purposes by the Federal Reserve
Bank on July 31, 2003. Use of this rate does not mean that pound sterling
amounts actually represent those US dollar amounts or could be converted into
US dollars at that rate at any particular time.
References throughout this prospectus to "[GBP]", "POUNDS" or "STERLING" are
to the lawful currency for the time being of the United Kingdom of Great
Britain and Northern Ireland.
References in this prospectus to "US$", "USD", "$", "US DOLLARS" or
"DOLLARS" are to the lawful currency of the United States of America.
References in this prospectus to "[e]", "EURO" or "EURO" are to the currency
of the member states of the European Union that adopt the single currency in
accordance with the Treaty of Rome of March 25, 1957 establishing the European
Community, as amended from time to time.
STERLING/US DOLLAR EXCHANGE RATE HISTORY*
YEARS ENDED DECEMBER 31
------------------------------------------------
JANUARY
1, 2003
THROUGH
JULY 31,
2003 2002 2001 2000 1999 1998
-------- ------ ------ ------ ------ ------
Last(1) 1.6108 1.6100 1.4546 1.4930 1.6182 1.6600
Average(2) 1.6133 1.5038 1.4407 1.5160 1.6177 1.6575
High 1.6853 1.6100 1.5038 1.6537 1.6746 1.7115
Low 1.5541 1.4082 1.3727 1.3977 1.5485 1.6128
-------- ------ ------ ------ ------ ------
Notes
(1) Last is the closing exchange rate on the last operating business day of
each of the years indicated, years commencing from January 1 or the next
operating business day.
(2) Average is the average daily exchange rate during the period.
JULY 1,
2003
THROUGH
JULY 31,
2003 JUNE 2003 MAY 2003 APRIL 2003 MARCH 2003
-------- --------- -------- ---------- ----------
High 1.6691 1.6853 1.6543 1.5985 1.6125
Low 1.5906 1.6291 1.5967 1.5541 1.5624
* Source: Bloomberg
66
THE ISSUER
INTRODUCTION
The issuer was incorporated in England and Wales as a public company limited
by shares under the Companies Act 1985 on July 7, 2003 with registered number
4823268. The registered office of the issuer is at Fifth Floor, 100 Wood
Street, London EC2V 7EX. The issuer's authorized share capital as at August 31,
2003 comprised, and as at the date of this prospectus comprises, 50,000
ordinary shares of [GBP]1 each. The issuer's issued share capital as at August
31, 2003 and as at the date of this prospectus comprised 50,000 ordinary shares
of [GBP]1 each (of which [GBP]12,500 is paid up), all of which are beneficially
owned by Funding (see "FUNDING").
The issuer is organized as a special purpose company and will be mostly
passive. The issuer has no subsidiaries. The seller does not own directly or
indirectly any of the share capital of Funding or the issuer.
The principal objects of the issuer are set out in its memorandum of
association and permit the issuer, among other things, to lend money and give
credit, secured or unsecured, to borrow or raise money and to grant security
over its property for the performance of its obligations or the payment of
money.
The issuer was established to raise capital by the issue of notes and to use
the net proceeds of such issuance to make the intercompany loan to Funding in
accordance with the intercompany loan agreement to be entered into between
Funding and the issuer.
Since its incorporation, the issuer has not engaged in any material
activities other than those incidental to its registration as a public company
under the Companies Act 1985, the authorization and issue of the notes, the
matters contemplated in this prospectus, the authorization of the other
transaction documents referred to in this prospectus or in connection with the
issue of the notes and other matters which are incidental or ancillary to those
activities. The issuer has no employees.
There is no intention to accumulate surplus cash in the issuer except in the
circumstances set out under "SECURITY FOR THE ISSUER'S OBLIGATIONS". The
current financial period of the issuer will end on December 31, 2004.
DIRECTORS AND SECRETARY
The directors of the issuer and their respective business addresses and
principal activities or business occupations are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ------------------------------ ------------------- -----------------------------
Keith McCallum Currie Northern Rock House Treasury Director of
Gosforth Northern Rock plc
Newcastle upon Tyne
NE3 4PL
L.D.C. Securitisation Director Fifth Floor Acting as corporate directors
No. 1 Limited 100 Wood Street of special purpose companies
London
EC2V 7EX
L.D.C. Securitisation Director Fifth Floor Acting as corporate directors
No. 2 Limited 100 Wood Street of special purpose companies
London
EC2V 7EX
Keith McCallum Currie is an employee of the seller.
67
The directors of L.D.C. Securitisation Director No. 1 Limited and L.D.C.
Securitisation Director No. 2 Limited and their principal activities or
business occupations are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ---------------------------- ----------------------------- --------------------------
Law Debenture Securitisation Fifth Floor, 100 Wood Street, Provision of directors for
Services Limited London EC2V 7EX special purpose vehicles
The affairs of L.D.C. Securitisation Director No. 1 Limited, L.D.C.
Securitisation Director No. 2 Limited and Law Debenture Securitisation Services
Limited are represented by its directors Denyse Monique Anderson, Julian Robert
Mason-Jebb, David Frank Norris and Robert James Williams each of whose business
address is at Fifth Floor, 100 Wood Street, London EC2V 7EX and (other than
Robert James Williams) each of whose principal activities are as director of The
Law Debenture Trust Corporation p.l.c. The principal activity of Robert James
Williams is director of The Law Debenture Corporation p.l.c.
The company secretary of the issuer is:
NAME BUSINESS ADDRESS
- ---------------------------------------- -----------------------------
Law Debenture Corporate Services Limited Fifth Floor, 100 Wood Street,
London EC2V 7EX
In accordance with the corporate services agreement, the seller and the
corporate services provider will each provide directors and other corporate
services for the issuer in consideration for the payment of an annual fee to
the corporate services provider.
The issuer's activities will principally comprise the issue of the notes,
the making of the intercompany loan to Funding pursuant to the intercompany
loan agreement, the entering into of all documents relating to such issue and
such intercompany loan to which it is expressed to be a party and the exercise
of related rights and powers and other activities referred to in this
prospectus or reasonably incidental to those activities.
68
CAPITALIZATION AND BORROWINGS
The following table shows the unaudited capitalization and borrowings of the
issuer as at August 31, 2003 and as adjusted for the issuance of the notes
(assuming all of the notes are issued on the closing date):
AS ADJUSTED
AT AUGUST 31, FOR ISSUANCE
2003 OF NOTES
[GBP] [GBP]
------------- ------------
Share Capital Total authorized share capital (ordinary
shares of [GBP]1 each) 50,000 50,000
------------- ------------
Total paid up share capital (50,000 ordinary shares of [GBP]1
each, partly paid up to 25%) 12,500 12,500
============= ============
BORROWINGS
Series 1 notes 0 [ ]
Series 2 notes 0 [ ]
Series 3 notes 0 [ ]
------------- ------------
0 [ ]
The issuer's audited balance sheet is set out in Appendix B to this
prospectus. As at August 31, 2003, the issuer had no contingent liabilities and
no outstanding guarantees or unsecured loan capital. None of the issuer's
borrowings, including loan capital, is guaranteed. There has been no material
change to the capitalization, borrowings (including loan capital), guarantees
or contingent liabilities of the issuer from August 31, 2003 to the date of
this prospectus. The notes issued by this prospectus will not be guaranteed by
the issuer or any other party.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE ISSUER
SOURCES OF CAPITAL AND LIQUIDITY
The issuer's source of capital will be the net proceeds of the offering of
the notes. The issuer's primary source of liquidity will be payments of
interest and principal on the intercompany loan.
RESULTS OF OPERATIONS
The issuer does not have an operating history as of the date of this
prospectus. Accordingly, this prospectus does not include any historical or pro
forma ratio of earnings to fixed charges. The earnings on the intercompany
loan, the interest costs of the notes and the related operating expenses will
determine the issuer's results of operations in the future. The fee payable by
Funding under the intercompany loan agreement will cover the fees and expenses
of the issuer in connection with the issuance of the notes. The income
generated on the intercompany loan will be used to pay principal and interest
on the notes.
69
USE OF PROCEEDS
The gross proceeds from the issuance of the offered notes will equal
approximately $[__] and will be applied (after exchanging the gross US dollar
proceeds of the series 1 notes for sterling proceeds calculated by reference to
the dollar currency swap rates, after exchanging the gross euro proceeds of the
series 2 notes for sterling proceeds calculated by reference to the euro
currency swap rates and after including the gross proceeds from the issuance of
the series 3 notes), in accordance with the intercompany loan agreement, to
make the intercompany loan to Funding. Our fees and expenses in connection with
the issuance of the notes are expected to be approximately [GBP][__] (or
$[__]). These fees and expenses will be paid by us, but will be funded by an
amount paid to us by Funding as a fee under the intercompany loan agreement.
70
THE NORTHERN ROCK GROUP
THE SELLER
The seller was incorporated as a public limited liability company in England
and Wales on October 30, 1996 with registered number 03273685. The seller is
regulated by the Financial Services Authority. The seller was originally a
building society and was converted October 1, 1997 from a mutual form UK
building society to a stock form UK bank listed on the London Stock Exchange
plc and authorized under the FSMA.
The registered office of the seller is at Northern Rock House, Gosforth,
Newcastle upon Tyne NE3 4PL. Its telephone number is + 44 191 285 7191.
At June 30, 2003, the seller was the ninth largest UK quoted bank by market
capitalization. It is a specialized mortgage lender whose core business is the
provision of residential mortgages funded in both the retail and wholesale
markets. It also provides a range of other services, mainly related to its core
activities.
At June 30, 2003, the seller and its principal subsidiaries (the "GROUP")
had total assets under management of approximately [GBP]48.5 billion and
employed approximately 4,325 employees. At the date of this prospectus,
Northern Rock has a long-term rating of "A" by Standard & Poor's, "A1" by
Moody's and "A+" by Fitch. The seller's ordinary shares are listed on the
London Stock Exchange plc.
MORTGAGE BUSINESS
The seller is one of the major mortgage lenders in the UK in terms of
mortgage loans outstanding. In the UK mortgage market, the seller's net
mortgage lending during 2001, 2002 and as at June 30, 2003 (i.e., new mortgage
lending during the year/period net of capital repayments and acquisitions) was
[GBP]5.1 billion, [GBP]6.7 billion and [GBP]3.8 billion, respectively, and
gross mortgage lending during 2001, 2002 and as at June 30, 2003 (i.e., solely
on the basis of new mortgage lending during the year/period) was [GBP]8.9
billion, [GBP]12.6 billion and [GBP]6.9 billion, respectively.
SUBSIDIARIES OF THE SELLER
The seller currently has the following two principal subsidiaries:
* NORTHERN ROCK MORTGAGE INDEMNITY COMPANY LIMITED
Northern Rock Mortgage Indemnity Company Limited, or NORMIC, is a limited
liability company incorporated in Guernsey on July 15, 1994 with registered
number 28379. NORMIC's core business is the provision of mortgage indemnity
insurance. NORMIC provides mortgage indemnity insurance to the seller.
* NORTHERN ROCK (GUERNSEY) LIMITED
Northern Rock (Guernsey) Limited, or NRG, is a limited liability company
incorporated in Guernsey on November 17, 1995 with registered number 30224. NRG
is a wholly owned subsidiary of the seller and engages in retail deposit
taking.
The issuer believes that additional information relating to Northern Rock,
in its capacity as basis rate swap provider, is not material to an investor's
decision to purchase the notes.
71
FUNDING
INTRODUCTION
Funding was incorporated as a private limited company in Jersey, Channel
Islands on February 14, 2001 with registered number 79308. The registered
office of Funding is at 22 Grenville Street, St. Helier, Jersey JE4 8PX,
Channel Islands. Funding has been registered, under Schedule 21A to the
Companies Act 1985, as having established a branch in England and Wales on
February 19, 2001. Its registered overseas company number is FC022999 and
branch number is BR005916. The branch address is at 4 Royal Mint Court, London
EC3N 4HJ. The authorized share capital of Funding as at December 31, 2002
comprised, and as at the date of this prospectus comprises, 100,000 ordinary
shares of [GBP]1 each. The issued share capital of Funding as at December 31,
2002 comprised 62,500 ordinary shares of [GBP]1 each, all of which are
beneficially owned by Holdings (see "HOLDINGS"), and the issued share capital
of Funding as at the date of this prospectus is comprised of 87,500 ordinary
shares of [GBP]1 each, all of which will continue to be beneficially owned by
Holdings.
Funding is organized as a special purpose company and is mostly passive.
Funding has no subsidiaries other than the previous issuers and the issuer,
although it is expected that, subject to certain conditions, Funding will
establish new issuers from time to time to issue new notes. Each new issuer
will be a subsidiary of Funding.
Since its incorporation, Funding has not engaged in any material activities
other than those relating to the issue of the previous notes by the previous
issuers and those activities incidental to establishing the issuer, authorizing
the transaction documents referred to in this prospectus, obtaining a standard
license under the Consumer Credit Act 1974, filing a notification under the
Data Protection Act 1998 and other matters which are incidental or ancillary to
those activities. The current financial period of Funding will end on December
31, 2003.
DIRECTORS AND SECRETARY
The directors of Funding and their respective business addresses and
principal activities or business occupations are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- --------------------- ------------------- -----------------------------
Keith McCallum Currie Northern Rock House Treasury Director of Northern
Gosforth Rock plc
Newcastle upon Tyne
NE3 4PL
Nigel Charles Bradley 4 Royal Mint Court Director
London
EC3N 4HJ
Jonathan David Rigby 4 Royal Mint Court Advocate
London
EC3N 4HJ
Keith McCallum Currie is an employee of the seller.
The company secretary of Funding is:
NAME BUSINESS ADDRESS
- ----------------------------------------- ----------------------------------
Mourant & Co. Capital Secretaries Limited 4 Royal Mint Court London EC3N 4HJ
72
Jonathan Rigby is an associate of Mourant du Feu & Jeune, the legal adviser
to Funding as to matters of Jersey law. Nigel Bradley and Jonathan Rigby are
employees of the Mourant Group, which is the ultimate owner of Mourant & Co.
Capital (SPV) Limited, to which fees are payable for providing corporate
administration services to Funding, including the provision of a secretary
through its subsidiary company, Mourant & Co. Capital Secretaries Limited.
Nigel Bradley is a director of both Mourant & Co Capital (SPV) Limited and
Mourant & Co. Capital Secretaries Limited.
CAPITALIZATION AND BORROWINGS
The following table shows the unaudited capitalization and borrowings of
Funding as at December 31, 2002 and as adjusted for the drawing of the
intercompany loan and the start-up loan (assuming that the intercompany loan
and the start-up loan are drawn on the closing date):
AS ADJUSTED FOR
DRAWING OF
DECEMBER 31, INTERCOMPANY
2002 LOAN AND START-UP LOAN
[GBP] [GBP]
----------------- ----------------------
SHARE CAPITAL
Total authorized share capital (ordinary shares of [GBP]1 each) 100,000 100,000
Total issued share capital (ordinary shares of [GBP]1 each
allotted and fully paid) 62,500 87,500
LOAN CAPITAL OR BORROWINGS
Secured intercompany loan (Granite Mortgages 01-1 plc) 1,173,514,180 1,035,112,591#3
Start-up loan for Granite Mortgages 01-1 plc 4,447,095 4,447,095#3
----------------- ----------------------
Secured intercompany loan (Granite Mortgages 01-2 plc) 1,284,873,077 1,136,669,231#3
Start-up loan for Granite Mortgages 01-2 plc 8,517,720 8,517,720#3
----------------- ----------------------
Secured intercompany loan (Granite Mortgages 02-1 plc) 2,246,620,661 1,988,428,163#3
Start-up loan for Granite Mortgages 02-1 plc 24,431,029 24,431,029#3
----------------- ----------------------
Secured intercompany loan (Granite Mortgages 02-2 plc) 2,748,444,620 2,427,016,049#3
Start-up loan for Granite Mortgages 02-2 plc 23,909,355 23,268,501#3
----------------- ----------------------
Secured intercompany loan (Granite Mortgages 03-1 plc) 01 2,723,377,816#3
Start-up loan for Granite Mortgages 03-1 plc 01 26,832,548#3
----------------- ----------------------
Secured intercompany loan (Granite Mortgages 03-2 plc) 0#2 2,412,618,772#3
Start-up loan for Granite Mortgages 03-2 plc 0#2 22,625,000#3
----------------- ----------------------
Secured intercompany loan (Granite Mortgages 03-3 plc) 0 [__]
Start-up loan for Granite Mortgages 03-3 plc 0 [__]
----------------- ----------------------
Total Loan Capital or Borrowings 7,514,757,737#1,2 [__]
================= ======================
1 Granite Mortgages 03-1 plc commenced trading on January 27, 2003 when it
issued [GBP]3,009,507,487 principal amount of asset backed notes and made an
intercompany loan in the amount of [GBP]3,009,507,487 to Funding. Funding in
turn used the proceeds of such intercompany loan to purchase an additional
share of the mortgages trust from the mortgages trustee in the amount of
[GBP]3,009,507,487. Northern Rock assigned [GBP]4,059,996,930 of mortgage
loans to the mortgages trustee on January 27, 2003 and also made available to
Funding a start-up loan on January 27, 2003 in the amount of [GBP]27,130,000.
No repayment of principal by Funding under the intercompany loan from Granite
Mortgages 03-1 plc or under the start-up loan from Northern Rock was due
until the payment date occurring in April 2003.
73
2 Granite Mortgages 03-2 plc commenced trading on May 21, 2003 when it issued
[GBP]2,494,618,462 principal amount of asset backed notes and made an
intercompany loan in the amount of [GBP]2,494,618,462 to Funding. Funding in
turn used the proceeds of such intercompany loan to purchase an additional
share of the mortgages trust from the mortgages trustee in the amount of
[GBP]2,494,618,462. Northern Rock assigned [GBP]3,526,069,110 of mortgage loans
to the mortgages trustee on April 14, 2003 and also made available to Funding a
start-up loan on May 21, 2003 in the amount of [GBP]22,625,000. No repayment of
principal by Funding under the intercompany loan from Granite Mortgages 03-2
plc or under the start-up loan from Northern Rock was due until the payment
date occurring in July 2003.
3 As adjusted for principal repaid by Funding to the relevant issuer under the
relevant intercompany loan and payments made by Funding to the start-up loan
provider under the relevant start-up loan on the payment dates occurring in
January 2003, April 2003 and July 2003.
Funding's audited balance sheets, related statements of income, statements
of changes in shareholders' equity and statements of cash flows are set out in
Appendices E through I to this prospectus. As of December 31, 2002, Funding had
no contingent liabilities and no outstanding guarantees or unsecured loan
capital or other debt other than as set forth above. None of Funding's
borrowings, including loan capital, is guaranteed. Except as disclosed in this
prospectus in relation to the issuance of the notes, there has been no material
change to the capitalization, borrowings (including loan capital), contingent
liabilities or outstanding guarantees of Funding from December 31, 2002 to the
date of this prospectus, other than as set forth in the above table and other
than with respect to principal repaid by Funding under the intercompany loans
on the January 2003, April 2003 and July 2003 payment dates as set forth in the
table above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF FUNDING
SOURCES OF CAPITAL AND LIQUIDITY
Funding's principal sources of capital are the previous intercompany loans
made to it by the previous issuers and the intercompany loan made to it by the
issuer.
Funding's primary source of liquidity is the earnings on Funding's interest
in the trust property and the Funding reserve fund and (in specified
circumstances and for specified purposes) each previous issuer's reserve fund
and each previous issuer's liquidity reserve fund, if any, and will include
after the closing date (in specified circumstances and for specified purposes)
earnings on Funding's interest in the issuer reserve fund and the issuer
liquidity reserve fund, if any.
RESULTS OF OPERATIONS
This prospectus does not include any historical or pro forma ratio of
Funding's earnings to fixed charges. The earnings on Funding's interest in the
trust property, the Funding reserve fund, each previous issuer's and our
reserve fund, each previous issuer's and our liquidity reserve fund, if any,
each start-up loan and the related operating expenses 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 intercompany loan to the issuer, to pay principal and interest on the
previous intercompany loans to the previous issuers and to pay principal and
interest on any new intercompany loan to any new issuer.
74
THE MORTGAGES TRUSTEE
INTRODUCTION
The mortgages trustee was incorporated as a private limited company in
Jersey, Channel Islands on February 14, 2001 with registered number 79309. The
registered office of the mortgages trustee is at 22 Grenville Street, St.
Helier, Jersey JE4 8PX, Channel Islands. The authorized share capital of the
mortgages trustee as at December 31, 2002 comprised 10,000 ordinary shares of
[GBP]1 each. The issued share capital of the mortgages trustee as at December
31, 2002 and as at the date of this prospectus comprised 10 ordinary shares of
[GBP]1 each, all of which were beneficially owned by Holdings (see "HOLDINGS").
As at the date of this prospectus, the mortgages trustee does not have any
borrowings or contingent liabilities. The mortgages trustee is organized as a
special purpose company and is mostly passive. The mortgages trustee has no
subsidiaries. The seller does not own directly or indirectly any of the share
capital of Holdings or the mortgages trustee.
Since its incorporation, the mortgages trustee has not engaged in any
material activities other than those incidental to the settlement of the trust
property on the mortgages trustee or relating to the issue of the previous
notes of the previous issuers, the authorization of the transaction documents
referred to in this prospectus to which it is or will be a party, obtaining a
standard license under the Consumer Credit Act 1974, filing a notification
under the Data Protection Act 1998 and other matters which are incidental or
ancillary to those activities. The current financial period of the mortgages
trustee will end on December 31, 2003.
DIRECTORS AND SECRETARY
The directors of the mortgages trustee and their respective business
addresses and principal activities or business occupations are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- --------------------------- -------------------- ------------------------
Nicola Claire Davies 22 Grenville Street Advocate
St. Helier
Jersey JE4 8PX
Channel Islands
Julia Anne Jennifer Chapman 22 Grenville Street Solicitor
St. Helier
Jersey JE4 8PX
Channel Islands
Richard Gough 22 Grenville Street Corporate Administration
St. Helier Manager
Jersey JE4 8PX
Channel Islands
Daniel Blancq 22 Grenville Street Corporate Administration
St. Helier Manager
Jersey JE4 8PX
Channel Islands
75
The company secretary of the mortgages trustee is:
NAME BUSINESS ADDRESS
- --------------------------------- -------------------
Mourant & Co. Secretaries Limited 22 Grenville Street
St. Helier
Jersey JE4 8PX
Channel Islands
Each of Nicola Davies and Julia Chapman is a partner of Mourant du Feu &
Jeune, the legal adviser to the mortgages trustee as to matters of Jersey law,
and each is a partner of the Mourant Group, the ultimate owner of Mourant & Co.
Limited, to which fees are payable for providing corporate administration
services to the mortgages trustee, including the provision of a secretary
through its subsidiary company, Mourant & Co. Secretaries Limited. Each of
Nicola Davies and Julia Chapman is a director of Mourant & Co. Limited and
Mourant & Co. Secretaries Limited. Each of Richard Gough and Daniel Le Blancq
is an employee of the Mourant Group and Richard Gough is an associate director
of Mourant & Co. Limited, the parent company of Mourant & Co. Secretaries
Limited.
76
HOLDINGS
INTRODUCTION
Holdings was incorporated as a private limited company in England and Wales
on December 14, 2000 with registered number 4127787. The registered office of
Holdings is at Fifth Floor, 100 Wood Street, London EC2V 7EX.
The authorized share capital of Holdings as at December 31, 2002 comprised
100,000 ordinary shares of [GBP]1 each. The issued share capital of Holdings as
at December 31, 2002 was comprised of 62,518 ordinary shares of [GBP]1 each,
all of which were held by The Law Debenture Intermediary Corporation p.l.c.
under the terms of a trust for the benefit of charitable institutions, and the
issued share capital of Holdings as at the date of this prospectus is comprised
of 87,518 ordinary shares of [GBP]1 each, all of which will continue to be held
by The Law Debenture Intermediary Corporation p.l.c. under the terms of a trust
for the benefit of charitable institutions. Holdings is organized as a special
purpose company and is mostly passive.
The principal objects of Holdings are as set out in its memorandum of
association and are, among other things, to acquire and hold, by way of
investments or otherwise and to deal in or exploit in such manner as may from
time to time be considered expedient, all or any of the shares, stocks,
debenture stocks, debentures or other interests of or in any company (including
the mortgages trustee, Funding and the post-enforcement call option holder).
Since its incorporation, other than subscribing for or otherwise acquiring
the issued share capital of the mortgages trustee, Funding and GPCH Limited,
Holdings has not engaged in any other activities. Holdings has no employees.
The current financial period of Holdings will end on December 31, 2003.
DIRECTORS AND SECRETARY
The directors of Holdings and their respective business addresses and
principal activities or business occupations are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ------------------------------ --------------------------- -----------------------------
Keith McCallum Currie Northern Rock House Treasury Director of Northern
Gosforth Newcastle upon Rock plc
Tyne NE3 4PL
L.D.C. Securitisation Director Fifth Floor 100 Wood Street Acting as corporate directors
No. 1 Limited London EC2V 7EX of special purpose companies
L.D.C. Securitisation Director Fifth Floor 100 Wood Street Acting as corporate directors
No. 2 Limited London EC2V 7EX of special purpose companies
Keith McCallum Currie is an employee of the seller.
The Company Secretary of Holdings is:
NAME BUSINESS ADDRESS
- ---------------------------------------- ----------------
Law Debenture Corporate Services Limited Fifth Floor
100 Wood Street
London EC2V 7EX
The directors of L.D.C. Securitisation Director No. 1 Limited and L.D.C.
Securitisation Director No. 2 Limited are set out on page 68 of this
prospectus.
77
GPCH LIMITED
INTRODUCTION
GPCH Limited, the post-enforcement call option holder, was incorporated as a
private limited company in England and Wales on December 15, 2000 with
registered number 4128437. The registered office of the post-enforcement call
option holder is at Fifth Floor, 100 Wood Street, London EC2V 7EX.
The authorized share capital of the post-enforcement call option holder as
at December 31, 2002 comprised 100 ordinary shares of [GBP]1 each. The issued
share capital of the post-enforcement call option holder as at December 31,
2002 and as at the date of this prospectus comprised 2 ordinary shares of
[GBP]1 each, both of which were beneficially owned by Holdings.
The post-enforcement call option holder is organized as a special purpose
company and is mostly passive. The post-enforcement call option holder has no
subsidiaries. The seller does not own directly or indirectly any of the share
capital of Holdings or the post- enforcement call option holder.
The principal objects of the post-enforcement call option holder are as set
out in its memorandum of association and are, among other things, to hold
bonds, notes, obligations and securities issued or guaranteed by any company
and any options or rights in respect of them.
Since its incorporation, the post-enforcement call option holder has not
engaged in any material activities other than those activities incidental or
relating to the issue of the previous notes by the previous issuers and the
authorizing of the transaction documents referred to in this prospectus and
other matters which are incidental to those activities. The post-enforcement
call option holder has no employees.
The current financial period of the post-enforcement call option holder will
end on December 31, 2003.
DIRECTORS AND SECRETARY
The directors of the post-enforcement call option holder and their
respective business addresses and principal activities or business occupations
are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ------------------------------ --------------------------- -----------------------------
Keith McCallum Currie Northern Rock House Treasury Director of Northern
Gosforth Newcastle upon Rock plc
Tyne NE3 4PL
L.D.C. Securitisation Director Fifth Floor 100 Wood Street Acting as corporate directors
No. 1 Limited London EC2V 7EX of special purpose companies
L.D.C. Securitisation Director Fifth Floor 100 Wood Street Acting as corporate directors
No. 2 Limited London EC2V 7EX of special purpose companies
Keith McCallum Currie is an employee of the seller.
The company secretary of the post-enforcement call option holder is:
NAME BUSINESS ADDRESS
- ---------------------------------------- ----------------
Law Debenture Corporate Services Limited Fifth Floor
100 Wood Street
London EC2V 7EX
The directors of L.D.C. Securitisation Director No. 1 Limited and L.D.C.
Securitisation Director No. 2 Limited are set out on page 68 of this
prospectus.
78
THE CURRENCY RATE SWAP PROVIDERS
THE DOLLAR CURRENCY SWAP PROVIDER
Swiss Re Financial Products Corporation of 55 East 52nd Street, 39th Floor,
New York, New York 10055 is the dollar currency swap counterparty in respect of
the series 1 notes.
The dollar currency swap provider is a Delaware corporation and an indirect,
wholly-owned subsidiary of Swiss Reinsurance Company of Mythenquai 50/60, CH-
8022 Zurich, Switzerland, a Swiss corporation. The dollar currency swap
provider currently has a long-term counterparty credit rating of "AA" and a
short-term rating of "A-1+" from S&P. The obligations of the dollar currency
swap provider under the dollar currency swaps will be fully and unconditionally
guaranteed under the dollar currency swap guarantee by Swiss Reinsurance
Company, as the dollar currency swap guarantor. The dollar currency swap
guarantor currently has an insurance financial strength rating of "AA" and a
short-term rating of "A-1+" from S&P and an insurance financial strength rating
of "Aa1 (negative outlook)" and a short-term rating of "P-1" from Moody's. In
addition, Fitch currently assigns a financial strength rating to the dollar
currency swap guarantor of "AA+" based purely on public information.
Except for the information provided in the preceding two paragraphs, the
dollar currency swap provider and dollar currency swap guarantor have not been
involved in the preparation of, and do not accept responsibility for, this
prospectus.
The issuer believes that additional information relating to Swiss Re
Financial Products Corporation and Swiss Reinsurance Company is not material to
an investor's decision to purchase the notes.
THE EURO CURRENCY SWAP PROVIDER
Citibank, N.A. ("CITIBANK"), acting through its London branch at Citigroup
Centre, Canada Square, Canary Wharf, London E14 5LB, is the euro currency swap
provider in respect of the series 2 notes.
Citibank is a national banking association organized under the National Bank
Act of 1864 of the United States. Citibank is a wholly-owned subsidiary of
Citicorp, a Delaware corporation, and is Citicorp's principal subsidiary.
Citicorp is an indirect wholly-owned subsidiary of Citigroup Inc.
("CITIGROUP"), a Delaware holding company. The obligations of Citibank under
the euro currency swaps will not be guaranteed by Citicorp or Citigroup or by
any other affiliate. As of June 30, 2003 the total assets of Citibank and its
consolidated subsidiaries represented approximately 69% of the total assets of
Citicorp and its consolidated subsidiaries.
Citibank is a commercial bank that, along with its subsidiaries and
affiliates, offers a wide range of banking and trust services to its customers
throughout the United States and the world. Citibank was registered in the
United Kingdom as a foreign company in July 1920. The London Branch is
primarily regulated by The Financial Services Authority and operated in the
United Kingdom as a fully authorized commercial banking institution offering a
wide range of corporate banking products.
For further information regarding Citibank, reference should be made to
Citicorp's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
and to any subsequent reports of Citicorp on Forms 10-K, 10-Q and 8-K which are
filed with the SEC. Copies of such material may be obtained, upon payment of a
duplicating fee, by writing to the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. In addition, such reports are available at the SEC web site
(http://www.sec.gov).
In addition, Citibank submits quarterly to the United States Office of the
Comptroller of the Currency (the "COMPTROLLER") certain reports called
"Consolidated Reports of Condition and Income for a Bank With Domestic and
Foreign Offices" ("CALL REPORTS"). The Call
79
Reports are on file with and publicly available at the Comptroller's offices at
250 E Street, S.W., Washington, D.C. 20219 and are also available on the web
site of the Federal Deposit Insurance Corporation of the United States (http://
www.fdic.gov). Each Call Report consists of a Balance Sheet, Income Statement,
Changes in Equity Capital and other supporting schedules at the end of and for
the period to which the report relates. The Call Reports are prepared in
accordance with the regulatory instructions issued by the Federal Financial
Institutions Examination Council. While the Call Reports are supervisory and
regulatory documents, not primarily accounting documents, and do not provide a
complete range of financial disclosure about Citibank, the reports nevertheless
provide important information concerning the financial condition and results of
operations of Citibank.
The information in the preceding five paragraphs has been provided by
Citibank for use in this prospectus. Except for the foregoing five paragraphs
Citibank, Citicorp, Citigroup and their affiliates do not accept responsibility
for this prospectus as a whole.
The issuer believes that additional information relating to Citibank,
Citicorp and Citigroup is not material to an investor's decision to purchase
the notes.
80
DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND
THE PREVIOUS INTERCOMPANY LOANS
FIRST ISSUER
The first issuer, Granite Mortgages 01-1 plc, was incorporated in England
and Wales as a public company limited by shares under the Companies Act 1985 on
December 18, 2000 with registered number 4129652. The registered office of the
first issuer is at Fifth Floor, 100 Wood Street, London EC2V 7EX. The first
issuer was organized as a special purpose company whose purpose was to issue
the first issuer notes that represent its asset- backed obligations and to lend
an amount equal to the proceeds of the issue of such notes to Funding under the
first issuer intercompany loan. The first issuer does not engage in any
activities that are unrelated to these activities.
The following table summarizes the principal features of the first issuer
notes:
CLASS OF FIRST ISSUER NOTES
---------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2
CLASS A1 CLASS A2 CLASS B CLASS C CLASS A CLASS B
---------------- ------------ ------------ ------------ ---------------- ---------------
Principal Amount as at $760,000,000 $735,000,000 $50,000,000 $67,500,000 [GBP]350,000,000 [GBP]10,000,000
March 26, 2001:
Interest rate: Three-month Three-month Three-month Three-month Three month Three month
USD LIBOR + USD LIBOR + USD LIBOR + USD LIBOR + sterling LIBOR sterling LIBOR
margin margin margin margin + margin + margin
Margin until payment date 0.12% p.a. 0.21% p.a. 0.40% p.a. 1.40% p.a. 0.24% p.a. 0.40% p.a.
falling in January 2008:
Margin after payment 0.24% p.a. 0.42% p.a. 0.80% 2.40% p.a. 0.48% p.a. 0.80% p.a.
date falling in January
2008:
Expected final payment January 20, 2004 N/A N/A N/A N/A N/A
date:
Final maturity date: January 2011 January 2026 January 2041 January 2041 January 2041 January 2041
Stock Exchange Listing: London London London London London London
Rating as at March 26, Aaa/AAA/AAA Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA
2001
(Moody's/S&P/Fitch):
CLASS OF FIRST
ISSUER NOTES
---------------
SERIES 2
CLASS C
---------------
Principal Amount as at [GBP]15,000,000
March 26, 2001:
Interest rate: Three month
sterling LIBOR
+ margin
Margin until payment date 1.40% p.a.
falling in January 2008:
Margin after payment 2.40% p.a.
date falling in January
2008:
Expected final payment N/A
date:
Final maturity date: January 2041
Stock Exchange Listing: London
Rating as at March 26, Baa2/BBB/ BBB
2001
(Moody's/S&P/Fitch):
81
SECOND ISSUER
The second issuer, Granite Mortgages 01-2 plc, was incorporated in England
and Wales as a public company limited by shares under the Companies Act 1985 on
August 14, 2001 with registered number 4270015. The registered office of the
second issuer is at Fifth Floor, 100 Wood Street, London EC2V 7EX. The second
issuer was organized as a special purpose company whose purpose was to issue
the second issuer notes that represent its asset-backed obligations and to lend
an amount equal to the proceeds of such notes to Funding under the second
issuer intercompany loan. The second issuer does not engage in any activities
that are unrelated to these activities.
The following table summarizes the principal features of the second issuer
notes:
CLASS OF SECOND ISSUER NOTES
----------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2 SERIES 2
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
-------------- ------------ ------------ ---------------- --------------- ---------------
Principal Amount as at $1,300,000,000 $43,500,000 $58,000,000 [GBP]500,000,000 [GBP]15,000,000 [GBP]20,000,000
September 28, 2001:
Interest rate: Three-month Three-month Three-month Three-month Three-month Three-month
USD LIBOR + USD LIBOR + USD LIBOR + sterling LIBOR sterling LIBOR sterling LIBOR
margin margin margin + margin + margin + margin
Margin until payment 0.230% p.a. 0.400% p.a. 1.375% p.a. 0.250% p.a. 0.420% p.a. 1.400% p.a.
date falling in October
2006:
Margin after payment 0.460% p.a. 0.800% p.a. 2.375% p.a. 0.500% p.a. 0.840% p.a. 2.400% p.a.
date falling in October
2006:
Final maturity date: October 2021 October 2041 October 2041 October 2041 October 2041 October 2041
Stock Exchange London London London London London London
Listing:
Rating as at September Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB
28, 2001 (Moody's/
S&P/Fitch):
CLASS OF SECOND
ISSUER NOTES
---------------
SERIES 2
CLASS D
---------------
Principal Amount as at [GBP]10,000,000
September 28, 2001:
Interest rate: Three-month
sterling LIBOR
+ margin
Margin until payment 4.600% p.a.
date falling in October
2006:
Margin after payment 5.600% p.a.
date falling in October
2006:
Final maturity date: October 2041
Stock Exchange London
Listing:
Rating as at September Ba2/BB+/BB+
28, 2001 (Moody's/
S&P/Fitch):
THIRD ISSUER
The third issuer, Granite Mortgages 02-1 plc, was incorporated in England
and Wales as a public company limited by shares under the Companies Act 1985 on
December 14, 2001 with registered number 4340767. The registered office of the
third issuer is at Fifth Floor, 100 Wood Street, London EC2V 7EX. The third
issuer was organized as a special purpose company whose purpose was to issue
the third issuer notes that represent its asset-backed obligations and to lend
an amount equal to the proceeds of such notes to Funding under the third issuer
intercompany loan. The third issuer does not engage in any activities that are
unrelated to these activities.
The following table summarizes the principal features of the third issuer
notes:
CLASS OF THIRD ISSUER NOTES
-------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2
CLASS A1 CLASS A2 CLASS B CLASS C CLASS A CLASS B
------------ -------------- ----------- ------------ ---------------- ----------------
Principal Amount as at $704,200,000 $1,274,400,000 $69,700,000 $96,500,000 [GBP]460,000,000 [GBP]16,200,000
March 20, 2002:
Interest rate: Three-month Three-month Three-month Three-month Three-month Three-month
USD LIBOR + USD LIBOR + USD LIBOR + USD LIBOR + sterling LIBOR + sterling LIBOR +
margin margin margin margin margin margin
Margin until payment 0.10% p.a. 0.16% p.a. 0.33% p.a. 1.30% p.a. 0.20% p.a. 0.35% p.a.
date falling in April 2007:
Margin after payment 0.20% p.a. 0.32% p.a. 0.66% p.a. 2.30% p.a. 0.40% p.a. 0.70% p.a.
date falling in April 2007:
Final maturity date: October 2016 July 2019 April 2042 April 2042 April 2042 April 2042
Stock Exchange Listing: London London London London London London
Rating as at March 20, Aaa/AAA/AAA Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA
2002 (Moody's/
S&P/Fitch):
CLASS OF THIRD ISSUER NOTES
-----------------------------------------------------------------------------------
SERIES 2 SERIES 2 SERIES 3 SERIES 3 SERIES 3
CLASS C CLASS D CLASS A CLASS B CLASS C
---------------- ---------------- ----------------- ------------- -------------
Principal Amount as at [GBP]22,500,000 [GBP]15,000,000 [e]600,000,000 [e]21,100,000 [e]29,300,000
March 20, 2002:
Interest rate: Three-month Three-month 5.15% annually, Three-month Three-month
sterling LIBOR + sterling LIBOR + until the payment EURIBOR + EURIBOR +
margin margin date in April margin margin
2007, and then
three-month
EURIBOR +
margin
Margin until payment 1.30% p.a. 4.50% p.a. N/A 0.35% p.a. 1.30% p.a.
date falling in April 2007:
Margin after payment 2.30% p.a. 5.50% p.a. 0.42% p.a. 0.70% p.a. 2.30% p.a.
date falling in April 2007:
Final maturity date: April 2042 April 2042 April 2042 April 2042 April 2042
Stock Exchange Listing: London London London London London
Rating as at March 20, Baa2/BBB/BBB Ba2/BB+/BB+ Aaa/AAA/AAA Aa3/AA/AA Ba2/BB+/BB+
2002 (Moody's/
S&P/Fitch):
82
FOURTH ISSUER
The fourth issuer, Granite Mortgages 02-2 plc, was incorporated in England
and Wales as a public company limited by shares under the Companies Act 1985 on
July 11, 2002 with registered number 4482804. The registered office of the
fourth issuer is at Fifth Floor, 100 Wood Street, London EC2V 7EX. The fourth
issuer was organized as a special purpose company whose purpose was to issue
the fourth issuer notes that represent its asset-backed obligations and to lend
an amount equal to the proceeds of such notes to Funding under the fourth
issuer intercompany loan. The fourth issuer does not engage in any activities
that are unrelated to these activities.
The following table summarizes the principal features of the fourth issuer
notes:
CLASS OF FOURTH ISSUER NOTES
---------------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2
CLASS A1 CLASS A2 CLASS B CLASS C CLASS A CLASS B
--------------- --------------- --------------- --------------- ---------------- -------------
Principal Amount as $650,000,000 $1,150,000,000 $60,000,000 $88,000,000 [e]1,100,000,000 [e]41,000,000
at September 23, 2002:
Interest rate: Three-month USD Three-month USD Three-month USD Three-month USD Three-month Three-month
LIBOR + margin LIBOR + margin LIBOR + margin LIBOR + margin EURIBOR + EURIBOR +
margin margin
Margin until payment 0.11% p.a. 0.18% p.a. 0.37% p.a. 1.25% p.a. 0.19% p.a. 0.37% p.a.
date falling in January 2008:
Margin after payment 0.22% p.a. 0.36% p.a. 0.74% p.a. 2.25% p.a. 0.38% p.a. 0.74% p.a.
date falling in January 2008:
Final maturity date: January 2017 January 2043 January 2043 January 2043 January 2043 January 2043
Stock Exchange Listing: London London London London London London
Rating as at Aaa/AAA/AAA Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA
September 23, 2002
(Moody's/S&P/Fitch):
CLASS OF FOURTH ISSUER NOTES
-------------------------------------------------------------------
SERIES 2 SERIES 3 SERIES 3 SERIES 3
CLASS C CLASS A CLASS B CLASS C
------------- ---------------- ---------------- ----------------
Principal Amount as [e]53,000,000 [GBP]665,000,000 [GBP]25,000,000 [GBP]33,000,000
at September 23, 2002:
Interest rate: Three-month Three-month Three-month Three-month
EURIBOR + sterling LIBOR + sterling LIBOR + sterling LIBOR +
margin margin margin margin
Margin until payment 1.25% p.a. 0.19% p.a. 0.37% p.a. 1.25% p.a.
date falling in January 2008:
Margin after payment 2.25% p.a. 0.38% p.a. 0.74% p.a. 2.25% p.a.
date falling in January 2008:
Final maturity date: January 2043 January 2043 January 2043 January 2043
Stock Exchange Listing: London London London London
Rating as at Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB
September 23, 2002
(Moody's/S&P/Fitch):
FIFTH ISSUER
The fifth issuer, Granite Mortgages 03-1 plc, was incorporated in England
and Wales as a public company limited by shares under the Companies Act 1985 on
November 22, 2002 with registered number 4598035. The registered office of the
fifth issuer is at Fifth Floor, 100 Wood Street, London EC2V 7EX. The fifth
issuer was organized as a special purpose company whose purpose was to issue
the fifth issuer notes that represent its asset-backed obligations and to lend
an amount equal to the proceeds of such notes to Funding under the fifth issuer
intercompany loan. The fifth issuer does not engage in any activities that are
unrelated to these activities.
The following table summarizes the principal features of the fifth issuer
notes:
CLASS OF FIFTH ISSUER NOTES
-----------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 2
CLASS A1 CLASS A2 CLASS A3 CLASS B CLASS C CLASS A
-------------- -------------- ------------- ------------ ------------ --------------
Principal Amount as at $925,000,000 $1,225,000,000 $300,000,000 $42,000,000 $56,000,000 [e]900,000,000
January 27, 2003:
Interest rate: One-month USD Three-month Federal funds Three-month Three- month Three-month
LIBOR + margin USD LIBOR + rate + margin USD LIBOR USD LIBOR + EURIBOR +
margin +margin margin margin
Margin until payment (0.01%) p.a. 0.19% p.a. 0.40% p.a. 0.43% p.a 1.45% p.a. 0.24% p.a.
date falling in April 2008:
Margin after payment 0.00% p.a. 0.38% p.a. 0.80% p.a. 0.86% p.a. 2.45% p.a. 0.48% p.a.
date falling in April 2008:
Final maturity date: January 2004 January 2020 January 2020 January 2043 January 2043 January 2043
Stock Exchange Listing: London London London London London London
Rating as at January 27, P-1/A-1+/F1+ Aaa/AAA/AAA Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB Aaa/AAA/AAA
2003 (Moody's/S&P/
Fitch):
CLASS OF FIFTH ISSUER NOTES
----------------------------------------------------------------------------------
SERIES 2 SERIES 2 SERIES 3 SERIES 3 SERIES 3
CLASS B CLASS C CLASS A CLASS B CLASS C
------------- ------------- ---------------- ---------------- ----------------
Principal Amount as at [e]62,000,000 [e]94,500,000 [GBP]665,000,000 [GBP]31,000,000 [GBP]41,000,000
January 27, 2003:
Interest rate: Three-month Three-month Three-month Three-month Three-month
EURIBOR + EURIBOR + sterling LIBOR + sterling LIBOR + sterling LIBOR +
margin margin margin margin margin
Margin until payment 0.43% p.a. 1.45% p.a. 0.24% p.a. 0.43% p.a. 1.45% p.a
date falling in April 2008:
Margin after payment 0.86% p.a. 2.45% p.a. 0.48% p.a. 0.86% p.a. 2.45% p.a.
date falling in April 2008:
Final maturity date: January 2043 January 2043 January 2043 January 2043 January 2043
Stock Exchange Listing: London London London London London
Rating as at January 27, Aa3/AA/AA Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB
2003 (Moody's/S&P/
Fitch):
83
SIXTH ISSUER
The sixth issuer, Granite Mortgages 03-2 plc, was incorporated in England
and Wales as a public company limited by shares under the Companies Act 1985 on
March 3, 2003 with registered number 4684567. The registered office of the
sixth issuer is at Fifth Floor, 100 Wood Street, London EC2V 7EX. The sixth
issuer was organized as a special purpose company whose purpose was to issue
the sixth issuer notes that represent its asset-backed obligations and to lend
an amount equal to the proceeds of such notes to Funding under the sixth issuer
intercompany loan. The sixth issuer does not engage in any activities that are
unrelated to these activities.
The following table summarizes the principal features of the sixth issuer
notes:
CLASS OF SIXTH ISSUER NOTES
------------------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2
CLASS A1 CLASS A2 CLASS A3 CLASS B CLASS C CLASS A CLASS B
-------------- -------------- ------------ ----------- ------------ -------------- -------------
Principal $1,245,000,000 $1,006,000,000 $500,000,000 $76,500,000 $10,500,000 [e]300,000,000 [e]72,900,000
amount
as at May 21,
2003:
Interest rate: Three-month Three-month Three-month Three-month Three-month Three-month Three-month
USD LIBOR + USD LIBOR + USD LIBOR + USD LIBOR + USD LIBOR + EURIBOR + EURIBOR +
margin margin margin margin margin margin margin
Margin until 0.08% p.a. 0.16% p.a. 0.25% p.a. 0.49% p.a. 1.55% p.a. 0.25% p.a. 0.49% p.a.
payment date
falling in
July 20101:
Margin after 0.16% p.a. 0.32% p.a. 0.50% p.a. 0.98% p.a. 2.55% p.a. 0.50% p.a. 0.98% p.a.
payment date
falling in July 2010:
Final maturity date: July 2017 July 2020 July 2043 July 2043 July 2043 July 2043 July 2043
Stock London London London London London London London
Exchange Listing:
Rating as at Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA
May 21, 2003
(Moody's/S&P/Fitch):
CLASS OF SIXTH ISSUER NOTES
----------------------------------------------------------------------------------------
SERIES 2 SERIES 2 SERIES 2 SERIES 3 SERIES 3
CLASS M CLASS C1 CLASS C2 CLASS A CLASS C
------------- ------------------- ------------- ------------------- ----------------
Principal [e]52,300,000 [e]16,000,000 [e]65,500,000 [GBP]352,280,000 [GBP]15,000,000
amount
as at May 21,
2003:
Interest rate: Three-month 5.20% p.a. Three-month 4.625% p.a. Three-month
EURIBOR + annually, until the EURIBOR + annually, until the sterling LIBOR +
margin earlier of (a) the margin payment date in margin
payment date in July 2010, and
July 2010, (b) the then three-month
occurrence of a sterling LIBOR +
trigger event or margin
(c) the
enforcement of
the issuer
security, and then
three-month
EURIBOR +
margin
Margin until 0.75% p.a. N/A 1.55% p.a. N/A 1.55% p.a.
payment date
falling in
July 20101:
Margin after 1.50% p.a. 2.55% p.a. 2.55% p.a. 0.48% p.a. 2.55% p.a.
payment date
falling in July 2010:
Final maturity date: July 2043 July 2043 July 2043 July 2043 July 2043
Stock London London London London London
Exchange Listing:
Rating as at A2/A/A Baa2/BBB/BBB Baa2/BBB/BBB Aaa/AAA/AAA Baa2/BBB/BBB
May 21, 2003
(Moody's/S&P/Fitch):
1 If a trigger event occurs or the sixth issuer security is enforced prior to
the payment date in July 2010, the margin for the series 2 class C1 notes
will be 1.55% p.a. up to and including the interest period ending on the
payment date falling in July 2010.
PREVIOUS ISSUERS -- GENERAL
Each previous issuer's obligations to pay principal and interest on the
previous notes issued by such previous issuer are funded primarily from
payments of principal and interest received by it from Funding under the
related previous intercompany loan. Each previous issuer's primary asset is the
related previous intercompany loan. None of the previous issuers nor the
previous noteholders have any direct interest in the trust property, although
each previous issuer shares with us the security interest under the Funding
deed of charge in Funding's share of the trust property.
Funding used the proceeds of the previous intercompany loans from the
previous issuers (less an amount used to fund each previous issuer's reserve
fund) to pay the mortgages trustee for Funding's initial contributions to the
mortgages trustee for the Funding share of the relevant trust property that the
seller assigned to the mortgages trustee pursuant to the mortgages trust deed.
Upon receipt of Funding's initial contribution, the mortgages trustee paid
those funds to the seller in satisfaction of the mortgages trustee's obligation
to pay to the seller the initial purchase price for the assignment to the
mortgages trustee of each mortgage portfolio pursuant to the mortgage sale
agreement. Funding uses a portion of the amounts received from the Funding
share of the trust
84
property to meet its obligations to pay interest and principal due to each
previous issuer under each related previous intercompany loan. As mentioned
above, Funding's obligations to the previous issuers under the previous
intercompany loans will be secured under the Funding deed of charge by, among
other things, the Funding share of the trust property. A default by Funding
under either previous intercompany loan will cause a default under our
intercompany loan.
85
THE MORTGAGE LOANS
INTRODUCTION
The housing market in the UK primarily consists of owner-occupied housing.
The remainder of dwellings are in some form of public, private landlord or
social ownership. The mortgage market, in which mortgage loans are provided for
the purchase of a property and secured on that property, is the primary source
of household borrowings in the UK. At June 30, 2003, mortgage loans outstanding
in the UK amounted to approximately [GBP]713 billion. Outstanding mortgage debt
grew at an annual average rate of 7.3% between 1992 and the first six months
of 2003. At the end of the first six months of 2003, banks held 68% of
outstanding mortgage debt while building societies held 18% of outstanding
mortgage debt.
In describing the characteristics of the mortgage loans, references in this
prospectus to:
* "INITIAL MORTGAGE PORTFOLIO" mean the portfolio of mortgage loans,
their related security, accrued interest and other amounts derived
from such mortgage loans that the seller assigned to the mortgages
trustee on March 26, 2001;
* "FURTHER MORTGAGE PORTFOLIOS" mean the portfolios of further
mortgage loans, their related security, accrued interest and other
amounts derived from such further mortgage loans that the seller
has assigned to the mortgages trustee after March 26, 2001 and
before August 18, 2003;
* "ADDITIONAL MORTGAGE PORTFOLIO" mean the portfolio of additional
mortgage loans, their related security, accrued interest and other
amounts derived from such additional mortgage portfolio that the
seller, as of the cut-off date, anticipated assigning to the
mortgages trustee on August 18, 2003;
* "CUT-OFF DATE MORTGAGE PORTFOLIO" mean, as of the cut-off date, the
initial mortgage portfolio and the further mortgage portfolios
(taking account of, among other things, amortization of mortgage
loans in that portfolio and the addition
and/or removal of any mortgage loans to or from that portfolio
since March 26, 2001) combined with the additional mortgage
portfolio;
* "ADDITIONAL ASSIGNED MORTGAGE PORTFOLIO" mean the portfolio of
additional assigned mortgage loans, their related security, accrued
interest and other amounts derived from such additional assigned
mortgage loans that the seller actually assigned to the mortgages
trustee on August 18, 2003; and
* "MORTGAGE PORTFOLIO" mean the initial mortgage portfolio, the
further mortgage portfolios and the additional assigned mortgage
portfolio as it is constituted as of any date of determination
since August 18, 2003, taking account of, among other things,
amortization of mortgage loans in that portfolio and the addition
and/or removal of any mortgage loans to or from that portfolio
since August 18, 2003.
The following is a description of some of the characteristics of the
mortgage loans currently or previously offered by the seller and includes
details of mortgage loan types, the underwriting process, lending criteria and
selected statistical information. Each mortgage loan in the cut-off date
mortgage portfolio incorporated one or more of the features referred to in this
section. The seller will not assign to the mortgages trust any mortgage loan
that was in arrears at any time during the 12 months prior to the assignment
date, and will not assign to the mortgages trust any mortgage loan that is a
non-performing mortgage loan.
Each borrower may have more than one mortgage loan incorporating different
features, but all mortgage loans secured on the same mortgaged property will be
incorporated in a single account with the seller which is called the mortgage
account. Each mortgage loan is secured by a first legal charge over a
residential property in England or Wales, and all of the mortgage loans are
subject to the laws of England and Wales. 170,078 of the mortgages securing the
mortgage loans in the cut-off date mortgage
86
portfolio (or 82.88% of the aggregate current balance of the mortgage loans as
of the cut- off date) were on freehold properties and 35,794 of the mortgages
securing the mortgage loans in the cut-off date mortgage portfolio (or 17.12%
of the aggregate current balance of the mortgage loans as of the cut-off date)
are on leasehold properties.
The seller randomly selected which mortgage loans from the additional
mortgage portfolio were assigned to the mortgages trustee on August 18, 2003.
In making its selection, the seller excluded from the additional mortgage
portfolio those mortgage loans that had been repaid in full or that did not
comply with the terms of the mortgage sale agreement on the August 18, 2003
assignment date. Once such mortgage loans were removed, the seller then
randomly selected from the mortgage loans remaining in the additional mortgage
portfolio those mortgage loans which were included in the additional assigned
mortgage portfolio once a determination had been made as to the anticipated
principal balances of the notes to be issued and the corresponding size of the
trust that would be required ultimately to support payments on the notes.
We do not expect the characteristics of the mortgage portfolio as of the
closing date to differ materially from the characteristics of the cut-off date
mortgage portfolio. Unless we indicate otherwise, the following description
relates to types of mortgage loans that could be included in the mortgage
portfolio as of the closing date or on any subsequent date.
The cut-off date mortgage portfolio was drawn up as at July 31, 2003 and
comprised 205,872 mortgage loans having an aggregate current balance of
[GBP]14,983,426,136.52 as at that date. The seller originated the mortgage
loans in the cut-off date mortgage portfolio between July 1, 1995 and May 31,
2003. None of the mortgage loans in the additional mortgage portfolio had an
aggregate monthly payment that is overdue by one or more months as of the
assignment date of August 18, 2003.
The seller may assign new mortgage loans and their related security to the
mortgages trustee after the closing date. The seller reserves the right to
amend its lending criteria and to assign to the mortgages trustee new mortgage
loans which are based upon mortgage conditions (as defined in the glossary)
different from those upon which mortgage loans which formed the cut-off date
mortgage portfolio were based. Those new mortgage loans may include mortgage
loans which are currently being offered to borrowers and have some of the
characteristics described here, but may also include mortgage loans with other
characteristics that the seller currently is not offering to borrowers or that
the seller has not yet developed. The terms of the mortgage sale agreement
require that all new mortgage loans comply with the warranties set out in the
mortgage sale agreement. We describe all of the material warranties in the
mortgage sale agreement in this prospectus. See "ASSIGNMENT OF THE MORTGAGE
LOANS AND RELATED SECURITY".
CHARACTERISTICS OF THE MORTGAGE LOANS
MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER
The seller offers a variety of fixed rate, variable rate and hybrid mortgage
loan products to borrowers. The seller may assign to the mortgages trustee any
of the following of its mortgage loan products, which in each case may comprise
one or more of the following:
* "FIXED RATE MORTGAGE LOANS": mortgage loans subject to a fixed
interest rate for a specified period of time and at the expiration
of that period are generally subject to the seller's standard
variable rate.
* "STANDARD VARIABLE RATE MORTGAGE LOANS": mortgage loans subject to
the seller's standard variable rate for the life of the mortgage
loan.
* "TOGETHER MORTGAGE LOANS": flexible mortgage loans, which are
offered in four product types: Together flexible, Together
variable, Together fixed and Together fixed for life. These
products allow the borrower to obtain a mortgage loan, an unsecured
loan and, in some cases, a credit card, each with a variable or a
fixed interest rate, depending on the product type, and which in
certain circumstances
87
permit the borrower to make authorized underpayments and take
payment holidays (collectively referred to in this prospectus as
"NON-CASH RE-DRAWS"), receive cash re-draws and make
overpayments.
* "TOGETHER CONNECTIONS MORTGAGE LOANS": flexible mortgage loans,
which are offered in two product types: Together Connections
variable and Together Connections fixed. These products have the
same basic features as a Together mortgage loan, but also allow the
borrower to link the mortgage loan with one or more deposit
accounts that are held with the seller. If a borrower elects to
take the Together Connections Benefit (as defined below), the
seller will only charge interest on the difference between the
total of the outstanding balances on the mortgage loan and any
related unsecured loan made to the borrower (the "COMBINED DEBIT
BALANCE") and the average cleared credit balance in that borrower's
linked deposit account or accounts (the "COMBINED CREDIT BALANCE")
in respect of each month or any part of a month. Despite the
foregoing, the borrower is nevertheless obligated to make their
contractual monthly payment of principal (if any) and interest in
full. The "TOGETHER CONNECTIONS BENEFIT" is the difference between
(1) the contractual monthly payment due on the combined debit
balance and (2) the proportion of the payment made on the amount by
which the outstanding combined debit balance exceeds the average
cleared credit balance in that borrower's linked deposit account or
accounts in respect of each month or any part of a month. Where the
customer has elected to take Together Connections Benefit,
calculations will be made and applied with effect from the first
day of the month following the month during which the combined
debit balance exceeded such combined credit balance. Unless the
borrower specifies otherwise, the Together Connections Benefit will
be apportioned pro rata between the mortgage loan and the unsecured
loan in accordance with their respective contractual monthly
payments. Any Together Connections Benefit is used to reduce the
principal amount outstanding on the mortgage loan and related
unsecured loan as described above. The application of the Together
Connections Benefit may lead to amortization of the related
mortgage loan more quickly than would otherwise be the case, as a
higher proportion of the contractual monthly payment could be
allocated towards the repayment of principal of the mortgage loan.
See "RISK FACTORS -- THE INCLUSION OF FLEXIBLE MORTGAGE LOANS MAY
AFFECT THE YIELD TO MATURITY OF AND THE TIMING OF PAYMENTS ON THE
NOTES". The borrower is not permitted to make a cash redraw of the
principal amounts that have been repaid as a result of the
application of the Together Connections Benefit.
Alternatively, customers that have linked their mortgage loan to
one or more deposit accounts may simply opt to be paid interest
periodically on deposits held in their linked accounts at the same
interest rate that is used to calculate interest on their mortgage
loan. This option is referred to as "TOGETHER CONNECTIONS
INTEREST".
The connection between a borrower's mortgage loan and unsecured
loan and any linked account or account of the borrower may be ended
(1) by the seller giving the borrower three months notice in
writing at any time or (2) immediately by the seller giving the
borrower notice in writing at any time where there are serious
grounds for ending the connection with immediate effect. The
connection between a borrower's mortgage loan and unsecured loan
and any linked account or account of the borrower will be ended
automatically where the average combined cleared credit balance for
the month exceeds the combined debit balance in any month;.
* "CONNECTIONS MORTGAGE LOANS": flexible mortgage loans, which allow
the borrower to obtain a mortgage loan with either a variable or
fixed rate, depending on the product type, and which, in certain
circumstances, permit the borrower to
88
make authorized underpayments and take payment holidays
(collectively referred to in this prospectus as "NON CASH
RE-DRAWS"), receive cash re-draws and make overpayments.
Connections mortgage loans have the same basic features as
Together Connections mortgage loans but without the facility for
an unsecured loan or credit card. The "CONNECTIONS DEBIT BALANCE"
will equal the total outstanding balance on the mortgage loan. In
addition, the "CONNECTIONS COMBINED CREDIT BALANCE" will comprise
the average cleared balance in the borrower's linked Save Direct
deposit account (a deposit account operated by a dedicated
savings division of the seller) and/or current account with the
seller. "CONNECTIONS BENEFIT" and "CONNECTIONS INTEREST" are
calculated in the same way as "TOGETHER CONNECTIONS BENEFIT" and
"TOGETHER CONNECTIONS INTEREST" taking into account the amended
definitions of "CONNECTIONS DEBIT BALANCE" and "CONNECTIONS
COMBINED CREDIT BALANCE" as outlined above. For the purposes of
calculating Connections Interest, only the average cleared
balance in the deposit account will apply.
* "CAT STANDARD MORTGAGE LOANS": flexible mortgage loans, which can
offer either a variable rate equal to the Bank of England base rate
plus an additional fixed percentage or can offer initially a fixed
rate for a specified period of time followed by a variable rate
equal to the Bank of England base rate plus an additional fixed
percentage, and which in some cases permit the borrower to make
non-cash re-draws and receive cash re-draws.
* "CAPPED RATE MORTGAGE LOANS": mortgage loans subject to a maximum
rate of interest and charge interest at the lesser of the seller's
standard variable rate or the specified capped rate.
* "FLEXIBLE CAPPED RATE MORTGAGE LOANS": flexible mortgage loans with
the same basic features as a Together mortgage loan (other than
allowing the borrower to obtain a credit card) which are subject to
a maximum rate of interest for a specified period of time, and at
the expiration of that period are generally subject to the seller's
standard variable rate.
* "FLEXIBLE FIXED RATE MORTGAGE LOANS": flexible mortgage loans with
the same basic features as a Together mortgage loan (other than
allowing the borrower to obtain a credit card) which are subject to
a fixed rate of interest for a specified period of time, and at the
expiration of that period are generally subject to the seller's
standard variable rate.
* "DISCOUNT RATE MORTGAGE LOANS": mortgage loans which allow the
borrower to pay interest at a specified discount to the seller's
standard variable rate for a specified period of time or for the
life of the loan.
* "TRACKER RATE MORTGAGE LOANS": mortgage loans subject to a variable
rate of interest that is linked to the Bank of England base rate
plus an additional fixed percentage.
* "FLEXIBLE TRACKER RATE MORTGAGE LOANS": flexible mortgage loans
with the same basic features as a Together mortgage loan (other
than allowing the borrower to obtain a credit card) which are
subject to a variable rate of interest that is linked to the Bank
of England base rate plus an additional fixed percentage.
* "CASHBACK MORTGAGE LOANS": mortgage loans which provide a specified
lump sum payment to the borrower at the time that the mortgage loan
is advanced to the borrower. The cashback mortgage loan product is
sometimes combined with another product (although the seller
currently does not combine the cashback feature with Together
mortgage loans, Together Connections mortgage loans, Connections
mortgage loans and CAT standard mortgage loans). For example, a
borrower may have a fixed rate and cashback mortgage loan, or a
discounted and cashback mortgage loan.
89
For a description of the mortgage loan products which were included in the
cut-off date mortgage portfolio, see the table entitled "MORTGAGE LOAN
PRODUCTS".
REPAYMENT TERMS
Borrowers typically make payments of interest on, and repay principal of,
their mortgage loans using one of the following methods:
* "REPAYMENT": the borrower makes monthly payments of both interest
and principal so that, when the mortgage loan matures, the borrower
will have repaid the full amount of the principal of the mortgage
loan.
* "INTEREST-ONLY" (with a repayment vehicle): the borrower makes
monthly payments of interest but not of principal; when the
mortgage loan matures, the entire principal amount of the mortgage
loan is still outstanding and the borrower must repay that amount
in one lump sum. The borrower arranges a separate investment plan
which will be administered by a separate organization, which plan
provides a lump sum payment to coincide with the end of the
mortgage term. Although these investment plans are forecast to
provide sufficient sums to repay the principal balance of the
mortgage loan upon its maturity, to the extent that the lump sum
payment is insufficient to pay the principal amount owing, the
borrower will be liable for making up any shortfall. These types of
plans include:
* "ENDOWMENT": the borrower makes regular payments to a life
assurance company which invests the premiums; the endowment policy
is intended to repay the mortgage loan at maturity;
* "PENSION POLICY": the borrower makes regular payments to a personal
pension plan; upon retirement, or plan maturity, the borrower will
receive a tax-free lump sum which is intended to repay the mortgage
loan;
* "INDIVIDUAL SAVINGS ACCOUNTS" or "ISAS": the borrower makes
contributions to a tax-free ISA account; once the value of the ISA
equals or exceeds the outstanding mortgage debt, the borrower may
use those amounts to repay the mortgage loan at any time thereafter
or may wait to repay the mortgage loan upon its maturity;
* "PERSONAL EQUITY PLANS" or "PEPS": similarly to ISAs, the borrower
makes contributions to a tax-free PEP account and uses these
amounts to repay the mortgage loan. Although PEPs have been
discontinued in the United Kingdom, some mortgage loans with PEP
repayment vehicles may be included in the mortgage portfolio; and
* "UNIT TRUSTS": the borrower makes regular payments to a unit trust,
and the accumulated unit trust is used to repay the mortgage loan
by the end of its term.
* "INTEREST-ONLY" (without a repayment vehicle): similar to the
interest- only mortgage loans described above, where the borrower
makes monthly payments of interest but not of principal and when
the mortgage loan matures, the entire principal amount of the
mortgage loan is due. However, the borrower has no formal repayment
vehicle in place to repay the mortgage loan in full.
* "COMBINATION REPAYMENT AND INTEREST-ONLY" (with or without a
repayment vehicle): this situation most often occurs when the
borrower had an interest- only mortgage loan with a repayment
vehicle on a prior mortgaged property, and after selling that
mortgaged property the borrower purchased a property with a
mortgage loan issued by the seller, where the subsequent home was
either more expensive than the prior home or the borrower took out
a larger mortgage loan or further advance. The borrower used the
existing interest-only repayment vehicle for the new mortgage loan
or further advance issued by the seller and made up the difference
between the anticipated maturity value of the interest-only
repayment vehicle and the higher mortgage loan value with a
repayment mortgage.
90
The required monthly payment in connection with repayment mortgage loans or
interest-only mortgage loans may vary from month to month for various reasons,
including changes in interest rates. See "-- ORIGINATION OF THE MORTGAGE LOANS
- -- MAXIMUM LTV RATIO" for the maximum LTV ratio for the mortgage loans
described above.
The borrowers in respect of 188,329 of the mortgage loans in the cut-off
date mortgage portfolio (or 92.06% of the aggregate current balance of the
mortgage loans as of the cut-off date) have agreed to have their monthly
mortgage payments to the seller directly debited from their bank accounts.
The seller does not (and in some cases cannot) take security over investment
plans. See "RISK FACTORS -- THERE CAN BE NO ASSURANCE THAT A BORROWER WILL
REPAY PRINCIPAL AT THE END OF A TERM ON AN INTEREST-ONLY LOAN (WITH OR WITHOUT
A CAPITAL REPAYMENT VEHICLE) OR A COMBINATION LOAN".
CAPITAL PAYMENTS, OVERPAYMENTS AND UNDERPAYMENTS ON NON-FLEXIBLE MORTGAGE LOANS
Subject to certain conditions, if a borrower makes a monthly payment on a
mortgage loan (other than a flexible mortgage loan) that is greater by [GBP]200
or more than the amount due for that month, and the borrower notifies the
seller that the overpayment is intended to reduce the capital balance of the
related mortgage loan (a "CAPITAL PAYMENT"), then the current balance of the
mortgage loan will be immediately reduced, and the capital balance of the
mortgage loan will be reduced from the last day of the month in which the
capital payment occurs. As interest on the mortgage loans accrues on the
capital balance thereof from time to time, any capital payment will affect the
amount of interest payable by the borrower from the first day of the month
following the month in which the capital payment was made by the borrower.
Capital payments may be subject to early repayment charges, as described under
" -- EARLY REPAYMENT CHARGES", and may only be made in certain minimum amounts
and only if the relevant borrower's account is not in arrears at the time of
the capital payment.
If the borrower makes a monthly payment on a mortgage loan (other than a
flexible mortgage loan) that is greater than the amount due for that month, but
the borrower (1) does not specify that the additional payment is intended to
reduce the capital balance of the related mortgage loan, (2) does not specify
any intention or (3) specifies that the payment is intended to repay the
capital balance but the additional payment is less than [GBP]200, that
overpayment initially will only reduce the current balance of the related
mortgage loan and not the capital balance. Any overpayment will be held by the
cash manager in the mortgages trustee GIC account and recorded on an
overpayments ledger and will not reduce the capital balance of the related
mortgage loan until the annual date at the end of each calendar year on which
the capital balances of the mortgage loans (other than flexible mortgage loans
as described below) are reconciled with the current balances of such mortgage
loans. The capital balances of such mortgage loans will only be reduced on such
annual date in an amount equal to the aggregate amount of the overpayments made
in that calendar year less any amounts that the borrower has underpaid (or has
overpaid in error, which amounts may be refunded to the borrower) during the
same calendar year of the overpayment. These credits and debits will be
recorded on the overpayments ledger during each calendar year. Any
underpayments or refunds may be made only up to the net amount of the
overpayment standing to the credit of the overpayments ledger during the same
calendar year as the underpayment. As interest on the mortgage loans accrues on
the capital balance thereof from time to time, an overpayment may only have an
effect on the interest accruing on that mortgage loan after the annual date
that the current balance and the capital balance of the mortgage loan is
reconciled.
If a borrower under a mortgage loan (other than a flexible mortgage loan)
makes a monthly payment which is less than the required monthly payment (an
"UNDERPAYMENT"), the current balance of that mortgage loan will remain higher
than the expected scheduled current balance, although the capital balance of
that mortgage loan will remain unchanged
91
until the annual reconciliation of the current balance and capital balance. As
overpayments on non-flexible mortgage loans will be held in the overpayments
ledger throughout the calendar year in which the overpayment was made, amounts
standing to the credit of the overpayments ledger will be used to fund
underpayments that the borrower has made during that same calendar year. See
"THE MORTGAGES TRUST -- OVERPAYMENTS". If a borrower makes an unauthorized
underpayment but has not made any prior overpayments within that same calendar
year, those underpayments are treated by the seller as arrears.
At the end of a calendar year, if a borrower under a mortgage loan (other
than a flexible mortgage loan) has a current balance which is less than its
capital balance (because of any overpayments made in that same calendar year
which were not used to fund an underpayment), the seller will decrease the
capital balance on that borrower's mortgage loan to equal the current balance
on that borrower's mortgage loan. The borrower then will no longer be able to
fund underpayments with amounts overpaid in the prior calendar year.
Conversely, if at the end of a calendar year a borrower under a mortgage loan
(other than a flexible mortgage loan) has a current balance which is greater
than its capital balance (because of any underpayments which were not funded by
overpayments made in that same calendar year), the seller will increase the
capital balance on that borrower's mortgage loan to equal the current balance
on that borrower's mortgage loan. Notwithstanding the year-end reconciliation
of the related capital balance and current balance, the borrower will still be
considered in arrears for the amount of the underpayment.
For a description of the treatment of overpayments and underpayments under
the seller's current flexible mortgage loan products, see "-- FLEXIBLE MORTGAGE
LOANS".
EARLY REPAYMENT CHARGES
Borrowers under the seller's non-flexible mortgage products that have
received a benefit in the form of a cashback, capped, discounted or fixed rate
mortgage loan will be required to pay an early repayment charge if (a) in any
one calendar year in addition to the scheduled monthly payments they repay more
than a specified percentage (currently 15%) of the initial amount of the
mortgage loan, or (b) generally if they make a product switch or a permitted
product switch, in each case before a date specified in the offer of advance.
Although a borrower under the seller's flexible capped rate mortgage loan,
flexible fixed rate mortgage loan, Together fixed mortgage loan, Together
Connections fixed mortgage loan or Connections fixed mortgage loan may make
overpayments or capital payments at any time without incurring any early
repayment charge, that borrower will be subject to an early repayment charge
for the remaining period of time during which the fixed or capped rate, as the
case may be, on the mortgage loan applies (except in the case of flexible fixed
rate mortgage loans with an extended early repayment charge period), to the
extent that the borrower repays the entire current balance under that mortgage
loan during such period. Borrowers under the seller's Connections Base Rate
Tracker mortgage loans will be subject to an early repayment charge which is
currently three (3) years from completion, to the extent that the borrower
repays the entire current balance under that mortgage loan during such period.
Borrowers under the seller's flexible fixed rate mortgage loans with an
extended early repayment charge period will be subject to an early repayment
charge for the remaining period of time during which the fixed rate on the
mortgage loan applies plus an additional period of one year to the extent that
the borrower repays the entire current balance under that mortgage loan during
such period. Borrowers under the seller's Together variable, Together
Connections variable and CAT standard mortgage loans are not subject to early
repayment charges regardless of whether they make an overpayment or they repay
the entire current balance under the relevant mortgage loan. 69,710 mortgage
loans in the cut-off date mortgage portfolio (or 27.84% of the aggregate
current balance of the mortgage loans as of the cut-off date) were Together
variable, Together Connections variable and CAT standard mortgage loans and
therefore are not subject to early repayment charges.
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Any early repayment charge will equal a percentage of the amount repaid in
excess of the specified percentage limit (except for an early repayment in
full, where the early repayment charge will equal a varying percentage of the
entire amount repaid). The seller retains absolute discretion to waive or
enforce early repayment charges in accordance with the seller's policy from
time to time. Under the terms of the mortgage sale agreement, the amount of any
early repayment charges which may become payable on any mortgage loans that
have been assigned to the mortgages trustee will be paid by the mortgages
trustee to the seller as deferred purchase price.
Cashback mortgage loans offered by the seller provide the borrower with a
cash payment that the seller makes to the borrower upon completion of the
mortgage loan. The cash payment depends upon the terms of the offer of advance,
but is usually calculated as a percentage of the amount borrowed. If a borrower
with a cashback mortgage loan makes an unscheduled principal repayment or
executes a product switch or a permitted product switch (as described under "--
PRODUCT SWITCHES") in either case before a date specified in the offer of
advance, then the borrower must repay to the seller some or all of the cash
payment made by the seller.
All of the seller's mortgage loan products allow for the borrower to avoid
early repayment charges and, if applicable, avoid repaying to the seller any of
the cash payment described above, by "PORTING" the existing mortgage loan to a
new mortgaged property, provided that (1) the new mortgage loan is equal to or
greater than the existing mortgage loan and (2) the borrower receives from the
seller substantially the same mortgage loan product. The new mortgage loan
preserves the borrower's status in that mortgage loan product.
A prepayment of the entire outstanding balance of a mortgage loan discharges
the related mortgage. Any prepayment in full must be made together with all
accrued interest, arrears of interest, any unpaid charges and any early
repayment charges.
INTEREST PAYMENTS AND SETTING OF INTEREST RATES
Interest on each mortgage loan accrues on the capital balance of that
mortgage loan from time to time. Interest is payable by the borrower monthly in
advance. Interest on the mortgage loans in the cut-off date mortgage portfolio
may be computed on a daily, monthly or annual basis. Each mortgage loan in the
cut-off date mortgage portfolio accrues interest at any time at a fixed or a
variable rate.
Fixed rate mortgage loans provide that the borrower pays interest on such
mortgage loan at a fixed rate of interest for the period specified in the offer
of advance. At the end of that period, the interest rate reverts to the
seller's standard variable rate. However, under the terms of certain fixed rate
loans, the borrower may exercise a one-time option within three months of the
end of the initial fixed rate period to "RE-FIX" the interest rate for a
further specified period of time at a new fixed rate that the seller is
offering to existing borrowers at that time. Any exercise of an option to "RE-
FIX" shall constitute a product switch and shall be dealt with as described
under "-- PRODUCT SWITCHES".
The rate of interest set by the seller for variable rate mortgage loans is
the "SELLER'S STANDARD VARIABLE RATE". Interest accrues on these mortgage loans
at a rate equal to the seller's standard variable rate, or, for a specified
period of time, at a set margin above or below the seller's standard variable
rate. The seller's standard variable rate is not directly linked to interest
rates in the financial markets although, in general, the seller's standard
variable rate follows movements in the markets. At August 31, 2003, the
seller's standard variable rate for existing and/or new borrowers was 5.49% per
annum.
The seller's "BASE RATE PLEDGE" guarantees that for variable rate mortgage
loans, and for fixed rate mortgage loans upon conversion from a fixed rate to
the seller's standard variable rate, the actual gross interest rate that the
seller charges will be the lower of:
* the seller's standard variable rate; or
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* the Bank of England base rate plus a margin which is determined by
Northern Rock.
This base rate pledge only applies, however, during the period, if any, in
which the borrower is subject to an early repayment charge as described under
"-- EARLY REPAYMENT CHARGES".
If the Bank of England's base rate falls to a level of 1.99% below the
seller's standard variable rate it is possible that a revenue shortfall would
occur. See "RISK FACTORS -- IF THE BANK OF ENGLAND BASE RATE FALLS BELOW A
CERTAIN LEVEL, WE COULD SUFFER A REVENUE SHORTFALL".
Mortgage loans may combine one or more of the features listed in this
section. For mortgage loans with an interest rate that lasts for a limited
period of time specified in the offer of advance, after the expiration of that
period the interest rate adjusts to some other interest rate type or else it
reverts to, or remains at, the seller's standard variable rate. The features
that may apply to a particular mortgage loan are specified in the offer of
advance (and as the seller may vary from time to time).
79,794 mortgage loans in the cut-off date mortgage portfolio (or 48.32% of
the aggregate current balance of the mortgage loans as of the cut-off date)
were fixed rate mortgage loans. The remaining 126,078 of the mortgage loans in
the cut-off date mortgage portfolio (or 51.68% of the aggregate current balance
of the mortgage loans as of the cut-off date) were standard variable rate
mortgage loans, discounted variable rate mortgage loans, "TOGETHER", "TOGETHER
CONNECTIONS", "CONNECTIONS" and flexible capped rate mortgage loans, as
described below. Each mortgage loan (other than a Together mortgage loan, a
Together Connections mortgage loan and a CAT standard mortgage loan) currently
provides for a loyalty discount reduction of 0.25% (although the seller may in
the future allow for a discount of between 0.25% and 0.75%) of the applicable
interest rate once the borrower has held the mortgage loan for at least seven
years, subject to certain conditions.
Except in limited circumstances as set out in "THE ADMINISTRATOR AND THE
ADMINISTRATION AGREEMENT -- THE ADMINISTRATION AGREEMENT -- UNDERTAKINGS BY THE
ADMINISTRATOR", the administrator on behalf of the mortgages trustee, Funding
and the security trustee is responsible for setting the variable mortgage rate
on the mortgage loans in the mortgage portfolio as well as on any new mortgage
loans that are assigned to the mortgages trustee. The mortgage conditions
applicable to all of the variable rate mortgage loans provide that the seller
and its successors may vary the variable mortgage rate only for certain reasons
which are specified in the mortgage conditions. These reasons may include:
* where there has been, or the lender reasonably expects there to be
in the near future, a general trend to increase rates on mortgages;
* where the lender for good commercial reasons needs to fund an
increase in the interest rate or rates payable to depositors;
* where the lender wishes to adjust its interest rate structure to
maintain a prudent level of profitability;
* where there has been, or the lender reasonably expects there to be
in the near future, a general increase in the risk of shortfalls on
the accounts of mortgage borrowers; and
* where the lender's administrative costs have increased or are
likely to increase in the near future.
The term "LENDER" in the above five bullet points means the seller and its
successors.
The rate that the borrower is required to pay under the variable rate
mortgage loans must not be greater than either the seller's standard variable
rate or a set margin above or below the seller's standard variable rate. The
seller has given the mortgages trustee,
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Funding, the administrator and the security trustee the power to set the
seller's standard variable rate and other applicable discretionary rates or
margins, but that power may only be exercised in limited circumstances.
In maintaining, determining or setting the variable mortgage rate for
mortgage loans within the mortgages trust, the administrator will apply the
factors set out here and has undertaken to maintain, determine or set the
standard variable rate and other applicable discretionary rates or margins at
rates which are not higher than the seller's equivalent rates from time to
time.
FLEXIBLE MORTGAGE LOANS
The "TOGETHER" mortgage loans, the "TOGETHER CONNECTIONS" mortgage loans,
the "CONNECTIONS" mortgage loans, the flexible capped rate mortgage loans, the
flexible fixed rate mortgage loans, the flexible tracker rate mortgage loans
and the "CAT STANDARD" mortgage loans (collectively, the "FLEXIBLE MORTGAGE
LOANS") are subject to a range of options selected by the borrower that give
the borrower greater flexibility in the timing and amount of payments made
under the mortgage loan as well as access to re-draws under the mortgage loan.
A mortgage loan that has one or more of these features may be called a flexible
mortgage loan. 134,991 of the mortgage loans in the cut-off date mortgage
portfolio (or 68.37% of the aggregate current balance of the mortgage loans as
of the cut-off date) were flexible mortgage loans, 69,584 mortgage loans (or
27.77% of the aggregate current balance of the mortgage loans as of the cut-of-
date) of which were Together mortgage loans. The seller anticipates that an
increasing percentage of the mortgage loans that it originates will offer the
flexible features described below. As a result, mortgage loans assigned to the
mortgages trustee in the future may contain a higher proportion of flexible
mortgage loans than are in the cut-off date mortgage portfolio. In addition to
the flexible mortgage loans that the seller currently offers, the seller in the
future may offer flexible mortgage loans that the seller also may assign to the
mortgages trustee that have different features than those described below.
Unlike non-flexible mortgage loans for which separate current balances and
capital balances are only reconciled annually (see "-- CAPITAL PAYMENTS,
OVERPAYMENTS AND UNDERPAYMENTS ON NON-FLEXIBLE MORTGAGE LOANS"), the flexible
mortgage loans that the seller currently offers have separate current balances
and capital balances which are reconciled on a daily basis.
The following options currently are available to a borrower following the
issue of a flexible mortgage loan:
* Overpayments. A borrower may make overpayments or may repay the
entire current balance under its Together, Together Connections,
Connections and CAT standard mortgage loan at any time without
incurring any early repayment charges. Although a borrower may make
overpayments under its flexible capped rate mortgage loan, flexible
fixed rate mortgage loan, flexible tracker rate mortgage loan,
Together fixed mortgage loan, Together Connections fixed mortgage
loan, Connections Base Rate Tracker mortgage loan or Connections
fixed mortgage loan at any time without incurring any early
repayment charge, that borrower will be subject to an early
repayment charge for the remaining period of time during which the
fixed, tracker or capped rate, as the case may be, on the mortgage
loan applies (except in the case of a Connections Base Rate Tracker
mortgage loan which has a variable early repayment charge period of
approximately three years from completion), to the extent that the
borrower repays the entire current balance under that mortgage
loan. Any overpayments immediately reduce the current balance of
the flexible mortgage loan from the day the seller receives
payment. Any overpayment on a flexible mortgage loan will result in
the immediate reduction in the amount of interest payable by the
relevant borrower.
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* Authorized Underpayments. A borrower may use certain amounts that
it has previously overpaid to the seller to fund future
underpayments under its mortgage loan (an "AUTHORIZED
UNDERPAYMENT"). If a borrower makes an authorized underpayment
under its mortgage loan, the current balance of that mortgage loan
will be increased at the end of the month in which the authorized
underpayment has been made and there will be an immediate effect on
the amount of interest payable by the borrower. An authorized
underpayment is also called a "NON-CASH RE-DRAW" for the purposes
of this prospectus. A borrower under a flexible mortgage loan may
offset authorized underpayments up to the aggregate amount of any
overpayments previously made (but not yet used to fund an
authorized underpayment or redrawn in cash by the borrower) during
the lifetime of the mortgage loan. Any authorized underpayment will
be funded solely by the seller in an amount equal to the unpaid
interest associated with that authorized underpayment. However, any
such amounts funded by the seller in connection with an authorized
underpayment will form part of the mortgage portfolio and thereby
increase the seller share of the trust property.
* Unauthorized Underpayments. Any underpayment made by a borrower (a)
which cannot be funded by prior overpayments and (b) where the
borrower is not entitled to a payment holiday (an "UNAUTHORIZED
UNDERPAYMENT"), if any, will be treated by the seller as arrears.
* Payment Holidays. A borrower that has made nine consecutive
scheduled monthly payments (or an equivalent sum of payments) on
its flexible mortgage loan may apply for a one month payment
holiday even if that borrower has not made prior overpayments. A
borrower may apply for this payment holiday facility once in each
rolling twelve-month period and may accumulate the right to take up
to a maximum of three monthly payment holidays in any one calendar
year if the borrower has not used the payment holiday facility in a
given three-year period. In addition, a flexible mortgage loan
borrower may apply for up to a six-month payment holiday in certain
limited cases (generally, where the borrower can demonstrate an
extenuating circumstance). The mortgage loan will continue to
accrue interest and other charges during any payment holiday and
accrued interest will be added to the current balance of the
related mortgage loans which will increase the amount of interest
payable by the borrower. Any payment holiday will be funded solely
by the seller in an amount equal to the unpaid interest associated
with that payment holiday. However, any such amounts funded by the
seller in connection with a payment holiday will form part of the
mortgage portfolio and thereby increase the seller share of the
trust property. A payment holiday is also called a "NON-CASH RE-
DRAW" for the purposes of this prospectus.
* Cash re-draws. A borrower may request a cash re-draw of
overpayments that the borrower has made on its flexible mortgage
loan by requesting that the seller refund some or all of such
overpayments in cash, provided that the aggregate amount of all
overpayments not yet used to fund an authorized underpayment or
otherwise re-drawn in cash by the borrower from the period
commencing with the origination of the mortgage loan to the date of
the cash re-draw is equal to or greater than [GBP]500, and that the
amount of such cash re-draw is equal to or greater than [GBP]500.
If the aggregate amount of all overpayments for such period is less
than [GBP]500, any borrower wishing to make a cash re-draw in these
amounts may instead make an authorized underpayment of the
scheduled monthly payment, but is not entitled to a cash re-draw.
Notwithstanding the foregoing, a borrower under a Together
Connections Benefit mortgage loan or Connections mortgage loan is
not permitted to make a cash re-draw of the principal amounts that
have been repaid as a result of the application of the Together
Connections Benefit or Connections Benefit. Any cash re-draw on a
flexible mortgage loan will result in the immediate increase in the
related current
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balance and will increase the amount of interest payable by the
borrower. Any cash re-draws will be funded solely by the seller,
but will form part of the mortgage portfolio and thereby increase
the seller share of the trust property.
Under the mortgage conditions, a borrower must receive permission from the
seller to make an authorized underpayment or take a payment holiday on a
flexible mortgage loan. However, the seller occasionally waives the requirement
that the borrower first seeks the seller's permission. The seller, however,
retains the discretion whether to grant a cash re-draw or to provide a further
advance (as described under "-- FURTHER ADVANCES" below) to a borrower on a
flexible mortgage loan, and also maintains discretion in some cases to grant a
payment holiday to a borrower, depending on the facts associated with the
borrower's request. Despite the foregoing means by which the seller describes
and treats authorized underpayments, payment holidays and cash re-draws, each
re-draw technically would be a "FURTHER ADVANCE" under the UK Law of Property
Act 1925.
For a description of the treatment of overpayments and underpayments in
respect of the seller's current non-flexible loan products, see "-- CAPITAL
PAYMENTS, OVERPAYMENTS AND UNDERPAYMENTS ON NON-FLEXIBLE MORTGAGE LOANS".
In addition to the features described above, the flexible mortgage loans
that the seller currently offers under the Together and Together Connections
programs may be linked to an unsecured credit facility and a credit card which
are made available to a borrower. In 2002, the seller also began offering a
linked unsecured credit facility to borrowers under the flexible capped rate
mortgage loan, flexible tracker rate mortgage loan and flexible fixed rate
mortgage loan products. The unsecured credit facility is a line of credit
available to be drawn down by the borrower over and above the amount of the
mortgage loan. Amounts drawn under the credit facility (or the credit card in
respect of Together and Together Connections mortgage loans) are not secured by
a mortgage on the borrower's property. These flexible mortgage loans that offer
borrowers a linked unsecured credit facility allow a borrower to make one
monthly payment of amounts due under the mortgage loan and under the unsecured
credit facility, to the extent the borrower has made a drawing under the
unsecured credit facility (any linked credit card payments under the Together
and Together Connections programs will be made separately). The seller applies
the borrower's regular monthly payments and any overpayments received on a
flexible mortgage loan in proportion to the contractual monthly payment due on
the mortgage loan and the amount due on the unsecured credit facility, unless
the borrower specifies otherwise.
The amount of a flexible mortgage loan is agreed at origination. Amounts
available under the unsecured credit facility (currently a maximum of
[GBP]30,000 for Together and Together Connections mortgage loans and
[GBP]10,000 for flexible capped rate, flexible tracker rate and flexible fixed
rate mortgage loans) and any credit card (in respect of Together and Together
Connections mortgage loans) are not secured by the mortgaged property, and the
seller will not assign to the mortgages trustee amounts due under the unsecured
credit facility or any credit card. This means that only the secured mortgage
loan is assigned to the mortgages trustee.
The seller has originated four types of Together mortgage loans (referred to
collectively in this prospectus as "TOGETHER" mortgage loans):
(1) "TOGETHER VARIABLE" mortgage loans. The interest rate on Together
variable mortgage loans offered at any time is set periodically (a)
for approximately the first two years of the mortgage loan, at a
rate which is below the average standard variable rate offered by a
basket of mortgage lenders in the UK or a rate which tracks the
Bank of England base rate and (b) after that initial approximate
two-year period, at a variable rate which is below the seller's
standard variable rate for the seller's then-existing borrowers.
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(2) "TOGETHER FLEXIBLE" mortgage loans. The interest rate on Together
flexible mortgage loans is set periodically (a) for approximately
the first two years of the mortgage loan, at a rate equal to or
lower than the seller's standard variable rate and (b) after that
initial period, at a variable rate equal to the lower of (i) the
Bank of England base rate plus a margin or (ii) the seller's then
current standard variable rate.
(3) "TOGETHER FIXED FOR LIFE" mortgage loans. The interest rate on
Together fixed for life mortgage loans is fixed by the seller,
which rate will remain for the life of the mortgage loan.
(4) "TOGETHER FIXED" mortgage loans. The initial interest rate on
Together fixed mortgage loans is fixed by the seller. After the
initial interest rate period, the interest rate will be set
periodically at a variable rate equal to the lower of (i) the Bank
of England base rate plus a margin or (ii) the seller's then
current standard variable rate.
The seller also began originating Together Connections variable mortgage
loans (referred to in this prospectus as "TOGETHER CONNECTIONS VARIABLE"
mortgage loans) on May 3, 2001 and Together Connections fixed mortgage loans
(referred to in this prospectus as "TOGETHER CONNECTIONS FIXED" mortgage loans)
on August 6, 2002 (Together Connections variable mortgage loans and Together
Connections fixed mortgage loans are together referred to in this prospectus as
"TOGETHER CONNECTIONS" mortgage loans). Together Connections mortgage loans
generally share the same characteristics as Together mortgage loans, but have
the additional feature of allowing the borrower to link the mortgage loan with
one or more deposit accounts that are held with the seller, as described above
under "-- MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER". The interest rate on
Together Connections mortgage loans depends on the LTV ratio of the particular
mortgage loan.
The seller began originating Connections mortgage loans on November 27,
2002. Connections mortgage loans have similar features to Together Connections
mortgage loans but allow the customer to connect the mortgage loan with a
current account and/or a Save Direct deposit account as described above under
"-- MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER". Connections mortgage loans
do not allow the customer to have an unsecured facility.
Generally, a prospective borrower applying for a currently offered flexible
mortgage loan may borrow up to a maximum of 95% of the lower of the original
property value or the purchase price of the mortgaged property. The seller
requires a lower LTV ratio where the valuation or purchase price is over
[GBP]250,000. In the case of a remortgage, the seller calculates the maximum
amount of the loan available by using the then current valuation of the
mortgaged property. A borrower may repay amounts owed under a currently offered
flexible mortgage loan under any of the repayment terms described above under
"-- REPAYMENT TERMS". The current term over which a borrower may repay its
flexible mortgage loan (other than a Together mortgage loan, a Together
Connections mortgage loan or a Connections mortgage loan) is up to 35 years,
and the current term over which a borrower may repay its Together mortgage
loan, Together Connections mortgage loan or Connections mortgage loan is up to
25 years.
The seller currently reviews monthly the interest rate on its variable rate
flexible mortgage loans. In addition, the seller will recalculate accrued
interest on flexible mortgage loans to take account of the exercise of any
overpayment or re-draw, so that (a) interest on any re-draw is charged from the
date of the redraw, and (b) borrowers are given the benefit of any overpayment
from the date on which the overpayment is paid.
In addition to the conditions described above, the re-draw options for
borrowers with flexible mortgage loans may cease to be available, at the
seller's sole discretion, if an event of default (as set out in the applicable
terms and conditions) occurs.
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ARREARS CAPITALIZATION
From time to time, where a borrower has demonstrated a regular payment
history following previous arrears, the seller may capitalize any outstanding
amounts in arrears. In those circumstances, the seller will set the arrears
tracking balance to zero and the related mortgage loan will no longer be
considered to be in arrears. The outstanding balance will be required to be
repaid over the remaining term of such mortgage loan. See "THE ADMINISTRATOR
AND THE ADMINISTRATION AGREEMENT -- ARREARS AND DEFAULT PROCEDURES".
FURTHER ADVANCES
An existing borrower may apply to the seller for a further amount to be lent
to him or her under his or her mortgage loan, which amount will be secured by
the same mortgaged property as the mortgage loan. Any such application may
result from a solicitation made by the seller, as the seller may periodically
contact borrowers in respect of the seller's total portfolio of mortgage loans
in order to offer to a borrower the opportunity to apply for a further advance.
Any advance approved by the seller and made to an existing borrower will be
added to the outstanding principal balance of that borrower's mortgage loan at
the time of the advance under the same terms and conditions as the existing
mortgage loan (a "FURTHER ADVANCE"). The aggregate of the outstanding amount of
the mortgage loan and the further advance may be greater than the original
amount of the mortgage loan.
In determining whether to make a further advance, the seller will use its
lending criteria applicable to further advances at that time in determining, in
its sole discretion, whether to approve the application. The seller will
calculate a new LTV ratio by dividing the aggregate of the outstanding amount
of the mortgage loan and the further advance by the revised valuation of the
mortgaged property. Where the aggregate of the initial advance and the further
advance is greater than 95% of the indexed value of the mortgaged property, the
seller will reassess the property's value, by instructing a valuer, who may
physically inspect the property. The seller will not assign to the mortgages
trust any mortgage loan where the LTV ratio at the time of origination or
further advance is in excess of 95% (excluding capitalized fees and/or
charges).
None of the mortgage loans in the cut-off date mortgage portfolio obliges
the seller to make further advances. However, the seller may have made further
advances on some mortgage loans in the additional mortgage portfolio prior to
their assignment to the mortgages trustee. The administrator is required under
the administration agreement not to issue an offer for a further advance to any
borrower in respect of a mortgage loan which has been assigned to the mortgages
trustee unless the seller has elected to repurchase that mortgage loan in
accordance with the terms of the mortgage sale agreement, although this
requirement may change if the seller decides at a later date to retain those
mortgage loans within the trust property and to assign such further advances to
the mortgages trustee. See "RISK FACTORS -- THE YIELD TO MATURITY OF THE NOTES
MAY BE ADVERSELY AFFECTED BY PREPAYMENT OR REDEMPTIONS ON THE MORTGAGE OR
REPURCHASES OF MORTGAGE LOANS BY THE SELLER" and "ASSIGNMENT OF THE MORTGAGE
LOANS AND RELATED SECURITY".
PRODUCT SWITCHES
From time to time borrowers may request or the seller may offer, in limited
circumstances, a variation in the mortgage conditions applicable to the
borrower's mortgage loan. In addition, in order to promote the retention of
borrowers, the seller may periodically contact certain borrowers in respect of
the seller's total portfolio of outstanding mortgage loans in order to
encourage a borrower to review the seller's other mortgage products and to
discuss shifting that borrower to an alternative mortgage product. Any such
variation, including a change in product type (other than a variation described
as a permitted product switch), is called a "PRODUCT SWITCH". The administrator
is required under the administration agreement not to issue an offer for a
product switch to any borrower in respect of a mortgage loan which has been
assigned to the mortgages trustee unless the seller has elected to repurchase
that mortgage loan in accordance with the
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terms of the mortgage sale agreement. However, some fixed rate mortgage loans
permit the borrower to exercise a one-time option within three months of the
end of the initial fixed rate period to "RE-FIX" the interest rate at a new
fixed rate that the seller is offering existing borrowers at that time.
Although this re-fixing of the borrower's fixed rate mortgage loan is
considered by the seller as a product switch, these mortgage loans may or may
not be repurchased by the seller from the mortgages trustee. See "RISK FACTORS
- -- THE YIELD TO MATURITY OF THE NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENT
OR REDEMPTIONS ON THE MORTGAGE OR REPURCHASES OF MORTGAGE LOANS BY THE SELLER"
and "ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY".
ORIGINATION OF THE MORTGAGE LOANS
The seller currently derives its mortgage lending business from the
following sources:
* intermediaries that range from mortgage clubs to small independent
mortgage advisors;
* its branch network throughout the United Kingdom;
* its website; and
* Northern Rock Direct, a centralized telephone-based lending
operation.
In each case, the seller performs all the evaluations of the borrower and
determines whether a mortgage loan will be offered. The seller has adopted the
Council of Mortgage Lenders' Code of Mortgage Lending Practice, which is a
voluntary code observed by most banks, building societies and other residential
mortgage lenders in the UK. The Code sets out, among other things, what
information loan applicants should be provided with before committing to a
mortgage loan, including the repayment method and repayment period, the
financial consequences of early repayment, the type of interest rate, insurance
requirements, costs and fees associated with the mortgage loan and when an
applicant's account details can be given to credit reference agencies. The Code
also mandates that the lender, among other things, act fairly and reasonably
with its borrowers and assist borrowers in choosing a mortgage that fits the
needs of the relevant borrower. See "RISK FACTORS -- POSSIBLE REGULATORY
CHANGES BY THE OFFICE OF FAIR TRADING, THE FINANCIAL SERVICES AUTHORITY AND ANY
OTHER REGULATORY AUTHORITY MAY HAVE AN IMPACT ON THE SELLER, THE ISSUER AND/OR
THE MORTGAGE LOANS AND MAY ADVERSELY AFFECT OUR ABILITY TO MAKE PAYMENTS WHEN
DUE ON THE NOTES".
UNDERWRITING
The decision to offer a mortgage loan to a potential borrower is made by one
of the seller's underwriters and/or mandate holders located in its mortgage
service centers or head office in Gosforth, who may liaise with the
intermediaries. Each underwriter and/or mandate holder must pass the seller's
formal training program to gain the authority to approve mortgage loans. The
seller has established various levels of authority for its underwriters who
approve mortgage loan applications. The levels are differentiated by, among
other things, degree of risk, value of the property and LTV ratio in the
relevant application. An underwriter wishing to move to the next level of
authority must first take and pass a further training course. The seller also
monitors the quality of underwriting decisions on a regular basis.
The decision to offer a mortgage loan to a potential borrower also may be
made by one of the seller's mandate holders located in a regional mortgage
service center or the seller's head office. "MANDATE HOLDERS" are employees of
the seller who are not underwriters but who have participated in a formal
training program, and who have been given a mandate by the seller to approve a
mortgage loan for which the potential borrower has attained a specified minimum
credit score on the seller's initial credit review.
The seller continually reviews the way in which it conducts its mortgage
origination business in order to ensure that it remains up-to-date and cost
effective in a competitive market. The seller may therefore change its
origination processes from time to time.
100
However, the seller will retain exclusive control over the underwriting polices
and lending criteria to be applied to the origination of each mortgage loan.
The seller's underwriting and processing of mortgage loans are independent from
the process by which the seller's mortgage loans are originated.
LENDING CRITERIA
Each mortgage loan was originated according to the seller's lending criteria
applicable at the time the mortgage loan was offered, which lending criteria in
the case of each mortgage loan included in the mortgage portfolio as of the
closing date were the same as or substantially similar to the criteria
described in this section. New mortgage loans may only be included in the
mortgage portfolio if they are originated in accordance with the lending
criteria applicable at the time the mortgage loan is offered and if the
conditions contained in "ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY
- -- ASSIGNMENT OF NEW MORTGAGE LOANS AND THEIR RELATED SECURITY" have been
satisfied. However, the seller retains the right to revise its lending criteria
from time to time, so the criteria applicable to new mortgage loans may not be
the same as those currently used.
To obtain a mortgage loan, each prospective borrower completes an
application form which includes information about the applicant's income,
current employment details, bank account information, if any, current mortgage
information, if any, and certain other personal information. The seller
completes a credit reference agency search in all cases against each applicant
at their current address and, if necessary, former addresses, which gives
details of public information including any county court judgements and details
of any bankruptcy. Some of the factors currently used in making a lending
decision are as follows:
(1) Employment details
The seller operates the following policy in respect of the verification of a
prospective borrower's income details. Under this policy, the seller
categorizes prospective borrowers as either "EMPLOYED" or "SELF-EMPLOYED".
Proof of income for employed prospective borrowers applying for mortgage loans
in an amount less than [GBP]500,000 may be established by:
* three monthly payslips from the six month period prior to the date
of the loan application; and
* a form P60 or accountants' certificate certifying the borrower's
income.
Proof of income for self-employed prospective borrowers may be established
by:
* a letter from the prospective borrower's accountant in acceptable
form; or
* acceptable confirmation of self-employment which might include any
of a tax return, accountant's letter or a trade invoice, together
with a certificate from the prospective borrower as to income.
In May 2001 the seller introduced self-certification of the income of the
prospective borrower for certain mortgage loan products. In order to qualify,
the prospective borrower must have attained a specified minimum credit score on
the seller's initial credit review. From May 2001 through January 2002, a
prospective borrower eligible for income self-certification must have had a
property value of at least [GBP]150,000, applied for a mortgage loan with an LTV
ratio no greater than 60% and must have had a valuation made on the mortgaged
property. From January 2002 to August 2002, a prospective borrower eligible for
income self-certification must have had a property value of at least
[GBP]100,000, applied for a mortgage loan with an LTV ratio no greater than 75%
and must have had a valuation made on the mortgaged property. From August 2002,
a prospective borrower eligible for income self-certification must have a
property value of at least [GBP]100,000, applied for a mortgage loan with an LTV
ratio no greater than 80% and must have a valuation made on the mortgaged
property. From July 2003, a prospective borrower eligible for income
self-certification must have a property value of at least [GBP]100,000,
applying for a mortgage
101
loan with an LTV ratio no greater than 85% and must have a
valuation made on the mortgaged property. An existing borrower may also be
eligible for income self- certification if the borrower is moving from one
property (for which the seller is the mortgagee) to another property and either
(a) the borrower has had a mortgage loan with the seller for at least two years
prior to the date on which the borrower applies for the new mortgage loan and
the LTV ratio for the new mortgage loan is no greater than 80%, or (b) the
amount of the new mortgage loan is equal to or less than the amount of the
original mortgage loan, and the borrower's personal circumstances (for example,
income and employment) have not changed since the date of the original mortgage
loan. In all cases, the seller reserves the right to obtain proof of income
references. Together mortgage loans, and Together Connections mortgage loans are
excluded from the self- certification procedure. If a mortgage loan is judged
appropriate for self- certification, income is accepted as stated by the
prospective borrower without further proof once positive identification of the
borrower is provided and the borrower has passed the credit scoring test.
(2) Income capacity
The maximum amount of money that the seller will lend to a prospective
borrower is determined by a number of factors, including the applicant's
income. The seller generally applies the following income multiples in
determining the amount of the mortgage loan:
* SINGLE APPLICANT: 3.50 times gross income for all mortgage loans
other than Together mortgage loans, and Together Connections
mortgage loans; 3.80 times gross income for Together mortgage
loans, and Together Connections mortgage loans.
* JOINT APPLICANTS: a sum equal to the higher of (1) 2.75 times the
joint gross income of the applicants (3.00 times joint gross income
for Together mortgage loans and Together Connections mortgage
loans), or (2) 3.50 times the highest earning applicant's gross
income (3.80 times the highest gross income for Together mortgage
loans, and Together Connections mortgage loans) plus the gross
income of the other applicant.
(3) Valuation
The seller requires that a valuation of the property be obtained either from
its in-house valuation department or from an independent firm of professional
valuers selected from a panel of approved valuers. The seller retains details
of professional indemnity insurance held by panel valuers. The person
underwriting the mortgage loan and/or the valuation team reviews the valuation
of each property securing the mortgage loans. For more information on the
valuation process and criteria used for a further advance, including the use of
desktop valuations, see "-- CHARACTERISTICS OF THE MORTGAGE LOANS -- FURTHER
ADVANCES".
(4) Property types
The seller applies the criteria set out below in determining the eligibility
of properties to serve as security for mortgage loans. Under these criteria,
eligible property types include freehold and leasehold houses, leasehold flats,
and mixed commercial and residential use properties where there is a separate
entrance for the residential part of the property. In the case of a mortgage
loan secured by a leasehold property, the seller requires that the unexpired
term of the lease be at least 30 years from the end of the agreed mortgage loan
term.
The seller may consider some property types that do not meet its usual
lending criteria on a case-by-case basis. However, some property types will not
be considered for the purposes of providing security for a mortgage loan. The
types of property falling within this category comprise freehold flats, shared
ownership or shared equity schemes and properties of non-standard construction
of a type considered to be defective.
102
(5) Loan amount
Generally, the maximum loan amount is [GBP]1,000,000, but this may vary
according to the application in question. The amount borrowed may exceed this
limit in exceptional cases. The seller has represented and warranted in the
mortgage sale agreement that, as of the date of assignment, no mortgage loan in
the mortgage portfolio has a current balance greater than [GBP]350,000. The
largest mortgage loan in the mortgage portfolio as of the cut- off date had a
current balance of [GBP]349,989.72.
(6) Term
Each mortgage loan must have an initial term of between 7 and 25 years (in
the case of a Together mortgage loan, and a Together Connections mortgage loan)
or between 7 and 35 years in the case of all other mortgage loans.
(7) Age of applicant
The first named borrower in respect of a Together mortgage loan or a
Together Connections mortgage loan must be aged 21 or over. All borrowers in
respect of all other mortgage loans must be aged 18 or over. There are no
maximum age limits.
SELLER'S DISCRETION TO LEND OUTSIDE OF ITS LENDING CRITERIA
On a case-by-case basis, and within approved limits as detailed in the
seller's lending criteria, the seller may have determined that, based upon
compensating factors, a prospective borrower that did not strictly qualify
under its lending criteria at that time warranted an underwriting exception.
The seller may take into account compensating factors including, but not
limited to, a low LTV ratio, stable employment and time in residence at the
applicant's current residence. New mortgage loans and further advances (made
prior to their assignment to the mortgages trustee or if the seller decides at
a later date to retain such mortgage loans subject to further advances within
the mortgages trust, after their assignment to the mortgages trustee) that the
seller has originated under lending criteria that are different than the
lending criteria set out here may be assigned to the mortgages trustee.
MAXIMUM LTV RATIO
The maximum LTV ratio permitted for prospective borrowers applying for
mortgage loans secured by mortgaged properties valued up to [GBP]250,000 is 95%
of the lower of the purchase price or valuation of the mortgaged property
determined by the relevant valuation. The maximum LTV ratio permitted for
prospective borrowers applying for mortgage loans secured by mortgaged
properties valued up to [GBP]1,000,000 is 90% of the lower of the purchase
price or valuation of the mortgaged property determined by the relevant
valuation. The maximum LTV ratio permitted for prospective borrowers applying
for mortgage loans secured by mortgaged properties valued over [GBP]1,000,000
is 85% of the lower of the purchase price or valuation of the mortgaged
property determined by the relevant valuation. The maximum LTV ratio for
prospective borrowers applying for mortgage loans secured by the seller's
currently offered flexible mortgage loans is as described under "--
CHARACTERISTICS OF THE MORTGAGE LOANS -- FLEXIBLE MORTGAGE LOANS".
In the case of a purchase of a mortgaged property, the seller will determine
the current market value of that mortgaged property (which will be used to
determine the maximum amount of the mortgage loan permitted to be made by the
seller) to be the lower of:
* the valuation made by an independent valuer from the panel of
valuers appointed by the seller or an employee valuer of the
seller; or
* the purchase price for the mortgaged property paid by the
prospective borrower.
103
If a borrower or a prospective borrower has applied to remortgage its
current mortgaged property, the seller will determine the current market value
of the mortgaged property (for the purpose of determining the maximum amount of
the loan available) by using the then current valuation of the mortgaged
property as determined using the process described under "-- LENDING CRITERIA
- -- (3) VALUATION".
If the borrower has applied for a further advance, the seller will determine
the current market value of the mortgaged property by using either an indexed
valuation figure provided by a UK pricing index, a desktop valuation by an
employee valuer of the seller or the then current valuation of the mortgaged
property as determined using the process described under "-- LENDING CRITERIA
- -- (3) VALUATION".
BUILDINGS INSURANCE POLICIES
INSURANCE ON THE PROPERTY
A borrower is required to arrange for insurance on the mortgaged property
for an amount equal to the full rebuilding cost of the property. The borrower
may either purchase the insurance through an insurer arranged by the seller (a
"SELLER ARRANGED INSURER"), or the borrower or landlord (for a leasehold
property) may arrange for the insurance independently. Where borrower or
landlord-arranged insurance fails or (without the knowledge of the seller) no
insurance is arranged, a contingency insurance policy exists to protect the
seller (but not the borrower) up to the amount of the seller's insurable
interest in the property (subject to aggregate limits of indemnity) and the
seller can make a claim under the contingency insurance policy. The policy has
a [GBP]50,000 deductible in the aggregate in any one period of insurance.
SELLER ARRANGED BUILDINGS INSURANCE POLICIES
The solicitor or licensed conveyancer acting for the seller is required to
ensure that buildings insurance cover is taken out by the relevant borrower
prior to the completion of each mortgage loan. If a borrower asks the seller to
arrange insurance on its behalf, a policy will be issued by a seller arranged
insurer, which currently is AXA General Insurance Ltd., a member of the AXA
Group of Companies ("AXA"). AXA's registered number is 141 885 and its address
is 107 Cheapside, London EC2V 6DU. The policy will provide the borrower with
rebuilding insurance up to an amount equal to the actual rebuilding cost.
Standard policy conditions apply, which are renegotiated periodically by the
seller with the seller arranged insurer. Under seller arranged insurance
policies, the seller will assign its rights under those policies to the
mortgages trustee. Amounts paid under the insurance policy are generally
utilized to fund the reinstatement of the property or are otherwise paid to the
seller to reduce the amount of the mortgage loan(s).
In the administration agreement, the seller, acting in its capacity as
administrator, has agreed to deal with claims under the seller arranged
insurance policies in accordance with its normal procedures and also has agreed
to make and enforce claims and to hold the proceeds of claims on trust for the
mortgages trustee or as the mortgages trustee may direct.
BORROWER OR LANDLORD-ARRANGED BUILDINGS INSURANCE POLICIES AND THE CONTINGENCY
INSURANCE POLICY
If a borrower elects not to take up a seller arranged insurance policy, or
if a borrower who originally had a seller arranged insurance policy confirms
that he or she no longer requires such insurance, that borrower is sent an
"alternative insurance requirements" form. The borrower is required to
acknowledge that it is responsible for arranging an alternative insurance
policy which covers the rebuilding cost of the property and to request joint
insured status for the seller.
Once an alternative insurance requirements form has been dispatched, it is
assumed that the borrower is making arrangements in accordance with those
requirements. If it transpires that the borrower has not complied with those
requirements and if the property is damaged while uninsured or partially
insured because of under insurance, the seller is
104
entitled to make a claim under the contingency insurance policy provided the
seller has no prior knowledge of the deficiency. The contingency insurance
policy is an insurance policy currently provided to the seller by AXA that
insures the seller against loss relating to mortgaged properties where
borrowers have failed to make their own property insurance arrangements. The
contingency insurance policy provides cover for the mortgages trustee. The
administrator will make claims in accordance with the contingency insurance
policy and hold the proceeds of claims on trust for the mortgages trustee or as
the mortgages trustee may direct.
In the case of leasehold properties where the lease requires the landlord to
insure the property, provision is made to deal with the insurance in the
mortgage conditions or the "GENERAL INSTRUCTIONS TO SOLICITORS" or other
comparable or successor instructions or guidelines. Again, if it transpires
that the property is not insured and is damaged, the seller can claim under the
contingency insurance policy.
If a borrower who originally had seller arranged insurance fails to pay a
premium, but does not notify the seller that it wishes to make alternative
arrangements, it is assumed that the borrower requires seller arranged
insurance to continue and no alternative insurance requirements form is sent to
that borrower. The unpaid premium is added to the balance of the relevant
mortgage loan.
The seller may not be insured under any insurance policy which is not
arranged by the seller, and it may not have the benefit of any security over
such policies. The mortgages trustee therefore may not have an interest in
policies that were not arranged through the seller. See "RISK FACTORS -- THE
MORTGAGES TRUSTEE MAY NOT RECEIVE THE BENEFIT OF CLAIMS MADE ON THE BUILDINGS
INSURANCE".
PROPERTIES IN POSSESSION POLICY
If the seller takes possession of a property from a borrower in default, the
seller has coverage through a properties in possession policy from AXA. The
policy provides the seller with rebuilding insurance up to an amount equal to
the actual rebuilding cost. The seller will assign its rights under this policy
to the mortgages trustee for any mortgage loan which is in a mortgage portfolio
and is a property in possession. Amounts paid under the properties in
possession policy are generally utilized to fund the reinstatement of the
property or are otherwise paid to the seller to reduce the amount of the
mortgage loan. This policy is subject to a [GBP]50,000 deductible in the
aggregate in any one period of insurance.
MIG POLICIES
A mortgage indemnity guarantee, or MIG, policy is an agreement between a
lender and an insurance company to underwrite the amount of each relevant
mortgage loan which exceeds a specified LTV ratio. Although since January 1,
2003 the seller is no longer required to take out a MIG policy with respect to
any mortgage loan originated on or after January 1, 2003, each mortgage loan
originated prior to January 1, 2003, that had an LTV ratio in excess of 75%
contains a condition that the seller take out mortgage indemnity insurance with
Northern Rock Mortgage Indemnity Company Limited ("NORMIC"). However, under the
terms of these MIG policies, the MIG coverage for a mortgage loan will be
cancelled in the event a further advance is granted with respect to such
mortgage loan on or after January 1, 2003.
This insurance is intended to provide only limited cover in the event of
losses being incurred in excess of the relevant LTV ratio following
repossession and sale of a mortgaged property from a borrower, and is further
limited in that such insurance is subject to certain caps on claims that may be
made under the MIG policy by the seller and/or its relevant subsidiary.
Firstly, each mortgage loan that is subject to a MIG policy is subject to a cap
on claims made in respect of that mortgage loan, regardless of whether or not
that mortgage loan is included in the mortgage portfolio. In addition, all
mortgage loans that were originated in any one year and that are subject to a
MIG policy are also subject to an aggregate cap on claims that can be made in
respect of that group of mortgage loans.
105
However, the aggregate cap in respect of mortgage loans originated in any one
year is proportioned between mortgage loans that are included in the mortgage
portfolio and mortgage loans that are not included in the mortgage portfolio.
As each proportionate aggregate cap is applicable either to mortgage loans
included in the mortgage portfolio or mortgage loans that are not included in
the mortgage portfolio, any losses on mortgage loans outside of the mortgage
portfolio will not reduce the amount of MIG coverage remaining on those
mortgage loans included in the mortgage portfolio which continue to have MIG
coverage. The MIG policy will not cover all losses suffered in relation to the
mortgage loans which continue to have MIG coverage and each such mortgage loan
is only covered for a ten year period following completion of the mortgage loan
or further advance. In addition, the mortgages trustee is not required to
maintain a mortgage indemnity policy with the current insurer, and the seller
is not required to maintain the same level of coverage under the mortgage
indemnity insurance policies for mortgag e loans that it may originate in the
future and assign to the mortgages trust. See "RISK FACTORS -- THE MORTGAGES
TRUSTEE IS NOT REQUIRED TO MAINTAIN MORTGAGE INDEMNITY INSURANCE WITH THE
CURRENT INSURER, AND THE SELLER IS NOT REQUIRED TO MAINTAIN THE SAME LEVEL OF
MORTGAGE INDEMNITY INSURANCE COVERAGE FOR NEW MORTGAGE LOANS THAT IT ORIGINATES
IN THE FUTURE, WHICH MAY ADVERSELY AFFECT THE FUNDS AVAILABLE TO PAY THE
NOTES".
The insured under each MIG policy is the seller and/or its relevant
subsidiary. The related borrower has no interest in this policy. The seller
will formally assign its interest in each MIG policy to the mortgages trustee
to the extent that it relates to the mortgage loans from time to time comprised
in the mortgage portfolio. Practically speaking, this will have little effect
on the way in which claims are made and paid under the policies as they will
continue to be administered by the seller acting in its capacity as
administrator. To the extent that claims relate to mortgage loans in the
mortgage portfolio, their proceeds will be paid by the seller into the
mortgages trustee transaction account and all other claims will be paid into
the seller's account.
NORMIC is a Guernsey limited liability company and a wholly-owned insurance
subsidiary of the seller. NORMIC's registered number in Guernsey is 28379, and
its address is P.O. Box 384, The Albany, South Esplanade, St. Peter Port,
Guernsey, Channel Islands. NORMIC does not have a public credit rating by any
of Moody's, Standard & Poor's or Fitch. The seller does not guarantee the
liabilities of NORMIC and is under no legal obligation to support NORMIC in the
discharge of those liabilities. The seller is, however, contingently liable to
NORMIC to pay up any unpaid amount in respect of the seller's shareholding in
NORMIC. The unpaid share capital is immaterial in relation to NORMIC's overall
exposure.
The seller has warranted that each of the mortgage indemnity policies
relating to a mortgaged property is in force and all premiums thereon have been
paid. The seller also has warranted that, so far as the seller is aware, there
has been no breach of any term of the mortgage indemnity policies which would
entitle the relevant insurer to avoid the same. Management of the seller
believes that financial information relating to NORMIC is not material to an
investor's decision to purchase the notes.
THE CUT-OFF DATE MORTGAGE PORTFOLIO
The statistical and other information contained in this prospectus has been
compiled by reference to the mortgage loans in the cut-off date mortgage
portfolio. The U.S. dollar figures set forth in the tables below have been
rounded to the nearest cent following their conversion from pounds sterling.
Columns stating percentage amounts may not add up to 100% due to rounding. A
mortgage loan will have been removed from the additional mortgage portfolio
(which comprised a portion of the cut-off date portfolio) if in the period up
to (and including) the August 18, 2003 assignment date the mortgage loan was
repaid in full or if the mortgage loan did not comply with the terms of the
mortgage sale agreement on the August 18, 2003 assignment date. Once such
mortgage loans were
106
removed, the seller then randomly selected from the mortgage loans remaining in
the additional mortgage portfolio those mortgage loans which were included in
the additional assigned mortgage portfolio once the determination had been made
as to the anticipated principal balances of the notes to be issued and the
corresponding size of the trust that would be required ultimately to support
payments on the notes. We do not expect the characteristics of the mortgage
portfolio as of the closing date to differ materially from the characteristics
of the cut-off date mortgage portfolio. The US dollar numbers in the following
tables have been calculated based on the currency exchange rate set forth on
page 66 under "US DOLLAR PRESENTATION".
TYPES OF PROPERTY
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
TYPE OF PROPERTY ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
Detached Bungalow 422,884,522.50 680,425,619.47 2.82 5,200 2.53
Detached House 3,856,284,865.40 6,204,802,679.65 25.74 38,476 18.69
Flat 1,501,586,578.64 2,416,068,509.48 10.02 18,384 8.93
Maisonette 223,113,659.36 358,992,211.36 1.49 2,611 1.27
Other Use 23,859,898.76 38,390,826.65 0.16 347 0.17
Purpose Built Flat 73,346,645.14 118,015,519.13 0.49 1,386 0.67
Semi Detached Bungalow 183,015,885.27 294,474,473.48 1.22 3,011 1.46
Semi Detached House 4,143,039,142.01 6,666,193,309.75 27.65 61,537 29.89
Terraced House 4,475,018,817.02 7,200,352,078.87 29.87 73,942 35.92
Not Known 78,446,617.44 126,221,427.90 0.52 950 0.46
New Property 2,829,504.98 4,552,703.11 0.02 28 0.01
----------------- ----------------- ---------- --------- ----------
Total 14,983,426,136.52 24,108,489,358.84 100.00 205,872 100.00
================= ================= ========== ========= ==========
EXPECTED SEASONING OF MORTGAGES AT CLOSING
The following table shows length of time since the mortgage loans were
originated as of the closing date.
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
AGE OF MORTGAGE LOANS BALANCE BALANCE MORTGAGE
(MONTHS) ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- --------------------- ----------------- ----------------- ---------- --------- ----------
0 to 6 1,607,024,053.26 2,585,718,508.87 10.73 17,147 8.33
6 to 12 3,355,772,536.00 5,399,473,107.00 22.40 38,926 18.91
12 to 18 2,846,487,152.49 4,580,027,598.54 19.00 37,645 18.29
18 to 24 1,865,792,339.10 3,002,079,387.13 12.45 26,464 12.85
24 to 30 1,411,120,545.87 2,270,507,716.60 9.42 21,586 10.49
30 to 36 831,995,122.00 1,338,688,852.78 5.55 13,414 6.52
36 to 42 632,939,693.22 1,018,406,586.03 4.22 10,370 5.04
42 to 48 495,308,969.31 796,957,311.84 3.31 7,927 3.85
48 to 54 403,562,960.36 649,337,023.91 2.69 6,453 3.13
54 to 60 289,203,926.69 465,332,142.70 1.93 4,665 2.27
60 to 66 455,784,172.70 733,361,500.72 3.04 6,580 3.20
66 to 72 247,415,311.77 398,093,824.25 1.65 3,924 1.91
72 to 78 187,607,305.14 301,862,116.07 1.25 3,187 1.55
78 to 84 120,830,186.92 194,417,034.47 0.81 2,463 1.20
84 to 90 119,809,250.02 192,774,336.32 0.80 2,535 1.23
90 to 96 70,401,406.22 113,276,598.91 0.47 1,592 0.77
96 to 102 42,371,205.45 68,175,712.71 0.28 994 0.48
----------------- ----------------- ---------- --------- ----------
Total 14,983,426,136.52 24,108,489,358.84 100.00 205,872 100.00
================= ================= ========== ========= ==========
107
The weighted average seasoning of mortgage loans as of the closing date is
expected to be 24.01 months and the maximum seasoning of mortgage loans as of
the closing date is expected to be 98.79 months. The minimum seasoning of the
mortgage loans as of the closing date is expected to be 3.85 months.
YEARS TO MATURITY AT CLOSING
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
YEARS TO MATURITY ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ----------------- ----------------- ----------------- ---------- --------- ----------
0 to 5 81,772,517.28 131,572,835.53 0.55 1,843 0.90
5 to 10 836,248,797.02 1,345,533,060.37 5.58 14,494 7.04
10 to 15 1,900,139,562.54 3,057,344,428.87 12.68 28,256 13.73
15 to 20 2,999,038,169.00 4,825,483,779.57 20.02 41,434 20.13
20 to 25 8,914,140,892.73 14,342,945,925.55 59.49 117,301 56.98
25 to 30 201,599,246.79 324,375,296.52 1.35 2,045 0.99
30 to 35 50,486,951.16 81,234,032.44 0.34 499 0.24
----------------- ----------------- ---------- --------- ----------
Total 14,983,426,136.52 24,108,489,358.84 100.00 205,872 100.00
================= ================= ========== ========= ==========
The weighted average remaining term of the mortgage loans as of the closing
date is expected to be 20.02 years and the maximum remaining term as of the
closing date is expected to be 34.68 years. The minimum remaining term as of
the closing date is expected to be less than one month.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
The following table shows the spread of mortgaged properties securing the
mortgage loans throughout England and Wales as of the cut-off date. No
properties are situated outside England and Wales. The geographical location of
a property has no impact upon the seller's lending criteria and credit scoring
tests.
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
REGION ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ----------------------------- ----------------- ----------------- ---------- --------- ----------
East Anglia 346,399,966.22 557,361,168.50 2.31 4,782 2.32
East Midlands 1,078,621,917.85 1,735,513,946.66 7.20 16,926 8.22
Greater London 2,907,162,095.45 4,677,654,216.33 19.40 25,161 12.22
North 1,455,425,323.82 2,341,794,567.69 9.71 29,446 14.30
North West 1,802,597,178.87 2,900,397,713.39 12.03 30,994 15.05
South East (excluding London) 3,175,452,208.84 5,109,335,814.71 21.19 32,713 15.89
South West 1,173,134,509.74 1,887,585,695.48 7.83 14,889 7.23
Wales 571,318,188.16 919,256,939.92 3.81 10,013 4.86
West Midlands 1,041,066,382.01 1,675,086,696.72 6.95 15,514 7.54
Yorkshire 1,432,248,365.56 2,304,502,599.45 9.56 25,434 12.35
----------------- ----------------- ---------- --------- ----------
Total 14,983,426,136.52 24,108,489,358.84 100.00 205,872 100.00
================= ================= ========== ========= ==========
108
CURRENT LOAN-TO-VALUE RATIOS
The following table shows the range of current loan-to-value, or LTV,
ratios, which express the outstanding balance of a mortgage loan as at the cut-
off date divided by the value of the mortgaged property securing that mortgage
loan at the same date. The seller has not revalued any of the mortgaged
properties since the date of the origination of the related mortgage loan,
other than in respect of a mortgaged property of a related borrower that has
remortgaged its property or to which the seller has made a further advance, as
described under "-- MAXIMUM LTV RATIO".
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
CURRENT LTV ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- -------------- ----------------- ----------------- ---------- --------- ----------
0% to 25% 234,808,009.12 377,808,542.43 1.57 5,911 2.87
25.01% to 50% 1,588,905,854.01 2,556,566,136.78 10.60 23,304 11.32
50.01% to 55% 575,894,110.21 926,619,646.36 3.84 7,224 3.51
55.01% to 60% 689,160,517.58 1,108,866,480.42 4.60 8,228 4.00
60.01% to 65% 761,755,722.48 1,225,672,924.34 5.08 8,822 4.29
65.01% to 70% 924,699,591.09 1,487,851,313.10 6.17 10,553 5.13
70.01% to 75% 1,393,594,070.92 2,242,307,435.11 9.30 17,260 8.38
75.01% to 80% 1,299,504,974.70 2,090,917,095.25 8.67 14,233 6.91
80.01% to 85% 1,227,523,876.13 1,975,098,754.84 8.19 15,022 7.30
85.01% to 90% 2,385,532,703.89 3,838,347,069.81 15.92 35,183 17.09
90.01% to 95% 2,829,933,785.60 4,553,393,058.09 18.89 42,211 20.50
95.01% to 100% 1,067,460,188.78 1,717,554,607.85 7.12 17,827 8.66
> 100% 4,652,732.01 7,486,294.47 0.03 94 0.05
----------------- ----------------- ---------- --------- ----------
Total 14,983,426,136.52 24,108,489,358.84 100.00 205,872 100.00
================= ================= ========== ========= ==========
The weighted average current loan-to-value ratio of the mortgage loans at
the cut-off date was 75.16%.
CURRENT INDEXED LOAN-TO-VALUE RATIOS
The following table shows the range of current indexed loan-to-value, or
LTV, ratios, which express the outstanding balance of a mortgage loan as of the
cut-off date divided by the indexed value of the mortgaged property securing
that mortgage loan as of the same date (calculated using the Halifax House
Price Index).
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
CURRENT INDEXED LTV ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ------------------- ----------------- ----------------- ---------- --------- ----------
0%-25% 635,059,366.73 1,021,817,162.88 4.24 13,632 6.62
25.01%-50% 3,470,407,218.18 5,583,921,509.54 23.16 49,304 23.95
50.01%-55% 1,264,723,829.84 2,034,953,869.41 8.44 18,700 9.08
55.01%-60% 1,593,709,735.23 2,564,295,631.91 10.64 24,375 11.84
60.01%-65% 1,478,545,013.04 2,378,994,389.44 9.87 20,996 10.20
65.01%-70% 1,416,475,127.25 2,279,123,294.05 9.45 18,690 9.08
70.01%-75% 1,253,834,720.56 2,017,433,178.70 8.37 14,946 7.26
75.01%-80% 1,157,862,494.31 1,863,012,862.93 7.73 12,281 5.97
80.01%-85% 1,001,455,794.06 1,611,352,846.44 6.68 11,866 5.76
85.01%-90% 877,444,481.36 1,411,817,347.32 5.86 11,185 5.43
90.01%-95% 524,750,295.00 844,328,712.79 3.50 5,522 2.68
95.01%-100% 306,851,527.69 493,727,317.28 2.05 4,345 2.11
>100% 2,306,533.27 3,711,236.15 0.02 30 0.01
----------------- ----------------- ---------- --------- ----------
Total 14,983,426,136.52 24,108,489,358.84 100.00 205,872 100.00
================= ================= ========== ========= ==========
The weighted average current indexed loan-to-value ratio of the mortgage
loans as of the cut-off date was 60.90%.
109
OUTSTANDING CURRENT BALANCES
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
RANGE OF CURRENT PRINCIPAL BALANCE BALANCE MORTGAGE
BALANCE ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------------- ----------------- ----------------- ---------- --------- ----------
[GBP]0 -- [GBP]25,000 212,757,852.92 342,329,610.49 1.42 10,626 5.16
[GBP]25,001 -- [GBP]50,000 2,478,275,429.93 3,987,571,085.97 16.54 65,023 31.58
[GBP]50,001 -- [GBP]75,000 3,592,225,426.97 5,779,928,281.53 23.97 58,478 28.41
[GBP]75,001 -- [GBP]100,000 2,718,988,237.56 4,374,880,510.96 18.15 31,659 15.38
[GBP]100,001 -- [GBP]125,000 1,864,363,087.41 2,999,779,706.21 12.44 16,736 8.13
[GBP]125,001 -- [GBP]150,000 1,251,149,459.34 2,013,112,565.31 8.35 9,183 4.46
[GBP]150,001 -- [GBP]175,000 830,422,949.84 1,336,159,211.33 5.54 51,577 2.50
[GBP]175,001 -- [GBP]200,000 606,161,899.98 975,320,836.65 4.05 3,247 1.58
[GBP]200,001 -- [GBP]225,000 434,310,857.74 698,810,712.37 2.90 2,061 1.00
[GBP]225,001 -- [GBP]250,000 327,391,485.75 526,776,324.62 2.19 1,385 0.67
[GBP]250,001 -- [GBP]275,000 233,515,089.06 375,728,220.53 1.56 894 0.43
[GBP]275,001 -- [GBP]300,000 184,667,899.09 297,132,581.00 1.23 644 0.31
[GBP]300,001 -- [GBP]325,000 149,696,302.60 240,862,916.49 1.00 483 0.23
[GBP]325,001 -- [GBP]350,000 99,500,158.33 160,096,795.38 0.66 296 0.14
----------------- ----------------- ---------- --------- ----------
Total 14,983,426,136.52 24,108,489,358.84 100.00 205,872 100.00
================= ================= ========== ========= ==========
The largest mortgage loan had a current balance as of the cut-off date of
[GBP]349,989.72 or $563,136.96. The average current balance as of the cut-off
date was approximately [GBP]72,780.30 or $117,104.23.
MORTGAGE LOAN PRODUCTS
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
MORTGAGE LOAN PRODUCTS ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
Tracker 90,897,109.97 146,254,400.60 0.61 1,135 0.55
Standard variable rate 3,046,796,164.50 4,902,326,893.81 20.33 49,109 23.85
Discount 47,191,282.99 75,931,267.88 0.31 710 0.34
Fixed 7,240,673,223.15 11,650,318,943.12 48.32 79,794 38.76
Capped 396,539,144.18 638,035,630.22 2.65 5,540 2.69
Together 3,724,540,596.34 5,992,824,772.87 24.86 62,465 30.34
Together Connections 436,788,615.39 702,797,450.35 2.92 7,119 3.46
----------------- ----------------- ---------- --------- ----------
Total 14,983,426,136.52 24,108,489,358.84 100.00 205,872 100.00
================= ================= ========== ========= ==========
110
EMPLOYMENT STATUS
AGGREGATE
CURRENT AGGREGATE NUMBER OF
BALANCE CURRENT MORTGAGE
EMPLOYMENT STATUS ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ----------------- ----------------- ----------------- ---------- --------- ----------
Full Time 13,032,520,586.80 20,969,461,925.66 86.98 184,740 89.74
Part Time 136,517,935.60 219,658,786.16 0.91 2,536 1.23
Retired 16,305,109.89 26,235,092.34 0.11 498 0.24
Self Employed 1,708,289,290.67 2,748,655,334.95 11.40 16,102 7.82
Other 89,793,213.56 144,478,219.73 0.60 1,996 0.97
----------------- ----------------- ---------- --------- ----------
Total 14,983,426,136.52 24,108,489,358.84 100.00 205,872 100.00
================= ================= ========== ========= ==========
Approximately 20.74% of the aggregate current balance of the mortgage loans
as of the cut-off date were made to borrowers who self-certified their income
in accordance with the seller's self-certification program as described under
"-- CHARACTERISTICS OF THE MORTGAGE LOANS -- LENDING CRITERIA".
DISTRIBUTION OF FIXED RATE MORTGAGE LOANS
Fixed rate mortgage loans remain at the relevant fixed rate for a period of
time as specified in the offer of advance, after which they move to the
seller's standard variable rate or some other rate as specified in the offer of
advance.
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
FIXED RATE % ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ------------ ---------------- ----------------- ---------- --------- ----------
0.00 -- 2.99 776,831,397.88 1,249,929,843.73 10.73 8,810 11.04
3.00 -- 3.99 2,006,329,488.63 3,228,205,130.54 27.71 16,317 20.45
4.00 -- 4.99 2,231,116,571.15 3,589,889,897.26 30.81 25,861 32.41
5.00 -- 5.99 2,104,075,237.89 3,385,479,063.38 29.06 26,826 33.62
6.00 -- 6.99 116,219,720.06 186,998,745.07 1.61 1,846 2.31
7.00 -- 7.99 5,968,840.20 9,603,926.31 0.08 133 0.17
8.00 -- 8.99 131,967.34 212,336.83 0.00 1 0.00
---------------- ----------------- ---------- --------- ----------
Total 7,240,673,223.15 11,650,318,943.12 100.00 79,794 100.00
================ ================= ========== ========= ==========
111
MONTH/YEAR IN WHICH FIXED RATE PERIOD ENDS
AGGREGATE AGGREGATE
MONTH/YEAR IN WHICH CURRENT CURRENT NUMBER OF
FIXED RATE PERIOD BALANCE BALANCE MORTGAGE
ENDS ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ------------------- ---------------- ----------------- ---------- --------- ----------
September-03 253,774,549.82 408,325,904.78 3.50 3,069 3.85
October-03 170,241,425.96 273,920,234.85 2.35 2,464 3.09
November-03 30,276,186.22 48,714,700.27 0.42 376 0.47
December-03 14,509,549.05 23,346,016.17 0.20 177 0.22
January-04 141,460,613.30 227,611,606.28 1.95 1,848 2.32
February-04 111,680,202.66 179,694,614.09 1.54 1,276 1.60
March-04 174,877.82 281,380.24 0.00 2 0.00
April-04 872,171,775.09 1,403,333,507.79 12.05 9,065 11.36
May-04 306,223.92 492,717.49 0.00 6 0.01
June-04 198,498,470.19 319,386,114.55 2.74 2,314 2.90
July-04 33,548,489.53 53,979,870.52 0.46 442 0.55
August-04 334,508,145.25 538,227,104.18 4.62 3,891 4.88
September-04 39,678,045.46 63,842,390.12 0.55 510 0.64
October-04 213,438,078.22 343,424,100.11 2.95 2,370 2.97
November-04 15,522,661.36 24,976,124.47 0.21 263 0.33
December-04 1,052,413,143.04 1,693,343,753.89 14.53 9,439 11.83
January-05 370,664,979.57 596,403,828.75 5.12 3,819 4.79
February-05 109,512,777.64 176,207,204.57 1.51 1,375 1.72
March-05 531,291,762.20 854,854,001.93 7.34 5,129 6.43
April-05 155,166,545.86 249,664,595.11 2.14 1,857 2.33
May-05 668,872,208.98 1,076,222,379.69 9.24 5,831 7.31
June-05 180,022,475.31 289,658,045.55 2.49 1,909 2.39
July-05 209,979.13 337,858.62 0.00 7 0.01
August-05 90,511,549.73 145,634,030.14 1.25 1,097 1.37
September-05 8,817,515.88 14,187,475.27 0.12 93 0.12
October-05 14,368,232.54 23,118,636.43 0.20 217 0.27
December-05 34,728,322.20 55,878,233.63 0.48 504 0.63
January-06 15,379,806.70 24,746,269.83 0.21 230 0.29
February-06 105,181.95 169,238.86 0.00 3 0.00
March-06 24,374,689.61 39,219,130.51 0.34 330 0.41
April-06 9,356,742.48 15,055,096.51 0.13 178 0.22
May-06 47,163,417.77 75,886,432.45 0.65 678 0.85
June-06 13,606,268.84 21,892,628.87 0.19 190 0.24
July-06 8,999,334.48 14,480,023.30 0.12 131 0.16
August-06 60,902,525.84 97,992,801.03 0.84 719 0.90
September-06 55,783,629.98 89,756,444.05 0.77 769 0.96
October-06 437,650.21 704,183,77 0.01 11 0.01
November-06 12,591,003.60 20,259,056.48 0.17 175 0.22
January-07 20,216,835.01 32,529,098.97 0.28 293 0.37
February-07 21,856,632.95 35,167,551.01 0.30 286 0.36
March-07 309,008.35 497,197.67 0.00 9 0.01
April-07 148,609,162.97 239,113,697.46 2.05 1,670 2.09
May-07 1,329,817.07 2,139,689.57 0.02 29 0.04
June-07 93,576,986.75 150,566,350.36 1.29 1,096 1.37
July-07 269,514.54 433,651.71 0.00 5 0.01
August-07 68,629,678.79 110,425,870.94 0.95 859 1.08
October-07 24,594,692.38 39,573,117.26 0.34 343 0.43
December-07 103,095,847.22 165,882,296.41 1.42 1,217 1.53
January-08 48,318,663.99 77,745,235.70 0.67 628 0.79
February-08 28,675,984.82 46,139,959.49 0.40 425 0.53
March-08 79,910,909.15 128,577,488.58 1.10 1,035 1.30
May-08 102,842,091.18 165,474,000.29 1.42 1,232 1.54
June-08 11,848,282,02 19,064,009.69 0.16 160 0.20
July-08 6,443,260.35 10,367,273.29 0.09 101 0.13
August-08 53,532,576.96 86,134,476.20 0.74 673 0.84
September-08 42,759,598.92 68,800,641.87 0.59 647 0.81
November-08 16,381,236.17 26,357,580.32 0.23 217 0.27
January-09 26,666,751.49 42,907,082.04 0.37 370 0.46
February-09 23,729,815.36 38,181,521.09 0.33 322 0.40
April-09 67,266,246.92 108,232,094.80 0.93 864 1.08
June-09 31,749,732.48 51,085,651.62 0.44 402 0.50
August-09 33,412,939.34 53,761,768.85 0.46 464 0.58
October-09 10,731,853.31 17,267,664.22 0.15 163 0.20
112
AGGREGATE AGGREGATE
MONTH/YEAR IN WHICH CURRENT CURRENT NUMBER OF
FIXED RATE PERIOD BALANCE BALANCE MORTGAGE
ENDS ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ------------------- ---------------- ----------------- ---------- --------- ----------
December-09 137,246,048.44 220,830,327.34 1.90 1.675 2.10
January-10 49,636,061.68 79,864,942.37 0.69 602 0.75
March-10 13,376,946.78 21,523,647.27 0.18 182 0.23
May-10 51,208,164.81 82,394,472.74 0.71 616 0.77
June-10 8,918,965.52 14,350,708.80 0.12 123 0.15
September-10 581,403.48 935,484.28 0.01 8 0.01
November-12 129,326.80 208,088.17 0.00 2 0.00
December-12 725,561.04 1,167,435.30 0.01 11 0.01
January-13 1,974,915.77 3,177,660.13 0.03 33 0.04
March-13 1,420,886.14 2,286,220.66 0.02 32 0.04
May-13 929,778.61 1,496,023.51 0.01 16 0.02
June-13 106,127.23 170,759.82 0.00 3 0.00
January-17 312,633.66 503,030.83 0.00 7 0.01
November-17 190,451.68 306,438.74 0.00 2 0.00
December-17 280,522.37 451,363.43 0.00 4 0.01
January-18 4,261,314.16 6,856,499.05 0.06 78 0.10
February-18 229,186.53 368,763.52 0.00 6 0.01
March-18 2,772,543.64 4,461,051.71 0.04 47 0.06
April-18 48,571.43 78,151.94 0.00 1 0.00
May-18 3,724,106.77 5,992,126.74 0.05 62 0.08
June-18 689,694.03 1,109,724.91 0.01 9 0.01
September-18 82,856.70 133,317.30 0.00 1 0.00
---------------- ----------------- ---------- --------- ----------
Total 7,240,673,223.15 11,650,318,943.12 100.00 79,794 100.00
================ ================= ========== ========= ==========
REPAYMENT TERMS
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
TYPE OF REPAYMENT BALANCE BALANCE MORTGAGE
PLAN ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- -------------------- ----------------- ----------------- ---------- --------- ----------
Endowment 2,566,414,391.76 4,129,387,597.36 17.13% 36,939 17.94
Interest Only 1,629,288,310.55 2,621,541,931.70 10.87% 14,808 7.19
Pension Policy 70,753,037.19 113,842,376.81 0.47% 735 0.36
Personal Equity Plan 112,435,806.32 180,910,388.29 0.75% 1,601 0.78
Repayment 10,604,534,590.70 17,062,807,064.68 70.78% 151,789 73.73
----------------- ----------------- ---------- --------- ----------
Total 14,983,426,136.52 24,108,489,358.84 100.00 205,872 100.00
================= ================= ========== ========= ==========
113
CHARACTERISTICS OF UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET
The housing market in the UK is primarily one of owner-occupied housing. The
remaining occupants are in some form of public/, private landlord or social
ownership.
At June 30, 2003 mortgage loans outstanding in the UK amounted to
approximately [GBP]713 billion, with banks and building societies holding 68%
and 18% of the total respectively, according to the Council of Mortgage
Lenders. During the first six months of 2003, outstanding mortgage debt grew by
13.9%, well above the long term average of 7.3% between 1992 and the first six
months of 2003.
Set out in the following tables are certain characteristics of the United
Kingdom mortgage market.
CPR RATES
The quarterly constant payment rate ("CPR") data presented below was
calculated by dividing the amount of scheduled and unscheduled repayments of
mortgage loans in a quarter by the quarterly balance of mortgage loans
outstanding for building societies in the UK. These quarterly scheduled and
unscheduled repayment rates were then annualized using standard methodology.
You should note that the CPR data presented below for the UK residential
mortgage market understates the seller's historical CPR data for mortgage loans
originated by the seller (and therefore the expected CPR for mortgage loans
included in the mortgages trust) as the data presented below is based upon a
percentage of the total UK residential mortgage market which has been
increasing over time, and as the seller's CPR data (which calculates the amount
of scheduled and unscheduled repayments on a monthly basis) includes the effect
of product switches, which results in a higher CPR.
The following table shows the actual annualized CPR experience of the
mortgage loans that have been assigned to the mortgages trust between March 26,
2001 and July 31, 2003. You should note that the table covers a relatively
short period of time and that the actual annualized CPR experience of the
seller may differ over time from the data presented below. Since the seller may
assign new mortgage loans and their related security to the mortgages trustee
after the closing date, you should note that the actual annualized CPR
experience of any new mortgage loans assigned to the mortgages trustee after
the closing date may also differ from the data presented below.
MONTH ANNUALIZED CPR MONTH ANNUALIZED CPR
- -------------- -------------- -------------- --------------
April 2001 25.94% June 2002 33.57%
May 2001 27.72% July 2002 44.13%
June 2001 28.23% August 2002 44.89%
July 2001 32.05% September 2002 38.65%
August 2001 31.87% October 2002 42.50%
September 2001 28.84% November 2002 44.26%
October 2001 29.28% December 2002 43.42%
November 2001 28.40% January 2003 37.28%
December 2001 27.76% February 2003 48.30%
January 2002 31.34% March 2003 44.60%
February 2002 33.33% April 2003 44.77%
March 2002 27.52% May 2003 49.23%
April 2002 41.78% June 2003 48.24%
May 2002 41.90% July 2003 44.96%
114
Over the past 40 years, quarterly CPR experienced in respect of residential
mortgage loans made by building societies have been between 9.5% and 14.0% for
approximately 78% of that time.
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE
QUARTERS QUARTERS QUARTERS QUARTERS QUARTERS
OVER 40 OVER 40 OVER 40 OVER 40 OVER 40
CPR (%) YEARS CPR (%) YEARS CPR (%) YEARS CPR (%) YEARS CPR (%) YEARS
- --------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
7.0 0 10.5 18 14.0 6 17.5 1 21.0 0
7.5 0 11.0 18 14.5 2 18.0 1 21.5 0
8.0 4 11.5 16 15.0 3 18.5 1 22.0 0
8.5 1 12.0 20 15.5 2 19.0 1 22.5 2
9.0 6 12.5 13 16.0 4 19.5 2
9.5 9 13.0 11 16.5 2 20.0 2
10.0 10 13.5 5 17.0 1 20.5 1
Source of repayment and outstanding mortgage information: 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%. The lowest level was 7.94% in June and
March of 1974. The highest 12 month rolling average CPR over the same 40 year
period was 21.07%. The lowest was 8.84%.
12 MONTH 12 MONTH
CPR RATE FOR THE ROLLING CPR RATE FOR THE ROLLING
DATE QUARTER (%) AVERAGE (%) DATE QUARTER (%) AVERAGE (%)
- -------------- ---------------- ----------- ------------- ---------------- -----------
March 1963 10.40 N/A June 1963 11.75 N/A
September 1963 12.70 N/A December 1963 13.36 12.05
March 1964 11.29 12.27 June 1964 12.30 12.41
September 1964 12.68 12.41 December 1964 12.82 12.27
March 1965 11.12 12.23 June 1965 10.80 11.86
September 1965 10.66 11.35 December 1965 11.51 11.02
March 1966 10.45 10.85 June 1966 11.39 11.00
September 1966 11.71 11.27 December 1966 10.60 11.04
March 1967 9.49 10.80 June 1967 10.95 10.69
September 1967 11.65 10.67 December 1967 11.51 10.90
March 1968 10.18 11.07 June 1968 10.57 10.98
September 1968 10.91 10.79 December 1968 10.24 10.48
March 1969 9.15 10.22 June 1969 10.23 10.13
September 1969 10.65 10.07 December 1969 10.01 10.01
March 1970 8.92 9.95 June 1970 10.68 10.06
September 1970 11.60 10.30 December 1970 11.46 10.66
March 1971 9.33 10.76 June 1971 11.44 10.96
September 1971 12.17 11.10 December 1971 12.30 11.31
March 1972 10.72 11.66 June 1972 11.81 11.75
September 1972 12.24 11.77 December 1972 11.74 11.63
March 1973 10.11 11.48 June 1973 10.54 11.16
September 1973 11.06 10.86 December 1973 10.55 10.56
March 1974 7.94 10.02 June 1974 7.94 9.37
September 1974 9.58 9.01 December 1974 10.83 9.07
March 1975 9.96 9.58 June 1975 12.23 10.65
September 1975 12.76 11.44 December 1975 12.21 11.79
March 1976 10.10 11.82 June 1976 11.48 11.64
September 1976 11.86 11.41 December 1976 11.70 11.28
March 1977 8.00 10.76 June 1977 9.84 10.35
September 1977 12.13 10.42 December 1977 12.66 10.66
March 1978 11.30 11.48 June 1978 12.19 12.07
September 1978 11.71 11.97 December 1978 11.19 11.60
March 1979 9.33 11.11 June 1979 10.12 10.59
115
12 MONTH 12 MONTH
CPR RATE FOR THE ROLLING CPR RATE FOR THE ROLLING
DATE QUARTER (%) AVERAGE (%) DATE QUARTER (%) AVERAGE (%)
- -------------- ---------------- ----------- ------------- ---------------- -----------
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
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 22.41 20.01 December 2002 22.16 20.80
March 2003 19.52 21.00 June 2003 20.19 21.07
Source of repayment and outstanding mortgage information: Council of Mortgage
Lenders
You should also note that the prior two CPR tables present the historical
CPR experience only of building societies in the UK. During the late 1990's, a
number of former building societies (including Northern Rock) converted to
stock form UK banks, and the CPR experience of these banks is therefore not
included in the foregoing building society CPR data. According to the Council
of Mortgage Lenders, the 12 month rolling average
116
CPR experience of banks during 1998 was 14.85%, during 1999 was 16.08%, during
2000 was 15.34%, during 2001 was 18.69%, during 2002 was 21.81% and during the
first six months of 2003 was 22.94%.
REPOSSESSION RATE
The repossession rate of residential mortgaged properties in the UK has
steadily declined since 1991:
YEAR REPOSSESSIONS (%) YEAR REPOSSESSIONS (%) YEAR REPOSSESSIONS (%)
- --------- ----------------- ---- ----------------- ---- -----------------
1982 0.11 1989 0.17 1996 0.40
1983 0.12 1990 0.47 1997 0.31
1984 0.17 1991 0.77 1998 0.31
1985 0.25 1992 0.69 1999 0.27
1986 0.30 1993 0.58 2000 0.21
1987 0.32 1994 0.47 2001 0.16
1988 0.22 1995 0.47 2002 0.11
Source: Council of Mortgage Lenders
In January 2003, the Council of Mortgage Lenders published arrears figures
for the year ended 2002, which showed that repossessions in the United Kingdom
had fallen to a
20-year low. No assurance can be given as to whether, or for how long, this
downward trend will continue.
ARREARS INFORMATION
The percentage of mortgage loans in arrears in the UK has steadily declined
since 1993:
ARREARS 6-12 ARREARS 12 ARREARS 6-12 ARREARS 12
YEAR MONTHS (%) MONTHS + (%) YEAR MONTHS (%) MONTHS + (%)
- --------- ------------ ------------ ----- ------------ ------------
1985 0.74 0.17 1994 1.28 1.12
1986 0.64 0.16 1995 1.20 0.81
1987 0.67 0.18 1996 0.95 0.63
1988 0.50 0.12 1997 0.69 0.42
1989 0.73 0.15 1998 0.68 0.32
1990 1.31 0.38 1999 0.52 0.27
1991 1.87 0.93 2000 0.43 0.19
1992 2.07 1.48 2001 0.38 0.18
1993 1.62 1.50 2002 0.30 0.15
20031 0.29 0.13
1 Half year to June
Source: Council of Mortgage Lenders
The arrears table above shows the number of mortgage loans in arrears at the
end of the period as a percentage of the total number of mortgage loans
outstanding at the end of the period.
HOUSE PRICE TO EARNINGS RATIO
The following table shows the ratio for any one year of the average annual
value of houses (sourced prior to and including 1993 from the DETR/BSA 5%
Sample Survey of Building Society Mortgage Completions and sourced from and
including 1994 from the DETR/CML Survey of Mortgage Lenders) compared to the
average annual salary in the UK as calculated from the weekly earnings in April
of the same year of male employees whose earnings were not affected by their
absence from work (as recorded by the Department for Education and Employment).
While this is a good indication of house affordability, it does not take into
account the fact that the majority of households have more than one income to
support a mortgage loan.
117
YEAR HOUSE PRICE TO EARNINGS RATIO YEAR HOUSE PRICE TO EARNINGS RATIO
- --------- ----------------------------- ---- -----------------------------
1988 4.56 1996 3.47
1989 5.05 1997 3.64
1990 4.54 1998 3.84
1991 4.17 1999 4.08
1992 3.79 2000 4.47
1993 3.58 2001 4.64
1994 3.56 2002 5.24
1995 3.47
Source: Council of Mortgage Lenders.
HOUSE PRICE INDEX
UK residential property prices, as measured by the Nationwide House Price
Index and Halifax House Price Index (collectively the "HOUSING INDICES"), have
generally followed the UK Retail Price Index over an extended period.
Nationwide is a UK building society and Halifax is a UK bank.
The housing market has been through three economic cycles since 1976. High
year to year increases in the Housing Indices occurred in the late 1970s and
late 1980s with greatest decrease in the early 1990s. The Housing Indices have
generally increased since 1996.
UK RETAIL NATIONWIDE HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------- ----------------- -----------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------- ------- -------- ------- -------- ------- --------
1973 Q4 N/A N/A 19.5 N/A N/A N/A
1974 Q1 N/A N/A 19.8 N/A N/A N/A
1974 Q2 N/A N/A 20.0 N/A N/A N/A
1974 Q3 N/A N/A 20.2 N/A N/A N/A
1974 Q4 N/A N/A 20.4 4.4 N/A N/A
1975 Q1 31.5 N/A 20.7 4.5 N/A N/A
1975 Q2 34.8 N/A 21.4 6.8 N/A N/A
1975 Q3 35.6 N/A 21.9 7.9 N/A N/A
1975 Q4 37.0 N/A 22.5 10.1 N/A N/A
1976 Q1 38.2 19.3 23.0 10.3 N/A N/A
1976 Q2 39.5 12.7 23.4 9.0 N/A N/A
1976 Q3 40.7 13.4 23.9 8.9 N/A N/A
1976 Q4 42.6 14.1 24.4 7.8 N/A N/A
1977 Q1 44.6 15.5 24.8 7.4 N/A N/A
1977 Q2 46.5 16.3 25.3 7.8 N/A N/A
1977 Q3 47.1 14.6 25.9 7.8 N/A N/A
1977 Q4 47.8 11.5 26.2 7.4 N/A N/A
1978 Q1 48.6 8.6 27.6 10.8 N/A N/A
1978 Q2 50.0 7.3 28.9 13.3 N/A N/A
1978 Q3 50.8 7.6 31.7 20.4 N/A N/A
1978 Q4 51.8 8.0 33.6 24.6 N/A N/A
1979 Q1 53.4 9.4 35.5 25.3 N/A N/A
1979 Q2 55.7 10.8 38.1 27.5 N/A N/A
1979 Q3 59.1 15.1 40.9 25.3 N/A N/A
1979 Q4 60.7 15.9 43.8 26.7 N/A N/A
1980 Q1 63.9 18.0 45.2 24.3 N/A N/A
1980 Q2 67.4 19.1 46.6 20.2 N/A N/A
1980 Q3 68.5 14.8 47.1 14.3 N/A N/A
1980 Q4 69.9 14.1 46.9 6.7 N/A N/A
1981 Q1 72.0 11.9 47.3 4.5 N/A N/A
1981 Q2 75.0 10.7 48.1 3.2 N/A N/A
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UK RETAIL NATIONWIDE HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------- ----------------- -----------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------- ------- -------- ------- -------- ------- --------
1981 Q3 76.3 10.8 48.3 2.3 N/A N/A
1981 Q4 78.3 11.3 47.5 1.3 N/A N/A
1982 Q1 79.4 9.8 48.2 1.9 N/A N/A
1982 Q2 81.9 8.8 49.2 2.4 N/A N/A
1982 Q3 81.9 7.1 49.8 3.2 N/A N/A
1982 Q4 82.5 5.2 51.0 7.2 N/A N/A
1983 Q1 83.1 4.6 52.5 8.4 97.1 N/A
1983 Q2 84.8 3.5 54.6 10.4 99.4 N/A
1983 Q3 86.1 5.0 56.2 12.1 101.5 N/A
1983 Q4 86.9 5.2 57.1 11.2 102.3 N/A
1984 Q1 87.5 5.2 59.2 12.0 104.1 7.0
1984 Q2 89.2 5.1 61.5 11.9 106.0 6.4
1984 Q3 90.1 4.5 62.3 10.4 108.4 6.6
1984 Q4 90.9 4.5 64.9 12.8 111.0 8.2
1985 Q1 92.8 5.9 66.2 11.2 113.5 8.6
1985 Q2 95.4 6.7 68.2 10.3 115.4 8.5
1985 Q3 95.4 5.7 69.2 10.5 116.8 7.5
1985 Q4 96.1 5.6 70.7 8.5 120.6 8.3
1986 Q1 96.7 4.1 71.1 7.1 124.0 8.8
1986 Q2 97.8 2.5 73.8 8.0 128.1 10.4
1986 Q3 98.3 3.0 76.3 9.7 132.2 12.4
1986 Q4 99.6 3.6 79.0 11.1 136.8 12.6
1987 Q1 100.6 4.0 81.6 13.7 142.3 13.8
1987 Q2 101.9 4.1 85.8 15.0 146.7 13.6
1987 Q3 102.4 4.1 88.6 15.0 151.5 13.6
1987 Q4 103.3 3.6 88.5 11.4 158.0 14.4
1988 Q1 104.1 3.4 90.0 9.8 167.0 16.0
1988 Q2 106.6 4.5 97.6 13.0 179.4 20.1
1988 Q3 108.4 5.7 108.4 20.1 197.4 26.5
1988 Q4 110.3 6.6 114.2 25.5 211.8 29.3
1989 Q1 112.3 7.6 118.8 27.8 220.7 27.9
1989 Q2 115.4 7.9 124.2 24.1 226.1 23.1
1989 Q3 116.6 7.3 125.2 14.4 225.5 13.3
1989 Q4 118.8 7.4 122.7 7.2 222.5 4.9
1990 Q1 121.4 7.8 118.9 0.1 223.7 1.4
1990 Q2 126.7 9.3 117.7 -5.4 223.3 -1.2
1990 Q3 129.3 10.3 114.2 -9.2 222.7 -1.2
1990 Q4 129.9 8.9 109.6 -11.3 223.0 0.2
1991 Q1 131.4 7.9 108.8 -8.8 223.1 -0.3
1991 Q2 134.1 5.7 110.6 -6.2 221.9 -0.6
1991 Q3 134.6 4.0 109.5 -4.2 219.5 -1.4
1991 Q4 135.7 4.4 107.0 -2.4 217.7 -2.4
1992 Q1 136.7 4.0 104.1 -4.4 213.2 -4.5
1992 Q2 139.3 3.8 105.1 -5.1 208.8 -6.1
1992 Q3 139.4 3.5 104.2 -5.0 206.9 -5.9
1992 Q4 139.2 2.5 100.1 -6.7 199.5 -8.7
1993 Q1 139.3 1.9 100.0 -4.0 199.6 -6.6
1993 Q2 141.0 1.2 103.6 -1.4 201.7 -3.5
1993 Q3 141.9 1.8 103.2 -1.0 202.6 -2.1
1993 Q4 141.9 1.9 101.8 1.7 203.5 2.0
1994 Q1 142.5 2.3 102.4 2.4 204.6 2.5
1994 Q2 144.7 2.6 102.5 -1.1 202.9 0.6
1994 Q3 145.0 2.2 103.2 0.0 202.7 0.0
1994 Q4 146.0 2.8 104.0 2.1 201.9 -0.8
1995 Q1 147.5 3.4 101.9 -0.5 201.8 -1.4
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UK RETAIL NATIONWIDE HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------- ----------------- -----------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------- ------- -------- ------- -------- ------- --------
1995 Q2 149.8 3.5 103.0 0.5 199.3 -1.8
1995 Q3 150.6 3.8 102.4 -0.8 197.8 -2.4
1995 Q4 150.7 3.2 101.6 -2.3 199.2 -1.3
1996 Q1 151.5 2.7 102.5 0.6 202.1 0.1
1996 Q2 153.0 2.1 105.8 2.7 206.7 3.6
1996 Q3 153.8 2.1 107.7 5.1 208.8 5.4
1996 Q4 154.4 2.4 110.1 8.0 213.9 7.1
1997 Q1 155.4 2.5 111.3 8.3 216.7 7.0
1997 Q2 157.5 2.9 116.5 9.6 220.2 6.3
1997 Q3 159.3 3.5 121.2 11.8 222.6 6.4
1997 Q4 160.0 3.6 123.3 11.4 225.4 5.2
1998 Q1 160.8 3.4 125.5 12.0 228.4 5.3
1998 Q2 163.4 3.7 130.1 11.0 232.1 5.3
1998 Q3 164.4 3.2 132.4 8.8 234.8 5.3
1998 Q4 164.4 2.7 132.3 7.0 237.2 5.1
1999 Q1 164.1 2.0 134.6 7.0 238.6 4.4
1999 Q2 165.6 1.3 139.7 7.1 245.5 5.6
1999 Q3 166.2 1.1 144.4 8.6 255.5 8.4
1999 Q4 167.3 1.7 148.9 11.8 264.1 10.7
2000 Q1 168.4 2.6 155.0 14.1 273.1 13.5
2000 Q2 171.1 3.3 162.0 14.8 272.8 10.5
2000 Q3 171.7 3.3 161.5 11.2 275.9 7.7
2000 Q4 172.2 2.9 162.8 9.0 278.6 5.3
2001 Q1 172.2 2.2 167.5 7.8 281.7 3.1
2001 Q2 174.4 1.9 174.8 7.6 293.2 7.2
2001 Q3 174.6 1.7 181.6 11.8 302.4 9.2
2001 Q4 173.4 0.7 184.6 12.5 311.8 11.3
2002 Q1 174.5 1.3 190.2 12.7 327.3 15.0
2002 Q2 176.2 1.0 206.5 16.6 343.8 15.9
2002 Q3 177.6 1.7 221.1 19.7 366.9 19.3
2002 Q4 178.5 2.9 231.3 22.6 394.4 23.5
2003 Q1 179.9 3.0 239.3 22.9 405.6 21.4
2003 Q2 181.3 2.9 250.1 19.2 418.9 19.8
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.
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THE ADMINISTRATOR AND THE ADMINISTRATION AGREEMENT
THE ADMINISTRATOR
The mortgages trustee, the seller and Funding have appointed Northern Rock
plc under the terms of the administration agreement as the initial
administrator of the mortgage loans. The administrator performs the day-to-day
servicing of the mortgage loans through its retail branches, mortgage service
centers and telephone banking and operations centers. The administrator will
continue to administer other mortgage loans in addition to those mortgage loans
included in the mortgage portfolio. The administrator's registered office is
Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL, United Kingdom.
This section describes the administrator's procedures in relation to
mortgage loans generally. A description of the administrator's obligations
under the administration agreement follows in the next section. The
administrator is continually reviewing the way in which it conducts its
mortgage loan administration business in order to ensure that it remains up-to-
date and cost effective in a competitive market, and the administrator may
therefore change its administration processes from time to time.
ADMINISTRATION OF MORTGAGE LOANS
Administration procedures include monitoring compliance with and
administering the mortgage loan features and facilities applicable to the
mortgage loans, responding to customer inquiries and management of mortgage
loans in arrears. See "-- THE ADMINISTRATION AGREEMENT".
Under the terms and conditions of the mortgage loans, borrowers generally
must pay the monthly payment required under the terms and conditions of the
mortgage loans on each monthly payment due date. Interest accrues in accordance
with the terms and conditions of each mortgage loan and is collected from
borrowers monthly.
In the case of variable rate mortgage loans, the administrator determines
the standard variable rate from time to time. In the case of variable rate
mortgage loans which are assigned to the mortgages trustee, except in certain
limited circumstances, the administrator will continue to determine the
standard variable rate applicable to such mortgage loans on behalf of the
mortgages trustee, Funding and/or the security trustee. The administrator will
take all necessary steps under the mortgage loans to notify borrowers of any
change in the interest rates applicable to the mortgage loans (whether or not
due to a change in the standard variable rate) and will continue to notify
borrowers of any such change under the terms of the administration agreement.
Payments of interest and, in the case of repayment mortgage loans,
principal, are payable monthly in advance. Where a borrower defaults in the
payment of interest and/or principal under a mortgage loan, the administrator
will follow the usual arrears procedures described under "-- ARREARS AND
DEFAULT PROCEDURES" below.
ARREARS AND DEFAULT PROCEDURES
The administrator collects all payments due under or in connection with
mortgage loans in accordance with its administration procedures in force from
time to time, but having regard to the circumstances of the relevant borrower
in each case. In accordance with standard market practice in the UK mortgage
loan servicing business, the administrator identifies a mortgage loan as being
"IN ARREARS" when, on any due date, the overdue amounts which were due on
previous due dates equal, in the aggregate, one or more full monthly payments.
In making an arrears determination, the administrator calculates as of the date
of determination the difference between:
121
* the sum of all monthly payments that were due and payable by a
borrower on any due date up to that date of determination (less the
aggregate amount of all authorized underpayments made by such
borrower up to such date of determination); and
* the sum of all payments actually made by that borrower up to that
date of determination.
The administrator will determine that a mortgage loan is in arrears if the
result arrived at by dividing that difference (if any) by the amount of the
required monthly payment equals or exceeds 1. A mortgage loan will continue to
be in arrears for each calendar month in which the result of the foregoing
arrears calculation equals or exceeds 1, which result means that the borrower
has missed payments that in the aggregate equal or exceed one monthly payment,
and subsequent payments by that borrower (if any) have not reduced the amount
of missed payments to less than one monthly payment. As the administrator
determines its arrears classification based upon the number of full monthly
payments that have been missed by a borrower, a borrower that has missed
payments that in the aggregate equal or exceed 2 monthly payments (but for
which the aggregate of missed payments is less than 3 monthly payments) would
be classified by the administrator as being between 2-3 months in arrears, and
so on. For example, suppose a borrower has made four monthly payments (either
in consecutive months or throughout any period of time) each in an amount less
than the required monthly amount, and the difference, for the purposes of
arrears calculation, between the sum of the payments due and payable by that
borrower and the sum of the payments actually made by that borrower (that
difference then divided by that borrower's required monthly payment) is less
than 1. The administrator would not classify that borrower as being in arrears.
However, if that borrower makes another payment (for the purposes of our
example, on the payment date in June 2003) that is less than the required
monthly amount and which deficient payment, when aggregated with that
borrower's prior deficient payments, results in the foregoing arrears
calculation equaling or exceeding 1, that borrower will be classified as being
one month in arrears as of July 1, 2003. Furthermore, if the result of the
foregoing arrears calculation continues to equal or exceed 1 (but remains less
than 2) until August 2003, that borrower will continue to be classified as
being one month in arrears during that time period. The administrator will not
classify the borrower as being two months in arrears until the beginning of the
month following the monthly payment date in which the result of the arrears
calculation equals or exceeds 2.
This formula that the administrator uses to determine arrears means that
there may be mortgage loans in the mortgage portfolio on which borrowers have
paid less than the monthly payment due, but which have not been classified as
being in arrears, as the aggregate of the amount of deficient payments does not
equal or exceed one monthly payment. This also means that there may be a
significant period of time between the due date on which a borrower pays less
than the monthly payment due on that due date and the date that the aggregate
amount of those deficient payments equals or exceeds one monthly payment, at
which time the administrator will classify that mortgage loan as being in
arrears. In addition, there may be a significant period of time between the
classification of a borrower as being, for example, one month in arrears, and
(assuming the borrower continues to make deficient monthly payments) the time
at which those deficient payments in the aggregate result in the administrator
classifying the borrower as being two months in arrears.
The arrears are reported at each calendar month end. After the arrears are
first reported the borrower is contacted and asked for payment of the arrears.
The administrator will continue to contact the borrower asking for payment of
the arrears. The administrator classifies a mortgage loan that is in arrears as
"NON-PERFORMING" if the related borrower has not made any payment within any of
the three consecutive calendar months prior to the date of determination.
122
In the case of any non-flexible mortgage loan and subject to the terms and
conditions of the mortgage loan, up to three months of arrears are capitalized
upon receipt of three consecutive full monthly payments and arrears in excess
of three months are capitalized upon receipt of six consecutive full monthly
payments. In the case of any flexible mortgage loan and subject to the terms
and conditions of the mortgage loan, arrears are generally capitalized from the
date of the unauthorized underpayment.
In seeking to control and manage arrears, the administrator from time to
time enters into arrangements with borrowers regarding the arrears, including:
* 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.
The administrator may vary any of these arrangements from time to time at
its discretion, the primary aim being to rehabilitate the borrower and recover
the arrears.
Legal proceedings do not usually commence until the arrears are equal to at
least three times the monthly payment then due. However, in many cases legal
proceedings may commence later than this. Once legal proceedings have
commenced, the administrator may send further letters to the borrower
encouraging the borrower to enter into discussions to pay the arrears. The
administrator may still enter into an arrangement with a borrower at any time
prior to a court hearing, or it may adjourn a court hearing. If the
administrator applies to the court for an order for possession following a
default of the borrower, the court has discretion as to whether it will grant
the order requiring the borrower to vacate the mortgaged property, and
discretion as to the terms upon which the order is granted. If after the
possession order has been granted the borrower does not voluntarily vacate the
property, then the administrator will be required to request a warrant for
execution by a court officer of the possession order. On average, the
equivalent of 12 monthly payments may have been missed prior to the
administrator obtaining possession, assuming no prior mortgage or the
imposition of defenses. Where a court order for possession is deferred to allow
time for payment and the borrower subsequently defaults in making the payment,
the administrator may take any action it considers appropriate, including
entering into an arrangement with the borrower. In all cases, the administrator
has a duty of care to the borrower to act reasonably.
The administrator has discretion to deviate from these arrears procedures.
In particular, the administrator may deviate from these procedures where a
borrower suffers from a mental or physical infirmity, is deceased or where the
borrower is otherwise prevented from making payment due to causes beyond the
borrower's control. This is the case for both sole and joint borrowers.
After the administrator has been granted possession, the administrator may
take any action it considers appropriate, subject to any fiduciary duties which
the administrator may owe to the borrower, including but not limited to:
* securing, maintaining or protecting the property and putting it
into a suitable condition for sale;
* creating any estate or interest on the property, including a
leasehold;
* disposing of the property (in whole or in parts) or of any interest
in the property, by auction, private sale or otherwise, for a price
it considers appropriate; and
* letting the property for any period of time.
Subject as provided above, the administrator has discretion as to the timing
of any of these actions, including whether to postpone the action for any
period of time. The administrator may also carry out works on the property as
it considers appropriate, including the demolition of the whole or any part of
it.
123
The period between the administrator obtaining possession and sale of a
mortgaged property is generally between three and nine months. However, you
should note that the administrator's ability to exercise its power of sale in
respect of a mortgaged property is dependent upon mandatory legal restrictions
as to notice requirements. In addition, there may be factors outside the
administrator's control, such as whether the borrower contests the sale and the
market conditions at the time of sale, that may affect the length of time
between the administrator's decision to exercise its power of sale and final
completion of the sale.
The administrator will apply the net proceeds of sale of the mortgaged
property against the sums owed by the borrower to the extent necessary to
discharge the mortgage including any accumulated fees and interest. Where those
proceeds are insufficient to cover all amounts owing under the mortgage loan,
the administrator will make a claim under the MIG policy, if appropriate. Where
the funds arising from application of these procedures are insufficient to pay
all amounts owing in respect of a mortgage loan, the funds are applied first in
paying principal, and secondly in paying interest and costs.
At this point the administrator will close the borrower's account. However,
the borrower remains liable for any deficit remaining after the mortgaged
property is sold but before the proceeds of any MIG insurance are applied. The
administrator may pursue the borrower to the extent of any deficiency resulting
from the sale if the administrator deems it appropriate to do so.
These arrears and security enforcement procedures may change over time as a
result of a change in the administrator's business practices, legislative or
regulatory changes or business codes of practice.
ARREARS EXPERIENCE
The following table summarizes, in respect of Northern Rock's overall
mortgage portfolio, Northern Rock's experience administering mortgage loans in
arrears and its repossession experience for residential mortgage loans that
were originated by the seller. The information set forth below includes
information in respect of Northern Rock's experience in administering mortgage
loans secured by mortgaged properties located in England, Wales and Scotland,
whereas the mortgage portfolio only includes mortgage loans secured by
mortgaged properties located in England and Wales. However, Northern Rock has
not experienced any significant variation in its arrears and repossession
experience in respect of mortgage loans secured by mortgaged properties located
in Scotland compared with mortgage loans secured by mortgaged properties
located in England and Wales.
The mortgage loans used for statistical purposes in the table below are
administered in accordance with Northern Rock's administration policies. You
should note the method by which Northern Rock classifies mortgage loans as
being in arrears, which is described under "-- ARREARS AND DEFAULT PROCEDURES",
and which is important in helping you to understand Northern Rock's arrears and
repossession experience as set forth in the following table.
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DECEMBER 31, 1996(1) DECEMBER 31, 1997(1) DECEMBER 31, 1998(1) DECEMBER 31, 1999(1)
---------------------- ---------------------- ---------------------- ----------------------
[GBP] US$ % [GBP] US$ % [GBP] US$ % [GBP] US$ %
(MLS) (MLS) (MLS) (MLS) (MLS) (MLS) (MLS) (MLS)
Current balance 10,515 16,919 n/a 12,119 19,500 n/a 13,720 22,076 n/a 15,524 24,978 n/a
Number of mortgage loans 292,222 292,222 n/a 315,184 315,184 n/a 327,088 327,088 n/a 338,149 338,149 n/a
outstanding
Current balance of loans in
arrears
1 to 2 months 231.3 372.16 2.20 283.4 455.99 2.34 244.4 393.24 1.78 247.5 398.23 1.59
2 to 3 months 82.0 131.94 0.78 71.2 114.56 0.59 101.8 163.80 0.74 62.5 100.56 0.40
3 to 6 months 93.5 150.44 0.89 78.1 125.66 0.64 93.7 150.76 0.68 71.7 115.37 0.46
6 to 12 months 83.5 134.35 0.79 56.3 90.59 0.46 51.2 82.38 0.37 36.0 57.92 0.23
Over 12 months 96.9 155.91 0.92 45.1 72.57 0.37 37.5 60.34 0.27 21.3 34.27 0.14
Total current balance of 587.2 944.81 5.58 534.1 859.37 4.41 528.6 850.52 3.85 439.0 706.36 2.83
mortgage loans in
arrears
Number of mortgage loans
outstanding in arrears
1 to 2 months 6,136 6,136 2.10 6,922 6,922 2.20 6,040 6,040 1.85 5,428 5,428 1.61
2 to 3 months 2,247 2,247 0.77 1,793 1,793 0.57 2,579 2,579 0.79 1,470 1,470 0.43
3 to 6 months 2,485 2,485 0.85 1,911 1,911 0.61 2,269 2,269 0.69 1,749 1,749 0.52
6 to 12 months 2,005 2,005 0.69 1,322 1,322 0.42 1,174 1,174 0.36 870 870 0.26
Over 12 months 2,104 2,104 0.72 940 940 0.30 756 756 0.23 447 447 0.13
Total number of mortgage 14,977 14,977 5.13 12,888 12,888 4.09 12,818 12,818 3.92 9,964 9,964 2.95
loans outstanding in
arrears
Repossessions during year 1,133 1,133 0.39 956 956 0.30 875 875 0.27 763 763 0.23
Amount of mortgage loan 14 22.53 n/a 14 22.53 n/a 10.8 17.38 n/a 8.5 13.68 n/a
losses
Mortgage loan losses as % 0.13% 0.13% n/a 0.12% 0.12% n/a 0.08% 0.08% n/a 0.05% 0.05% n/a
of total current balance
DECEMBER 31, 2000(1) DECEMBER 31, 2001(1) DECEMBER 31, 2002(1) JUNE 30, 2003(1)
---------------------- ---------------------- ---------------------- ----------------------
[GBP] US$ % [GBP] US$ % [GBP] US$ % [GBP] US$ %
(MLS) (MLS) (MLS) (MLS) (MLS) (MLS) (MLS) (MLS)
Current balance 17,858 28,734 n/a 21,639 34,817 n/a 28,955 46,589 n/a 32,697 51,491 n/a
Number of mortgage loans 367,963 367,963 n/a 414,023 414,023 n/a 489,690 489,690 n/a 513,307 513,307 n/a
outstanding
Current balance of loans in
arrears
1 to 2 months 218.2 351.09 1.22 231.98 373.26 1.07 271.07 436.15 0.94 257.60 405.67 0.79
2 to 3 months 77.1 124.05 0.43 78.08 125.63 0.36 104.94 168.85 0.36 103.70 163.31 0.32
3 to 6 months 69.3 111.50 0.39 74.11 119.24 0.34 96.55 155.35 0.33 108.50 170.87 0.33
6 to 12 months 34.8 55.99 0.19 36.17 58.19 0.17 32.60 52.45 0.11 36.40 57.32 0.11
Over 12 months 13.2 21.24 0.07 9.27 14.92 0.04 7.39 11.89 0.03 6.10 9.61 0.02
Total current balance of 412.6 663.88 2.31 429.60 691.24 1.99 512.55 824.70 1.77 512.30 806.77 1.57
mortgage loans in
arrears
Number of mortgage loans
outstanding in arrears
1 to 2 months 5,104 5,104 1.39 4,861 4,861 1.17 4,557 4,557 0.93 4,524 4,524 0.88
2 to 3 months 1,896 1,896 0.52 1,694 1,694 0.41 2,150 2,150 0.44 1,903 1,903 0.37
3 to 6 months 1,601 1,601 0.44 1,598 1,598 0.39 1,946 1,946 0.40 2,020 2,020 0.39
6 to 12 months 800 800 0.22 736 736 0.18 658 658 0.13 712 712 0.14
Over 12 months 290 290 0.08 191 191 0.05 133 133 0.03 115 115 0.02
Total number of mortgage 9,691 9,691 2.63 9,080 9,080 2.19 9,444 9,444 1.93 9,274 9,274 1.81
loans outstanding in
arrears
Repossessions during year 620 620 0.17 658 658 0.16 573 573 0.06 234 234 0.03
Amount of mortgage loan 7 11.26 n/a 5.57 8.96 n/a 3.72 5.99 n/a 0.42 0.66 n/a
losses
Mortgage loan losses as % 0.04% 0.04% n/a 0.03% 0.03% n/a 0.01% 0.01% n/a 0.001% 0.001% n/a
of total current balance
Provided by Northern Rock plc
(1) Year ended December 31 or six months ended June 30, as applicable.
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Repossessions expresses the number of mortgaged properties that the
administrator has taken into possession during the period, as a percentage of
the number of mortgage loans outstanding at the end of the period.
There can be no assurance that the arrears and repossession experience with
respect to the mortgage loans comprising the trust property will correspond to
the experience of the administrator's overall mortgage portfolio as set forth
in the foregoing table. The statistics in the preceding table represent only
the arrears and repossession experience for the years presented, whereas the
arrears and repossession experience on the mortgage loans in the trust property
will depend on results obtained over the life of the mortgage loans in the
trust property. The foregoing statistics include mortgage loans with a variety
of payment type, product type and other characteristics that may not correspond
to those of the mortgage loans in the trust property. Moreover, if the property
market experiences an overall decline in property values so that the value of
the properties in the trust falls below the current balances of the mortgage
loans comprising the overall pool, the actual rates of arrears and
repossessions could be significantly higher than those previously experienced
by the administrator. In addition, other adverse economic conditions, whether
or not they affect property values, may nonetheless affect the timely payment
by borrowers of principal and interest and, accordingly, the rates of arrears,
repossessions and losses with respect to the mortgage loans in the trust
property. You should note that the United Kingdom experienced relatively low
and stable interest rates during the periods covered in the preceding tables.
If interest rates were to rise, it is likely that the rate of arrears and
repossessions likewise would rise.
Northern Rock's level of mortgage arrears has been on a downward trend since
the recession in the UK in the early 1990s. Between June 1996 and December
2000, interest rate increases, and the reduction (and ultimate elimination) of
benefits offered by the Mortgage Interest Relief At Source scheme, have
contributed to slowing that downward trend.
House price inflation has indirectly contributed to the improved arrears
situation by enabling borrowers to sell at a profit if they encounter financial
hardship. Recently, house price inflation has broken through its historical
upward trend line and is expected to moderate. If it does not, then there is
potential for a boom-bust situation similar to that which occurred in the
period from 1988 to 1990, where housing prices rose substantially faster than
inflation as housing turnover increased to record levels. At that time, the UK
economy grew rapidly, which led to falling unemployment and relatively high
rates of real income growth. These fed into higher demand for housing and house
prices rose rapidly. Demand was further increased by changes in taxation
legislation with regard to tax relief on mortgage payments in 1988. When
monetary policy was tightened subsequently (in terms of both "LOCKING IN"
sterling to the European Exchange Rate Mechanism and higher interest rates),
the pace of economic activity first slowed and then turned into recession.
Rising unemployment combined with high interest rates led to a fall in housing
demand and increased default rates and repossessions. The ability of borrowers
to refinance was limited as house prices began to fall and many were in a
position of negative equity (borrowings greater than the resale value of the
property) in relation to their mortgage.
In January 2003, the Council of Mortgage Lenders published arrears figures
for the year ended 2002, which showed that repossessions in the United Kingdom
had fallen to a 20-year low. No assurance can be given as to whether, or for
how long, this downward trend will continue. See "RISK FACTORS -- THE TIMING
AND AMOUNT OF PAYMENTS ON THE MORTGAGE LOANS COULD BE AFFECTED BY VARIOUS
FACTORS WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES".
The performance of Northern Rock's new business and the arrears profiles are
monitored monthly against various triggers. Whenever arrears rise and a trigger
is exceeded the cause is reviewed and acted upon. In a continuing effort to
reduce the level
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of mortgage arrears and to improve collection performance, Northern Rock has
developed behavioral scoring systems to target differing groups of customers in
arrears according to risk.
THE ADMINISTRATION AGREEMENT
The following section describes, in summary, the material terms of the
administration agreement. The description does not purport to be complete and
is subject to the provisions of the administration agreement, a form of which
has been filed as an exhibit to the registration statement of which this
prospectus is a part.
APPOINTMENT
On March 26, 2001, each of the mortgages trustee, Funding and the seller
appointed Northern Rock under the administration agreement to be their agent to
exercise their respective rights, powers and discretions in relation to the
mortgage loans and their related security and to perform their respective
duties in relation to the mortgage loans and their related security. The
security trustee is a party to the administration agreement and has consented
to the appointment. The administrator will continue to administer mortgage
loans which have not been assigned to the mortgages trustee. The administrator
has agreed to administer the mortgage loans assigned to the mortgages trustee
in the same manner as it administers mortgage loans which have not been
assigned to the mortgages trustee but remain on the books of the seller.
Subject to the provisions of the administration agreement, the mortgage
loans, the mortgages and the transaction documents, the administrator has the
power to do or cause to be done any and all things which it reasonably
considers necessary, convenient or incidental to the administration of the
mortgage loans and their related security or the exercise of such rights,
powers and discretions.
The administrator has agreed to comply with any reasonable directions,
orders and instructions which any of the mortgages trustee, Funding or the
seller may from time to time give to it in accordance with the provisions of
the administration agreement (and, in the event of any conflict, those of the
mortgages trustee shall prevail).
The administrator has agreed to administer and service the mortgage loans
and their related security in accordance with:
* the terms and conditions of the mortgage loans and the mortgages;
* the administrator's administration procedures. The administrator's
administration procedures are the administration, arrears and
enforcement policies and procedures from time to time pursuant to
which the administrator administers and enforces mortgage loans and
their related security which are beneficially owned by the seller;
and
* the terms and provisions of the administration agreement.
UNDERTAKINGS BY THE ADMINISTRATOR
Under the administration agreement, the administrator has undertaken, among
other things:
(A) to determine and set the interest rates applicable to the mortgage
loans which have been assigned to the mortgages trustee including
the standard variable rate, except in the limited circumstances set
out in the administration agreement when the mortgages trustee,
Funding and/or the security trustee will be entitled to do so. The
administrator may not at any time, without the prior consent of the
mortgages trustee, Funding and the security trustee, set or
maintain the standard variable rate and other discretionary rates
or margins for mortgage loans which form part of the mortgages
trust at rates which are higher than the then prevailing rates for
mortgage loans which are beneficially owned by the seller outside
the mortgages trust;
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(B) to determine on each payment date, having regard to the aggregate
of:
(1) the income which Funding would expect to receive during the
next succeeding interest period;
(2) the standard variable rate for mortgage loans forming part of
the mortgages trust and the variable mortgage rates in respect
of such mortgage loans which the administrator proposes to set
under the administration agreement; and
(3) all other resources available to Funding including the Funding
reserve fund and amounts standing to the credit of each
issuer's reserve fund and each issuer's liquidity reserve fund,
if any,
whether Funding would receive an amount of income during that loan
interest period which is less than the amount which is the
aggregate of (a) the amount of interest which will be payable by
Funding in order to fund (whether by payment to a swap provider or
otherwise) the amount of interest payable in respect of the class A
notes of the issuer and the highest rated class of the previous
notes issued by each previous issuer (and the highest rated class
of notes issued by each new issuer, if any) and all amounts ranking
higher in priority to such amounts on the payment date falling at
the end of that loan interest period and (b) all other amounts
payable by Funding which rank equally with or in priority to
interest due on the intercompany loan in respect of interest which
is payable by the issuer on the class A notes of the issuer and
interest due on each previous intercompany loan in respect of
interest which is payable by each previous issuer on the highest
rated class of previous notes issued by each previous issuer (and
any new intercompany loan (if any) in respect of interest which is
payable by any new issuer on the highest rated class of notes
issued by each new issuer, if any). If the administrator determines
that there will be a revenue shortfall in the foregoing amounts, it
will give written notice to the mortgages trustee, Funding and the
security trustee, within one London business day of such
determination, of the amount of the revenue shortfall and recommend
the standard variable rate and the other discretionary rates or
margins which would, in the administrator's opinion, need to be set
in relation to the mortgage loans within the mortgages trust in
order for no revenue shortfall to arise, having regard to the
obligations of Funding. If the mortgages trustee, Funding and/or
the security trustee notify the administrator that, having regard
to the obligations of Funding, the standard variable rate and the
other discretionary rates or margins for mortgage loans within the
mortgages trust should be increased, the administrator will take
all steps which are necessary including publishing any notice
required under the mortgage conditions to effect such increase in
those rates or margins. The mortgages trustee, Funding and/or the
security trustee may terminate the authority of the administrator
to set the standard variable rate and the other discretionary rates
or margins applicable to mortgage loans included in the mortgages
trust in certain limited circumstances set out in the
administration agreement including upon the occurrence of any
administrator termination event (as described below), in which case
the mortgages trustee shall set such standard variable rate and the
other discretionary rates or margins;
(C) except as provided in relation to re-fixed mortgage loans, not to
issue to any borrower an offer for a further advance or a product
switch without having received confirmation that the seller has
elected to repurchase the relevant mortgage loan together with its
related security from the seller in accordance with the terms of
the mortgage sale agreement;
(D) sixty days prior to the end of the relevant fixed rate period in
respect of any fixed rate mortgage loan included in the mortgages
trust and on behalf of the mortgages trustee, to offer to re-sell
to the seller all fixed rate mortgage loans which become "RE-FIXED"
during the three month period immediately following the
128
end of the then current fixed rate period. Where any "RE-FIX" takes
place this will constitute a product switch as described above and
if the seller does not repurchase such mortgage loans and their
related security, the administrator will take all steps to set the
existing borrowers' re-fix rate at the higher of the rate
recommended by the administrator (having regard to Funding's
obligations), the rate notified to it by the mortgages trustee and
Funding and the rates notified to it by the trustee or trustees of
any other securitizations of the seller which include fixed rate
mortgage loans;
(E) to take all steps necessary under the mortgage conditions and
applicable law to notify borrowers of each change in interest
rates, whether due to a change in the standard variable rate
(including any such change effected at the request of the mortgages
trustee, Funding and/or the security trustee) or as a consequence
of the mortgage conditions. The administrator will also notify the
mortgages trustee, Funding and the security trustee of any change
in the standard variable rate;
(F) to maintain such records as are necessary to enforce each mortgage
loan and its related security and to keep and maintain, on a loan
by loan basis, records and accounts on behalf of the mortgages
trustee in relation to the mortgage loans;
(G) to keep or cause to be kept the mortgage loan files and title deeds
in safe custody and to the order of the mortgages trustee, Funding
and/or the security trustee and in such a manner that they are
readily identifiable and accessible;
(H) to provide the mortgages trustee, Funding and the security trustee
and their agents with access to the title deeds and mortgage loan
files at all reasonable times;
(I) to assist the cash manager in the preparation of a quarterly report
substantially in the form set out in the cash management agreement
on, among other things, arrears. The administrator will regularly
give to the mortgages trustee and the beneficiaries written details
of mortgage loans that are in arrears;
(J) to take all reasonable steps to collect and recover payments due
under or in respect of the mortgage loans and the related security,
including instituting proceedings and enforcing any relevant
mortgage loan, mortgage or any other related security in accordance
with the seller's administration procedures but having regard to
the circumstances of the relevant borrower in each case; and
(K) to not knowingly fail to comply with any legal requirements in the
performance of its obligations under the administration agreement.
COLLECTION OF PAYMENTS
The administrator has undertaken to ensure that all payments due under the
mortgage loans which are included in the trust property will be made by the
relevant borrower by direct debit or, if such payment is late or borrowers
choose not to pay by direct debit, by check or other means into accounts in the
name of the administrator held with Barclays Bank plc, City Group Office, Percy
Street, Newcastle upon Tyne NE99 1JP and Lloyds TSB Bank plc, City Office,
Bailey Drive, Gillingham Business Park, Kent ME8 0LS (each a "COLLECTION BANK")
and other accounts (each a "COLLECTION ACCOUNT") which the administrator may
utilize from time to time in accordance with the collection bank agreement and
the administration agreement, all of which will be held on trust by the seller.
The administrator has agreed to use its reasonable endeavors to credit any
monthly payment made by a borrower to the relevant collection account within
the following time limits:
* in the case of direct debit payment, by close of business on the
London business day which immediately follows the day on which such
amounts are received;
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* in the case of standing order, by close of business on the second
London business day following the day on which such amounts are
received;
* in the case of payment by cash, transfer payment from another
account of the seller or check where reference to the relevant
borrower is provided or payment made by way of paying-in book, by
close of business on the London business day which immediately
follows the day on which such amounts are received; and
* in the case of any payment by check where a reference to the
relevant borrower is not provided, by close of business on the next
London business day after notification from the relevant collection
bank of the identity of the borrower,
provided, however, that in any event the administrator has agreed to credit
monthly payments made by a borrower to the relevant collection account within
three London business days of receiving that monthly payment.
Payments from borrowers under mortgage loans originated by the seller which
are not intended to be assigned to the mortgages trustee are also paid into and
flow through the collection accounts.
Amounts paid into the collection accounts are held on trust by the
administrator for the relevant beneficiaries including the mortgages trustee.
The trusts in favor of the mortgages trustee are in respect of all amounts
credited to the collection accounts which represent receipts in respect of
mortgage loans which are assigned to the mortgages trustee and included in the
trust property.
The collection accounts are operated by the administrator in accordance with
the collection bank agreement. Under the collection bank agreement, until the
collection banks receive notice from the security trustee that an intercompany
loan enforcement notice has been served or that the appointment of the
administrator has been terminated, each collection bank has agreed to operate
the collection accounts in accordance with the instructions of the
administrator. If the short term, unsecured, unguaranteed and unsubordinated
debt obligations of Barclays Bank plc or Lloyds TSB Bank plc are not rated at
least "A-1+" by Standard & Poor's, "P-1" by Moody's and "F1+" by Fitch, the
administrator will arrange for the transfer of the credit balance on such
accounts to another bank which has the required ratings. The long term and
short term, unsecured, unguaranteed and unsubordinated debt obligations of
Barclays Bank plc and Lloyds TSB Bank plc are rated as of the cut-off date "AA"
and "A-1+" and "AA" and "A-1+", respectively, by Standard & Poor's, "Aa1" and
"P-1" and "Aaa" and "P-1", respectively, by Moody's and "AA+" and "F1+" and
"AA+" and "F1+", respectively, by Fitch. Amounts standing to the credit of the
collection accounts that represent amounts collected in respect of mortgage
loans that have been assigned to the mortgages trust are transferred by the
administrator to the mortgages trustee transaction account every three London
business days.
Amounts standing to the credit of the mortgages trustee transaction account
are transferred (subject to retaining a minimum balance of [GBP]1 in such
account) on a weekly basis by the cash manager to the mortgages trustee GIC
account or, at the cash manager's option, invested in authorized investments,
provided that the yield on those authorized investments expressed as an annual
percentage rate of return is not less than the interest rate on the mortgages
trustee GIC account at the time the investment decision is made. Any amounts
invested in authorized investments, including the interest accrued on such
amounts, are transferred to the mortgages trustee GIC account on the related
distribution date.
In the case of monthly payments which are made by direct debit, the
administrator initially credits the applicable collection account with the full
amount of the direct debit. If an unpaid direct debit is returned in
circumstances where the administrator has credited to the mortgages trustee
transaction account the amount of the monthly payment, the administrator is
permitted to reclaim from the mortgages trustee transaction account the
corresponding amounts previously credited.
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Any amount standing to the credit of the mortgages trustee GIC account
accrues interest at a margin below LIBOR for three-month sterling deposits.
REDEMPTION
Under the administration agreement, the administrator is responsible for
handling the procedures connected with the redemption of mortgage loans and is
authorized to release the relevant title deeds to the person or persons
entitled thereto upon redemption.
FEES
The administrator is entitled to receive a fee for servicing the mortgage
loans. On each distribution date the mortgages trustee pays to the
administrator an administration fee of 0.12% per annum (inclusive of VAT) on
the amount of the Funding share of the trust property as determined on that
distribution date in respect of the then current trust calculation period, but
only to the extent that the mortgages trustee has sufficient funds to pay such
amount in accordance with the mortgages trust allocation of revenue receipts.
The unpaid balance (if any) is carried forward until the next succeeding
distribution date and, if not paid before such time, is payable on the latest
occurring final repayment date of the intercompany loans, or on their earlier
repayment in full by Funding. The administration agreement also provides for
the administrator to be reimbursed for all reasonable out-of-pocket expenses
and charges properly incurred by the administrator in the performance of its
services under the administration agreement.
REMOVAL OR RESIGNATION OF THE ADMINISTRATOR
The appointment of the administrator may be terminated by the mortgages
trustee, Funding or the security trustee immediately upon written notice to the
administrator, on the occurrence of certain events (each an "ADMINISTRATOR
TERMINATION EVENT") including:
* the administrator fails to pay any amount due and payable by it and
such failure is not remedied for a period of 5 London business days
after the administrator becomes aware of the default;
* subject as provided further in the transaction documents, the
administrator fails to comply with any of its other material
obligations under the administration agreement which in the opinion
of the security trustee is materially prejudicial to the interests
of the holders of the notes, the previous notes and any new notes
and such failure is not remedied for a period of 20 days after the
administrator becomes aware of the default;
* if at any time required under any UK mortgage regulatory regime the
administrator fails to obtain the necessary license or regulatory
approval enabling it to continue administering mortgage loans; or
* the occurrence of an insolvency event in relation to the
administrator.
Upon termination of the administrator, the security trustee will agree to
use its reasonable endeavors to appoint a substitute administrator.
In addition, subject to the fulfillment of certain conditions including,
without limitation, that a substitute administrator has been appointed by the
mortgages trustee, Funding and the security trustee (and in the event of
failure to agree, by the security trustee), the administrator may voluntarily
resign by giving not less than 12 months' notice of termination to the
mortgages trustee, Funding and the seller.
Any such substitute administrator (whether appointed upon a termination of
the appointment of, or the resignation of, the administrator) is required to:
* if possible, have experience administering mortgage loans secured
on residential mortgaged properties in England and Wales; and
* enter into an agreement on substantially the same terms as the
provisions of the administration agreement.
131
In addition, the then current ratings (if any) of the notes, the previous
notes or any new notes may not adversely be affected as a result of the
appointment of the substitute administrator, unless otherwise agreed by an
extraordinary resolution of the holders of the relevant class of notes.
Forthwith upon termination of the appointment of the administrator, the
administrator must deliver the title deeds, the mortgage loan files and all
books of account and other records maintained by the administrator relating to
the mortgage loans and/or the related security to, or at the direction of, the
mortgages trustee.
The administration agreement will terminate automatically upon a termination
of the mortgages trust when Funding no longer has any interest in the trust
property.
DELEGATION BY THE ADMINISTRATOR
The administrator may, in some circumstances including with the prior
written consent of the mortgages trustee and Funding and after consultation
with the security trustee, delegate or subcontract the performance of any of
its obligations or duties under the administration agreement. Upon the
appointment of any such delegate or sub-contractor the administrator will
nevertheless remain responsible for the performance of those duties to Funding,
the mortgages trustee and the security trustee.
DELEGATION BY THE SECURITY TRUSTEE TO AN AUTHORIZED THIRD PARTY
Subject as provided in the transaction documents, the security trustee is
entitled pursuant to the administration agreement to delegate certain of its
functions and rights under the transaction documents to one or more authorized
third parties whom the rating agencies have previously confirmed in writing to
the security trustee and the issuer will not result in the ratings on the notes
being downgraded, qualified or withdrawn. The security trustee is obliged to
use reasonable endeavors to procure the appointment of an authorized third
party and in the event of any such appointment is not required to monitor or
supervise the third party's performance and is not responsible for any act or
omission of such third party or for any loss caused thereby.
GOVERNING LAW
The administration agreement is governed by English law.
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ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY
The following section describes, in summary, the material terms of the
mortgage sale agreement. The description does not purport to be complete and is
subject to the provisions of the mortgage sale agreement, a form of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
THE MORTGAGE SALE AGREEMENT
Under the mortgage sale agreement dated March 26, 2001 entered into between
the seller, the mortgages trustee, the security trustee and Funding, the seller
assigned the initial mortgage portfolio together with all related security to
the mortgages trustee. The mortgage sale agreement has been amended and
restated on certain dates subsequent to the initial closing date, and the
seller assigned the further mortgage portfolios and the additional assigned
mortgage portfolio with all related security to the mortgages trustee pursuant
to such amended and restated mortgage sale agreement. In addition to providing
for the assignment of the initial mortgage portfolio, the further mortgage
portfolios and the additional assigned mortgage portfolio and related security,
the mortgage sale agreement also sets out or provides for the following:
* the representations and warranties given by the seller in relation
to the mortgage loans and the related security (and the
representations and warranties to be given by the seller as of each
assignment date in relation to any new mortgage loans and the
related security assigned to the mortgages trustee on that
assignment date);
* the assignment of other mortgage loans and their related security
to the mortgages trust;
* the repurchase of mortgage loans together with their related
security which are subject to a product switch or in respect of
which a further advance is made or where the seller has breached
any of its representations and warranties in respect of such
mortgage loans or their related security;
* the making of re-draws in respect of flexible mortgage loans
contained in the trust property; and
* the circumstances for the transfer of legal title to the mortgage
loans to the mortgages trustee.
THE ADDITIONAL ASSIGNED MORTGAGE PORTFOLIO
The seller assigned to the mortgages trustee on the August 18, 2003
assignment date the additional assigned mortgage portfolio and related
security. The assignment was an equitable assignment only and the transfer of
legal title to the additional assigned mortgage loans and their related
security may not occur or, if it does occur, will not occur until a later date,
as described under "-- TRANSFER OF LEGAL TITLE TO THE MORTGAGES TRUSTEE".
The consideration for the assignment of the additional assigned mortgage
portfolio together with its related security consisted of:
* the corresponding increase in the seller share of the trust
property;
* the covenant of the mortgages trustee to pay or procure the payment
to the seller of amounts of deferred purchase price in accordance
with the provisions of the mortgage sale agreement and the
mortgages trust deed, which payment also satisfies Funding's
obligation to make deferred contributions to the mortgages trustee
for the Funding share of the trust property; and
* the covenant of the mortgages trustee to hold the additional
assigned trust property on trust for Funding (as to the Funding
share) and the seller (as to the seller share) in accordance with
the terms of the mortgages trust deed.
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Under the terms of the mortgage sale agreement, the amount of any early
repayment charges which may become payable on any mortgage loans that have been
assigned to the mortgages trustee will be paid by the mortgages trustee to the
seller as deferred purchase price.
REPRESENTATIONS AND WARRANTIES
The mortgage sale agreement contains representations and warranties given by
the seller to the mortgages trustee, Funding and the security trustee in
relation to each mortgage loan assigned, or to be assigned, to the mortgages
trustee pursuant to that agreement. None of the mortgages trustee, Funding, the
security trustee or the issuer have carried out or will carry out any searches,
inquiries or independent investigations of the type which a prudent purchaser
or mortgagee would normally be expected to carry out. Each is relying entirely
on the seller's representations and warranties under the mortgage sale
agreement. The seller's material warranties under the mortgage sale agreement
include, among others, substantially the following:
* subject to completion of any registration which may be pending at
H.M. Land Registry, the seller is the absolute legal and beneficial
owner of the mortgage loans, the related security and all property
to be sold by the seller pursuant to the mortgage sale agreement;
* each related mortgage secures the repayment of all advances,
interest, costs and expenses payable by the relevant borrower under
the relevant mortgage loan in priority to any other charges
registered against the relevant property;
* subject to completion of any registration which may be pending at
H.M. Land Registry, each mortgage either constitutes, or will
constitute, following registration at H.M. Land registry, a first
ranking charge by way of legal mortgage over the relevant mortgaged
property;
* each relevant mortgaged property is located in England or Wales;
* prior to making each mortgage loan, the seller instructed
solicitors to carry out all investigations, searches and other
actions in relation to the relevant mortgaged property that would
have been undertaken by the seller acting in accordance with
standards consistent with those of a reasonable and prudent
mortgage lender, when advancing money in an amount equal to such
advance to an individual to be secured on a mortgaged property of
the kind permitted under the lending criteria;
* the seller's lending criteria are consistent with the criteria that
would be used by a reasonable and prudent mortgage lender;
* in relation to each mortgage loan, the borrower has a good and
marketable title to the relevant mortgaged property;
* prior to making a mortgage loan, an independent valuer from the
panel of valuers appointed by the seller or an employee valuer of
the seller valued the relevant mortgaged property, and the results
of such valuation would be acceptable to a reasonable and prudent
mortgage lender;
* prior to making a mortgage loan, the nature and amount of such
mortgage loan, the circumstances of the relevant borrower and
nature of the relevant mortgaged property satisfied the lending
criteria in force at that time in all material respects;
* no payment of interest (or in the case of repayment mortgage loans,
principal and interest) equivalent to an amount in excess of one
month's installment at the applicable rate in respect of a mortgage
loan was at any time during the 12 months before the relevant
assignment date in arrears;
* so far as the seller is aware, no borrower is in material breach of
its mortgage loan;
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* the first payment due has been paid by the relevant borrower in
respect of each mortgage loan and each mortgage loan is fully
performing;
* each insurance contract arranged by the seller in respect of any
mortgaged property is in full force and effect and all premiums
have been paid in full and the seller is not aware of any
circumstances giving the insurer under any such insurance contract
the right to avoid or terminate such policy in so far as it relates
to the mortgaged properties or the mortgage loans;
* where the lending criteria required that a mortgage loan was
covered by a MIG insurance contract with NORMIC, that mortgage loan
is covered by such an insurance contract;
* the seller has procured that full and proper accounts, books and
records have been kept showing clearly all material transactions,
payments, receipts and proceedings relating to that mortgage loan
and its mortgage;
* each borrower is a natural person, and no borrower is, as of the
assignment date, an employee or an officer of the seller;
* all formal approvals, consents and other steps necessary to permit
an equitable transfer of the mortgage loans and their related
mortgages to be sold under the mortgage sale agreement have been
obtained or taken and there is no requirement in order for such
transfer to be effective to notify the borrower before, on or after
any such equitable transfer;
* in relation to any cashback mortgage loan, the seller paid to the
relevant borrower the full amount of the cashback payment either
upon completion of the relevant mortgage loan or, if subsequent to
completion, prior to the assignment of such mortgage loan to the
mortgages trustee;
* no mortgage loan has a current balance of more than [GBP]350,000;
* each mortgage loan in the mortgage portfolio as of the closing date
was made not earlier than July 1, 1995; and
* each mortgage loan was originated by the seller in pounds sterling
and is denominated in pounds sterling (or was originated and is
denominated in euro at any time when the euro has been adopted as
the lawful currency of the UK) and is currently repayable in pounds
sterling.
REPURCHASE BY THE SELLER
The seller has agreed in the mortgage sale agreement to repurchase any
mortgage loan together with its related security in the circumstances described
below.
If a mortgage loan or its related security does not materially comply on the
date of its assignment with the representations and warranties given by the
seller under the mortgage sale agreement and the seller does not remedy such
breach within 28 days of receiving written notice of such breach from any of
the mortgages trustee, Funding or the security trustee, then, at the direction
of Funding or the security trustee, the seller must repurchase the relevant
mortgage loan or mortgage loans and their related security from the mortgages
trustee.
For so long as the seller is the administrator it must notify the mortgages
trustee, Funding and the security trustee of any material breach of a warranty
as soon as the administrator becomes aware of such breach.
The repurchase price payable upon the repurchase of any mortgage loan and
its related security is an amount (not less than zero) equal to the current
balance on such mortgage loan as of the date of completion of such repurchase
plus all unpaid interest (including all accrued interest and arrears of
interest) and expenses payable thereon to the date of repurchase. If the seller
fails to pay the consideration due for any repurchase or otherwise fails to
complete such repurchase in accordance with the terms of the mortgage
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sale agreement, then the seller share of the trust property shall be deemed to
be reduced by an amount equal to that consideration. If on any date on which
the seller is obliged to repurchase any mortgage loan or mortgage loans
pursuant to the mortgage sale agreement, the seller assigns new mortgage loans
together with their related security to the mortgages trustee in accordance
with the terms of the mortgage sale agreement (as described below), the seller
shall be entitled to set-off against the repurchase price payable by it on such
repurchase the amount of any initial purchase price payable for any such new
mortgage loans and shall pay or be paid a net amount.
PRODUCT SWITCHES AND FURTHER ADVANCES
Except as described below with respect to re-fixed mortgage loans, under the
mortgage sale agreement, the mortgages trustee has agreed not to (and has
agreed to procure that the administrator does not) issue to a borrower an offer
for a further advance or a product switch without having received confirmation
from the seller that it has elected to repurchase the relevant mortgage loan
together with its related security in accordance with the terms of the mortgage
sale agreement. Upon receipt of such confirmation the mortgages trustee (or the
administrator on behalf of the mortgages trustee) may then issue an offer for a
further advance or a product switch and accept the mortgage documentation duly
completed by the borrower. The mortgages trustee may not itself make any
further advance.
A mortgage loan will be subject to a "PRODUCT SWITCH" if there is any
variation of the financial terms and conditions of the mortgage loan other
than:
* a variation in the financial terms and conditions of the mortgage
loan involving a permitted product switch (as described below);
* a change between interest-only and repayment mortgage loans;
* a transfer of equity;
* a release of a party to a mortgage loan or a release of part of the
land subject to the mortgage;
* any variation agreed with borrowers to control or manage arrears on
a mortgage loan;
* any variation which extends the maturity date of the mortgage loan
unless, while any intercompany loan is outstanding, it is extended
beyond January 2039;
* any variation imposed by statute; and
* any variation of the interest rate payable where that rate is
offered to the borrowers of more than 10% by current balance of the
mortgage loans in the trust property in any interest period.
A "PERMITTED PRODUCT SWITCH" is a variation in the financial terms and
conditions of a mortgage loan in which a borrower exchanges its then current
mortgage loan product for a different mortgage loan product offered by the
seller, provided that the related borrower has made at least one monthly
payment on its then current mortgage loan product, and provided further that
the new mortgage loan for which the prior mortgage loan is to be exchanged is a
permitted replacement mortgage loan. A "PERMITTED REPLACEMENT MORTGAGE LOAN" is
a mortgage loan:
* that is subject to a variable rate of interest; and
* that has a maturity date prior to January 2039.
In addition, each of the conditions for the assignment of new mortgage loans
and their related security as set forth under "-- ASSIGNMENT OF NEW MORTGAGE
LOANS AND THEIR RELATED SECURITY" must be satisfied in order for a permitted
product switch to occur, provided that conditions (a), (c), (k), (n) and (o) in
that section will only be required to
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have been satisfied on the date of the most recent assignment of mortgage loans
to the mortgages trust. The repurchase obligations of the seller set forth
under "-- REPURCHASE BY THE SELLER" will continue to apply to any permitted
replacement mortgage loan.
A mortgage loan will be subject to a "FURTHER ADVANCE", for the purposes of
this prospectus, if an existing borrower requests further monies to be advanced
to him or her under a mortgage loan either in circumstances which do not amount
to a re-draw under a flexible loan or where such mortgage loan is not a
flexible mortgage loan, and in either case such request is granted.
Except as provided below with respect to re-fixed mortgage loans, if the
administrator and the mortgages trustee are notified or are otherwise aware
that a borrower has requested a further advance or a product switch and the
mortgages trustee has received confirmation of the seller's election to
repurchase the mortgage loan and its related security, the mortgages trustee
shall at any time upon notice from the seller assign to the seller and the
seller shall repurchase such mortgage loan together with its related security
in accordance with the mortgage sale agreement at a price not less than the
current balance on such mortgage loan as of the date of completion of such
repurchase plus all unpaid interest (including all accrued interest and arrears
of interest) and expenses payable on such mortgage loan to the date of
repurchase.
In the case of fixed rate mortgage loans, a borrower may have the right,
under the terms of such fixed rate mortgage loan, to elect to "RE-FIX" such
fixed rate mortgage loan at the applicable fixed rate then being offered to the
seller's existing borrowers for the applicable requested period within three
months following the end of the fixed rate period. Sixty days prior to the end
of the relevant fixed rate period, the mortgages trustee may offer to re-sell
to the seller all fixed rate mortgage loans which become "RE-FIXED" during the
three month period immediately following the end of the then current fixed rate
period. The seller may accept this offer by payment to the mortgages trustee on
the date on which the relevant mortgage loan becomes a re-fixed mortgage loan
of the purchase price payable for that re-fixed mortgage loan as described
below.
If such fixed rate mortgage loan becomes re-fixed during the relevant three
month period and the seller pays the purchase price for that re-fixed mortgage
loan, the mortgages trustee shall assign to the seller and the seller shall
repurchase such re-fixed mortgage loan and its related security in accordance
with the mortgage sale agreement. The price payable on such repurchase shall be
at least equal to the current balance on the relevant mortgage loan as at the
date of completion of the repurchase plus all unpaid interest (including all
accrued interest and arrears of interest) and expenses in respect of such
mortgage loan.
If the seller does not pay to the mortgages trustee the purchase price to
repurchase any mortgage loan which becomes re-fixed during such three month
period, the administrator may agree to a borrower's request to re-fix any such
mortgage loan if required by the terms of the mortgage. In any event the seller
has agreed under the mortgage sale agreement to set the existing borrowers' re-
fix rate for the three month period immediately following expiry of the
relevant fixed rate period at a rate not less than that notified from time to
time to the seller by the mortgages trustee, Funding or the administrator as
being required by the mortgages trustee or Funding.
Upon a fixed rate mortgage loan becoming re-fixed as stated above without
having been repurchased by the seller:
(1) the notional amount of the basis rate swap of the issuer, the
previous issuers and of each new issuer (if any) will automatically
be reduced by the current balance of such re-fixed mortgage loan;
(2) the issuer, the previous issuers and each new issuer (if any) will
be obliged to enter into a new hedging arrangement in respect of
such mortgage loans with either an existing swap counterparty, in
which case such hedging will be fixed at such fixed rate as such
swap counterparty, on the basis of fixed rates being
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offered in the swap market, determines to be the fixed rate
applicable to the relevant fixed rate period of the relevant
mortgage loans (which may be different from the fixed rate being
offered to the seller's existing borrowers) or at an issuer's
option, another counterparty whose rating will not affect the then
current ratings of the notes; and
(3) if required, the seller will set the existing borrowers' re-fix
rate at the rate notified to it by the mortgages trustee, Funding
or the administrator as being required by the mortgages trustee or
Funding.
RE-DRAWS UNDER FLEXIBLE MORTGAGE LOANS
Only the seller is responsible for funding all future re-draws in respect of
flexible mortgage loans contained in the trust property. The seller share of
the trust property increases by the amount of any re-draw.
ASSIGNMENT OF NEW MORTGAGE LOANS AND THEIR RELATED SECURITY
The seller is entitled under the terms of the mortgage sale agreement to
assign new mortgage loans and their related security to the mortgages trustee
subject to the fulfillment of certain conditions (which may be varied or waived
by the mortgages trustee with the prior approval of the rating agencies or
their confirmation that there will be no adverse effect on the previous notes)
on or as at the relevant assignment date as follows:
(a) the aggregate arrears of interest in respect of all the mortgage
loans in the mortgages trust, as a percentage of the aggregate
gross interest due on all mortgage loans during the previous 12
months, does not exceed 2% or such other percentage as is then
acceptable to the then current rating agencies at such time
("ARREARS OF INTEREST" for the purpose of this clause, in respect
of a mortgage loan on any date, shall mean the aggregate amount
overdue on that date, but only where such aggregate amount overdue
equals or exceeds an amount equal to the monthly payment then due
on the mortgage loan and such amount has been overdue for an entire
calendar month);
(b) the long term, unsecured, unsubordinated and unguaranteed debt
obligations of the seller are rated no lower than "A3" by Moody's
and "A-" by Fitch;
(c) on the relevant assignment date, the aggregate current balance of
the mortgage loans in the mortgages trust which are then in arrears
for at least 3 months is less than 4% of the aggregate current
balance of all mortgage loans in the mortgages trust on such date,
unless the rating agencies have confirmed that the then current
ratings of the notes will not be adversely affected;
(d) the seller originated the new mortgage loans in accordance with its
lending criteria in force at the time of origination of the
relevant mortgage loan or with material variations from such
lending criteria provided that the then current rating agencies
have been notified of any such material variation;
(e) no new mortgage loan has on the relevant assignment date an
aggregate amount in arrears which is greater than the amount of the
monthly payment then due;
(f) the rating agencies have not provided written confirmation to the
mortgages trustee, the security trustee and the issuer that the
assignment to the mortgages trustee of new mortgage loans on the
assignment date will adversely affect the then current ratings of
the existing notes of any issuer (provided that at a time when a
new issuer issues new notes the rating agencies will have provided
written confirmation that the then current ratings of the existing
notes have not been downgraded or otherwise adversely affected);
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(g) the aggregate current balance of new mortgage loans transferred in
any one interest period does not exceed 10% of the aggregate
current balance of the mortgage loans in the mortgages trust as at
the beginning of that interest period;
(h) each issuer reserve fund is fully funded on the relevant assignment
date up to the relevant required amount (or, if any issuer reserve
fund is not so fully funded on such relevant assignment date, no
payments have been made from such issuer reserve fund);
(i) no intercompany loan enforcement notice has been served in respect
of any intercompany loan;
(j) the assignment of new mortgage loans does not result in the product
of the weighted average repossession frequency ("WAFF") and the
weighted average loss severity ("WALS") for the mortgage loans in
the mortgages trust after such purchase, calculated on such
assignment date in the same way as for the initial mortgage
portfolio (or as agreed by the administrator and the rating
agencies from time to time), exceeding the product of the WAFF and
WALS for the mortgage loans in the mortgages trust calculated on
the most recent preceding closing date, plus 0.35%;
(k) new mortgages loans may only be assigned to the mortgages trustee
if (to the extent necessary) each issuer has entered into
appropriate hedging arrangements in respect of such mortgage loans;
(l) no event of default under the transaction documents shall have
occurred which is continuing at the relevant assignment date;
(m) the weighted average yield on the mortgage loans in the mortgages
trust together with the new mortgage loans to be assigned to the
mortgages trustee on the relevant assignment date is not less than
LIBOR for three-month sterling deposits plus 0.6%, taking into
account the weighted average yield on the mortgage loans and the
margins on the basis rate swaps as at the relevant assignment date;
(n) the assignment of new mortgage loans on the relevant assignment
date does not result in the weighted average LTV ratio of the
mortgage loans and the new mortgage loans, after application of the
LTV test on the relevant assignment date, exceeding the LTV ratio
(based on the LTV test), as determined in relation to the mortgage
loans in the mortgages trust on the most recent preceding closing
date, plus 0.25%;
(o) each new mortgage loan has a maturity date prior to January 2039;
(p) the related borrower under each new mortgage loan has made at least
one monthly payment;
(q) for so long as any notes issued by the issuer, any previous issuer
or any new issuer that have a final maturity date earlier than
January 2041 are outstanding, the assignment of new mortgage loans
to the mortgages trustee may only occur if, following such
assignment, the aggregate number of repayment mortgage loans in the
mortgage portfolio is greater than or equal to 25% of the aggregate
number of mortgage loans in the mortgage portfolio;
(r) the rating agencies have provided written confirmation that the
then current ratings on the notes would not be adversely affected
by the assignment to the mortgages trustee of a new mortgage loan
in respect of a mortgage loan product having characteristics and/or
features that differ materially from the characteristics and/or
features of the mortgage loans in the initial mortgage portfolio;
and
(s) each new mortgage loan and its related security must comply at the
relevant assignment date with the representations and warranties
set out in the mortgage sale agreement, which are described earlier
in this section under "--REPRESENTATIONS AND WARRANTIES";
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PROVIDED THAT, if an initial purchase price for the new mortgage loans is
payable to the seller by the mortgages trustee on the relevant assignment date,
only the conditions set out in paragraphs (e), (f), (i), (k), (l), (m), (o),
(p), (q), (r) and (s) are required to be satisfied to effect an assignment of
the new mortgage loans.
In addition, no assignment of new mortgage loans may occur after a step-up
date in respect of an issuer's notes if the option to redeem such issuer's
notes on such step-up date pursuant to the terms and conditions of such notes
is not exercised.
Any new mortgage loans and related security so assigned will be held by the
mortgages trustee on trust for Funding and the seller in accordance with the
terms of the mortgages trust deed.
The mortgage sale agreement provides that the seller may not assign new
mortgage loans to the mortgages trustee during any trust calculation period
prior to the distribution date occurring in that trust calculation period, and
that the seller may only make one assignment of new mortgage loans to the
mortgages trustee during any trust calculation period.
To the extent that Funding makes an initial contribution on an assignment
date to increase the Funding share of the trust property, the consideration for
the assignment of the new mortgage loans and their related security to the
mortgages trustee will consist of:
* the payment by the mortgages trustee to the seller of the initial
purchase price for the assignment to the mortgages trustee of the
new mortgage loans. The initial purchase price will be paid by the
mortgages trustee out of funds received by the mortgages trustee in
respect of Funding's initial contribution for the Funding share of
the new trust property pursuant to the mortgages trust deed, which
initial contribution will be funded out of the proceeds of any new
intercompany loan paid by any new issuer to Funding;
* the covenant of the mortgages trustee to pay or procure the payment
to the seller of amounts of deferred purchase price in accordance
with the provisions of the mortgage sale agreement and the
mortgages trust deed, which payment also satisfies Funding's
obligation to make deferred contributions to the mortgages trustee
for the Funding share of the trust property. Amounts of deferred
purchase price will be payable to the seller to the extent of
available funds only after paying or providing for prior ranking
claims and only out of excess income to which Funding is entitled
in accordance with and subject to the priority of payments set out
in "THE MORTGAGES TRUST -- MORTGAGES TRUST ALLOCATION OF REVENUE
RECEIPTS"; and/or
* the covenant of the mortgages trustee to hold the trust property on
trust for Funding (as to the Funding share) and the seller (as to
the seller share of the trust property) in accordance with the
terms of the mortgages trust deed.
In the mortgage sale agreement, the seller has undertaken to use reasonable
efforts to assign to the mortgages trustee, and the mortgages trustee has
undertaken to use reasonable efforts to acquire from the seller and hold in
accordance with the terms of the mortgages trust deed, until the earlier of the
payment date falling in July 2010 (or such later date as may be notified by
Funding) and the occurrence of a trigger event, sufficient new mortgage loans
and their related security so that the overcollateralization test is not
breached on three consecutive distribution dates. However, the seller shall not
be obliged to assign to the mortgages trustee, and the mortgages trustee shall
not be obliged to acquire, new mortgage loans and their related security if, in
the opinion of the seller, such assignment would adversely affect the business
of the seller. If Funding enters into a new intercompany loan, then the period
during which the seller covenants to use reasonable efforts to maintain the
aggregate current balance of mortgage loans in the mortgages trust at a certain
level prior to a trigger event may be extended.
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The overcollateralization test shall be calculated on each distribution date
and shall be breached on any distribution date where the aggregate current
balance of mortgage loans in the mortgage portfolio on such distribution date
is less than an amount equal to the product of 1.05 and the principal amount
outstanding of all notes of all issuers on such distribution date provided that
where the notes outstanding are controlled amortization notes, the principal
amount outstanding of such notes will be calculated on a straight-line basis by
applying the appropriate constant payment rate applicable to each series of
notes on a monthly, rather than quarterly, basis.
TRANSFER OF LEGAL TITLE TO THE MORTGAGES TRUSTEE
The mortgage portfolio and related security have been assigned to the
mortgages trustee by way of equitable assignment. This means that legal title
to the mortgage loans and their related security will remain with the seller
until such time as certain additional steps have been taken including the
giving of notices of the assignment to the borrowers.
In relation to mortgages of registered land, until such time as transfers of
such mortgages in favor of the mortgages trustee have been completed and
registered at H.M. Land Registry, the assignment of the mortgages to the
mortgages trustee takes effect in equity and transfers beneficial title only.
In the case of mortgages of unregistered land, in order for legal title to pass
to the mortgages trustee, conveyances of the relevant mortgages would have to
be completed in favor of the mortgages trustee.
Under the mortgage sale agreement none of the seller, the mortgages trustee,
Funding or the security trustee will require notification of such assignments
to the borrowers or the execution and completion of such transfers and
conveyances in favor of the mortgages trustee or the registration of such
transfers in order to effect the transfer of legal title to the mortgage loans
and their related security (including, where appropriate, their registration),
except in the limited circumstances described below.
The execution of transfers of the mortgages to the mortgages trustee and the
notifications of assignments of mortgage loans to the borrowers will be
required to be completed within 20 business days of receipt of written notice
from the mortgages trustee, Funding and/or the security trustee upon the
occurrence of any of:
* the valid service of an intercompany loan enforcement notice or
(unless the sole reason for service of any note enforcement notice
is default by a currency rate swap provider of any issuer) a note
enforcement notice;
* unless otherwise agreed by the rating agencies, the termination of
the seller's role as administrator under the administration
agreement and failure of any substitute administrator to assume the
duties of the administrator;
* the seller being required, by an order of a court of competent
jurisdiction, or by a change in law occurring after the closing
date, or by a regulatory authority or organization whose members
include mortgage lenders of which the seller is a member or with
whose instructions it is customary for the seller to comply, to
perfect the transfer of legal title to the mortgage loans and
related security in favor of the mortgages trustee;
* the security under the Funding deed of charge or any material part
of such security being in jeopardy and it being necessary to
perfect the transfer of legal title to the mortgage loans in favor
of the mortgages trustee in order to reduce such jeopardy
materially;
* the occurrence of an insolvency event in relation to the seller; or
* notice in writing from the seller to the mortgages trustee and
Funding (with a copy to the security trustee) requesting such
transfer.
If the seller ceases to have a long term unsecured, unsubordinated and
unguaranteed credit rating by Standard & Poor's of at least "BBB-", by Moody's
of at least "Baa3" and by Fitch of at least "BBB-" (unless Standard & Poor's,
Moody's and Fitch confirm that the
141
then current ratings of the notes will not be adversely affected) the seller
will be obliged to give notice only of the transfer of the equitable interest
in the mortgage loans to the borrowers but will not be required to complete any
other steps necessary to perfect legal title to the mortgage loans in favor of
the mortgages trustee.
TITLE DEEDS
The title deeds and mortgage loan files relating to the mortgage loans are
currently held by or to the order of the seller or by solicitors acting for the
seller in connection with the creation of the mortgage loans and their related
security. Under the administration agreement the administrator has undertaken
that all the title deeds and mortgage loan files at any time in its possession
or under its control or held to its order relating to the mortgage loans which
are at any time assigned to the mortgages trustee will be held to the order of
the mortgages trustee. The administrator will keep, or cause to be kept, the
title deeds and mortgage loan files relating to each mortgage loan and each
mortgaged property in safe custody and shall not part with possession, custody
or control of them except in the limited circumstances specified in the
administration agreement.
GOVERNING LAW
The mortgage sale agreement is governed by English law.
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THE MORTGAGES TRUST
The following section contains a summary of the material terms of the
mortgages trust deed. The summary does not purport to be complete and is
subject to the provisions of the mortgages trust deed, a form of which has been
filed as an exhibit to the registration statement of which this prospectus is a
part.
GENERAL LEGAL STRUCTURE
The mortgages trust is a trust formed under English law with the mortgages
trustee as trustee for the benefit of the seller and Funding as beneficiaries.
The mortgages trust was formed on March 26, 2001 in connection with the
issuance of the previous notes, the issuance of our notes and the issuances of
any new notes. This section describes the material terms of the mortgages
trust, including how money is distributed from the mortgages trust to Funding
and the seller.
Under the terms of the mortgages trust deed, the mortgages trustee has
agreed to hold all of the trust property on trust absolutely for Funding (as to
the Funding share) and for the seller (as to the seller share). The "TRUST
PROPERTY" consists of:
* the sum of [GBP]100 settled by Law Debenture Corporate Services
Limited on trust on the date of the mortgages trust deed;
* the mortgage portfolio, including the mortgage loans and their
related security, the rights under any MIG policies and the other
seller arranged insurance policies;
* any new mortgage portfolio that is assigned to the mortgages
trustee by the seller after the closing date, including the
mortgage loans and their related security, the rights under any MIG
policies and the other seller arranged insurance policies;
* any permitted replacement mortgage loan and its related security
(including the rights under any related MIG policy and other seller
arranged insurance policies) relating to any permitted product
switch effected in relation to any mortgage loan and assigned to
the mortgages trustee in accordance with the mortgage sale
agreement and thereby included in the trust property;
* any interest and principal paid by borrowers on their mortgage
loans on or after the relevant assignment date;
* any other amounts received under the mortgage loans and related
security on or after the relevant assignment date excluding third
party amounts;
* any re-draws under flexible mortgage loans included in the trust
property;
* any further advances made by the seller to existing borrowers which
are assigned to the trust in accordance with the mortgage sale
agreement;
* any contribution paid by either Funding or the seller to the
mortgages trustee for application in accordance with the terms of
the mortgages trust but only up to the time of such application;
* amounts on deposit (and interest earned on such amounts) in the
mortgages trustee transaction account and the mortgages trustee GIC
account; and
* the proceeds of sale of any mortgage loan and its related security
pursuant to the mortgage sale agreement or other proceeds of sale
of any trust property;
less
* any actual losses in relation to the mortgage loans and any actual
reductions occurring in respect of the mortgage loans as described
in paragraph (1) in "-- ADJUSTMENTS TO TRUST PROPERTY" below; and
* distributions of principal made from time to time to the
beneficiaries of the mortgages trust.
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In addition, the outstanding principal balances of any Together Connections
mortgage loans and Connections mortgage loans included in the trust property
(and therefore the aggregate amount of the trust property) will be reduced from
time to time by the amount of any Together Connections Benefit and Connections
Benefit applied to those Together Connections mortgage loans or Connections
mortgage loans, respectively, as described under "THE MORTGAGE LOANS --
CHARACTERISTICS OF THE MORTGAGE LOANS -- MORTGAGE LOAN PRODUCTS OFFERED BY THE
SELLER".
Funding is not entitled to particular mortgage loans and their related
security separately from the seller. Instead, each of the beneficiaries has an
undivided interest in all of the mortgage loans and their related security
constituting the trust property.
As of the date of this prospectus, the amount of Funding's beneficial
interest in the trust property is approximately [GBP]11,151,200,000, which
corresponds to 74.1% of the trust property, and the amount of the seller's
beneficial interest in the trust property is approximately [GBP]3,903,400,000,
which corresponds to 25.9% of the trust property.
At the closing date and immediately following Funding's further contribution
to the mortgages trustee in connection with Funding's purchase of an additional
beneficial interest in the trust property, the amount of Funding's beneficial
interest in the trust property is expected to be approximately [GBP][__], which
corresponds to [__]% of the trust property. The amount of the Funding share of
the trust property as of the closing date is only an approximation and the
actual amount of the Funding share of the trust property as of the closing date
will depend, among other things, on the actual amortization of the mortgage
loans in the mortgage portfolio between August 18, 2003 and the closing date.
The actual share of Funding's beneficial interest in the trust property on the
closing date will not be determined until the day prior to the closing date.
At the closing date and immediately following the payment by the mortgages
trustee to the seller of the initial consideration (which sum is payable from
amounts received by the mortgages trustee from Funding as a further
contribution in connection with Funding's purchase of an increased beneficial
interest in the trust property), the amount of the seller's beneficial interest
in the trust property is expected to be approximately [GBP][__], which
corresponds to [__]% of the trust property. The amount of the seller share of
the trust property as of the closing date is only an approximation and the
actual amount of the seller share of the trust property as of the closing date
will depend, among other things, on the actual amortization of the mortgage
loans in the mortgage portfolio between August 18, 2003 and the closing date.
The actual share of the seller's beneficial interest in the trust property on
the closing date will not be determined until the day prior to the closing
date.
Following the final repayment date of the latest maturing intercompany loan
of any issuer and provided that there are no further claims under any
intercompany loan, or on such earlier date on which there are no claims
outstanding under any intercompany loan, Funding will make a final deferred
contribution to the mortgages trustee. This final deferred contribution will be
in an amount equal to the aggregate amount standing to the credit of the
Funding bank accounts (including any account established by Funding for the
purpose of any issuer reserve fund and/or any issuer liquidity reserve fund of
any issuer) after making any payments ranking in priority, subject to and in
accordance with the relevant Funding priority of payments. On receipt of such
amount, the mortgages trustee will be obliged to pay such amount to the seller
in satisfaction of the mortgages trustee's obligation to make a final payment
of deferred purchase price to the seller under the mortgage sale agreement.
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FLUCTUATION OF THE SELLER SHARE/FUNDING SHARE OF THE TRUST PROPERTY
The Funding share and the seller share of the trust property fluctuates
depending on a number of factors including:
* the allocation of principal receipts from the mortgage loans to
Funding and/or the seller on each distribution date;
* losses arising on the mortgage loans;
* the assignment of new mortgage loans and their related security to
the mortgages trustee;
* Funding increasing its beneficial interest in, and the Funding
share of, the trust property by making contributions (excluding any
deferred contribution) to the mortgages trustee in accordance with
the mortgages trust deed;
* the seller increasing its beneficial interest in, and the seller
share of, the trust property by making contributions to the
mortgages trustee in accordance with the mortgages trust deed;
* a borrower making a re-draw under a flexible mortgage loan;
* the capitalization of arrears in respect of any mortgage loan; and
* the seller making a further advance to an existing borrower.
Although the seller does not currently intend either to assign to
the mortgages trustee further advances made in respect of a
mortgage loan following the assignment of that mortgage loan to the
mortgages trustee or to retain mortgage loans subject to such
further advances within the mortgages trust, it may do so in the
future.
The Funding share of the trust property may not be reduced below zero. The
seller will not be entitled to receive principal receipts which would reduce
the seller share of the trust property to an amount less than the minimum
seller share unless and until the Funding share of the trust property has been
reduced to zero or following the occurrence of an asset trigger event.
The cash manager will recalculate the Funding share and the seller share:
* on each distribution date;
* on any date (including, in connection with the issuance of the
notes, the closing date) on which Funding makes a further
contribution to the mortgages trustee in connection with Funding's
purchase of an increased beneficial interest in the trust property,
on which date the mortgages trustee will also pay to the seller an
initial consideration equal to the amount of such further
contribution (each such date, a "FUNDING CONTRIBUTION DATE"); and
* on the date of each assignment of any new mortgage portfolio to the
mortgages trustee (each such date, an "ASSIGNMENT DATE").
The reason for the recalculation on a Funding contribution date is to
determine the percentage shares of Funding and the seller in the trust property
which will reflect Funding's further contribution to the mortgages trust (which
will increase the Funding share of the trust property) and to reflect the
mortgages trustee's payment of initial consideration to the seller (which will
decrease the seller share of the trust property) on that same date. The reason
for the recalculation on an assignment date is to determine the percentage
shares of Funding and the seller in the trust property which will reflect the
assignment of the new mortgage loans to the trust property (which, unless
Funding makes an initial contribution to the mortgages trustee on the
assignment date, will only increase the seller share of the trust property).
When the cash manager recalculates the Funding share, Funding share
percentage, seller share and seller share percentage on a distribution date,
that recalculation will apply for the then current trust calculation period.
However, if during that trust calculation period the seller assigns a new
mortgage portfolio to the mortgages trustee and/or if Funding
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makes a further contribution to the mortgages trustee, the recalculation made by
the cash manager on that distribution date will only apply from the beginning of
that then current trust calculation period to (but excluding) the relevant
assignment date or Funding contribution date, as applicable. The new
recalculation made by the cash manager on that relevant assignment date or
Funding contribution date will (in the case of the assignment of a new mortgage
portfolio) apply from (and including) that assignment date to the end of t hat
then current trust calculation period or (in the case of Funding making a
further contribution to the mortgages trust) from (and including) that Funding
contribution date to the end of that then current trust calculation period. The
portion of a trust calculation period that is less than a full trust calculation
period during which any single calculation of the Funding share, Funding share
percentage, seller share and seller share percentage applies is called an
"INTERIM CALCULATION PERIOD".
The percentage shares that each of Funding and the seller has in the trust
property will determine their entitlement to interest and principal receipts
from the mortgage loans in the trust property and also the allocation of losses
arising on the mortgage loans for each trust calculation period or interim
calculation period, as applicable. The method for determining those new
percentage shares is set out in the next three sections.
FUNDING SHARE OF TRUST PROPERTY (DISTRIBUTION DATE RECALCULATION)
On each distribution date (also referred to in this section as the "RELEVANT
DISTRIBUTION DATE") the interest of Funding in the trust property will be
recalculated for the then current trust calculation period or related interim
calculation period, as applicable, in accordance with the following formula:
* The current Funding share of the trust property will be an amount
equal to:
A -- B -- C + D
* The current Funding share percentage of the trust property will be
an amount equal to:
A -- B -- C + D X 100
---------------------
G
expressed as a percentage and rounded upwards to five decimal places,
where,
A = the amount of the Funding share of the trust property as determined
on the later of the distribution date, or the assignment date or
Funding contribution date (if any), immediately preceding the
relevant distribution date;
B = the amount of any principal receipts on the mortgage loans
distributed to Funding on the relevant distribution date (as
described under "-- MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF
MORTGAGES TRUSTEE PRINCIPAL RECEIPTS PRIOR TO THE OCCURRENCE OF A
TRIGGER EVENT" and "-- MORTGAGES TRUST ALLOCATION AND DISTRIBUTION
OF MORTGAGES TRUSTEE PRINCIPAL RECEIPTS AFTER THE OCCURRENCE OF A
TRIGGER EVENT");
C = the amount of losses sustained on the mortgage loans during the
immediately preceding trust calculation period and the amount of
any reductions occurring in respect of the mortgage loans as
described in paragraphs (1) to (5) in "--ADJUSTMENTS TO TRUST
PROPERTY" below, in each case allocated to Funding in the trust
calculation period ending on the relevant distribution date;
D = the amount of any capitalized arrears which have been allocated to
Funding in the immediately preceding trust calculation period; and
G = the amount of the mortgages trustee retained principal receipts (if
any) plus the aggregate current balance of all of the mortgage
loans in the trust property as at the last day of the immediately
preceding trust calculation period after making the distributions,
allocations and additions referred to in "B", "C" and "D" above
(or,
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if applicable, on the relevant assignment date or Funding
contribution date) and after taking account of the following (being
"TRUST PROPERTY CALCULATION ADJUSTMENTS"):
(i) any distribution of principal receipts to the seller and
Funding,
(ii)the amount of any losses or capitalized arrears allocated to
the seller and Funding,
(iii)the adjustments referred to in paragraphs (1) to (5) in "--
ADJUSTMENTS TO TRUST PROPERTY" below,
(iv)the amount of any other additions to or removals from the trust
property (including any additions to the trust property
resulting from re-draws made by borrowers but excluding the
addition of mortgage loans on an assignment date and any
initial contributions or further contributions made by
Funding), and
(v) any reduction in the outstanding principal balances of Together
Connections mortgage loans and Connections mortgage loans
resulting from borrowers being allocated a portion of the
related Together Connections Benefit and Connections Benefit,
respectively, under such mortgage loans.
FUNDING SHARE OF TRUST PROPERTY (ASSIGNMENT DATE RECALCULATION)
On each assignment date which is not also a Funding contribution date (also
referred to in this section as the "RELEVANT ASSIGNMENT DATE"), the interest of
Funding in the trust property will be recalculated for the related interim
calculation period, for the sole purposes of calculating the distributions to
be made from the trust property and determining the amount of losses to be
allocated to Funding on the immediately succeeding distribution date, in
accordance with the following formula:
* The current Funding share of the trust property will be an amount
equal to:
A + E
* The current Funding share percentage of the trust property will be
an amount equal to:
A + E X 100
-----------
H
where,
A = the amount of the Funding share of the trust property as determined
on the distribution date immediately preceding the relevant
assignment date;
E = the amount of any initial contribution paid by Funding to the
mortgages trustee on that relevant assignment date in respect of
the Funding share of any new trust property; and
H = the amount of the mortgages trustee retained principal receipts (if
any) plus the aggregate current balance of all of the mortgage loans in
the trust property as at the immediately preceding distribution date
(after making the distributions, allocations and additions on that
preceding distribution date) plus the aggregate current balance of the
new mortgage loans assigned to the mortgages trustee on that relevant
assignment date and after taking account of trust property calculation
adjustments.
FUNDING SHARE OF TRUST PROPERTY (FUNDING CONTRIBUTION DATE RECALCULATION)
On each Funding contribution date (also referred to in this section as the
"RELEVANT FUNDING CONTRIBUTION DATE"), the interest of Funding in the trust
property will be recalculated for the related interim calculation period, for
the sole purposes of calculating
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the distributions to be made from the trust property and determining the amount
of losses to be allocated to Funding on the immediately succeeding distribution
date, in accordance with the following formula:
* The current Funding share of the trust property will be an amount
equal to:
A + E + F
* The current Funding share percentage of the trust property will be
an amount equal to:
A + E + F X 100
----------------
J
where,
A = the amount of the Funding share of the trust property as determined
on the distribution date immediately preceding the relevant Funding
contribution date;
E = (1) if that relevant Funding contribution date is also an
assignment date, the amount of any initial contribution paid by
Funding to the mortgages trustee on that Funding contribution date
in respect of the Funding share of any new trust property, and (2)
in all other cases, zero;
F = the amount of any further contribution paid by Funding to the
mortgages trustee on that relevant Funding contribution date to
increase Funding's beneficial interest in the trust property; and
J = the amount of the mortgages trustee retained principal receipts
(if any) plus the aggregate current balance of all of the mortgage
loans in the trust property as at the immediately preceding
distribution date (after making the distributions, allocations and
additions on that preceding distribution date) plus the aggregate
current balance of the new mortgage loans assigned to the mortgages
trustee on that relevant assignment date and after taking account
of trust property calculation adjustments.
ADJUSTMENTS TO TRUST PROPERTY
If any of the following events occurs during a trust calculation period,
then the aggregate current balance of the mortgage loans in the trust property
will be reduced or deemed to be reduced for the purposes of making the trust
property calculation adjustments:
(1) any borrower exercises a right of set-off so that the amount of
principal and interest owing under a mortgage loan is reduced but
no corresponding payment is received by the mortgages trustee. In
this event, the aggregate current balance of the mortgage loans in
the trust property will be reduced by an amount equal to the amount
of such set-off; and/or
(2) a mortgage loan or its related security is (i) in breach of the
loan warranties contained in the mortgage sale agreement or (ii)
the subject of a product switch or further advance in respect of
which the seller has elected to repurchase the relevant mortgage
loan or mortgage loans and their related security, and in each case
the seller fails to repurchase the mortgage loan or mortgage loans
under the relevant mortgage account and their related security as
required by the terms of the mortgage sale agreement. In this
event, the aggregate current balance of the mortgage loans in the
trust property will be deemed to be reduced, for the purposes of
making the trust property calculation adjustments, by an amount
equal to the current balance of the relevant mortgage loan or
mortgage loans under the relevant mortgage account (together with
arrears of interest and accrued interest); and/or
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(3) the security trustee is notified that a flexible mortgage loan or
part thereof has been determined by a court judgment on the point
or a determination by a relevant regulatory authority (whether or
not in relation to an analogous flexible mortgage loan product of
another UK mortgage lender):
(a) to be unenforceable; and/or
(b) not to fall within the first ranking charge by way of legal
mortgage over the relevant mortgaged property,
in which event, the aggregate current balance of the mortgage loans
in the trust property will be deemed to be reduced, for the
purposes of making the trust property calculation adjustments, by
an amount equal to that portion of the current balance of the
flexible mortgage loan which is so determined to be unenforceable
or not to fall within the first ranking charge by way of legal
mortgage over the relevant mortgaged property; and/or
(4) the seller would be required to repurchase a mortgage loan and its
related security as required by the terms of the mortgage sale
agreement, but the mortgage loan is not capable of being
repurchased. In this event, the aggregate current balance of the
mortgage loans in the trust property will be deemed to be reduced,
for the purposes of making the trust property calculation
adjustments, by an amount equal to the current balance of the
relevant mortgage loan (together with arrears of interest and
accrued interest); and/or
(5) the seller breaches any other material warranty under the mortgage
sale agreement and/or (for so long as the seller is the
administrator) the administration agreement, which will also be
grounds for terminating the appointment of the administrator. In
this event, the aggregate current balance of the mortgage loans in
the trust property will be deemed to be reduced by an amount equal
to the resulting loss incurred by Funding and the seller.
The reductions set out in paragraphs (1) to (5) (as well as any resulting
loss in respect thereof) will be made on the relevant date on which the cash
manager makes the relevant trust property calculation adjustments first to the
seller's share (including the minimum seller share) of the trust property only,
and thereafter will be made to the Funding share of the trust property. Any
subsequent recoveries on mortgage loans which have been subject to a set-off or
in respect of which the seller share of the trust property has otherwise been
reduced or deemed reduced pursuant to paragraphs (1) to (5) above will
constitute a revenue receipt under the relevant mortgage loan. Such revenue
receipt will belong to Funding (but only if and to the extent that the related
reductions were applied against Funding's share of the trust property) and
thereafter will belong to the seller (and to the extent received by the
mortgages trustee will be returned to the seller).
The trust property (and the seller share of the trust property) will also be
adjusted to account for the allocation of any Together Connections Benefit to a
Together Connections mortgage loan and any Connections Benefit to a Connections
mortgage loan, as described below under "-- ADDITIONS TO, AND REDUCTIONS FROM,
THE TRUST PROPERTY" and "-- INCREASING AND DECREASING THE SELLER SHARE OF THE
TRUST PROPERTY".
WEIGHTED AVERAGE FUNDING SHARE PERCENTAGE
On any distribution date with respect to which (i) the seller had assigned
new mortgage loans to the mortgages trustee during the immediately preceding
trust calculation period, or (ii) Funding had made a further contribution to
the mortgages trustee in connection with Funding's purchase of an increased
beneficial interest in the trust property during the immediately preceding
trust calculation period, the cash manager will calculate (for the sole purpose
of making the distributions to be made on that distribution date) the weighted
average of the current Funding share percentages that were calculated
previously in respect of each interim calculation period occurring in that
immediately preceding trust calculation period. The calculation will be based
on the amount of revenue receipts and
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principal receipts received and losses sustained during each of the foregoing
interim calculation periods. The "WEIGHTED AVERAGE FUNDING SHARE PERCENTAGE" for
any such distribution date will be equal to:
* in respect of the distribution of revenue receipts to be made on
that distribution date, the formula set forth below:
(AxB) + (CxD)
where,
A = the related current Funding share percentage for interim
calculation period 1;
B = the number of days in interim calculation period 1 divided by
the number of days in the trust calculation period;
C = the related Funding share percentage for interim calculation
period 2; and
D = the number of days in interim calculation period 2 divided by
the number of days in the trust calculation period;
* in respect of the distribution of principal receipts to be made on
that distribution date, the formula set forth below:
(AxB) + (CxD)
where,
A = the related current Funding share percentage for that interim
calculation period 1;
B = the number of days in interim calculation period 1 divided by
the number of days in the trust calculation period;
C = the related Funding share percentage for interim calculation
period 2; and
D = the number of days in interim calculation 2 period divided by
the number of days in the trust calculation period; and
* in respect of the allocation of losses to be made on that
distribution date, the formula set forth below:
(AxB) + (CxD)
where,
A = the related current Funding share percentage for interim
calculation period 1;
B = the number of days in interim calculation period 1 divided by
the number of days in the trust calculation period;
C = the related Funding share percentage for interim calculation
period 2; and
D = the number of days in interim calculation period 2 divided by
the number of days in the trust calculation period.
SELLER SHARE OF TRUST PROPERTY (DISTRIBUTION DATE RECALCULATION)
On each relevant distribution date, the current seller share of the trust
property will be recalculated for the then current trust calculation period or
related interim calculation period, as applicable, in accordance with the
following formula:
* the aggregate amount of the trust property as at the relevant
distribution date minus the current Funding share,
where "CURRENT FUNDING SHARE" has the meaning given in "-- FUNDING SHARE OF
TRUST PROPERTY (DISTRIBUTION DATE RECALCULATION)" above.
On each relevant distribution date, the current seller share percentage of
the trust property will be recalculated for the then current trust calculation
period or related interim calculation period, as applicable, in accordance with
the following formula:
* 100% minus the current Funding share percentage,
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where "CURRENT FUNDING SHARE PERCENTAGE" has the meaning given in "--
FUNDING SHARE OF TRUST PROPERTY (DISTRIBUTION DATE RECALCULATION)" above.
SELLER SHARE OF TRUST PROPERTY (ASSIGNMENT DATE RECALCULATION)
On each relevant assignment date, the current seller share of the trust
property will be recalculated for the related interim calculation period in
accordance with the following formula:
* the aggregate amount of the trust property as at the relevant
assignment date minus the current Funding share,
where "CURRENT FUNDING SHARE" has the meaning given in "-- FUNDING SHARE OF
TRUST PROPERTY (ASSIGNMENT DATE RECALCULATION)" above.
On each relevant assignment date, the current seller share percentage of the
trust property will be recalculated for the related interim calculation period
in accordance with the following formula:
* 100% minus the current Funding share percentage,
where "CURRENT FUNDING SHARE PERCENTAGE" has the meaning given in "--
FUNDING SHARE OF TRUST PROPERTY (ASSIGNMENT DATE RECALCULATION)" above.
SELLER SHARE OF TRUST PROPERTY (FUNDING CONTRIBUTION DATE RECALCULATION)
On each relevant Funding contribution date, the current seller share of the
trust property will be recalculated for the related interim calculation period
in accordance with the following formula:
* the aggregate amount of the trust property as at the relevant
Funding contribution date minus the current Funding share,
where "CURRENT FUNDING SHARE" has the meaning given in "-- FUNDING SHARE OF
TRUST PROPERTY (FUNDING CONTRIBUTION DATE RECALCULATION)" above.
On each relevant Funding contribution date, the current seller share
percentage of the trust property will be recalculated for the related interim
calculation period in accordance with the following formula:
* 100% minus the current Funding share percentage,
where "CURRENT FUNDING SHARE PERCENTAGE" has the meaning given in "--
FUNDING SHARE OF TRUST PROPERTY (FUNDING CONTRIBUTION DATE RECALCULATION)"
above.
WEIGHTED AVERAGE SELLER SHARE PERCENTAGE
On any distribution date with respect to which (i) the seller had assigned
new mortgage loans to the mortgages trustee during the immediately preceding
trust calculation period, or (ii) Funding had made a further contribution to
the mortgages trustee in connection with Funding's purchase of an increased
beneficial interest in the trust property during the immediately preceding
trust calculation period, the cash manager will calculate (for the sole purpose
of making the distributions to be made on that distribution date) the weighted
average of the current seller share percentages that were calculated previously
in respect of the revenue receipts and principal receipts received, and losses
sustained, during each interim calculation period occurring in that immediately
preceding trust calculation period and will be a percentage equal to:
* in respect of the distribution of revenue receipts to be made on
that distribution date:
100% minus the weighted average Funding share percentage,
where the weighted average Funding share percentage is as calculated on that
distribution date in respect of revenue receipts under "-- WEIGHTED AVERAGE
FUNDING SHARE PERCENTAGE" above;
151
* in respect of the distribution of principal receipts to be made on
that distribution date:
100% minus the weighted average Funding share percentage,
where the weighted average Funding share percentage is as calculated on that
distribution date in respect of principal receipts under "-- WEIGHTED AVERAGE
FUNDING SHARE PERCENTAGE" above; and
* in respect of the allocation of losses to be made on that
distribution date:
100% minus the weighted average Funding share percentage,
where the weighted average Funding share percentage is as calculated on that
distribution date in respect of losses under "-- WEIGHTED AVERAGE FUNDING SHARE
PERCENTAGE" above.
MINIMUM SELLER SHARE
The seller share of the trust property includes an amount known as the
"MINIMUM SELLER SHARE". As at the closing date, the minimum seller share will be
approximately [GBP]387,200,000 but the amount of the minimum seller share will
fluctuate depending on changes to the characteristics of the mortgage loans in
the trust property. The amount of the minimum seller share as of the closing
date is only an approximation and the actual amount of the minimum seller share
as of the closing date will depend, among other things, on the actual
amortization of the mortgage loans in the mortgage portfolio between July 31,
2003 and the closing date. The seller will not be entitled to receive principal
receipts which would reduce the seller share of the trust property to an amount
less than the minimum seller share unless and until the Funding share of the
trust property has been reduced to zero or following the occurrence of an asset
trigger event. The minimum seller share will be the amount determined on each
distribution date in accordance with the following formula:
W + X + Y + Z
where,
W = 100% of the sum of the average cleared credit balance of all
applicable accounts linked to Together Connections mortgage loans
and Connections mortgage loans in respect of each calendar month or
part of any such calendar month;
X = 2.0% of the aggregate current balance of mortgage loans in the
trust property;
Y = the product of: (p x q) x r where:
p = 8.0%;
q = the "FLEXIBLE CASH RE-DRAW CAPACITY", being an amount equal to
the difference between (1) the maximum amount of cash re-draws
that borrowers may make under flexible mortgage loans included
in the trust property (whether or not drawn) as at the last day
of the immediately preceding trust calculation period and (2)
the aggregate current balance of cash re-draws which form part
of the trust property as at the last day of the immediately
preceding trust calculation period; and
r = 3.0; and
Z = the aggregate current balance of re-draws in the trust property as
at the last day of the immediately preceding trust calculation
period.
The purpose of "W" is to mitigate the risks relating to borrowers holding
deposits in Northern Rock bank accounts that are linked to Together Connections
mortgage loans and Connections mortgage loans, and the purpose of "X" is to
mitigate the risks relating to borrowers holding deposits in Northern Rock bank
accounts that are not linked to Together Connections mortgage loans and
Connections mortgage loans (see "RISK FACTORS -- THERE MAY BE RISKS ASSOCIATED
WITH THE FACT THAT THE MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO
152
THE MORTGAGE LOANS AND THEIR RELATED SECURITY, WHICH MAY ADVERSELY AFFECT
PAYMENTS ON THE NOTES"). The purpose of the calculation in "Y" is to mitigate
the risk of the seller failing to fund a re-draw under a flexible mortgage loan
in the trust property. The purpose of "Z" is to mitigate enforceability and
priority risks relating to re-draws under the flexible mortgage loans in the
trust property.
CASH MANAGEMENT OF TRUST PROPERTY -- REVENUE RECEIPTS
Under the cash management agreement, the cash manager is responsible for
distributing revenue receipts on behalf of the mortgages trustee on each
distribution date in accordance with the order of priority described in the
following section. For further information on the role of the cash manager, see
"CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING".
MORTGAGES TRUST ALLOCATION OF REVENUE RECEIPTS
"MORTGAGES TRUSTEE AVAILABLE REVENUE RECEIPTS" will be calculated by the
cash manager on each distribution date and will be an amount equal to the sum
of (in each case in the period prior to the end of the immediately preceding
trust calculation period):
* revenue receipts on the mortgage loans (which shall include, in
respect of any non-flexible mortgage loan only, the amount of any
overpayment made by the borrower in respect of such mortgage loan
as is equal to the amount of any underpayment of interest made by
such borrower in respect of such mortgage loan in the immediately
preceding trust calculation period provided that such underpayment
of interest is made prior to December 31 in the year in which such
overpayment is received from the borrower);
* interest payable to the mortgages trustee on the mortgages trustee
transaction account and the mortgages trustee GIC account; and
* payments made by the seller to the mortgages trustee to fund any
non- cash re-draw in respect of any flexible mortgage loan;
less
* amounts due to third parties (also known as "THIRD PARTY AMOUNTS")
including:
(1) payments of insurance premiums, if any, due to the seller in
respect of any seller arranged insurance policy and/or to the
MIG provider to the extent not paid or payable by the seller
(or to the extent such insurance premiums have been paid by the
seller in respect of any further advance which is not
repurchased by the seller to reimburse the seller);
(2) amounts under an unpaid direct debit which are repaid by the
administrator to the bank making such payment if such bank is
unable to recoup that amount itself from its customer's
account;
(3) other charges which are due to the seller; and/or
(4) recoveries in respect of amounts deducted from mortgage loans
as described in paragraphs (1) to (5) under "-- ADJUSTMENTS TO
TRUST PROPERTY" above, which will belong to and be paid to
Funding and/or the seller as described therein, which amounts
may be paid daily from monies on deposit in the mortgages
trustee transaction account or the mortgages trustee GIC
account; and
* amounts distributed on each previous distribution date in
accordance with the mortgages trust allocation of revenue receipts.
On each distribution date, the cash manager will apply mortgages trustee
available revenue receipts in the following order of priority (the "MORTGAGES
TRUST ALLOCATION OF REVENUE RECEIPTS"):
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(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;
* to 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 (inclusive of VAT) due to the administrator
or the cash manager or to become due to the administrator or the
cash manager prior to the next following distribution date under
the provisions of the administration agreement or the cash
management agreement, as the case may be; and
(C) in no order of priority between them but in proportion to the
respective amounts due, and subject to the proviso below, to
allocate and pay mortgages trustee available revenue receipts to:
* the seller in an amount determined by multiplying the total
amount of the remaining mortgages trustee available revenue
receipts by the seller share percentage of the trust property
(as determined on the immediately preceding distribution date
or, in the case of the first distribution date immediately
following the closing date, as of the closing date); and
* Funding in an amount equal to the lesser of:
(x) an amount determined by multiplying the total amount of the
remaining mortgages trustee available revenue receipts by
the Funding share percentage of the trust property (as
determined on the immediately preceding distribution date
or, in the case of the first distribution date immediately
following the closing date, as of the closing date), and
(y) the aggregate of the amounts to be applied on the
immediately succeeding payment date as set forth under the
Funding pre-enforcement revenue priority of payments or, as
the case may be, the Funding post-enforcement priority of
payments (but excluding any principal amount due under any
intercompany loan (save that, for the avoidance of doubt,
such exclusion shall not apply in respect of any Funding
available revenue receipts which are applied by an issuer
to credit that issuer's principal deficiency ledgers and
thereby reduce the principal payable under that issuer's
intercompany loan) and any amount of deferred contribution
under item (P) of the Funding pre-enforcement revenue
priority of payments and/or item (F) of the Funding post-
enforcement priority of payments), less all other amounts
(not derived from the distribution of mortgages trustee
available revenue receipts under the mortgages trust) which
will constitute Funding available revenue receipts on the
immediately succeeding payment date, such amount not to be
less than zero; and
(D) to allocate to Funding but pay at the direction of Funding to the
seller an amount equal to YY -- ZZ, where "YY" is the amount of the
mortgages trustee available revenue receipts and "ZZ" is the amount
of such mortgages trustee available revenue receipts applied and/or
allocated under (A) to (C) above, such amount to be in satisfaction
of amounts of deferred purchase price due to the seller under the
terms of the mortgage sale agreement;
provided that, if an assignment date or a Funding contribution date has
occurred during the trust calculation period immediately preceding that
distribution date, then the cash manager will use (i) the weighted
average seller share percentage (instead of the seller share percentage)
in respect of revenue receipts in determining the
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amount of mortgages trustee available revenue receipts to distribute to
the seller on that distribution date, and (ii) the weighted average
Funding share percentage (insteadof the Funding share percentage) in
respect of revenue receipts in determining the amount of mortgages
trustee available revenue receipts to distribute to Funding on that
distribution date.
Amounts due to the mortgages trustee and the administrator will include VAT,
if applicable, payable under English tax law. At the date of this prospectus,
VAT is calculated at the rate of 17.5% of the amount to be paid. Payment of VAT
will reduce the amounts ultimately available to pay interest on the notes.
CASH MANAGEMENT OF TRUST PROPERTY -- PRINCIPAL RECEIPTS
Under the cash management agreement, the cash manager is also responsible
for distributing principal receipts on behalf of the mortgages trustee on each
distribution date in accordance with the order of priority described in the
next two following sections. To understand how the cash manager will distribute
principal receipts on the mortgage loans on each distribution date (the
"MORTGAGES TRUSTEE PRINCIPAL PRIORITY OF PAYMENTS") you need to understand the
following definitions:
The "FINAL REPAYMENT DATE" means, in respect of the intercompany loan, the
payment date in January 2044, being the final maturity date of the latest
maturing series 1, series 2 and series 3 notes.
A "TRIGGER EVENT" means an asset trigger event and/or a non-asset trigger
event.
An "ASSET TRIGGER EVENT" is the event that occurs when an amount is debited
to the principal deficiency subledger established for any issuer with respect
to class A notes of that issuer. For more information on the issuer principal
deficiency ledger, see "CREDIT STRUCTURE".
A "NON-ASSET TRIGGER EVENT" means any of the following events:
* an insolvency event occurs in relation to the seller;
* the seller's role as administrator is terminated and a new
administrator is not appointed within 60 days; or
* on the distribution date immediately succeeding a seller share
event distribution date, the current seller share is equal to or
less than the minimum seller share (determined using the amounts of
the current seller share and minimum seller share that would exist
after making the distributions of mortgages trustee principal
receipts due on that distribution date on the basis that the cash
manager assumes that those mortgages trustee principal receipts are
distributed in the manner described under "-- MORTGAGES TRUSTEE
ALLOCATION AND DISTRIBUTION OF MORTGAGES TRUSTEE PRINCIPAL RECEIPTS
PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT").
A "SELLER SHARE EVENT" will occur if, on a distribution date, (i) the result
of the calculation of the current seller share on that distribution date would
be equal to or less than the minimum seller share for such distribution date
(determined using the amounts of the current seller share and minimum seller
share that would exist after making the distributions of mortgages trustee
principal receipts due on that distribution date on the basis that the cash
manager assumes that those mortgages trustee principal receipts are distributed
in the manner described under "-- MORTGAGES TRUSTEE ALLOCATION AND DISTRIBUTION
OF MORTGAGES TRUSTEE PRINCIPAL RECEIPTS PRIOR TO THE OCCURRENCE OF A TRIGGER
EVENT"), and (ii) a seller share event has not occurred on the immediately
preceding distribution date).
A "SELLER SHARE EVENT DISTRIBUTION DATE" is a distribution date on which a
seller share event occurs.
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The rating agencies may require the relevant parties to amend the foregoing
non-asset trigger events should a new issuer issue "BULLET" notes as described
under "-- MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF MORTGAGES TRUSTEE
PRINCIPAL RECEIPTS PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT" below.
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF MORTGAGES TRUSTEE PRINCIPAL
RECEIPTS PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT
Prior to the occurrence of a trigger event (and whether or not there has
been any enforcement of the Funding security or any issuer security) the cash
manager on behalf of the mortgages trustee will allocate and distribute
mortgages trustee principal receipts on each distribution date (or, in respect
of any initial consideration, on any Funding contribution date) as follows:
(A) to the seller the amount of any initial consideration which is then
allocable and payable to the seller in accordance with the
mortgages trust deed;
(B) to Funding an amount in respect of each issuer which is equal to
the lesser of:
(1) the principal amount due on the intercompany loan of such
issuer equal to the controlled amortization amounts due, if
any, on the payment date immediately succeeding such
distribution date (in each case determined on the assumption
that each such amount will not be restricted and/or deferred on
that payment date in any of the circumstances described under
"CASHFLOWS" below); and
(2) an amount equal to:
mortgages Funding share percentage as outstanding principal balance of the
trustee intercompany loan of such issuer
principal __ calculated on the __ ------------------------------------
receipts immediately preceding aggregate outstanding principal
distribution date balance on all intercompany loans
(C) to Funding an amount in respect of each issuer towards any
principal amount remaining which will be due and payable (following
the payment to Funding set forth in (B) above) on the immediately
succeeding payment date under such issuer's intercompany loan (in
each case determined on the assumption that each such principal
amount will not be restricted and/or deferred on that payment date
in any of the circumstances described under "CASHFLOWS" below) plus
an amount equal to the amount which Funding will be required to
apply on that payment date under item (A) of the Funding pre-
enforcement principal priority of payments, and
(D) if such distribution date is not a seller share event distribution
date, all remaining mortgages trustee principal receipts to the
seller,
PROVIDED THAT in relation to (A) through (D) above the following rules shall
apply:
(1) If the notes of any issuer have become immediately due and payable
as a result of the service of a note enforcement notice or if the
intercompany loan of any issuer (and the other intercompany loans
of any other issuer) have become immediately due and payable as a
result of the service of an intercompany loan enforcement notice,
principal payments in respect of the intercompany loan of that
issuer may be made in excess of any controlled amortization amount
and paragraph (B)(1) above shall no longer apply in relation to
that issuer, and, except following a non-asset trigger event, the
amount of principal receipts to be distributed to Funding in
respect of that issuer on that distribution date may not exceed the
amount determined under paragraph (B)(2) above.
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(2) If the notes of any issuer have become immediately due and payable
as a result of the service of a note enforcement notice or if the
intercompany loan of any issuer (and the other intercompany loans
of any other issuers) have become immediately due and payable as a
result of the service of an intercompany loan enforcement notice,
then for the purpose of calculating the amount in respect of that
issuer under paragraph (B)(2) above, that amount will be reduced to
the extent of any remaining amounts standing to the credit of the
issuer reserve
ledger and/or the issuer liquidity reserve ledger (if any) for that
issuer which are to be utilized on the immediately succeeding
payment date to repay principal on that issuer's intercompany loan,
but only to the extent that those amounts would not otherwise be
payable on that intercompany loan on that payment date.
(3) The amount of principal receipts payable to Funding in respect of
each issuer on a distribution date will be reduced in proportion to
the aggregate of the issuer available revenue receipts of that
issuer which are to be applied on the immediately succeeding
payment date in reduction of deficiencies recorded on the issuer
principal deficiency ledger of that issuer, but only to the extent
that the issuer available revenue receipts which are to be so
applied on that payment date would not otherwise be payable as
principal of the relevant notes on that payment date.
(4) On a seller share event distribution date, the cash manager shall
deposit all mortgages trustee principal receipts remaining after
(C) above (the "MORTGAGES TRUSTEE RETAINED PRINCIPAL RECEIPTS") in
the mortgages trustee GIC account and make a corresponding credit
to the principal ledger.
(5) For the purpose of determining the principal receipts to be
distributed to Funding in respect of the amount due on the
intercompany loan of any issuer under (B) and (C) above, the
outstanding principal balance of that intercompany loan shall be
deemed to be reduced by the amount of: (a) any deficiency recorded
on the issuer principal deficiency ledger of that issuer as at that
distribution date, but only to the extent that such deficiency has
arisen as a result of (i) losses on the mortgage loans allocated by
Funding to that issuer and/or (ii) the application of Funding
available principal receipts to fund the issuer liquidity reserve
fund of that issuer but not as a result of any other principal
deficiency of that issuer; and (b) the outstanding principal
balance as at such distribution date of any special repayment notes
issued by that issuer.
(6) Funding will not be entitled to receive and the cash manager shall
procure that Funding does not receive any amount of principal
receipts from the mortgages trustee on a distribution date which is
not required by Funding to repay principal falling due on any
intercompany loan on the immediately succeeding payment date in
order to fund payments of principal falling due on any notes of any
issuer on that payment date.
(7) The mortgages trustee will not distribute any overpayment (other
than a capital payment) in respect of any non-flexible mortgage
loans until the first distribution date following December 31 of
the year in which such overpayment is received; provided that if a
borrower has made an underpayment of principal on such non-flexible
mortgage loan following the overpayment then the mortgages trustee
will distribute principal in an amount up to the amount of such
underpayment (but not exceeding the amount of the overpayment
previously made) on the next-occurring distribution date.
(8) If an assignment date or a Funding contribution date has occurred
during the trust calculation period immediately preceding the
relevant distribution date, then the cash manager shall use the
weighted average Funding share percentage (instead of the current
Funding share percentage) in respect of principal receipts in
determining the amount of mortgages trustee principal receipts to
be distributed to Funding in respect of each issuer pursuant to
clause (B)(2) above.
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A new issuer may enter into a new intercompany loan with Funding as
described under "THE INTERCOMPANY LOAN AGREEMENT -- NEW INTERCOMPANY LOANS",
and may issue "BULLET" notes that are scheduled to be repaid in full on a
single payment date. As Funding's corresponding repayment of such new
intercompany loan to the new issuer also would be scheduled to be repaid in
full on a single payment date, Funding would need to accumulate a large
proportion of the principal receipts distributed by the mortgages trustee
over a certain period of time. Any accumulation of principal receipts may
require the consent of the rating agencies and the security trustee if an
amendment to the foregoing mortgages trustee principal priority of payments is
required.
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF MORTGAGES TRUSTEE PRINCIPAL
RECEIPTS ON OR AFTER THE OCCURRENCE OF A TRIGGER EVENT
On each distribution date on or after the occurrence of an asset trigger
event, the cash manager will allocate and distribute all mortgages trustee
principal receipts as follows:
(A) if the immediately preceding distribution date was a seller share
event distribution date, all of the mortgages trustee retained
principal receipts to Funding; and then
(B) with no order of priority between them but in proportion to the
respective amounts due, to Funding and the seller according to the
Funding share percentage of the trust property and the seller share
percentage of the trust property, respectively, until the Funding
share of the trust property is zero, even though those payments may
reduce the seller share of the trust property to an amount less
than the minimum seller share. Notwithstanding the foregoing, if an
assignment date or a Funding contribution date has occurred during
the trust calculation period immediately preceding any such
distribution date, the cash manager will apply all mortgages
trustee principal receipts remaining after (A) above between
Funding and the seller in no order of priority between them but in
proportion to the weighted average Funding share percentage and
weighted average seller share percentage, each in respect of
mortgages trustee principal receipts, for that distribution date
until the Funding share of the trust property is zero.
Following the occurrence of an asset trigger event, the notes will be
subject to prepayment risk (that is, they may be repaid earlier than expected).
See "RISK FACTORS -- THE OCCURRENCE OF AN ASSET TRIGGER EVENT OR ENFORCEMENT OF
THE ISSUER SECURITY MAY ACCELERATE THE REPAYMENT OF CERTAIN NOTES AND/OR DELAY
THE REPAYMENT OF OTHER NOTES".
On each distribution date on or after the occurrence of a non-asset trigger
event and until the occurrence of an asset trigger event, the cash manager will
allocate and distribute all mortgages trustee principal receipts to Funding
until the Funding share of the trust property is zero. Following the occurrence
of a non-asset trigger event, the notes will be subject to prepayment risk
(that is, they may be repaid earlier than expected). See "RISK FACTORS -- THE
OCCURRENCE OF A NON-ASSET TRIGGER EVENT MAY ACCELERATE THE REPAYMENT OF CERTAIN
NOTES AND/OR DELAY THE REPAYMENT OF OTHER NOTES".
OVERPAYMENTS
An overpayment in respect of any non-flexible mortgage loan which does not
constitute a capital payment in respect of any mortgage loan will not become
available for distribution to the beneficiaries as principal receipts until the
first distribution date following December 31 of the year in which such
overpayment is received, save to the extent that any such overpayment by a
borrower is applied in reduction of an underpayment by such borrower in respect
of such mortgage loan prior to such date. Any such overpayment shall be
retained in the mortgages trustee GIC account and the cash manager will
maintain a separate ledger to record its receipt and subsequent payment from
time to time. Where
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any such overpayment has been made in error the
administrator will be authorized to refund the amount of such overpayment to
the relevant borrower at any time prior to December 31 of the year in which
such overpayment was made.
An overpayment in respect of any flexible mortgage loan will not be retained
by the mortgages trustee but will be distributed to the beneficiaries on the
immediately succeeding distribution date as principal receipts.
LOSSES
All losses arising on the mortgage loans will, save as otherwise provided,
be applied in reducing proportionately the Funding share of the trust property
and the seller share of the trust property. Save as otherwise provided, the
Funding share of losses will be determined on any distribution date by
multiplying the amount of losses in the immediately preceding trust calculation
period by the Funding share percentage (as determined on the immediately
preceding distribution date) until the Funding share of the trust property is
zero. However, if an assignment date or a Funding contribution date has
occurred during the trust calculation period immediately preceding a
distribution date, then the amount of losses shall be multiplied by the
weighted average Funding share percentage (as calculated on that distribution
date) in respect of losses rather than the current Funding share percentage.
The remainder of the losses shall be allocated to the seller.
For a description of how losses on the mortgage loans that have been
allocated to Funding on any date will be allocated to the intercompany loan of
each issuer, see "THE INTERCOMPANY LOAN AGREEMENT -- ALLOCATION OF LOSSES".
DISPOSAL OF TRUST PROPERTY
The trust property is held on trust for the benefit of Funding and the
seller. Subject as provided otherwise in the mortgages trust deed and the other
transaction documents, the mortgages trustee will not be entitled to dispose of
the trust property or create any security interest over the trust property.
If an event of default occurs under any intercompany loan agreement (an
"INTERCOMPANY LOAN EVENT OF DEFAULT") and the security trustee enforces the
security granted by Funding over its assets under the Funding deed of charge,
including its share of the trust property, then the security trustee will be
entitled, among other things, to sell the Funding share of the trust property.
For further information on the security granted by Funding over its assets, see
"SECURITY FOR FUNDING'S OBLIGATIONS".
ADDITIONS TO, AND REDUCTIONS FROM, THE TRUST PROPERTY
The trust property may be increased from time to time by the assignment of
new mortgage loans and their related security to the mortgages trustee. The
mortgages trustee will hold the new mortgage loans and their related security
on trust for Funding and the seller according to the terms of the mortgages
trust deed. For further information on the assignment of new mortgage loans and
their related security to the mortgages trustee, see "ASSIGNMENT OF THE
MORTGAGE LOANS AND RELATED SECURITY".
If a borrower makes a re-draw under a flexible mortgage loan included in the
mortgages trust, then the seller will be solely responsible for funding that
re-draw. As a result, the size of the trust property and the seller share of
the trust property will increase by, in the case of a cash re-draw, the
principal amount of such cash re-draw and, in the case of a non-cash re-draw,
the amount of any further contribution made by the seller to the mortgages
trustee of the unpaid interest element in respect of such non-cash re-draw.
However, if an insolvency event occurs in respect of the seller, then the
seller may continue to make payments to the mortgages trustee in an amount
equal to the unpaid interest element in respect of such non-cash re-draw in the
same manner and for the same purposes as described above, but it is not obliged
to do so.
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If at any time the administrator agrees to a further advance being made
under a mortgage loan included in the mortgages trust, then the seller will be
solely responsible for funding that further advance. If at some future date the
seller decides to assign such further advance to the mortgages trustee or not
repurchase the mortgage loan that is subject to such further advance from the
mortgages trustee, the trust property and the seller share of the trust
property will increase by the principal amount of the further advance made by
the seller.
In addition to the reductions or deemed reductions to the trust property
described above under "-- ADJUSTMENTS TO TRUST PROPERTY", the application of
any Together Connections Benefit in relation to Together Connections mortgage
loans and any Connections Benefit in relation to Connections mortgage loans
included in the mortgages trust will also reduce the size of the trust property
(and, as described below under "-- INCREASING AND DECREASING THE SELLER SHARE
OF THE TRUST PROPERTY", the seller share of the trust property only). This will
occur because the outstanding principal balances of any Together Connections
mortgage loans and Connections mortgage loans included in the trust property
(and therefore the aggregate amount of the trust property) will be reduced from
time to time by the amount of any Together Connections Benefit applied to those
Together Connections mortgage loans and any Connections Benefit applied to
those Connections mortgage loans, as described under "THE MORTGAGE LOANS --
CHARACTERISTICS OF THE MORTGAGE LOANS -- MORTGAGE LOAN PRODUCTS OFFERED BY THE
SELLER".
ARREARS
The aggregate current balance of the mortgage loans in the mortgages trust
will be increased at any time by the amount in which the mortgage loans that
have been assigned to the mortgages trust are in arrears and those arrears have
been capitalized. Such increase shall be allocated to Funding and the seller at
any time in proportion to their respective percentage shares in the trust
property as determined in respect of the trust calculation period or interim
calculation period, as the case may be, in which the arrears occur.
INCREASING AND DECREASING THE SELLER SHARE OF THE TRUST PROPERTY
If a borrower makes a non-cash re-draw in respect of any flexible mortgage
loan under the mortgages trust deed the seller as beneficiary has agreed under
the mortgages trust to fund such non-cash re-draw in the mortgages trust by
making a further contribution to the mortgages trustee of an amount equal to
the unpaid interest element in respect of such non-cash re-draw. Accordingly,
the size of the trust property and the seller share of the trust property will
increase by an amount equal to the further contribution made by the seller. Any
such payment received by the mortgages trustee will be treated as revenue
receipts in the mortgages trust and will be distributed on the immediately
succeeding distribution date among the beneficiaries in accordance with the
mortgages trust allocation of revenue receipts.
The seller will also fund cash re-draws in respect of flexible mortgage
loans held in the mortgages trust by payment of the amount of the cash re-draw
to the relevant borrower. Accordingly, the size of the trust property and the
seller share of the trust property will automatically increase by the amount of
any cash re-draw so made.
In addition to the reductions or deemed reductions to the seller share of
the trust property described above under "-- ADJUSTMENTS TO TRUST PROPERTY",
the application of any Together Connections Benefit in relation to Together
Connections mortgage loans and any Connections Benefit in relation to
Connections mortgage loans included in the mortgages trust that reduces the
size of the trust property will also reduce the seller share of the trust
property. This will occur because the outstanding principal balances of any
Together Connections mortgage loans and Connections mortgage loans included in
the trust property (and therefore the aggregate amount of the trust property)
will be reduced from time to time by the amount of any Together Connections
Benefit applied to those Together Connections mortgage loans and any
Connections Benefit applied to those Connections
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mortgage loans, as described under "THE MORTGAGE LOANS -- CHARACTERISTICS OF THE
MORTGAGE LOANS -- MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER". The amount of
any such reduction will be applied against the seller share of the trust
property only.
INCREASING THE FUNDING SHARE OF THE TRUST PROPERTY
If Funding enters into a new intercompany loan, then it may apply the
proceeds of that intercompany loan as a further contribution to the mortgages
trust to increase its beneficial interest in, and the Funding share of, the
trust property. Funding will be permitted to do this only if it meets certain
conditions, including among others:
* that no intercompany loan enforcement notice has been served under
any intercompany loan;
* that as at the most recent payment date no deficiency was recorded
on the issuer principal deficiency ledger of any issuer;
* that no event of default under the transaction documents shall have
occurred which is continuing;
* that the rating agencies have not confirmed in writing to the
security trustee or the issuer that the proposed increase in the
Funding share would adversely affect the then current ratings by
the rating agencies of the existing notes of any issuer; and
* that, as of the last day of the immediately preceding trust
calculation period, the aggregate current balance of mortgage loans
in the mortgages trust which were then in arrears for at least 3
months is less than 4% of the aggregate current balance of all
mortgage loans in the mortgages trust as of such date, unless the
rating agencies have confirmed that the then current ratings of the
notes will not be adversely affected.
Under the mortgages trust deed, Funding and the seller have agreed that
principal receipts held by the mortgages trustee on any date in respect of any
further contribution paid by Funding to the mortgages trustee on that date will
be allocated and paid by the mortgages trustee to the seller as initial
consideration (an "INITIAL CONSIDERATION") from the mortgages trust on such
date whether or not such date is a distribution date. The payment of any such
initial consideration will reduce the seller share of the trust property.
TERMINATION OF THE MORTGAGES TRUST
The mortgages trust will terminate on the date on which there is no
remaining trust property or, if earlier, such date as may be requested in
writing by the seller to the mortgages trustee being on or after the date on
which all of the intercompany loans have been repaid in full or there is no
further claim under any intercompany loan or the Funding share of the trust
property has been reduced to zero or such other date which may be agreed
between the mortgages trustee, Funding and the seller so long as all amounts
due from Funding to the Funding secured creditors have been repaid in full.
RETIREMENT OF MORTGAGES TRUSTEE
The mortgages trustee is not entitled to retire or otherwise terminate its
appointment. The seller and Funding cannot replace the mortgages trustee.
GOVERNING LAW
The mortgages trust deed is governed by English law.
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THE INTERCOMPANY LOAN AGREEMENT
The following section describes, in summary, the material terms of the
intercompany loan agreement. The description does not purport to be complete
and is subject to the provisions of the intercompany loan agreement, a form of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
THE FACILITY
Under the terms of the intercompany loan agreement, the issuer will make a
loan to Funding on the closing date in an aggregate amount in sterling equal to
the proceeds of the issue of the notes. For this purpose, the dollar proceeds
of the series 1 notes and the euro proceeds of the series 2 notes will be
converted into sterling at the relevant dollar currency swap rate or euro
currency swap rate, as applicable. Funding will then pay the proceeds of the
intercompany loan to the mortgages trustee in satisfaction of Funding's further
contribution to the mortgages trustee for the additional Funding share of the
trust property pursuant to the mortgages trust deed. Upon receipt of Funding's
further contribution, the mortgages trustee will pay such funds to the seller
as initial consideration for Funding increasing its beneficial interest in the
trust property, which will reduce the seller share of the trust property.
CONDITIONS PRECEDENT TO DRAWDOWN
The issuer will not be obliged to make the intercompany loan available to
Funding unless on the closing date certain conditions have been met, including:
* that the notes have been issued and the proceeds have been received
by or on behalf of the issuer;
* that one or more deeds of accession relating to the Funding deed of
charge have been executed by the parties to the Funding deed of
charge;
* that each of the transaction documents has been executed by the
relevant parties to those documents; and
* that Funding has delivered a solvency certificate to the security
trustee in form and substance satisfactory to the security trustee.
THE INTERCOMPANY LOAN
Subject to the satisfaction of the conditions precedent to drawdown, the
intercompany loan will be made available by the issuer to Funding on the
closing date.
The final repayment date of the intercompany loan will be the final maturity
date of the latest maturing class of notes issued by the issuer.
None of the parties to the intercompany loan agreement may assign its rights
thereunder to any third party, except that the issuer may assign to the note
trustee by way of security its right, title and interest under the intercompany
loan agreement. The note trustee will not be entitled to assign to a third
party its or the issuer's right, title and interest under the intercompany loan
agreement following the service of a note enforcement notice.
REPRESENTATIONS, WARRANTIES AND COVENANTS
Under the intercompany loan agreement, Funding will make standard
representations and warranties to the issuer.
In addition to standard covenants, Funding will give the following
undertakings:
* it will not create or permit to subsist any security interest over
or in respect of any of its assets (unless arising by operation of
law) other than as provided for pursuant to the transaction
documents;
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* it will not sell, assign, transfer, lease or otherwise dispose of
or grant any option over all or any of its assets, properties or
undertakings or any interest, estate, right, title or benefit to or
in such assets, properties or undertakings other than as provided
for pursuant to the transaction documents;
* it will not enter into any amalgamation, demerger, merger or
reconstruction, nor acquire any assets or business nor make any
investments other than as contemplated in the transaction
documents;
* except as provided or contemplated under the transaction documents
it will not incur any indebtedness or give any guarantee or
indemnity in respect of any obligation of any other person;
* it will not pay any dividend or make any other distribution in
respect of any of its shares other than in accordance with the
Funding deed of charge, or issue any new shares or alter any rights
attaching to its issued shares as at the date of the intercompany
loan agreement;
* it will not carry on any business or engage in any activity other
than as contemplated by the transaction documents or which is not
incidental to or necessary in connection with any of the activities
in which the transaction documents provide or envisage that Funding
will engage; and
* save for the previous issuers, the issuer and any other issuer, it
will not have any subsidiaries or subsidiary undertakings as
defined in the Companies Act 1985 (as amended).
PAYMENT OF INTEREST
Payment of interest and fees on the intercompany loan will be made only from
and to the extent of distributions received by Funding in respect of the
Funding share of the trust property representing issuer allocable revenue
receipts which are payable to the issuer on that payment date, subject to and
in accordance with the Funding priority of payments and the rules for the
application of Funding available revenue receipts described under "CASHFLOWS"
below.
Subject as provided above and to the limited recourse provisions described
below, interest will be payable by Funding on each payment date on the
outstanding principal balance of the intercompany loan. The interest due on the
intercompany loan on each payment date will be in an amount equal to the amount
required by the issuer on that payment date to fund (by payment to any swap
provider or otherwise) the payment of interest on the notes, as set forth in
the items under "CASHFLOWS -- DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS
PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY" or in the relevant items under
such other issuer priority of payments as may apply on that payment date.
Subject as provided above and to the limited recourse provisions described
below, in addition, on each payment date or as and when required Funding will
pay an additional fee to the issuer. This fee will be equal to the amount
required by the issuer to pay or provide for all other amounts (but excluding
interest and principal due on the notes and tax that can be met out of the
issuer's profits) if any, falling due on that payment date as set forth in the
items under "CASHFLOWS -- DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS
PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY" or in the relevant items under
such other issuer priority of payments as may apply on that payment date.
Funding and the issuer will agree under the intercompany loan agreement that
to the extent that the issuer receives from Funding on any payment date an
amount of interest and/or fees which the issuer utilizes to credit the issuer
principal deficiency ledger (but only to the extent of any deficiency which has
arisen as a result of (i) losses on the mortgage loans allocated by Funding to
the issuer and/or (ii) the application of Funding available principal receipts
to fund the issuer liquidity reserve fund of the issuer but not as a result of
any other principal deficiency of the issuer) that amount of interest and/or
fees
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will be recharacterized and will constitute a payment of principal in respect
of the intercompany loan and will thereby reduce the outstanding principal
balance of the intercompany loan on that payment date by such amount.
REPAYMENT OF THE INTERCOMPANY LOAN
Payment of principal on the intercompany loan on any payment date will be
made only from and to the extent of distributions received by Funding in
respect of the Funding share of the trust property representing issuer
allocable principal receipts which are payable to the issuer on that payment
date subject to and in accordance with the Funding priority of payments and the
rules for the application of Funding available principal receipts described
under "CASHFLOWS" below.
Subject as provided above and subject to the limited recourse provisions
described below, on each payment date Funding will repay to the issuer
principal on the intercompany loan in amounts sufficient to fund (by payment to
any swap provider or otherwise) the payments of principal of the notes in the
amounts and in the priorities described under "CASHFLOWS -- DISTRIBUTION OF
ISSUER AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY
AND/OR OCCURRENCE OF A TRIGGER EVENT" or in the relevant amounts and priorities
described in any other issuer priority of payments as may apply on that payment
date.
A "CONTROLLED AMORTIZATION AMOUNT" will be due under the intercompany loan
on any payment date equal to the aggregate of the controlled amortization
amounts due on such date under the notes.
At the option of the issuer, Funding may be required to prepay the
intercompany loan in specified circumstances, including funding any optional
redemption of the notes.
ALLOCATION OF LOSSES
Losses on the mortgage loans that have been allocated to Funding on any date
(as described under "THE MORTGAGES TRUST -- LOSSES") shall be allocated to the
intercompany loan of each issuer on such date according to the following
formula:
outstanding principal balance of the
amount of losses allocated intercompany loan of such issuer
to Funding x ----------------------------------------
aggregate outstanding principal balance
of the intercompany loans of all issuers
PROVIDED THAT, for the purposes of the foregoing calculation, the
outstanding principal balance of the intercompany loan of any issuer shall be
reduced by the principal amount outstanding on such date of any special
repayment notes of that issuer.
LIMITED RECOURSE
Funding will only be obliged to pay amounts to the issuer under the
intercompany loan to the extent that it has funds to do so subject to and in
accordance with the relevant Funding priority of payments, the rules for the
application of Funding available revenue receipts and the rules for the
application of Funding available principal receipts described under "CASHFLOWS"
below.
If, on the final repayment date of the intercompany loan, there is a
shortfall between the amount required to pay all outstanding interest on and/or
principal of the notes and the amount available to Funding to pay amounts due
under the intercompany loan in respect thereof, then Funding will not be
obliged to pay that shortfall to the issuer under the intercompany loan
agreement and any claim that the issuer may have against Funding in respect of
that shortfall will be extinguished.
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Following enforcement of the Funding security and distribution of the
proceeds in accordance with the terms of the Funding deed of charge all
outstanding claims of any issuer will be extinguished.
INTERCOMPANY LOAN EVENTS OF DEFAULT
Each intercompany loan agreement will contain events of default (each, an
"INTERCOMPANY LOAN EVENT OF DEFAULT") including, among others, the following
events:
* Funding does not pay any amount payable under the intercompany loan
agreement for a period of 5 London business days after such amount
has become due and payable in accordance with the terms of the
intercompany loan agreement (subject always to the limited recourse
provisions set out in the intercompany loan agreement); or
* Funding does not comply in any material respect with any of its
obligations under the transaction documents (except for its payment
obligations under the intercompany loan agreement) and, if capable
of remedy, such non-compliance is not remedied within 20 London
business days of Funding becoming aware of it or of receiving
notice from the security trustee requiring it to be remedied; or
* a representation or warranty of Funding made or repeated in
connection with any of the transaction documents is incorrect in
any material respect when made or deemed to be made or repeated; or
* an insolvency event occurs in relation to Funding; or
* it is, or becomes, unlawful for Funding to perform its obligations
under any of the transaction documents; or
* the Funding deed of charge is no longer binding or enforceable
against Funding or is no longer effective to create the security
intended to be created by it.
If an intercompany loan event of default occurs and is continuing under the
intercompany loan agreement or any other intercompany loan agreement, then the
security trustee may, by delivery of an intercompany loan enforcement notice to
Funding, declare the intercompany loan and each other intercompany loan to be
immediately due and payable and/or declare the intercompany loan and each other
intercompany loan to be due and payable on demand of the security trustee.
You should be aware that the non-payment by Funding of any amount due under
the intercompany loan agreement in circumstances where Funding does not have
sufficient funds available to make the relevant payment to the issuer will not
be an intercompany loan event of default. The ability of the issuer to repay
the notes will depend, among other things, upon payments received by the issuer
from Funding under the intercompany loan agreement. See "RISK FACTORS --
FUNDING IS NOT REQUIRED TO MAKE PAYMENTS ON THE INTERCOMPANY LOAN IF IT DOES
NOT HAVE ENOUGH MONEY TO DO SO, WHICH COULD ADVERSELY AFFECT THE PAYMENT ON THE
NOTES" and "-- OUR RECOURSE TO FUNDING UNDER THE INTERCOMPANY LOAN IS LIMITED,
WHICH COULD ADVERSELY AFFECT THE PAYMENT ON THE NOTES".
OTHER INTERCOMPANY LOAN AGREEMENTS
Funding has entered into a previous intercompany loan with each of the
previous issuers. In addition, new issuers may be established by Funding for
the purpose of issuing new notes to investors. The intercompany loan agreement
will permit Funding, by written notice to the security trustee and the rating
agencies, to enter into a new intercompany loan agreement with a new issuer at
any time and to borrow additional money under such new intercompany loan
agreement. The drawdown of any new intercompany loan will be financed by the
issue of new notes by the new issuer, and will only be permitted if certain
conditions precedent are satisfied, including among others:
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* that the proceeds of the new intercompany loan are used by Funding
(1) to pay Funding's initial contribution to the mortgages trustee
for the Funding share in respect of any new trust property (which
amount will be paid to the seller by the mortgages trustee in
satisfaction of the initial purchase price for the assignment to
the mortgages trustee of new mortgage loans and related security to
be assigned to the mortgages trustee pursuant to the mortgage sale
agreement) and/or (2) to fund a further contribution to the
mortgages trustee in order to increase the Funding share of the
trust property and/or (3) to refinance the existing debts of
Funding, including the intercompany loan which is funding payments
on the notes; and
* any conditions for such assignment of new loans or such increase in
the funding share of the existing trust property or such
refinancing (if any) have been or will be satisfied prior to
drawdown.
The previous intercompany loan agreements were, and each new intercompany
loan agreement will be, on substantially the same terms as the intercompany
loan agreement, except as to the amount advanced, the date that monies were, or
are, drawn and the terms for repayment. Each intercompany loan is repayable by
Funding from the issuer allocable principal receipts which are allocated to the
relevant new issuer. You should note that each intercompany loan agreement is
subject to the same general terms and conditions, which are then supplemented
by a separate intercompany loan confirmation to provide for the specific terms
and conditions of that related intercompany loan. If Funding enters into a new
intercompany loan agreement, then the provisions of the intercompany loan
agreement that we have entered into with Funding may be varied without our
consent to the extent necessary to reflect the terms of that new intercompany
loan, provided that no variation shall be made to certain fundamental terms of
the intercompany loan, including the payment dates and the limited recourse
nature of the intercompany loan, without the prior written consent of the
Funding secured creditors and the rating agencies.
FUNDING'S BANK ACCOUNTS
Funding currently maintains the "FUNDING GIC ACCOUNT" in its name with the
account bank to which the Funding reserve fund is credited from time to time. A
separate "FUNDING RESERVE LEDGER" is maintained to record amounts standing to
the credit of the Funding reserve fund from time to time. Among other things,
Funding may use amounts credited to the Funding reserve ledger from time to
time to fund issuer reserve funds, if any, in respect of new issuers, to pay
the start-up costs in connection with new issuers and to cover losses and
shortfalls of any issuers as part of fees payable under the relevant
intercompany loan agreement.
On each distribution date the Funding share of each of the mortgages trustee
available revenue receipts and mortgages trustee available principal receipts
payable to Funding under the mortgages trust will initially be deposited in the
Funding GIC account. On each payment date, amounts required to meet Funding's
obligations to its various creditors will, with the consent of the security
trustee, be transferred from the Funding GIC account to the "FUNDING
TRANSACTION ACCOUNT" and applied by the cash manager in accordance with the
relevant Funding priority of payments. Amounts representing Funding's profits
will be retained in the Funding transaction account.
Funding will also establish accounts from time to time to which the reserve
funds it holds in respect of the issuer or any new issuer may be credited.
On the closing date, Funding will establish a reserve account for our
benefit (the "FUNDING (GRANITE 03-3) GIC ACCOUNT") in its name with the account
bank. On the closing date, the issuer reserve fund will be credited to the
Funding (Granite 03-3) GIC account, and a separate "ISSUER RESERVE LEDGER" will
be maintained to record amounts standing to the credit of the issuer reserve
fund from time to time. If at any time an issuer liquidity reserve fund is
required to be established, the issuer liquidity reserve fund will also be
credited to the Funding (Granite 03-3) GIC account and a separate "ISSUER
LIQUIDITY
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reserve ledger" will be maintained to record amounts standing to the credit of
the issuer liquidity reserve fund from time to time. Pursuant to the Funding
deed of charge, Funding will grant a security interest to the security trustee
in respect of its rights and interest in, and all monies standing to the credit
of, the Funding (Granite 03-3) GIC account as security for its obligations to
the issuer under the intercompany loan. Subject to certain limitations, Funding
will be entitled to utilize monies credited to the issuer reserve ledger and
the issuer liquidity reserve ledger to meet certain of its payment obligations
to the issuer under the intercompany loan in circumstances where there would
otherwise be a deficit as described under "CREDIT STRUCTURE -- ISSUER RESERVE
FUND" and "CREDIT STRUCTURE -- ISSUER LIQUIDITY RESERVE FUND".
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CASHFLOWS
DISTRIBUTIONS OF FUNDING AVAILABLE REVENUE RECEIPTS
DEFINITIONS
"FUNDING AVAILABLE REVENUE RECEIPTS" in respect of any payment date will be
calculated by the cash manager on the distribution date immediately preceding
such payment date and will be an amount equal to the sum of:
(1) all mortgages trustee available revenue receipts distributed to
Funding during the interest period ending on the relevant payment
date;
(2) other net income of Funding including all amounts of interest
received on the Funding GIC account and the Funding transaction
account, and/or all income from authorized investments, in each
case to be received on or prior to the relevant payment date; and
(3) the amount standing to the credit of the Funding reserve ledger,
PROVIDED THAT for the purpose only of the payments to be made to any issuer
on the relevant payment date in respect of the intercompany loan made by that
issuer (but not for the purpose of any other payment to be made by Funding on
the relevant payment date including any payment in respect of any other
intercompany loan made by any other issuer), it shall also include the sum of:
* the amount standing to the credit of the issuer reserve ledger in
respect of that issuer (but not in respect of any other issuer),
subject to any limits or conditions on the purposes for which that
reserve may be utilized as set out in the Funding deed of charge;
and
* the amount standing to the credit of the issuer liquidity reserve
ledger, if any, in respect of that issuer (but not in respect of
any other issuer), subject to any limits or conditions of the
purposes for which that reserve may be utilized as set out in the
Funding deed of charge.
In the case of the issuer, the limits and conditions on the utilization of
the issuer reserve fund and the issuer liquidity reserve fund, if any, are
described under "CREDIT STRUCTURE -- ISSUER RESERVE FUND" and "CREDIT STRUCTURE
- -- ISSUER LIQUIDITY RESERVE FUND".
"ISSUER ALLOCABLE REVENUE RECEIPTS" for each issuer will be calculated by
the cash manager on the distribution date immediately preceding the relevant
payment date and will be an amount (not less than zero) for each issuer equal
to the sum of:
(1) the amount calculated by reference to the following formula:
(Funding available revenue outstanding principal balance of the
receipts (excluding all issuer intercompany loan of such issuer
reserve funds and issuer X ----------------------------------------
liquidity
reserve funds) -- R)
aggregate outstanding principal balance
of the intercompany loans of all issuers
where "R" = the sum of items (A), (B), (C) and (D) of the Funding pre-
enforcement revenue priority of payments or, as applicable, the sum of items
(A), (B) and (C) of the Funding post-enforcement priority of payments;
(2) the amount standing to the credit of the issuer reserve ledger in
respect of that issuer (but not in respect of any other issuer),
subject to any limits or conditions on the purposes for which that
reserve may be utilized; and
(3) the amount standing to the credit of the issuer liquidity reserve
ledger, if any, in respect of that issuer (but not in respect of
any other issuer), subject to any limits or conditions on the
purposes for which that reserve may be utilized.
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As of the closing date the only issuers will be Granite Mortgages 03-3 plc,
the first issuer, the second issuer, the third issuer, the fourth issuer, the
fifth issuer and the sixth issuer.
RULES FOR APPLICATION OF FUNDING AVAILABLE REVENUE RECEIPTS
The Funding deed of charge sets out certain rules for the application by
Funding, or the cash manager on its behalf, of Funding available revenue
receipts on each payment date. The principal rules are as follows:
(1) Subject as provided in rules (2) through (4) below, the portion of
issuer allocable revenue receipts remaining after item (M) of the
Funding pre-enforcement revenue priority of payments, together with
any additional Funding available revenue receipts under rule (3)
below, shall constitute "SHARED ISSUER REVENUE RECEIPTS". Shared
issuer revenue receipts will be reallocated by the cash manager on
a payment date in accordance with item (N) of the Funding pre-
enforcement revenue priority of payments and will continue to be
distributed on such payment date in accordance with items (E)
through (M) of the Funding pre-enforcement revenue priority of
payments until there are no remaining amounts of shared issuer
revenue receipts to be reallocated and distributed on such payment
date. If there is more than one issuer that is entitled to shared
issuer revenue receipts, then each such issuer will be reallocated
a portion of shared issuer revenue receipts equal to:
outstanding principal balance of the
amount of shared issuer intercompany loan of such issuer
revenue receipts X ----------------------------------------
aggregate outstanding principal balance
of the intercompany loans of all issuers
(2) No issuer shall be entitled to or shall receive any amount of
issuer allocable revenue receipts from Funding on a payment date on
which such issuer is not required by that issuer to make a payment
on that date in accordance with the relevant issuer pre-enforcement
revenue priority of payments or other relevant issuer priority of
payments which applies to that issuer on that date, and the cash
manager will take account of all of the funds which are or will
become available to that issuer on that payment date and which
constitute issuer available revenue receipts (including any
payments due under any swap agreement and any interest or other
income received or to be received) for that issuer for the purpose
of making this determination.
(3) Unless and until the intercompany loan of any issuer has been
repaid in full and Funding has no further liability under the
relevant intercompany loan agreement, amounts standing to the
credit of the issuer reserve ledger and the issuer liquidity
reserve ledger, if any, established by Funding for that issuer may
only be utilized by Funding in making payments due under that
issuer's intercompany loan and may not be used in or towards the
payment of any other liability of Funding. On the payment date
following the repayment in full of the intercompany loan of that
issuer and provided that Funding has no further liability in
respect of the relevant intercompany loan agreement, any remaining
amounts standing to the credit of the issuer reserve ledger and the
issuer liquidity reserve ledger, if any, of that issuer will
constitute additional Funding available revenue receipts for the
purpose of items (N) through (Q) of the Funding pre-enforcement
revenue priority of payments and may be utilized by Funding in
paying any other liability of Funding subject to and in accordance
with the relevant Funding priority of payments.
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(4) If on any payment date any issuer allocable revenue receipts and/or
any shared issuer revenue receipts are paid to an issuer and are
applied by that issuer in reducing any deficiency recorded on the
issuer principal deficiency ledger of that issuer (but only to the
extent of any deficiency which has arisen as a result of (i) losses
on the mortgage loans allocated by Funding to the issuer and/or
(ii) the application of Funding available principal receipts to
fund the issuer liquidity reserve fund of the issuer but not as a
result of any other principal deficiency of the issuer), then the
issuer allocable revenue receipts and/or shared issuer revenue
receipts so applied shall constitute repayments of principal under
the relevant intercompany loan and shall reduce the outstanding
principal balance of that intercompany loan accordingly.
To the extent that (a) an amount payable to an issuer pursuant to
the Funding pre-enforcement revenue priority of payments on any
payment date would, in accordance with the issuer pre-enforcement
revenue priority of payments relating to that issuer, be credited
by that issuer to its issuer principal deficiency ledger, and (b)
the amount to be treated as principal as a result of making such
credit would result in the issuer available principal receipts of
that issuer on that payment date being in excess of the principal
amount to be repaid by that issuer in respect of its notes on that
payment date, then an amount equal to that excess shall be
reapplied by Funding as Funding available principal receipts.
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.
On each payment date or, in respect of amounts due to third parties by
Funding under item (B), when due, prior to enforcement of the Funding security,
the cash manager will, subject to the rules for application of Funding
available revenue receipts, apply Funding available revenue receipts in the
following order of priority (the "FUNDING PRE-ENFORCEMENT REVENUE PRIORITY OF
PAYMENTS"):
(A) first, to pay amounts due to the security trustee (together with
interest and (to the extent not already inclusive) VAT on those
amounts) and to provide for any amounts due or to become due during
the following interest period to the security trustee, under the
Funding deed of charge or any other transaction document;
(B) second, to pay amounts due to any third party creditors of Funding
(other than those referred to later in this order of priority of
payments or in the Funding pre-enforcement principal priority of
payments) of which the cash manager has notice prior to the
relevant payment date, which amounts have been incurred without
breach by Funding of the transaction documents to which it is a
party (and for which payment has not been provided for elsewhere)
and to provide for any such amounts expected to become due and
payable by Funding during the following interest period and to pay
or discharge any liability of Funding for corporation tax on any
chargeable income or gain of Funding;
(C) third, towards payment of amounts due to the cash manager under the
cash management agreement (together with (to the extent not already
inclusive) VAT on those amounts);
(D) fourth, in no order of priority between them, but in proportion to
the respective amounts due, towards payment of amounts, if any, due
to the account bank under the terms of the bank account agreement
and to the corporate services provider under the corporate services
agreement;
(E) fifth, to pay, in no order of priority among them, to each issuer
an amount up to its issuer allocable revenue receipts in respect of
interest and fees due on that issuer's intercompany loan but not
exceeding the aggregate amount of, and to be
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applied in the amounts and priorities set forth in, the issuer
pre-liquidity payments for that issuer. "ISSUER PRE-LIQUIDITY
PAYMENTS" means, in the case of the issuer, the payments set out
in items (A) through (G) under "-- DISTRIBUTION OF ISSUER
AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER
SECURITY" (or the relevant payments in the equivalent items under
such other issuer priority of payments as may apply to the issuer
on that payment date) and, in the case of any other issuer, the
payment(s) identified as such for that other issuer;
(F) sixth, to pay, in no order of priority among them, such amount for
each issuer up to its issuer allocable revenue receipts as is
necessary to replenish the issuer liquidity reserve fund, if any,
established in respect of that issuer up to the issuer liquidity
reserve required amount (in the case of the issuer, as defined in
"CREDIT STRUCTURE -- ISSUER LIQUIDITY RESERVE FUND") (but only to
the extent that monies have been drawn from the relevant issuer
liquidity reserve fund to pay interest and fees due under the
relevant intercompany loan and only to replenish the issuer
liquidity reserve fund of an issuer to the extent that there are
class A notes issued by such issuer outstanding on such payment
date);
(G) seventh, to pay, in no order of priority among them, to each issuer
an amount up to its issuer allocable revenue receipts in respect of
interest and fees due on that issuer's intercompany loan but not
exceeding the aggregate amount of, and to be applied in the amounts
and priorities set forth in, the issuer post-liquidity payments for
that issuer. "ISSUER POST-LIQUIDITY PAYMENTS" means, in the case of
the issuer, the payments set out in items (H) through (L) under "--
DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS PRIOR TO
ENFORCEMENT OF THE ISSUER SECURITY" (or the relevant payments in
the equivalent items under such other issuer priority of payments
as may apply to the issuer on that payment date) and in the case of
any new issuer the payment(s) identified as such for that new
issuer;
(H) eighth, to pay in no order of priority among them, such amount for
each issuer up to its issuer allocable revenue receipts as is
necessary to fund the issuer reserve fund established in respect of
that issuer up to the issuer reserve required amount (in the case
of the issuer, as defined in "CREDIT STRUCTURE -- ISSUER RESERVE
FUND") or to replenish such issuer reserve fund up to the related
issuer reserve required amount (to the extent that monies have been
drawn from such issuer reserve fund to pay interest and fees under
the relevant intercompany loan);
(I) ninth, to pay, in no order of priority among them, to each issuer
an amount up to its issuer allocable revenue receipts in respect of
interest, principal (in the case of the special repayment notes)
and fees due on that issuer's intercompany loan but not exceeding
the aggregate amount of, and to be applied in the amounts and
priorities set forth in, the issuer pre-reserve payments for that
issuer. "ISSUER PRE-RESERVE PAYMENTS" means the relevant payments
identified as such in the items under such other issuer priority of
payments as may apply to such other issuer on that payment date and
in the case of any new issuer the payment(s) identified as such for
that new issuer;
(J) tenth, in no order of priority among them from each issuer's
allocable revenue receipts, to credit the Funding reserve ledger in
an amount up to the Funding reserve required amount (as defined in
"CREDIT STRUCTURE -- FUNDING RESERVE FUND");
(K) eleventh, to pay, to each issuer in no order of priority among
them, but in proportion to the respective amounts due, an amount up
to its issuer allocable revenue receipts in respect of interest and
fees due on that issuer's intercompany loan but not exceeding the
aggregate amount of, and to be applied in the amounts and
priorities set forth in, the issuer post-reserve payments for
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that issuer. "ISSUER POST-RESERVE PAYMENTS" means, in the case of
the issuer, the payments set out in item (M) under "--
DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS PRIOR TO
ENFORCEMENT OF THE ISSUER SECURITY" (or the relevant payments in
the equivalent items under such other issuer priority of payments
as may apply to the issuer on that payment date) and in the case
of any new issuer the payment(s) identified as such for that
issuer;
(L) twelfth, in no order of priority among them, but in proportion to
the respective amounts due, from issuer allocable revenue receipts,
towards payment of interest and principal amounts due to each
start-up loan provider under the relevant start-up loan agreement;
(M) thirteenth, to pay each issuer, in no order of priority among them,
but in proportion to the respective amounts due, an amount up to
its issuer allocable revenue receipts in respect of interest and
fees and any other amount (if any) due on that issuer's
intercompany loan but not exceeding the aggregate amount of, and to
be applied in the amounts and priorities set forth in, the issuer
post start-up payments for that issuer. "ISSUER POST START-UP
PAYMENTS" means, in the case of the issuer, the payments set out in
items (N) and (O) under "-- DISTRIBUTION OF ISSUER AVAILABLE
REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY" (or
the relevant payments in the equivalent items under such other
issuer priority of payments as may apply to the issuer on that
payment date) and in the case of any new issuer the payment(s)
identified as such for that issuer;
(N) fourteenth, to the extent required, to apply all shared issuer
revenue receipts in the priorities set forth in items (E) through
(M) above;
(O) fifteenth, towards payment to Funding of an amount equal to 0.01%
per annum of the Funding available revenue receipts, which amount
will be retained by Funding as profit, less corporation tax in
respect of those profits provided for or paid at item (B) above;
(P) sixteenth, towards payment of any deferred contribution due to the
mortgages trustee pursuant to the terms of the mortgages trust
deed; and
(Q) last, towards payment to the shareholders of Funding of any
dividend declared by Funding,
PROVIDED THAT no amount will be applied in replenishing any of the reserve
funds held by Funding in respect of an issuer under items (F) and/or (H) above
following an enforcement of the issuer security relating to that issuer.
For the avoidance of doubt, references to the issuer allocable revenue
receipts for a particular issuer in items (E) through (M) (inclusive) above
shall be reduced by any amounts already allocated to that issuer in the above
priority of payments on that payment date.
DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY
DEFINITION OF ISSUER AVAILABLE REVENUE RECEIPTS
"ISSUER AVAILABLE REVENUE RECEIPTS" for the issuer in respect of any payment
date will be calculated by the issuer cash manager on the distribution date
immediately preceding that payment date and will be an amount equal to the sum
of:
* interest, fees and any other amount (excluding principal) paid by
Funding on the relevant payment date in respect of the intercompany
loan;
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* amounts received by the issuer under or in accordance with the
basis rate swap agreement (excluding swap collateral excluded
amounts) and any early termination amounts (other than such early
termination amounts applied or to be applied by the issuer in the
purchase of one or more replacement hedge transactions) received by
the issuer under the swap agreements;
* interest payable on the issuer transaction account and any income
from authorized investments made with funds standing to the credit
of the issuer transaction account, in each case which has been or
will be received on or before the relevant payment date; and
* (only to the extent required after making the calculation set out
below) the aggregate of all principal amounts (if any) repaid by
Funding to the issuer under the intercompany loan on the relevant
payment date which are to be applied on the relevant payment date
to pay items (A) through (E), (G), (I) and/or (K) of the issuer
pre-enforcement revenue priority of payments.
On each distribution date the issuer cash manager will calculate whether
there will be an excess or a deficit of issuer available revenue receipts to
pay items (A) through (O) of the issuer pre-enforcement revenue priority of
payments (after taking account of shared issuer revenue receipts, if any,
available therefor).
Subject as provided below, if there is a deficit in the amount of issuer
available revenue receipts to pay items (A) through (E), (G), (I) and (K) of
the issuer pre-enforcement revenue priority of payments, then the issuer cash
manager shall pay or provide for that deficit by applying amounts which
constitute issuer allocable principal receipts, if any, paid to the issuer and
the issuer cash manager shall make a corresponding entry in the issuer
principal deficiency ledger, as described under "CREDIT STRUCTURE". Issuer
allocable principal receipts may not, however, be used to pay interest to any
class of notes if the application of that interest by the relevant issuer would
create or increase a principal deficiency in respect of a higher-ranking class
of notes issued by such issuer.
DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY
The issuer cash management agreement sets out the order of priority of
distribution by the issuer cash manager, prior to the enforcement of the issuer
security, of issuer available revenue receipts on each payment date. As at the
closing date, the order of priority will be as described in this section.
As used in this prospectus, "DOLLAR CURRENCY SWAP PROVIDER DEFAULT" means
the occurrence of an event of default or downgrade termination event (as
defined in the relevant dollar currency swap agreement) where the dollar
currency swap provider is the defaulting party or the affected party (as
defined in the relevant dollar currency swap agreement). The term "EURO
CURRENCY SWAP PROVIDER DEFAULT" means the occurrence of an event of default or
downgrade termination event (as defined in the relevant euro currency swap
agreement) where the euro currency swap provider is the defaulting party or the
affected party (as defined in the relevant euro currency swap agreement). The
term "BASIS RATE SWAP PROVIDER DEFAULT" means the occurrence of an event of
default or downgrade termination event (as defined in the basis rate swap
agreement) where the basis rate swap provider is the defaulting party or the
affected party (as defined in the basis rate swap agreement). As used in this
prospectus, "ISSUER SWAP PROVIDER DEFAULT" means the occurrence of either a
dollar currency swap provider default, a euro currency swap provider default or
a basis rate swap provider default and "ISSUER SWAP DEFAULT" means the
occurrence of an event of default (as defined in the relevant swap agreement)
where the issuer is the defaulting party (as defined in the relevant swap
agreement).
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On (i) each payment date or (ii) the date when due in respect of amounts due
to third parties under paragraph (C) below, the issuer cash manager will apply
issuer available revenue receipts in the following order of priority (the
"ISSUER PRE-ENFORCEMENT REVENUE PRIORITY OF PAYMENTS"):
(A) first, to pay amounts due to the note trustee, together with
interest and (to the extent not already inclusive) VAT on those
amounts, and to provide for any amounts due or to become due during
the following interest period to the note trustee, under the trust
deed, the issuer deed of charge or any other transaction document;
(B) second, in no order of priority among them but in proportion to the
respective amounts due, to pay amounts due to the agent bank, the
paying agents, the transfer agent and the registrar together with
interest and (to the extent not already inclusive) VAT on those
amounts, and to provide for any costs, charges, liabilities and
expenses due or to become due during the following interest period
to the agent bank, the paying agents, the transfer agent and the
registrar, under the paying agent and agent bank agreement;
(C) third, to pay amounts due to any third party creditors of the
issuer (other than those referred to later in this order of
priority of payments or in the issuer pre-enforcement principal
priority of payments), of which the issuer cash manager has notice
prior to the relevant payment date, which amounts have been
incurred without breach by the issuer of the transaction documents
to which it is a party and for which payment has not been provided
for elsewhere and to provide for any such amounts expected to
become due and payable during the following interest period by the
issuer and to pay or discharge any liability of the issuer for
corporation tax on any chargeable income or gain of the issuer;
(D) fourth, in no order or priority among them but in proportion to the
respective amounts due, to pay amounts due to the issuer cash
manager under the issuer cash management agreement, the corporate
services provider under the corporate services agreement and the
issuer account bank under the issuer bank account agreement
together with (to the extent not already inclusive) VAT on those
amounts, and to provide for any amounts due, or to become due in
the immediately succeeding interest period, to the issuer cash
manager under the issuer cash management agreement, to the
corporate services provider under the corporate services agreement
and to the issuer account bank under the issuer bank account
agreement;
(E) fifth, in no order of priority among them but in proportion to the
respective amounts due, to pay:
* amounts (including such part of any termination payment) due to
the basis rate swap provider (except for any termination
payment or any part thereof due and payable to the basis rate
swap provider as a result of a basis rate swap provider
default, save to the extent such termination payment may be
satisfied by any swap replacement payment received by the
issuer following a downgrade termination event in respect of
the basis rate swap and applied in accordance with this order
of priority of payments);
* amounts due in respect of interest and such part of any
termination payment due to the series 1 class A1 dollar
currency swap provider under the series 1 class A1 dollar
currency swap (except for any termination payment or any part
thereof due and payable to that swap provider as a result of a
dollar currency swap provider default by that swap provider,
save to the extent such termination payment may be satisfied by
any swap replacement payment received by the issuer following a
downgrade termination event in respect of the series 1 class A1
dollar currency swap and applied in accordance with this order
of priority of payments) and from amounts
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received on each payment date in respect of interest from
the series 1 class A1 dollar currency swap provider to pay
on such payment date interest due or overdue on the series 1
class A1 notes to the holders of the series 1 class A1
notes;
* amounts due in respect of interest and such part of any
termination payment due to the series 1 class A2 dollar
currency swap provider under the series 1 class A2 dollar
currency swap (except for any termination payment or any part
thereof due and payable to that swap provider as a result of a
dollar currency swap provider default by that swap provider,
save to the extent such termination payment may be satisfied by
any swap replacement payment received by the issuer following a
downgrade termination event in respect of the series 1 class A2
dollar currency swap and applied in accordance with this order
of priority of payments) and from amounts received on each
payment date in respect of interest from the series 1 class A2
dollar currency swap provider to pay on such payment date
interest due or overdue on the series 1 class A2 notes to the
holders of the series 1 class A2 notes;
* amounts due in respect of interest and such part of any
termination payment due to the series 1 class A3 dollar
currency swap provider under the series 1 class A3 dollar
currency swap (except for any termination payment or any part
thereof due and payable to that swap provider as a result of a
dollar currency swap provider default by that swap provider,
save to the extent such termination payment may be satisfied by
any swap replacement payment received by the issuer following a
downgrade termination event in respect of the series 1 class A3
dollar currency swap and applied in accordance with this order
of priority of payments) and from amounts received on each
payment date in respect of interest from the series 1 class A3
dollar currency swap provider to pay on such payment date
interest due or overdue on the series 1 class A3 notes to the
holders of the series 1 class A3 notes;
* amounts due in respect of interest and such part of any
termination payment due to the series 2 class A euro currency
swap provider under the series 2 class A euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap
replacement payment received by the issuer following a
downgrade termination event in respect of the series 2 class A
euro currency swap and applied in accordance with this order of
priority of payments) and from amounts received on each payment
date in respect of interest from the series 2 class A euro
currency swap provider to pay on such payment date interest due
or overdue on the series 2 class A notes to the holders of the
series 2 class A notes; and
* amounts due to pay on each payment date interest due or overdue
on the series 3 class A notes to the holders of the series 3
class A notes;
(F) sixth, towards a credit to the principal deficiency subledger for
the class A notes in an amount up to the amount necessary to
eliminate any debit on that ledger;
(G) seventh, in no order of priority among them but in proportion to
the respective amounts due, to pay:
* amounts due in respect of interest and such part of any
termination payment due to the series 1 class B dollar currency
swap provider under the series 1 class B dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar
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currency swap provider default by that swap provider, save
to the extent such termination payment may be satisfied by
any swap replacement payment received by the issuer
following a downgrade termination event in respect of the
series 1 class B dollar currency swap and applied in a
ccordance with this order of priority of payments) and from
amounts received on each payment date in respect of interest
from the series 1 class B dollar currency swap provider to
pay on such payment date interest due or overdue on the
series 1 class B notes to the holders of the series 1 class
B notes;
* amounts due in respect of interest and such part of any
termination payment due to the series 2 class B euro currency
swap provider under the series 2 class B euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap
replacement payment received by the issuer following a
downgrade termination event in respect of the series 2 class B
euro currency swap and applied in accordance with this order of
priority of payments) and from amounts received on each payment
date in respect of interest from the series 2 class B euro
currency swap provider to pay on such payment date interest due
or overdue on the series 2 class B notes to the holders of the
series 2 class B notes; and
* amounts due to pay on each payment date interest due or overdue
on the series 3 class B notes to the holders of the series 3
class B notes;
(H) eighth, towards a credit to the principal deficiency subledger for
the class B notes in an amount up to the amount necessary to
eliminate any debit on that ledger;
(I) ninth, in no order of priority among them but in proportion to the
respective amounts due, to pay:
* amounts due in respect of interest and such part of any
termination payment due to the series 1 class M dollar currency
swap provider under the series 1 class M dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap
replacement payment received by the issuer following a
downgrade termination event in respect of the series 1 class M
dollar currency swap and applied in accordance with this order
of priority of payments) and from amounts received on each
payment date in respect of interest from the series 1 class M
dollar currency swap provider to pay on such payment date
interest due or overdue on the series 1 class M notes to the
holders of the series 1 class M notes;
* amounts due in respect of interest and such part of any
termination payment due to the series 2 class M euro currency
swap provider under the series 2 class M euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap
replacement payment received by the issuer following a
downgrade termination event in respect of the series 2 class M
euro currency swap and applied in accordance with this order of
priority of payments) and from amounts received on each payment
date in respect of interest from the series 2 class
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M euro currency swap provider to pay on such payment date
interest due or overdue on the series 2 class M notes to the
holders of the series 2 class M notes; and
* amounts due to pay on each payment date interest due or overdue
on the series 3 class M notes to the holders of the series 3
class M notes;
(J) tenth, to credit the principal deficiency subledger for the class M
notes in an amount up to the amount necessary to eliminate any
debit on that ledger;
(K) eleventh, in no order of priority among them but in proportion to
the respective amounts due, to pay:
* amounts due in respect of interest and such part of any
termination payment due to the series 1 class C dollar currency
swap provider under the series 1 class C dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap
replacement payment received by the issuer following a
downgrade termination event in respect of the series 1 class C
dollar currency swap and applied in accordance with this order
of priority of payments) and from amounts received on each
payment date in respect of interest from the series 1 class C
dollar currency swap provider to pay on such payment date
interest due or overdue on the series 1 class C notes to the
holders of the series 1 class C notes;
* amounts due in respect of interest and such part of any
termination payment due to the series 2 class C euro currency
swap provider under the series 2 class C euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap
replacement payment received by the issuer following a
downgrade termination event in respect of the series 2 class C
euro currency swap and applied in accordance with this order of
priority of payments) and from amounts received on each payment
date in respect of interest from the series 2 class C euro
currency swap provider to pay on such payment date interest due
or overdue on the series 2 class C notes to the holders of the
series 2 class C notes; and
* amounts due to pay on each payment date interest due or overdue
on the series 3 class C notes to the holders of the series 3
class C notes;
(L) twelfth, towards a credit to the principal deficiency subledger for
the class C notes in an amount up to the amount necessary to
eliminate any debit on that ledger;
(M) thirteenth, in no order of priority among them but in proportion to
the respective amounts due, to pay any termination payment to:
* the basis rate swap provider following a basis rate swap
provider default;
* the dollar currency swap provider following a dollar currency
swap provider default; and
* the euro currency swap provider following a euro currency swap
provider default;
(N) fourteenth, to pay to the issuer an amount equal to 0.01% per annum
of the interest received under the intercompany loan, which will be
retained by the issuer as profit, less corporation tax in respect
of those profits provided for or paid at item (C) above; and
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(O) last, to pay to shareholders of the issuer any dividend declared by
the issuer.
If any swap collateral available revenue amounts (as defined in the
glossary) are received by the issuer on a payment date, such swap collateral
available revenue amounts shall be applied by the issuer cash manager on that
payment date in the same manner as it would have applied the receipts which
such swap collateral available revenue amounts replace.
DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT
OF THE FUNDING SECURITY
DEFINITION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS
"FUNDING AVAILABLE PRINCIPAL RECEIPTS" in respect of any payment date will
be calculated by the cash manager or otherwise on behalf of Funding (or,
following enforcement of the Funding security, the security trustee) on the
distribution date immediately preceding that payment date and will be an amount
equal to all Funding principal receipts received by Funding from the mortgages
trustee during the interest period ending on the relevant payment date plus
amounts standing to the credit of the Funding principal ledger on that payment
date provided that, subject as provided otherwise, for the purpose only of
determining the amount of Funding available principal receipts which may be
allocated following an enforcement of the issuer security relating to that
issuer, it may also include the aggregate of any amounts standing to the credit
of the issuer liquidity reserve ledger, if any, and the issuer reserve ledger
of that issuer remaining on that payment date after the application of such
reserve funds in accordance with the Funding pre-enforcement revenue priority
of payments.
RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS
The Funding deed of charge sets out certain rules for the application by
Funding, or the cash manager on its behalf, of Funding available principal
receipts on each payment date. The principal rules are as follows:
(1) On the distribution date immediately preceding such payment date,
the cash manager will calculate the "ISSUER ALLOCABLE PRINCIPAL
RECEIPTS" for each issuer in respect of the relevant payment date
which, subject as provided in paragraphs (2) through (7) below, is
an amount that is equal to the sum of:
(A) the aggregate of:
(a) for any issuer, the amount, if any, by which the issuer
liquidity reserve fund relating to that issuer will be less
than the issuer liquidity reserve required amount in each
case prior to the distribution of Funding available
principal receipts on the payment date immediately
succeeding such distribution date; and
(b) for any issuer which has a money market note still
outstanding, up to the amount equal to the controlled
amortization amount due on such money market note, if any, on
the payment date immediately succeeding such distribution date;
and
(B) for any issuer, an amount equal to the lesser of:
(a) (only if relevant) the principal amount due on the
intercompany loan of such issuer which is an amount equal
to the controlled amortization amount due, if any, on the
payment date immediately succeeding such distribution date
(excluding any amount calculated in accordance with
paragraph 1(A)); and
(b) an amount equal to:
Funding available principal outstanding principal balance on
receipts minus the aggregate such issuer's intercompany loan
amount under (1)(A) above in x --------------------------------
respect of the relevant issuer aggregate outstanding principal
on such payment date balance all intercompany loans
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PROVIDED THAT:
* subject as provided in paragraphs (2) through (7) below, for
the purpose only of determining the amount of issuer allocable
principal receipts which may be allocated and paid to that
issuer (but not to any other issuer) in accordance with this
paragraph (1), following an enforcement of the issuer security
relating to that issuer the amount so determined may be
increased to the extent of the aggregate of any amounts
standing to the credit of the issuer liquidity reserve ledger,
if any, and the issuer reserve ledger of that issuer remaining
on that payment date after the application of such reserve
funds in accordance with the Funding pre-enforcement revenue
priority of payments; and
* for the purpose of determining the amount of shared issuer
principal receipts in accordance with paragraph (6) below,
issuer allocable principal receipts shall be an amount equal to
the amount calculated in accordance with paragraphs (1)(A) and
(1)(B)(b) above and paragraph (1)(B)(a) above shall not apply.
(2) If the notes of any issuer have become immediately due and payable
as a result of the service of a note enforcement notice or if the
intercompany loan of any issuer and the other intercompany loans of
any other issuers have become immediately due and payable as a
result of the service of an intercompany loan enforcement notice or
otherwise on any payment date following the occurrence of any asset
trigger event, principal payments in respect of any intercompany
loan may be made in excess of any controlled amortization amount
and paragraphs (1)(A) and (1)(B)(a) above shall no longer apply in
relation to that issuer and the amount of issuer allocable
principal receipts payable to that issuer on the relevant payment
date may not exceed the amount determined under paragraph (1)(B)(b)
above (save that no deduction shall be made from Funding available
principal receipts) but subject always to any increase in that
amount as a result of the utilization of the issuer reserve fund
and the issuer liquidity reserve fund (if any) following
enforcement of the issuer security relating to that issuer as
provided in that paragraph. Following the occurrence of any non-
asset trigger event (but prior to the occurrence of an asset
trigger event), (1) the reference in paragraph (1)(A)(b) above to
the "controlled amortization amount due on such money market note"
shall be deemed to refer to the "outstanding principal balance of
such money market note", and (2) paragraph (1)(B)(a) above shall no
longer apply in relation to the relevant issuer and the amount of
issuer allocable principal receipts payable to that issuer on the
relevant payment date may not exceed the amount determined under
paragraph (1)(B)(b) above, subject to the same qualifications set
forth in the immediately preceding paragraph.
(3) For the purpose of determining the amount of issuer allocable
principal receipts and/or shared issuer principal receipts which
may be paid to any issuer on a payment date pursuant to paragraph
(1) above or paragraph (6) below, the outstanding principal balance
of that intercompany loan shall be deemed to be reduced by the
amount of: (a) any deficiency recorded on the issuer principal
deficiency ledger of that issuer as at such payment date, but only
to the extent that such deficiency has arisen as a result of (i)
losses on the mortgage loans allocated by Funding to that issuer
and/or (ii) the application of Funding available principal receipts
to fund the issuer liquidity reserve fund of that issuer but not as
a result of any other principal deficiency of that issuer; and (b)
the outstanding principal balance as of such payment date of any
special repayment notes issued by that issuer.
(4) The amount of Funding available principal receipts payable to
each issuer on a payment date will be reduced by an amount equal
to the aggregate of the issuer available revenue receipts of that
issuer which are to be applied on that payment
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date in reducing deficiencies recorded on the issuer principal
deficiency ledgers, but only to the extent that the issuer
available revenue receipts which are to be so applied on that
payment date would not otherwise be payable as principal of the
relevant notes on such payment date.
(5) No issuer shall be entitled to, or shall receive on a payment date,
any amount of issuer allocable principal receipts from Funding
which is not required by that issuer to make a payment on that date
in accordance with the relevant issuer pre-enforcement principal
priority of payments or otherwise to make a payment of principal of
the notes.
(6) The portion of issuer allocable principal receipts (calculated in
accordance with paragraph (1)(B)(b) above), if any, not required to
be applied by the issuer to pay principal of the notes on a payment
date together with the portion of issuer allocable principal
receipts relating to all other issuers not required to be so
applied by such other issuers (or otherwise required to be set
aside by Funding for any issuer) on that payment date (excluding
the amount of any issuer reserve fund or issuer liquidity reserve
fund (if any) of any issuer) shall constitute "SHARED ISSUER
PRINCIPAL RECEIPTS". Shared issuer principal receipts will be
reallocated by the cash manager and distributed on such payment
date among the issuers until there are no remaining amounts of
shared issuer principal receipts to be reallocated and distributed
on such payment date. Save as provided in paragraph (2) above, if
there is more than one issuer that is entitled to shared issuer
principal receipts, then each such issuer will be reallocated a
portion of the shared issuer principal receipts equal to:
outstanding principal balance of the
amount of shared issuer intercompany loan of such issuer
principal receipts X ----------------------------------------
aggregate outstanding principal balance
of the intercompany loans of all issuers
(7) The repayment of any intercompany loan prior to the occurrence of a
trigger event, enforcement of the issuer security by the note
trustee under the issuer deed of charge or enforcement of the
Funding security by the security trustee under the Funding deed of
charge will be made in accordance with the terms of the relevant
intercompany loan agreement.
DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF
THE FUNDING SECURITY
This section sets out the order of priority of payments of Funding available
principal receipts as at the closing date.
On each payment date prior to enforcement of the Funding security, the cash
manager will, subject to the rules for application of Funding available
principal receipts, apply Funding available principal receipts in the following
order of priority (the "FUNDING PRE-ENFORCEMENT PRINCIPAL PRIORITY OF
PAYMENTS"):
(A) first, to fund (either initially or to replenish, as the case may
be) the issuer liquidity reserve fund, if any, of each issuer up to
the issuer liquidity reserve required amount but only from and to
the extent of the issuer allocable principal receipts for that
issuer;
(B) second, to pay to (or, if required under that issuer's intercompany
loan, set aside for) each issuer an amount up to its issuer
allocable principal receipts in respect of principal due (or, if
required under that issuer's intercompany loan, to become due) on
that issuer's intercompany loan, which shall be an amount up to
the aggregate amount of, and shall be applied in the amounts and
priorities set forth in, the issuer principal payments for that
issuer. "ISSUER PRINCIPAL PAYMENTS" means, in relation to the
issuer, the payments set forth in items (A) through (F)
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under "-- DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS
PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY AND/OR OCCURRENCE OF A
TRIGGER EVENT" or the relevant payments set forth in the
equivalent items in such other issuer priority of payments as may
be applicable to the issuer on that payment date and in relation
to any new issuer the paymen t(s) identified as such for that new
issuer;
(C) third, to pay to (or, if required under that issuer's intercompany
loan, set aside for) each issuer an amount up to its allocable
portion of shared issuer principal receipts in respect of principal
due (or, if required under that issuer's intercompany loan, to
become due) on that issuer's intercompany loan, which in the case
of the issuer shall be an amount up to the aggregate amount of, and
shall be applied in the amounts and priorities set forth in, the
issuer principal payments for that issuer until there are no
remaining Funding available principal receipts on such payment
date; and
(D) last, to credit any remaining amounts to the Funding principal
ledger,
PROVIDED THAT no amount will be applied in replenishing the issuer liquidity
reserve fund held by the Funding in respect of an issuer under paragraph (A)
above following an enforcement of the issuer security relating to that issuer.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS
DEFINITION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS
Prior to enforcement of the issuer security, "ISSUER AVAILABLE PRINCIPAL
RECEIPTS" for the issuer in respect of any payment date will be calculated by
the issuer cash manager on the distribution date immediately preceding that
payment date and will be an amount equal to the sum of:
* all principal amounts repaid by Funding to the issuer under the
intercompany loan during the period from (but excluding) the
immediately preceding payment date to (and including) that payment
date; and
* all issuer available revenue receipts which are to be applied on
that payment date to credit the issuer principal deficiency ledger
for any class of notes issued by the issuer,
less
* the aggregate of all principal amounts (if any) repaid by Funding
to the issuer under the intercompany loan on the relevant payment
date which are to be applied on the relevant payment date to pay
items (A) through (E), (G), (I) or (K) of the issuer pre-
enforcement revenue priority of payments.
Following enforcement of the issuer security, "ISSUER AVAILABLE PRINCIPAL
RECEIPTS" for the issuer in respect of any payment date will be the sum
calculated by or on behalf of the note trustee on the distribution date
immediately preceding that payment date as the amount to be repaid to the
issuer under the intercompany loan during the relevant interest period and/or
the sum otherwise recovered by the note trustee (or any receiver appointed on
its behalf) representing the principal amount outstanding of the notes.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY AND/OR THE OCCURRENCE OF A TRIGGER EVENT
Prior to enforcement of the issuer security, and/or the occurrence of a
trigger event, the issuer, or the issuer cash manager on its behalf, will apply
any issuer available principal receipts on each payment date in the following
manner (the "ISSUER PRE-ENFORCEMENT PRINCIPAL PRIORITY OF PAYMENTS"):
(A) first, amounts due in respect of principal and such part of any
termination payment due to the series 1 class A1 dollar currency
swap provider under the series 1 class A1 dollar currency swap
(except for any termination payment or
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any part thereof due and payable to that swap provider as a result
of a dollar currency swap provider default by that swap provider,
save to the extent such termination payment may be satisfied by
any swap replacement payment received by the issuer following a
downgrade termination event in respect of the series 1 class A1
dollar currency swap and applied in accordance with this order of
priority of payments) and from amounts received in respect of
principal from the series 1 class A1 dollar currency swap provider
to pay up to the series 1 class A1 controlled amortization amount
to the holders of the series 1 class A1 notes;
(B) second, amounts due in respect of principal and such part of any
termination payment due to the series 1 class A2 dollar currency
swap provider under the series 1 class A2 dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar currency swap
provider default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade termination
event in respect of the series 1 class A2 dollar currency swap and
applied in accordance with this order of priority of payments) and
from amounts received in respect of principal from the series 1
class A2 dollar currency swap provider to pay up to the series 1
class A2 controlled amortization amount to the holders of the
series 1 class A2 notes;
(C) third, in no order of priority between them but in proportion to
the respective amounts due, to pay:
* amounts due in respect of principal and such part of any
termination payment due to the series 1 class A3 dollar
currency swap provider under the series 1 class A3 dollar
currency swap (except for any termination payment or any part
thereof due and payable to that swap provider as a result of a
dollar currency swap provider default by that swap provider,
save to the extent such termination payment may be satisfied by
any swap replacement payment received by the issuer following a
downgrade termination event in respect of the series 1 class A3
dollar currency swap and applied in accordance with this order
of priority of payments) and from amounts received in respect
of principal from the series 1 class A3 dollar currency swap
provider to pay up to the series 1 class A3 controlled
amortization amount to the holders of the series 1 class A3
notes; and
* amounts due in respect of principal and such part of any
termination payment due to the series 2 class A euro currency
swap provider under the series 2 class A euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap
replacement payment received by the issuer following a
downgrade termination event in respect of the series 2 class A
euro currency swap and applied in accordance with this order of
priority of payments) and from amounts received in respect of
principal from the series 2 class A euro currency swap provider
to pay up to the series 2 class A controlled amortization
amount to the holders of the series 2 class A notes;
* up to the series 3 class A controlled amortization amount to
the holders of the series 3 class A notes;
(D) fourth, provided that the issuer reserve requirement, the issuer
arrears test and the subordinated principal test are satisfied on
such payment date (or, if any of the issuer reserve requirement,
the issuer arrears test and the subordinated
182
principal test are not satisfied on such payment date, but the
class A notes have been repaid in full), in no order of priority
among them but in proportion to the respective amounts due, to
pay:
* amounts due in respect of principal and such part of any
termination payment due to the series 1 class B dollar currency
swap provider under the series 1 class B dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap
replacement payment received by the issuer following a
downgrade termination event in respect of the series 1 class B
dollar currency swap and applied in accordance with this order
of priority of payments) and from amounts received in respect
of principal from the series 1 class B dollar currency swap
provider to pay up to the series 1 class B controlled
amortization amount to the holders of the series 1 class B
notes;
* amounts due in respect of principal and such part of any
termination payment due to the series 2 class B euro currency
swap provider under the series 2 class B euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap
replacement payment received by the issuer following a
downgrade termination event in respect of the series 2 class B
euro currency swap and applied in accordance with this order of
priority of payments) and from amounts received in respect of
principal from the series 2 class B euro currency swap provider
to pay up to the series 2 class B controlled amortization
amount to the holders of the series 2 class B notes; and
* up to the series 3 class B controlled amortization amount to
the holders of the series 3 class B notes;
(E) fifth, provided that the issuer reserve requirement, the
issuer arrears test and the subordinated principal test are
satisfied on such payment date (or, if any of the issuer
reserve requirement, the issuer arrears test and the
subordinated principal test are not satisfied on such
payment date, but the class A notes have been repaid in
full), in no order of priority among them but in proportion
to the respective amounts due, to pay:
* amounts due in respect of principal and such part of any
termination payment due to the series 1 class M dollar currency
swap provider under the series 1 class M dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap
replacement payment received by the issuer following a
downgrade termination event in respect of the series 1 class M
dollar currency swap and applied in accordance with this order
of priority of payments) and from amounts received in respect
of principal from the series 1 class M dollar currency swap
provider to pay up to the series 1 class M controlled
amortization amount to the holders of the series 1 class M
notes;
* amounts due in respect of principal and such part of any
termination payment due to the series 2 class M euro currency
swap provider under the series 2 class M euro currency swap
(except for any termination payment or any part thereof due
and payable to that swap provider as a result of a euro
currency swap provider default by that swap provider, save to
the extent such termination payment may be satisfied by any
swap replacement payment received by the issuer following a
downgrade termination event in
183
respect of the series 2 class M euro currenc y swap and
applied in accordance with this order of priority of payments)
and from amounts received in respect of principal from the
series 2 class M euro currency swap provider to pay up to the
series 2 class M controlled amortization amount to the holders
of the series 2 class M notes; and
* up to the series 3 class M controlled amortization amount to
the holders of the series 3 class M notes; and
(F) last, provided that the issuer reserve requirement, the issuer
arrears test and the subordinated principal test are satisfied on
such payment date (or, if any of the issuer reserve requirement, the
issuer arrears test and the subordinated principal test are not
satisfied on such payment date, but the class A notes have been
repaid in full), in no order of priority among them but in
proportion to the respective amounts due, to pay:
* amounts due in respect of principal and such part of any
termination payment due to the series 1 class C dollar currency
swap provider (except for any termination payment or any part
thereof due and payable to that swap provider as a result of a
dollar currency swap provider default by that dollar currency
swap provider, save to the extent such termination payment may
be satisfied by any swap replacement payment received by the
issuer following a downgrade termination event in respect of
the series 1 class C dollar currency swap and applied in
accordance with this order of priority of payments) under the
series 1 class C dollar currency swap and from amounts received
in respect of principal from the series 1 class C dollar
currency swap provider to pay up to the series 1 class C
controlled amortization amount to the holders of the series 1
class C notes;
* amounts due in respect of principal and such part of any
termination payment due to the series 2 class C euro currency
swap provider under the series 2 class C euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap
replacement payment received by the issuer following a
downgrade termination event in respect of the series 2 class C
euro currency swap and applied in accordance with this order of
priority of payments) and from amounts received in respect of
principal from the series 2 class C euro currency swap provider
to pay up to the series 2 class C controlled amortization
amount to the holders of the series 2 class C notes; and
* up to the series 3 class C controlled amortization amount to
the holders of the series 3 class C notes.
If any swap collateral available principal amounts (as defined in the
glossary) are received by the issuer on a payment date, such swap collateral
available principal amounts shall be applied by the issuer cash manager on that
payment date in the same manner as it would have applied the receipts which
such swap collateral available principal amounts replace.
The "ISSUER ARREARS TEST" is satisfied on a payment date if the issuer or
the issuer cash manager on its behalf calculates on the distribution date
immediately preceding that payment date that, as of the last day of the trust
calculation period immediately preceding that distribution date (i) the
aggregate current balance of the mortgage loans which are then in arrears for
at least 3 months is less than 4% of the aggregate current balance of all
mortgage loans, unless the rating agencies have confirmed that the then current
ratings of the notes will not be adversely affected by the issuer arrears test
not having been met; and (ii) the aggregate interest arrears in respect of all
the mortgage loans in the
184
mortgages trust as a percentage of the aggregate gross interest due on all
mortgage loans during the previous 12 months does not exceed 2%, or such other
percentage as is then acceptable to the then current rating agencies at such
time.
The "ISSUER RESERVE REQUIREMENT" is satisfied on a payment date if, after
taking account of the application of any Funding available revenue receipts to
the credit of the issuer reserve ledger, the amount of funds in the issuer
reserve fund is equal to the issuer reserve required amount.
The "SUBORDINATED PRINCIPAL TEST" is satisfied if the following conditions
are met:
* on any payment date occurring on or after the fourth anniversary of
the closing date; and
* on any payment date on which:
(A) the percentage equal to the aggregate principal amount
outstanding of the class B notes, the class M notes and the class C
notes as at that payment date as a percentage of the aggregate
principal amount outstanding of the notes as at that payment date
is greater than
(B) the product of (i) 2 and (ii) the percentage equal to the
aggregate principal amount outstanding of the class B notes, the
class M notes and the class C notes as at the closing date as a
percentage of the aggregate principal amount outstanding of the
notes as at the closing date.
The purpose of the subordinated principal test is to ensure that there is a
sufficient level of credit enhancement provided to the class A notes by the
class B notes, the class M notes and the class C notes while the notes are
outstanding.
The "CONTROLLED AMORTIZATION AMOUNT" for each series and/or class of notes
of the issuer for any payment date set forth below is an amount equal to the
amount which the issuer would be required to repay in respect of such class of
notes so that on that payment date the aggregate principal amount outstanding
of such class of notes has been reduced to (but is not less than) the stated
amount or "TARGET BALANCE" set out in the following table:
PAYMENT [GBP]($*) TARGET BALANCE [GBP]($*) TARGET BALANCE [GBP]($*) TARGET BALANCE [GBP]($*) TARGET BALANCE
DATE FOR SERIES 1 CLASS A1 FOR SERIES 1 CLASS A2 FOR SERIES 1 CLASS A3 FOR SERIES 1 CLASS B
OCCURRING IN: NOTES NOTES NOTES NOTES
- ------------- -------------------------- -------------------------- -------------------------- ------------------------
([GBP]) $ ([GBP]) $ ([GBP]) $ ([GBP]) $
------------ ------------ ------------ ------------ ------------ ------------ ----------- -----------
Jan 04 [336,925,956] [528,973,751] [477,707,006] [750,000,000] [318,471,338] [500,000,000] [45,849,532] [72,000,000]
Apr 04 [233,204,425] [366,130,947] [477,707,006] [750,000,000] [318,471,338] [500,000,000] [45,849,532] [72,000,000]
Jul 04 [135,110,657] [212,123,731] [477,707,006] [750,000,000] [318,471,338] [500,000,000] [45,849,532] [72,000,000]
Oct 04 [42,339,299] [66,472,699] [477,707,006] [750,000,000] [318,471,338] [500,000,000] [45,849,532] [72,000,000]
Jan 05 [0] [0] [432,308,571] [678,724,457] [318,471,338] [500,000,000] [45,849,532] [72,000,000]
Apr 05 [0] [0] [349,331,346] [548,450,214] [318,471,338] [500,000,000] [45,849,532] [72,000,000]
Jul 05 [0] [0] [270,856,332] [425,244,441] [318,471,338] [500,000,000] [45,849,532] [72,000,000]
Oct 05 [0] [0] [196,639,245] [308,723,615] [318,471,338] [500,000,000] [45,849,532] [72,000,000]
Jan 06 [0] [0] [126,449,059] [198,525,022] [318,471,338] [500,000,000] [45,849,532] [72,000,000]
Apr 06 [0] [0] [60,067,278] [94,305,627] [318,471,338] [500,000,000] [45,849,532] [72,000,000]
Jul 06 [0] [0] [0] [0] [317,168,866] [497,955,120] [45,849,532] [72,000,000]
Oct-06 [0] [0] [0] [0] [288,661,641] [453,198,777] [45,849,532] [72,000,000]
Jan 07 [0] [0] [0] [0] [261,701,172] [410,870,840] [45,849,532] [72,000,000]
Apr 07 [0] [0] [0] [0] [236,203,535] [370,839,549] [45,849,532] [72,000,000]
July 07 [0] [0] [0] [0] [212,089,358] [332,980,292] [45,849,532] [72,000,000]
Oct 07 [0] [0] [0] [0] [206,323,652] [323,928,134] [36,991,043] [58,089,035]
Jan 08 [0] [0] [0] [0] [188,616,059] [296,127,213] [34,983,968] [54,937,218]
Apr 08 [0] [0] [0] [0] [171,869,252] [269,834,726] [33,085,794] [51,956,413]
Jul 08 [0] [0] [0] [0] [156,031,099] [244,968,826] [31,290,612] [49,137,341]
Oct 08 [0] [0] [0] [0] [141,052,299] [221,452,110] [29,592,834] [46,471,228]
Jan 09 [0] [0] [0] [0] [126,886,225] [199,211,373] [27,987,175] [43,949,774]
PAYMENT [GBP]($*) TARGET BALANCE [GBP]($*) TARGET BALANCE
DATE FOR SERIES 1 CLASS M FOR SERIES 1 CLASS C
OCCURRING IN: NOTES NOTES
- ------------- ------------------------ ------------------------
([GBP]) $ ([GBP]) $
----------- ----------- ----------- -----------
Jan 04 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Apr 04 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Jul 04 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Oct 04 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Jan 05 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Apr 05 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Jul 05 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Oct 05 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Jan 06 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Apr 06 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Jul 06 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Oct-06 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Jan 07 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Apr 07 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
July 07 [17,193,574] [27,000,000] [39,545,221] [62,100,000]
Oct 07 [13,871,641] [21,783,388] [31,904,774] [50,101,793]
Jan 08 [13,118,988] [20,601,457] [30,173,673] [47,383,350]
Apr 08 [12,407,173] [19,483,655] [28,536,498] [44,812,406]
Jul 08 [11,733,980] [18,426,503] [26,988,153] [42,380,957]
Oct 08 [11,097,313] [17,426,711] [25,523,819] [40,081,434]
Jan 09 [10,495,190] [16,481,165] [24,138,938] [37,906,680]
* The target balances for the series 1 class A notes which are stated in US
dollars in the above table have been calculated based upon the dollar
currency swap rate under the dollar currency swaps for the series 1 class A
notes of [GBP]1 = $[__].
185
[GBP]([E]*) TARGET [GBP]([E]*) TARGET [GBP]([E]*) TARGET [GBP]([E]*)) TARGET
PAYMENT DATE BALANCE FOR BALANCE FOR BALANCE FOR BALANCE FOR
OCCURRING IN: SERIES 2 CLASS A NOTES SERIES 2 CLASS B NOTES SERIES 2 CLASS M NOTES SERIES 2 CLASS C NOTES
- ------------- -------------------------- ------------------------ ---------------------- ------------------------
Jan 04 [344,827,586] [500,000,000] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Apr 04 [344,827,586] [500,000,000] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Jul 04 [344,827,586] [500,000,000] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Oct 04 [344,827,586] [500,000,000] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Jan 05 [344,827,586] [500,000,000] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Apr 05 [344,827,586] [500,000,000] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Jul 05 [344,827,586] [500,000,000] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Oct 05 [344,827,586] [500,000,000] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Jan 06 [344,827,586] [500,000,000] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Apr 06 [344,827,586] [500,000,000] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Jul 06 [343,417,324] [497,955,120] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Oct 06 [312,550,880] [453,198,777] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Jan 07 [283,359,200] [410,870,840] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Apr 07 [255,751,413] [370,839,549] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Jul 07 [229,641,581] [332,980,292] [17,379,310] [25,200,000] [6,482,759] [9,400,000] [14,962,524] [21,700,000]
Oct 07 [223,398,713] [323,928,134] [14,021,491] [20,331,162] [5,230,239] [7,583,846] [12,071,647] [17,507,390]
Jan 08 [204,225,664] [269,127,213] [13,260,708] [19,228,026] [4,946,454] [7,172,359] [11,416,659] [16,557,467]
Apr 08 [186,092,914] [269,834,726] [12,541,203] [18,184,744] [4,678,068] [6,783,198] [10,797,209] [15,659,085]
Jul 08 [168,944,018] [244,968,826] [11,860,738] [17,198,069] [4,424,243] [6,415,153] [10,211,370] [14,809,449]
Oct 08 [152,725,593] [221,452,110] [11,217,193] [16,264,930] [4,184,191] [6,067,077] [9,657,318] [14,005,912]
Jan 09 [137,387,154] [199,211,373] [10,608,566] [15,382,421] [3,957,164] [5,737,887] [9,133,327] [13,245,974]
* The target balances for the series 2 notes which are stated in euro in the
above table have been calculated based upon the euro currency swap rate under
the euro currency swaps for the series 2 notes of [GBP]1 = [e][__].
[GBP] TARGET BALANCE [GBP] TARGET BALANCE [GBP] TARGET BALANCE [GBP] TARGET BALANCE
PAYMENT DATE FOR SERIES 3 FOR SERIES 3 FOR SERIES 3 FOR SERIES 3
OCCURRING IN: CLASS A NOTES CLASS B NOTES CLASS M NOTES CLASS C NOTES
- ------------- -------------------- -------------------- -------------------- --------------------
Jan 04 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Apr 04 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Jul 04 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Oct 04 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Jan 05 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Apr 05 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Jul 05 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Oct 05 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Jan 06 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Apr 06 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Jul 06 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Oct 06 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Jan 07 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Apr 07 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Jul 07 [250,000,000] [18,900,000] [7,100,000] [16,300,000]
Oct 07 [250,000,000] [15,248,372] [5,728,224] [13,150,712]
Jan 08 [250,000,000] [14,421,020] [5,417,420] [12,437,176]
Apr 08 [250,000,000] [13,638,558] [5,123,480] [11,762,355]
Jul 08 [250,000,000] [12,898,552] [4,845,488] [11,124,148]
Oct 08 [250,000,000] [12,198,697] [4,582,579] [10,520,570]
Jan 09 [250,000,000] [11,536,816] [4,333,936] [9,949,741]
Notwithstanding the foregoing, on the payment date immediately following the
step- up date in respect of the issuer and on each payment date thereafter:
(1) the target balance for the series 1 class A1 notes and the series 1
class A2 notes will be zero; and
(2) the target balances for each other class of notes will be an amount
equal to the greater of:
186
(a) zero, and
(b) the aggregate principal amount outstanding on that class of
notes as at the immediately preceding payment date (after
taking into account principal payments on such payment date)
less an amount equal to the product of:
(i) the sum of (1) the product of (A) the sum of the mortgages
trustee principal receipts for each distribution date since
the immediately preceding payment date, and (B) the Funding
share percentage or, as applicable, the weighted average
Funding share percentage applicable as at the later to
occur of the immediately preceding assignment date, the
immediately preceding Funding contribution date and the
immediately preceding distribution date, and (2) the amount
standing to the credit of the Funding principal ledger as
at the end of the preceding payment date (after application
of Funding available principal receipts on that preceding
payment date); and
(ii)the quotient of (A) the outstanding principal balance of
the issuer's intercompany loan as at the immediately
preceding payment date (after taking into account principal
payments on such payment date) less the aggregate of
amounts recorded on the principal deficiency ledger of the
issuer, divided by (B) the aggregate outstanding principal
balance on all intercompany loans as at the immediately
preceding payment date (after taking into account principal
payments on such payment date) less the sum of (1) the
aggregate outstanding principal balance of all special
repayment notes and (2) the aggregate of amounts recorded
on the principal deficiency ledgers of all issuers; and
(iii) either:
(1) if the class A notes have not been repaid in full on
that payment date and either the issuer arrears test
or the issuer reserve requirement or the subordinated
principal test has not been satisfied on such payment
date:
(a) in relation to class A notes, the quotient of (A)
the aggregate principal amount outstanding on the
relevant class of notes as at the immediately
preceding payment date (after taking into account
principal payments on such payment date), divided
by (B) the aggregate principal amount outstanding
on all class A notes of the issuer as at the
immediately preceding payment date (after taking
into account principal payments).
(b) in relation to any other class of notes, 0; and
(2) in any other case, the quotient of (A) the aggregate
principal amount outstanding on the relevant class of
notes as at the immediately preceding payment date
(after taking into account principal payments on such
payment date), divided by (B) the aggregate principal
amount outstanding on all notes of the issuer as at
the immediately preceding payment date (after taking
into account principal payments on such payment date).
To the extent not repaid earlier, the full principal amount outstanding on a
class of notes will become due and payable on the final maturity date of that
class of notes.
187
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS FOLLOWING THE OCCURRENCE OF
A NON-ASSET TRIGGER EVENT AND PRIOR TO THE OCCURRENCE OF AN ASSET TRIGGER
EVENT
Following the occurrence of a non-asset trigger event but prior to the
enforcement of the Funding security under the Funding deed of charge and/or the
issuer security under the issuer deed of charge, the issuer cash manager will
apply issuer available principal receipts in the following order of priority:
(A) first, to pay amounts (including such part of any termination
payment) due to the series 1 class A1 dollar currency swap provider
under the series 1 class A1 dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such termination
payment may be satisfied by any swap replacement payment received
by the issuer following a downgrade termination event in respect of
the series 1 class A1 dollar currency swap and applied in
accordance with this order of priority of payments) and from
amounts received from the series 1 class A1 dollar currency swap
provider to repay the series 1 class A1 notes until the series 1
class A1 notes have been repaid in full;
(B) second, to pay amounts (including such part of any termination
payment) due to the series 1 class A2 dollar currency swap provider
under the series 1 class A2 dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such termination
payment may be satisfied by any swap replacement payment received
by the issuer following a downgrade termination event in respect of
the series 1 class A2 dollar currency swap and applied in
accordance with this order of priority of payments) and from
amounts received from the series 1 class A2 dollar currency swap
provider to repay the series 1 class A2 notes until the series 1
class A2 notes have been repaid in full;
(C) third, in no order of priority between them, but in proportion to
the amounts due:
* to pay amounts (including such part of any termination payment)
due to the series 1 class A3 dollar currency swap provider
under the series 1 class A3 dollar currency swap (except for
any termination payment or any part thereof due and payable to
that swap provider as a result of a dollar currency swap
provider default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class A3 dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class A3 dollar currency swap provider to repay the series 1
class A3 notes until the series 1 class A3 notes have been
repaid in full; and
* to pay amounts (including such part of any termination payment)
due to the series 2 class A euro currency swap provider under
the series 2 class A euro currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a euro currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 2 class A euro
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
2 class A euro currency swap provider to repay the series 2
class A notes until the series 2 class A notes have been repaid
in full;
* to repay the series 3 class A notes until the series 3 class A
notes have been repaid in full;
188
(D) fourth, in no order of priority among them, but in proportion to
the amounts due:
* to pay amounts (including such part of any termination payment)
due to the series 1 class B dollar currency swap provider under
the series 1 class B dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class B dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class B dollar currency swap provider to repay the series 1
class B notes until the series 1 class B notes have been repaid
in full;
* to pay amounts (including such part of any termination payment)
due to the series 2 class B euro currency swap provider under
the series 2 class B euro currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a euro currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 2 class B euro
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
2 class B euro currency swap provider to repay the series 2
class B notes until the series 2 class B notes have been repaid
in full; and
* to repay the series 3 class B notes until the series 3 class B
notes have been repaid in full;
(E) fifth, in no order of priority among them, but in proportion
to the amounts due:
* to pay amounts (including such part of any termination payment)
due to the series 1 class M dollar currency swap provider under
the series 1 class M dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class M dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class M dollar currency swap provider to repay the series 1
class M notes until the series 1 class M notes have been repaid
in full;
* to pay amounts (including such part of any termination payment)
due to the series 2 class M euro currency swap provider under
the series 2 class M euro currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a euro currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 2 class M euro
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
2 class M euro currency swap provider to repay the series 2
class M notes until the series 2 class M notes have been repaid
in full; and
* to repay the series 3 class M notes until the series 3 class M
notes have been repaid in full; and
189
(F) last, in no order of priority among them, but in proportion to
the amounts due:
* to pay amounts (including such part of any termination payment)
due to the series 1 class C dollar currency swap provider under
the series 1 class C dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class C dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class C dollar currency swap provider to repay the series 1
class C notes until the series 1 class C notes have been repaid
in full;
* to pay amounts (including such part of any termination payment)
due to the series 2 class C euro currency swap provider under
the series 2 class C euro currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a euro currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 2 class C euro
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
2 class C euro currency swap provider to repay the series 2
class C notes until the series 2 class C notes have been repaid
in full; and
* to repay the series 3 class C notes until the series 3 class C
notes have been repaid in full.
If any swap collateral available principal amounts (as defined in the
glossary) are received by the issuer on a payment date, such swap collateral
available principal amounts shall be applied by the issuer cash manager on that
payment date in the same manner as it would have applied the receipts which
such swap collateral available principal amounts replace.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS FOLLOWING THE OCCURRENCE OF
AN ASSET TRIGGER EVENT
Following the occurrence of an asset trigger event but prior to enforcement
of the Funding security under the Funding deed of charge and/or the issuer
security under the issuer deed of charge, the issuer cash manager will apply
issuer available principal receipts in the following order of priority:
(A) first, in no order of priority among them, but in proportion to the
amounts due:
* to pay amounts (including such part of any termination payment)
due to the series 1 class A1 dollar currency swap provider
under the series 1 class A1 dollar currency swap (except for
any termination payment or any part thereof due and payable to
that swap provider as a result of a dollar currency swap
provider default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class A1 dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class A1 dollar currency swap provider to repay the series 1
class A1 notes until the series 1 class A1 notes have been
repaid in full;
* to pay amounts (including such part of any termination payment)
due to the series 1 class A2 dollar currency swap provider
under the series 1 class A2 dollar currency swap (except for
any termination payment or any part thereof due and payable to
that swap provider as a result of a dollar currency swap
190
provider default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class A2 dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class A2 dollar currency swap provider to repay the series 1
class A2 notes until the series 1 class A2 notes have been
repaid in full;
* to pay amounts (including such part of any termination payment)
due to the series 1 class A3 dollar currency swap provider
under the series 1 class A3 dollar currency swap (except for
any termination payment or any part thereof due and payable to
that swap provider as a result of a dollar currency swap
provider default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class A3 dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class A3 dollar currency swap provider to repay the series 1
class A3 notes until the series 1 class A3 notes have been
repaid in full;
* to pay amounts (including such part of any termination payment)
due to the series 2 class A euro currency swap provider under
the series 2 class A euro currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a euro currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 2 class A euro
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
2 class A euro currency swap provider to repay the series 2
class A notes until the series 2 class A notes have been repaid
in full; and
* to repay the series 3 class A notes until the series 3 class A
notes have been repaid in full;
(B) second, in no order of priority among them, but in proportion to
the amounts due:
* to pay amounts (including such part of any termination payment)
due to the series 1 class B dollar currency swap provider under
the series 1 class B dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class B dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class B dollar currency swap provider to repay the series 1
class B notes until the series 1 class B notes have been repaid
in full;
* to pay amounts (including such part of any termination payment)
due to the series 2 class B euro currency swap provider under
the series 2 class B euro currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a euro currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 2 class B euro
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
2 class B euro currency swap provider to repay the series 2
class B notes until the series 2 class B notes have been repaid
in full; and
191
* to repay the series 3 class B notes until the series 3 class B
notes have been repaid in full;
(C) third, in no order of priority among them, but in proportion to the
amounts due:
* to pay amounts (including such part of any termination payment)
due to the series 1 class M dollar currency swap provider under
the series 1 class M dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class M dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class M dollar currency swap provider to repay the series 1
class M notes until the series 1 class M notes have been repaid
in full;
* to pay amounts (including such part of any termination payment)
due to the series 2 class M euro currency swap provider under
the series 2 class M euro currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a euro currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 2 class M euro
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
2 class M euro currency swap provider to repay the series 2
class M notes until the series 2 class M notes have been repaid
in full; and
* to repay the series 3 class M notes until the series 3 class M
notes have been repaid in full; and
(D) last, in no order of priority among them, but in proportion to the
amounts due:
* to pay amounts (including such part of any termination payment)
due to the series 1 class C dollar currency swap provider under
the series 1 class C dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class C dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class C dollar currency swap provider to repay the series 1
class C notes until the series 1 class C notes have been repaid
in full;
* to pay amounts (including such part of any termination payment)
due to the series 2 class C euro currency swap provider under
the series 2 class C euro currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a euro currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 2 class C euro
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
2 class C euro currency swap provider to repay the series 2
class C notes until the series 2 class C notes have been repaid
in full; and
* to repay the series 3 class C notes until the series 3 class C
notes have been repaid in full.
192
If any swap collateral available principal amounts (as defined in the
glossary) are received by the issuer on a payment date, such swap collateral
available principal amounts shall be applied by the issuer cash manager on that
payment date in the same manner as it would have applied the receipts which
such swap collateral available principal amounts replace.
DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND FUNDING AVAILABLE
REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE FUNDING SECURITY
The Funding deed of charge sets out the order of priority of distribution by
the security trustee, following service of an intercompany loan enforcement
notice, of amounts received or recovered by the security trustee or a receiver
appointed on its behalf.
The security trustee (or the cash manager on its behalf) will apply amounts
received or recovered following enforcement of the Funding security on each
payment date in accordance with the following order of priority (known as the
"FUNDING POST-ENFORCEMENT PRIORITY OF PAYMENTS"):
(A) first, to pay amounts due to the security trustee and any receiver
appointed by the security trustee, together with interest and (to
the extent not already inclusive) VAT on those amounts, and to
provide for any amounts due or to become due to the security
trustee and the receiver in the following interest period under the
Funding deed of charge or any other transaction document;
(B) second, towards payment of amounts due and payable to the cash
manager and any costs, charges, liabilities and expenses then due
or to become due and payable to the cash manager under the cash
management agreement, together with (to the extent not already
inclusive) VAT on those amounts;
(C) third, in no order of priority between them but in proportion to
the respective amounts due, towards payment of amounts (if any) due
to the account bank under the terms of the bank account agreement
and to the corporate services provider under the corporate services
agreement;
(D) fourth, in no order of priority among them but in proportion to the
respective amounts due, to each issuer its issuer allocable revenue
receipts and issuer allocable principal receipts towards payment of
amounts of interest, principal and fees due to such issuer under
such issuer's intercompany loan agreement, which in the case of the
issuer shall be up to the aggregate of the amounts, and shall be
applied in the amounts and priorities, as set forth in "--
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS AND ISSUER
AVAILABLE REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE ISSUER
SECURITY" below;
(E) fifth, towards payment of amounts due to each start-up loan
provider under the relevant start-up loan agreement;
(F) sixth, towards payment of any deferred contribution due to the
mortgages trustee under the mortgages trust deed; and
(G) last, to pay any amount remaining following the application of
principal and revenue set forth in items (A) through (F) above, to
Funding.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS AND ISSUER AVAILABLE
REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE ISSUER SECURITY
Following enforcement of the issuer security, "ISSUER AVAILABLE PRINCIPAL
RECEIPTS" for the issuer in respect of any payment date means the sum
calculated by or on behalf of the note trustee on the distribution date
immediately preceding such payment date as the amount to be repaid by Funding
to the issuer under the intercompany loan during the relevant interest period
and/or the sum otherwise recovered by the note trustee (or the receiver
appointed on its behalf) representing the outstanding principal balance of the
notes.
193
The issuer deed of charge sets out the order of priority of distribution by
or on behalf of the note trustee, following enforcement of the issuer security,
of amounts received or recovered by the note trustee (or a receiver appointed
on its behalf) pursuant to the issuer deed of charge. If the Funding security
is enforced under the Funding deed of charge, then there will be an event of
default in respect of the issuer security under each issuer deed of charge.
On each payment date the note trustee (or the issuer cash manager on its
behalf) will apply amounts received or recovered following enforcement of the
issuer security as follows:
(A) first, to pay amounts due to the note trustee (and any receiver
appointed by the note trustee) together with the interest and VAT
on those amounts and to provide for any amounts then due or to
become due and payable to the note trustee and the receiver under
the provisions of the trust deed, the issuer deed of charge and any
other transaction document;
(B) second, to pay, in no order of priority among them but in
proportion to the respective amounts due, the agent bank, the
paying agents, the transfer agent and the registrar, together with
interest and VAT on those amounts and to provide for any costs,
charges, liabilities and expenses then due or to become due and
payable to them under the provisions of the paying agent and agent
bank agreement;
(C) third, in no order of priority among them but in proportion to the
respective amounts due, towards payment of amounts (together with
VAT on those amounts) due and payable to the issuer cash manager
under the issuer cash management agreement, to the corporate
services provider under the corporate services agreement and to the
issuer account bank under the issuer bank account agreement;
(D) fourth, in no order of priority among them but in proportion to the
respective amounts due, to pay:
* amounts (including such part of any termination payment) due to
the basis rate swap provider (except for any termination
payment or any part thereof due and payable to the basis rate
swap provider as a result of a basis rate swap provider
default, save to the extent such termination payment may be
satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the basis
rate swap and applied in accordance with this order of priority
of payments);
* amounts (including such part of any termination payment) due to
the series 1 class A1 dollar currency swap provider under the
series 1 class A1 dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class A1 dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class A1 dollar currency swap provider to pay interest due or
overdue and to repay principal of the series 1 class A1 notes
until the series 1 class A1 notes have been repaid in full;
* amounts (including such part of any termination payment) due to
the series 1 class A2 dollar currency swap provider under the
series 1 class A2 dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by
194
the issuer following a downgrade termination event in respect
of the series 1 class A2 dollar currency swap and applied in
accordance with this order of priority of payments) and from
amounts received from the series 1 class A2 dollar currency
swap provider to pay interest due or overdue and to repay
principal of the series 1 class A2 notes until the series 1
class A2 notes have been repaid in full;
* amounts (including such part of any termination payment) due to
the series 1 class A3 dollar currency swap provider under the
series 1 class A3 dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class A3 dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class A3 dollar currency swap provider to pay interest due or
overdue and to repay principal of the series 1 class A3 notes
until the series 1 class A3 notes have been repaid in full;
* amounts (including such part of any termination payment) due to
the series 2 class A euro currency swap provider under the
series 2 class A euro currency swap (except for any termination
payment or any part thereof due and payable to that swap
provider as a result of a euro currency swap provider default
by that swap provider, save to the extent such termination
payment may be satisfied by any swap replacement payment
received by the issuer following a downgrade termination event
in respect of the series 2 class A euro currency swap and
applied in accordance with this order of priority of payments)
and from amounts received from the series 2 class A euro
currency swap provider to pay interest due or overdue and to
repay principal of the series 2 class A notes until the series
2 class A notes have been repaid in full; and
* interest due or overdue and to repay principal of the series 3
class A notes until the series 3 class A notes have been repaid
in full;
(E) fifth, in no order of priority among them but in proportion to the
respective amounts due, to pay:
* amounts (including such part of any termination payment) due to
the series 1 class B dollar currency swap provider under the
series 1 class B dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class B dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class B dollar currency swap provider to pay interest due or
overdue and to repay principal of the series 1 class B notes
until the series 1 class B notes have been repaid in full;
* amounts (including such part of any termination payment) due to
the series 2 class B euro currency swap provider under the
series 2 class B euro currency swap (except for any termination
payment or any part thereof due and payable to that swap
provider as a result of a euro currency swap provider default
by that swap provider, save to the extent such termination
payment may be satisfied by any swap replacement payment
received by the issuer following a downgrade termination event
in respect of the series 2 class B euro currency swap and
applied in accordance with this order of
195
priority of payments) and from amounts received from the series
2 class B euro currency swap provider to pay interest due or
overdue and to repay principal of the series 2 class B notes
until the series 2 class B notes have been repaid in full; and
* interest due or overdue and to repay principal of the series 3
class B notes until the series 3 class B notes have been repaid
in full;
(F) sixth, in no order of priority among them but in proportion to the
respective amounts due, to pay:
* amounts (including such part of any termination payment) due to
the series 1 class M dollar currency swap provider under the
series 1 class M dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class M dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class M dollar currency swap provider to pay interest due or
overdue and to repay principal of the series 1 class M notes
until the series 1 class M notes have been repaid in full;
* amounts (including such part of any termination payment) due to
the series 2 class M euro currency swap provider under the
series 2 class M euro currency swap (except for any termination
payment or any part thereof due and payable to that swap
provider as a result of a euro currency swap provider default
by that swap provider, save to the extent such termination
payment may be satisfied by any swap replacement payment
received by the issuer following a downgrade termination event
in respect of the series 2 class M euro currency swap and
applied in accordance with this order of priority of payments)
and from amounts received from the series 2 class M euro
currency swap provider to pay interest due or overdue and to
repay principal of the series 2 class M notes until the series
2 class M notes have been repaid in full; and
* interest due or overdue and to repay principal of the series 3
class M notes until the series 3 class M notes have been
repaid in full;
(G) seventh, in no order of priority among them but in proportion to
the respective amounts due, to pay:
* amounts (including such part of any termination payment) due to
the series 1 class C dollar currency swap provider under the
series 1 class C dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment received by the issuer following a downgrade
termination event in respect of the series 1 class C dollar
currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series
1 class C dollar currency swap provider to pay interest due or
overdue and to repay principal of the series 1 class C notes
until the series 1 class C notes have been repaid in full;
* amounts (including such part of any termination payment) due to
the series 2 class C euro currency swap provider under the
series 2 class C euro currency swap (except for any termination
payment or any part thereof due and payable to that swap
provider as a result of a euro currency swap provider default
by that swap provider, save to the extent such termination
196
payment may be satisfied by any swap replacement payment
received by the issuer following a downgrade termination event
in respect of the series 2 class C euro currency swap and
applied in accordance with this order of priority of payments)
and from amounts received from the series 2 class C euro
currency swap provider to pay interest due or overdue and to
repay principal of the series 2 class C notes until the series
2 class C notes have been repaid in full; and
* to pay interest due or overdue and to repay principal of the
series 3 class C notes until the series 3 class C notes have
been repaid in full;
(H) eighth, in no order of priority among them but in proportion to the
respective amounts due, to pay any termination payment to:
* the basis rate swap provider following a basis rate swap
provider default;
* any dollar currency swap provider following a dollar currency
swap provider default; and
* any euro currency swap provider following a euro currency swap
provider default; and
(I) last, to pay any amount remaining following the application of
principal and revenue set forth in items (A) through (H) above, to
the issuer.
197
CREDIT STRUCTURE
The notes will be an obligation of the issuer only and will not be
obligations of, or the responsibility of, or guaranteed by, any other party.
However, there are ten main features of the transaction which enhance the
likelihood of timely receipt of payments to noteholders, as follows:
* mortgages trustee available revenue receipts remaining after
payment to the seller of the seller share of the trust property are
expected to exceed interest and fees payable to the issuers under
the intercompany loans;
* a revenue shortfall in issuer available revenue receipts may be met
from issuer available principal receipts;
* an issuer reserve fund will be established by Funding for the
issuer to meet revenue shortfalls in Funding available revenue
receipts to pay fees and interest due on the intercompany loan;
* each of the series 1, series 2 and series 3 payments on the class C
notes will be subordinated to payments on the class A notes, the
class B notes and the class M notes;
* each of the series 1, series 2 and series 3 payments on the class M
notes will be subordinated to payments on the class A notes and the
class B notes;
* each of the series 1, series 2 and series 3 payments on the class B
notes will be subordinated to payments on the class A notes;
* the mortgages trustee GIC account, the Funding GIC account and the
Funding (Granite 03-3) GIC account each earn interest at a
specified rate (expected to be 0.375% below LIBOR for three-month
sterling deposits);
* a reserve fund will be available to Funding to meet revenue
shortfalls in fees and interest due on the intercompany loan and
any other intercompany loans;
* Funding will be obliged to establish an issuer liquidity reserve
fund for the issuer if the seller ceases to have a long-term
unsecured, unsubordinated and unguaranteed credit rating by Moody's
of at least "A3" or at least "A-" by Fitch (unless the relevant
rating agency confirms that the then current ratings of the notes
will not be adversely affected by the ratings downgrade of the
seller); and
* a start-up loan will be provided to Funding to meet the costs of
setting up the structure and to partially fund the issuer reserve
fund.
Each of these factors is considered more fully in the remainder of this
section.
CREDIT SUPPORT FOR THE NOTES PROVIDED BY MORTGAGES TRUSTEE AVAILABLE REVENUE
RECEIPTS
The interest rates charged on the mortgage loans vary according to product
type. It is anticipated, however, that during the life of the notes, the
revenue receipts received from borrowers on the mortgage loans remaining after
payment to the seller of the seller share of such revenue receipts will,
assuming that all of the mortgage loans are fully performing, be greater than
the sum of the interest which Funding is required to pay on the intercompany
loans in order to fund (by payment to a swap provider or otherwise) the
interest payments due on the notes and the notes of all other issuers and the
other costs and expenses of the structure and the structures relating to all
other issuers. Based on the same assumption, issuer allocable revenue receipts
are expected to be sufficient to pay the amounts payable under items (A)
through (E), (G), (I) and (K) of the issuer pre-enforcement revenue priority of
payments.
The actual amount of any excess will vary during the life of the notes. The
key factors determining such variation are as follows:
* the weighted average interest rate on the mortgage portfolio; and
* the level of arrears experienced.
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On any distribution date, any excess will be available to meet the payments
referred to in the mortgages trust allocation of revenue receipts and the
payment of amounts of deferred contribution to the mortgages trustee which, in
turn, will fund the payment of deferred purchase price to the seller. Any
deferred contribution so paid to the mortgages trustee cannot subsequently be
reclaimed by Funding.
INTEREST RATE ON THE MORTGAGE PORTFOLIO
The weighted average interest rate on the mortgage portfolio will depend on:
* the standard variable rate or other interest rate payable on, and
the aggregate current balance of, the variable rate mortgage loans
included in the trust property from time to time; and
* the fixed rates of interest payable on, and the aggregate current
balance of, the fixed rate mortgage loans included in the trust
property from time to time.
The issuer will enter into a basis rate swap agreement to hedge against the
variances on the rates payable on the mortgage loans. See "THE SWAP
AGREEMENTS".
Scheduled and unscheduled repayments will also affect the weighted average
interest rate on the mortgage portfolio. For historical data on the level of
scheduled and unscheduled repayments in the UK housing market, see
"CHARACTERISTICS OF UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET -- CPR RATES".
LEVEL OF ARREARS EXPERIENCED
If the level of arrears of interest payments made by the borrowers results
in Funding experiencing an income deficit on any payment date, then the issuer
reserve fund and the issuer liquidity reserve fund, if any, established by
Funding in respect of the issuer may be utilized by Funding in making payments
of interest (or, in limited circumstances, payments of principal following the
enforcement of the issuer security) to the issuer under the intercompany loan
on that payment date. However, no issuer reserve fund or issuer liquidity
reserve fund established by Funding in respect of any other issuer may be
utilized by Funding in making any payments to the issuer under the intercompany
loan.
In addition (but only if there are no amounts standing to the credit of the
relevant issuer reserve ledger and issuer liquidity reserve ledger, if any, of
the issuer) Funding will be able to apply the issuer's share of any amounts
standing to the credit of the Funding reserve ledger, as described under"--
FUNDING RESERVE FUND", against that income deficit.
Funding available revenue receipts which are paid to the issuer on a payment
date may be applied on that payment date by the issuer to extinguish amounts
standing to the credit of the issuer principal deficiency ledger in accordance
with the issuer pre-enforcement revenue priority of payments.
Funding available revenue receipts which are not paid to the issuer also may
be utilized to replenish the issuer reserve fund in accordance with the issuer
pre-enforcement revenue priority of payments to the extent of the issuer's
allocable share.
FUNDING RESERVE FUND
The Funding reserve fund has been established:
* to be allocated among issuers to help meet any deficit in Funding
available revenue receipts and thereby to help meet any deficit
recorded on the issuer principal deficiency ledgers; and
* to fund initial reserves and other expenses in connection with the
issuance of notes by the issuer and any other issuers.
The Funding reserve fund is funded from Funding available revenue receipts
which are distributed to Funding from the mortgages trust and deposited in the
Funding GIC account. The Funding reserve ledger is maintained by the cash
manager to record the balance from time to time of the Funding reserve fund.
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On each payment date funds standing to the credit of the Funding reserve
fund will be added to certain other income of Funding in calculating Funding
available revenue receipts which are available to make payments of interest and
fees on the intercompany loan and any other intercompany loan.
Prior to enforcement of the Funding security, amounts standing to the credit
of the Funding reserve fund may be utilized through their inclusion in the
calculation of Funding available revenue receipts to meet, and thereby to
satisfy, any deficit on each issuer principal deficiency ledger.
The Funding reserve fund will be funded and replenished from Funding
available revenue receipts up to and including an amount equal to the "FUNDING
RESERVE REQUIRED AMOUNT", being the amount from time to time equal to the
product of 0.60% and the greater of (a) the aggregate principal amount
outstanding of the notes outstanding of all issuers on the relevant
determination date and (b) the aggregate outstanding principal balance of the
intercompany loans of all issuers on the relevant determination date, or such
other amount as may be agreed from time to time with the rating agencies. As at
the closing date, the Funding reserve required amount will be approximately
[GBP][__]. All amounts currently in the Funding reserve fund as of the closing
date may be used to partially fill the issuer reserve fund and/or to pay a
portion of the costs and expenses in connection with the issuance of the notes.
The balance of the Funding reserve fund as of August 31, 2003 was
[GBP]34,266,596. Funding available revenue receipts will only be applied to
replenish the Funding reserve fund after paying interest due on each
intercompany loan (which, in turn, is funding interest due on the notes and any
new notes (if any) and reducing any deficiency on the issuer principal
deficiency ledgers) as described under "CASHFLOWS -- DISTRIBUTION OF FUNDING
AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY".
The seller, Funding, the rating agencies and the security trustee may agree
to increase the Funding reserve required amount from time to time.
ISSUER RESERVE FUND
On the closing date, an issuer reserve fund will be established by Funding.
The issuer reserve fund will be initially funded to an amount of [GBP][__] from
a portion of the start-up loan and will be deposited into the Funding (Granite
03-3) GIC account, which will be a separate GIC account in the name of Funding.
The issuer reserve ledger will be maintained by the cash manager to record the
balance from time to time of the issuer reserve fund. Funding will grant to the
security trustee a security interest in respect of the Funding (Granite 03-3)
GIC account as security for its obligations to the issuer under the
intercompany loan agreement.
On each payment date prior to the enforcement of the issuer security funds
standing to the credit of the issuer reserve fund will be added to certain
other income of Funding in calculating the Funding available revenue receipts
which are to be allocated to the issuer to make payments of interest and fees
due under the intercompany loan. Once received by the issuer those revenue
receipts may be utilized by the issuer in meeting, and thereby satisfying, any
deficit on the issuer principal deficiency ledger. Funding is not entitled to
utilize the issuer reserve fund to meet any deficit in Funding available
revenue receipts which are allocated to any other issuer to make payments due
under any other intercompany loan agreement. However, Funding will be entitled
to establish a separate reserve fund which will be deposited into a separate
GIC account in the name of Funding to help meet that deficit allocated to any
new issuer and has established issuer reserve funds with respect to the
previous issuers.
The cash manager will apply funds available in the issuer reserve fund and
the issuer liquidity reserve fund, if any, prior to applying funds available in
the Funding reserve fund in calculating the Funding available revenue receipts
to be allocated to the issuer. In
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addition, prior to utilizing any amounts credited to the issuer reserve fund or
the issuer liquidity reserve fund, if any, the cash manager will apply other
Funding available revenue receipts in making payments of interest and fees under
any intercompany loan.
The issuer reserve fund will be funded and, if necessary, replenished from
excess Funding available revenue receipts which are allocated to the issuer up
to and including an amount equal to the "ISSUER RESERVE REQUIRED AMOUNT", being
the sum of [GBP][__]. Funding available revenue receipts will only be applied
to replenish the issuer reserve fund after paying interest due under the
intercompany loan to fund interest due on the notes on the relevant payment
date, after paying such fees under the intercompany loan as will be sufficient
to reduce any deficiency on the issuer principal deficiency subledgers and
after application of Funding available revenue receipts to pay certain expenses
of Funding and to fund the issuer liquidity reserve fund up to the issuer
liquidity reserve required amount, all as described under "CASHFLOWS --
DISTRIBUTION OF FUNDING AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE
FUNDING SECURITY".
Following enforcement of the issuer security, amounts standing to the credit
of the issuer reserve ledger may be applied in making payments of principal due
under the intercompany loan of the issuer (but not in respect of any other
intercompany loan of any other issuer).
The seller, Funding, the rating agencies and the security trustee may agree
to increase the issuer reserve required amount from time to time.
ISSUER LIQUIDITY RESERVE FUND
Funding will be required to establish a liquidity reserve fund for the
issuer if the long- term, unsecured, unsubordinated and unguaranteed debt
obligations of the seller cease to be rated at least A3 by Moody's or A- by
Fitch (unless Moody's or Fitch, as applicable, confirms that the then current
ratings of the notes will not be adversely affected by the ratings downgrade).
Prior to enforcement of the issuer security, the issuer liquidity reserve
fund may be used:
* to help meet any deficit in Funding available revenue receipts
which are allocated to the issuer to pay amounts due on the
intercompany loan, but only to the extent that such amounts are
necessary to fund the payment by the issuer of interest and fees
due on the relevant payment date in respect of the class A notes
and/or the class B notes and to help meet any deficit recorded on
the issuer principal deficiency ledger in respect of the class A
notes; and
* (provided that there are no class A notes outstanding) to help meet
any deficit in Funding available revenue receipts which are
allocated to the issuer to pay all interest and fees due on the
intercompany loan.
The issuer liquidity reserve fund, if any, will be funded initially from
Funding available principal receipts which are allocated to the issuer in
accordance with the Funding pre-enforcement principal priority of payments. The
issuer liquidity reserve fund will be funded up to the "ISSUER LIQUIDITY
RESERVE REQUIRED AMOUNT", being an amount as of any payment date equal to the
excess, if any, of 3% of the aggregate outstanding balance of the notes on that
payment date over amounts standing to the credit of the issuer reserve fund on
that payment date.
The issuer liquidity reserve fund will be deposited in Funding's name in the
Funding (Granite 03-3) GIC account into which the issuer reserve fund also will
be deposited. All interest or income accrued on the amount of the issuer
liquidity reserve fund while on deposit in the Funding (Granite 03-3) GIC
account will belong to Funding. The cash manager will maintain a separate
issuer liquidity reserve ledger to record the balance from time to time of the
issuer liquidity reserve fund.
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Funding will not be entitled to utilize the issuer liquidity reserve fund to
meet any deficit in Funding available revenue receipts which are allocated to
any other issuer to make payments due under any other intercompany loan, but
Funding will be entitled to
establish a separate liquidity reserve fund for each new issuer which will be
deposited into a separate GIC account in the name of Funding to help meet that
deficit allocated to any new issuer.
On each payment date prior to enforcement of the issuer security, funds
standing to the credit of the issuer liquidity reserve fund will be added to
certain other income of Funding in calculating Funding available revenue
receipts which are allocated to the issuer to make payments due under the
intercompany loan.
Once it has been initially funded, the issuer liquidity reserve fund will be
replenished from any Funding available revenue receipts or Funding available
principal receipts. Funding available revenue receipts will only be applied to
replenish the issuer liquidity reserve fund after paying amounts due on the
intercompany loan to the extent that such amounts will fund the payment of
interest due on the class A notes, the class B notes and the reduction of any
deficiency on the principal deficiency subledger for the class A notes (but not
to fund any payment which would reduce any deficiency on the principal
deficiency subledgers for the class B notes, the class M notes or the class C
notes as described under "CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE
REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY"). Funding
available principal receipts will be applied, if necessary, on any payment date
to replenish the issuer liquidity reserve fund as described under "CASHFLOWS --
DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF
THE FUNDING SECURITY".
Following enforcement of the issuer security, amounts standing to the credit
of the issuer liquidity reserve ledger may be applied in making payments of
principal due under the intercompany loan of the issuer (but not in respect of
any other intercompany loan of any previous issuer or any new issuer).
ISSUER PRINCIPAL DEFICIENCY LEDGER
An issuer principal deficiency ledger will be established for the issuer on
the closing date to record:
* any principal losses on the mortgage loans allocated by Funding to
the intercompany loan of the issuer;
* the application of issuer allocable principal receipts to meet any
deficiency in issuer available revenue receipts as described under
"-- USE OF PRINCIPAL RECEIPTS TO PAY ISSUER INCOME DEFICIENCY"; and
* the application of Funding available principal receipts which are
allocated to the issuer to fund the issuer liquidity reserve fund
as described under "CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE
PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY".
On the closing date, the issuer principal deficiency ledger will be divided
into four subledgers which will correspond to each of the class A notes, class
B notes, class M notes and class C notes, respectively. The subledger for each
class will show separate entries for each class of notes.
The allocation of losses on the mortgage loans to the intercompany loan of
the issuer or the application of issuer available principal receipts to pay
interest on the notes or the application by Funding of issuer allocable
principal receipts to fund the issuer liquidity reserve fund will be recorded
as follows:
* first, on the class C principal deficiency subledger until the
balance of that subledger is equal to the aggregate outstanding
balance of the series 1 class C notes, the series 2 class C notes
and the series 3 class C notes;
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* second, on the class M principal deficiency subledger, until the
balance of that subledger is equal to the aggregate outstanding
balance of the series 1 class M notes, the series 2 class M notes
and the series 3 class M notes;
* third, on the class B principal deficiency subledger, until the
balance of that subledger is equal to the aggregate outstanding
balance of the series 1 class B notes, the series 2 class B notes
and the series 3 class B notes; and
* last, on the class A principal deficiency subledger, at which point
there will be an asset trigger event.
Losses on the mortgage loans that have been allocated to Funding on any date
shall be allocated to the intercompany loan of each issuer as described under
"THE INTERCOMPANY LOAN AGREEMENT -- ALLOCATION OF LOSSES".
Each time that the issuer credits issuer available revenue receipts to the
principal deficiency ledger of the issuer, it shall be deemed to cure the
relevant deficiencies in the following order:
* first, deficiencies which have resulted from the application of
issuer available principal receipts to meet any deficiency in
issuer available revenue receipts;
* second, deficiencies which have arisen from principal losses on the
mortgage loans being allocated by Funding to the intercompany loan
of such issuer; and
* last, deficiencies which have arisen from the application by
Funding of Funding allocable principal receipts to fund the issuer
liquidity reserve fund, and
accordingly, each time a record is made on the principal deficiency ledger of
the issuer, the issuer cash manager will describe the source of such deficiency
as being one of the above categories (as appropriate).
As described under "CASHFLOWS -- DISTRIBUTION OF ISSUER AVAILABLE REVENUE
RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY", issuer available revenue
receipts may, on each payment date, be applied as follows:
* first, provided that interest due on the series 1 class A1 notes,
the series 1 class A2 notes, the series 1 class A3 notes, the
series 2 class A notes and the series 3 class A notes has been
paid, in an amount necessary to reduce to zero the balances in
respect of the series 1 class A1 notes, the series 1 class A2
notes, the series 1 class A3 notes, the series 2 class A notes and
the series 3 class A notes (in no order of priority but in
proportion to their outstanding balances) on the class A principal
deficiency subledger;
* second, provided that interest due on the series 1 class B notes,
the series 2 class B notes and the series 3 class B notes has been
paid, in an amount necessary to reduce to zero the balances in
respect of the series 1 class B notes, the series 2 class B notes
and the series 3 class B notes (in no order of priority but in
proportion to their outstanding balances) on the class B principal
deficiency subledger;
* third, provided that interest due on the series 1 class M notes,
the series 2 class M notes and the series 3 class M notes has been
paid, in an amount necessary to reduce to zero the balance in
respect of the series 1 class M notes, the series 2 class M notes
and the series 3 class M notes on the class M principal deficiency
subledger; and
* last, provided that interest due on the series 1 class C notes, the
series 2 class C notes and the series 3 class C notes has been
paid, in an amount necessary to reduce to zero the balances in
respect of the series 1 class C notes, the series 2 class C notes
and the series 3 class C notes (in no order of priority but in
proportion to their outstanding balances) on the class C principal
deficiency subledger.
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To the extent that on any payment date, any Funding available revenue
receipts are applied as Funding available principal receipts pursuant to rule 4
under "RULES FOR APPLICATION OF FUNDING AVAILABLE REVENUE RECEIPTS", then on
such payment date (for the limited purposes set out in this paragraph) the
issuer shall be deemed to have received
such amounts as issuer available revenue receipts to be applied to reduce the
balances on the issuer principal deficiency ledger in the manner described
above. Any such adjustment to the issuer principal deficiency ledger shall be
completed prior to the application of the issuer pre-enforcement revenue
priority of payments on such payment date.
FUNDING PRINCIPAL DEFICIENCY LEDGER
A principal deficiency ledger has been established for Funding to record any
principal losses on the mortgage loans allocated to Funding pursuant to the
terms of the mortgages trust, and to record the application of Funding
available principal receipts to any issuer to fund the issuer liquidity reserve
fund of that issuer. As to principal losses on the mortgage loans and the
application of Funding available principal receipts to fund issuer liquidity
reserve funds, the Funding principal deficiency ledger will reflect the
aggregate positions of the issuer principal deficiency ledgers of the issuers.
On each occasion on which an issuer principal deficiency ledger is credited
(and the related principal deficiencies are thereby reduced), the cash manager
on behalf of Funding will credit the Funding principal deficiency ledger and
thereby record a similar reduction in aggregate principal deficiencies.
USE OF PRINCIPAL RECEIPTS TO PAY ISSUER INCOME DEFICIENCY
On the distribution date immediately preceding each payment date, the issuer
cash manager will calculate whether there will be an excess or a deficit of
issuer available revenue receipts to pay items (A) through (O) of the issuer
pre-enforcement revenue priority of payments (after taking account of any
shared issuer revenue receipts, if any, available therefor).
If there is a deficit in the amount of issuer available revenue receipts to
pay items (A) through (E), (G), (I) and (K) of the issuer pre-enforcement
revenue priority of payments, then the issuer shall pay or provide for that
deficit by the application of funds which constitute issuer allocable principal
receipts, if any, paid to the issuer and the issuer cash manager shall make a
corresponding debit entry in the relevant issuer principal deficiency
subledger, as described under "-- ISSUER PRINCIPAL DEFICIENCY LEDGER".
Issuer available principal receipts may not be used to pay interest on any
class of notes if and to the extent that would result in a deficiency being
recorded, or an existing deficiency being increased, on a principal deficiency
subledger relating to a higher ranking class of notes, and may not be used to
make up any deficit other than in respect of items (A) through (E), (G), (I)
and/or (K) of the issuer pre-enforcement revenue priority of payments.
Principal therefore may not be used to pay interest on a class of notes if the
balance on the relevant principal deficiency subledger for such class of notes
is equal to the principal amount outstanding on such class of notes.
The issuer shall apply any excess issuer available revenue receipts to
extinguish any balance on the issuer principal deficiency ledger, as described
under "-- ISSUER PRINCIPAL DEFICIENCY LEDGER".
ISSUER BASIS AND CURRENCY SWAPS
On the closing date, the issuer will enter into the basis rate swap
agreement with the basis rate swap provider and the note trustee, which will
hedge against the rate of interest applicable to payments to be made by Funding
in respect of the intercompany loan (which will be related to the interest
rates applicable to the mortgage loans in the trust property) and the rates of
interest at which the issuer is obliged to make payments in respect of the
notes.
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On the closing date, the issuer also will enter into the dollar currency
swaps with the dollar currency swap provider and the note trustee to hedge
against the possible variance between:
* the interest received by the issuer in respect of the basis rate
swap agreement, which will be related to sterling LIBOR for three
month sterling deposits, and the interest which the issuer is
obliged to pay in respect of the series 1 notes, which will be
related to US dollar LIBOR for three-month dollar deposits; and
* fluctuations in the exchange rate in respect of principal received
on the intercompany loan, which will be received in sterling, and
principal which the issuer is obliged to repay in respect of the
series 1 notes, which must be repaid in dollars.
On the closing date, the issuer also will enter into the euro currency swaps
with the euro currency swap provider and the note trustee to hedge against the
possible variance between:
* the interest received by the issuer in respect of the basis rate
swap agreement, which will be related to sterling LIBOR for three
month sterling deposits, and the interest which the issuer is
obliged to pay in respect of the series 2 notes, which will be
related to EURIBOR for three-month euro deposits; and
* fluctuations in the exchange rate in respect of principal received
on the intercompany loan, which will be received in sterling, and
principal which the issuer is obliged to repay in respect of the
series 2 notes, which must be repaid in euro.
PRIORITY OF PAYMENTS AMONG THE CLASS B NOTES, THE CLASS M NOTES AND THE CLASS C
NOTES
The order of payments of interest to be made on the classes of notes will be
prioritized so that interest payments on the class C notes will be subordinated
to interest payments on the class M notes, the class B notes and the class A
notes, interest payments on the class M notes will be subordinated to interest
payments on the class B notes and the class A notes and interest payments on
the class B notes will be subordinated to interest payments on the class A
notes, in each case in accordance with the issuer priority of payments.
Any revenue shortfall in payments of interest due on the class B notes, the
class M notes or the class C notes on any payment date will be deferred until
the immediately succeeding payment date. On that immediately succeeding payment
date, the amount of interest due on the relevant class of notes will be
increased to take account of any deferred interest. If on that payment date
there is still a revenue shortfall, that revenue shortfall will be deferred
again. This deferral process will continue until the final repayment date of
the notes, at which point if there is insufficient money available to us to pay
interest on the class B notes, the class M notes or the class C notes, then you
may not receive all interest amounts payable on those classes of notes.
We are not able to defer payments of interest due on any payment date in
respect of the class A notes. The failure to pay interest on the class A notes
will be an event of default under the notes.
The class A notes, the class B notes, the class M notes and the class C
notes will be constituted by the trust deed and will share the same security.
Upon enforcement of that security or the occurrence of a trigger event, the
class A notes of each series will rank in priority to each series of class B
notes, each series of class M notes and each series of class C notes, the class
B notes of each series will rank in priority to each series of class M notes
and each series of class C notes and each series of class M notes will rank in
priority to each series of class C notes.
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MORTGAGES TRUSTEE GIC ACCOUNT/FUNDING GIC ACCOUNT/FUNDING (GRANITE 03-3) GIC
ACCOUNT
All amounts held by the mortgages trustee which are not invested in
authorized investments will be deposited in the mortgages trustee GIC account
with the mortgages trustee GIC provider. This account is subject to a guaranteed
investment contract such that the mortgages trustee GIC provider has agreed to
pay a variable rate of interest on funds in the mortgages trustee GIC account of
0.375% per annum below LIBOR for three-month sterling deposits.
Save as provided below, all amounts held by Funding which are not invested
in authorized investments will be deposited in the Funding GIC account. The
Funding GIC account is maintained with the Funding GIC provider. This account
is subject to a guaranteed investment contract such that the Funding GIC
provider has agreed to pay a variable rate of interest on funds in the Funding
GIC account of 0.375% per annum below LIBOR for three-month sterling deposits.
All amounts held by Funding in respect of the issuer and standing at any
time to the credit of the issuer reserve ledger or the issuer liquidity reserve
ledger, if any, and which are not invested in authorized investments will be
deposited in the Funding (Granite 03-3) GIC account. The Funding (Granite 03-3)
GIC account will be maintained with the Funding GIC provider. This account will
be subject to a guaranteed investment contract such that the Funding GIC
provider will agree to pay a variable rate of interest on funds in the Funding
(Granite 03-3) GIC account of 0.375% per annum below LIBOR for three-month
sterling deposits.
START-UP LOAN
The following section contains a summary of the material terms of the start-
up loan agreement. The summary does not purport to be complete and is subject
to the provisions of the start-up loan agreement, a form of which has been
filed as an exhibit to the registration statement of which this prospectus is a
part.
GENERAL DESCRIPTION
On the closing date, Northern Rock plc (the "START-UP LOAN PROVIDER") will
make available to Funding a start-up loan under the start-up loan agreement in
an amount of approximately [GBP][__], a portion of which will be used to
partially fund the issuer reserve fund, and the other portion of which will be
used to meet the costs and expenses incurred by Funding in connection with the
acquisition by Funding of the additional Funding share of the trust property
and the fees payable under the intercompany loan agreement which will enable
the issuer to meet its costs in relation to the issuance of the notes.
INTEREST ON THE START-UP LOAN
The start-up loan will bear interest at the rate of three-month sterling
LIBOR plus 0.90% per annum until repaid. Any unpaid interest will be added to
the principal amount owed and will bear interest. Interest is payable by
Funding on each payment date.
REPAYMENT OF START-UP LOAN
Funding will repay the start-up loan only to the extent that it has Funding
available revenue receipts after making payments ranking in priority to
payments to the start-up loan provider as described under "CASHFLOWS --
DISTRIBUTION OF FUNDING AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE
FUNDING SECURITY" or "CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL
RECEIPTS AND FUNDING AVAILABLE REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE
FUNDING SECURITY". Amounts due to the start-up loan provider are payable on any
payment date after amounts of interest due to the issuer on the intercompany
loan and to any other issuers on the related intercompany loans. Funding will
have no further recourse to the start-up loan provider after it has repaid the
start-up loan.
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EVENT OF DEFAULT
It will be an event of default under the start-up loan agreement if Funding
has available funds to pay amounts due to the start-up loan provider and it
does not pay them.
ACCELERATION
Subject to the Funding deed of charge, the start-up loan will become
immediately due and payable upon service of an intercompany loan enforcement
notice.
GOVERNING LAW
The start-up loan will be governed by English law.
EXISTING AND FUTURE START-UP LOANS
The start-up loan provider has in the past made available to Funding start-
up loans in connection with the making of the previous intercompany loans which
were used by Funding for meeting the costs and expenses incurred by Funding in
connection with the acquisitions by Funding of the Funding share of the initial
and further mortgage portfolios and the fees payable under the previous
intercompany loan agreements. In the future, Funding may enter into new start-
up loan agreements, the proceeds of which may be used to help fund any relevant
issuer reserve fund and/or to meet the costs and expenses incurred in the
acquisition of additional assigned mortgage loans and their related security
and in the payment of fees under any new intercompany loan agreements. Each
previous start-up loan agreement was, and each new start-up loan agreement will
be, on substantially the same terms as the start-up loan agreement, except as
to the amount advanced, the date that monies were, are, or will be drawn and
the terms for repayment. Each start-up loan is repayable by Funding from
Funding available revenue receipts after making payments ranking in priority to
payments to the start-up loan provider.
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THE SWAP AGREEMENTS
The following section describes, in summary, the material terms of the swap
agreements. The description does not purport to be complete and is subject to
the provisions of each of the swap agreements, forms of which have been filed
as exhibits to the registration statement of which this prospectus is a part.
GENERAL
The issuer will enter into the basis rate swap with Northern Rock plc, in
its capacity as the basis rate swap provider, and the note trustee. The issuer
will also enter into dollar currency swaps with the dollar currency swap
provider and the note trustee and euro currency swaps with the euro currency
swap provider and the note trustee. In general, the basis rate and currency
swaps are designed to do the following:
* basis rate swap: to protect the issuer against the possible
variance between the seller's standard variable rate payable on the
variable rate mortgage loans, the rates of interest payable on the
flexible mortgage loans which pay variable rates of interest no
higher than the rate offered by a basket of UK mortgage lenders or
a rate which tracks the Bank of England base rate, and the fixed
rates of interest payable on the fixed rate mortgage loans and a
LIBOR based rate for three-month sterling deposits;
* dollar currency swaps: to protect the issuer against changes in the
sterling to dollar exchange rate following the closing date and the
possible variance between a LIBOR based rate for three-month
sterling deposits and a LIBOR based rate for three-month dollar
deposits applicable to the series 1 notes; and
* euro currency swaps: to protect the issuer against changes in the
sterling to euro exchange rate following the closing date and the
possible variance between a LIBOR based rate for three-month
sterling deposits and a EURIBOR based rate for three-month euro
deposits applicable to the series 2 notes.
In addition to the foregoing, the issuer may from time to time enter into
additional swap arrangements or add additional features to the swap
arrangements described above in order to hedge against interest rate risks that
may arise in connection with new mortgage loan products that the seller assigns
into the mortgages trust at a later date.
THE BASIS RATE SWAP
Some of the mortgage loans in the mortgage portfolio pay a variable rate of
interest for a period of time which may either be linked to the seller's
standard variable rate or linked to an interest rate other than the seller's
standard variable rate, such as a variable rate offered by a basket of UK
mortgage lenders or a rate that tracks the Bank of England base rate. Other
mortgage loans pay a fixed rate of interest for a period of time.
The amount of revenue receipts that Funding receives will fluctuate
according to the interest rates applicable to the mortgage loans in the
mortgages trust. The amount of interest payable by Funding to the issuer under
the intercompany loan, from which the issuer will fund, inter alia, its payment
obligations under the currency swaps and the notes, will be made in sterling.
However, for each interest period the issuer will be required to pay
interest (1) on the series 1 notes in dollars, based upon a LIBOR based rate
for three-month dollar deposits, (2) on the series 2 notes in euro, based upon
a EURIBOR based rate for three-month euro deposits and (3) on the series 3
notes in sterling, based upon a LIBOR based rate for three-month sterling
deposits.
Under the dollar currency swaps and the euro currency swaps (each as
described below), the issuer will be required to pay to the applicable currency
rate swap provider, certain amounts based upon a LIBOR based rate for three-
month sterling deposits in return for the US dollar and euro amounts it needs
to pay the interest on the series 1
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notes, and the series 2 notes, respectively. The amounts payable by the issuer
to the dollar currency swap provider under the dollar currency swaps and to the
euro currency swap provider under the euro currency swaps will be paid in
sterling.
To provide a hedge against the possible variance between:
(1) the seller's standard variable rate payable on the variable rate
mortgage loans, the rates of interest payable on the flexible
mortgage loans which pay variable rates of interest no higher than
the rate offered by a basket of UK mortgage lenders or a rate which
tracks the Bank of England base rate and the fixed rates of
interest payable on the fixed rate mortgage loans; and
(2) a margin over the LIBOR based rate for three-month sterling
deposits,
the issuer will enter into the basis rate swap with the basis rate swap
provider and the note trustee.
Under the basis rate swap, the following amounts will be calculated in
respect of each calculation period:
* the amount (known as the "CALCULATION PERIOD SWAP PROVIDER AMOUNT")
produced by applying LIBOR for three-month sterling deposits plus a
spread to the notional amount of the basis rate swap as defined
later in this section; and
* the amount (known as the "CALCULATION PERIOD ISSUER AMOUNT")
produced by applying a rate equal to the weighted average of:
(1) the average of the standard variable mortgage rates or their
equivalent charged to existing borrowers on residential mortgage
loans as published from time to time, after excluding the highest
and the lowest rate, of Abbey National plc, Alliance & Leicester
plc, Bradford & Bingley, HBOS plc, Lloyds TSB Bank plc, National
Westminster Bank plc and Woolwich plc;
(2) in respect only of any flexible residential mortgage loans (as
described below) the difference between (a) the average of the
standard variable mortgage rates or their equivalent charged to
existing borrowers on residential mortgage loans as published from
time to time, after excluding the highest and the lowest rate, of
Abbey National plc, Alliance & Leicester plc, Bradford & Bingley,
HBOS plc, Lloyds TSB Bank plc, National Westminster Bank plc and
Woolwich plc, and (b) the weighted average of the discount to the
average interest rate calculated in (a) above in respect of the
flexible residential mortgage loans; and
(3) the weighted average of the rates of interest payable on the
fixed rate mortgage loans, other than fixed rate mortgage loans
which have become re-fixed mortgage loans since the immediately
preceding payment date,
to the notional amount of the basis rate swap.
For the purposes of (2) above, a "FLEXIBLE RESIDENTIAL MORTGAGE LOAN" is a
mortgage loan secured by a residential mortgaged property which is subject to a
variable rate of interest, and which generally allows the borrower certain
flexible payment features, including the ability to make larger repayments than
are due on a given payment date, and which also may allow the borrower to make
underpayments, take payment holidays and make cash re-draws of amounts
previously overpaid.
After these two amounts are calculated in relation to a payment date, the
following payments will be made on that payment date:
* if the calculation period swap provider amount is greater than the
calculation period issuer amount, then the basis rate swap provider
will pay the difference (after such difference is adjusted to take
account of amounts payable by the basis rate swap provider and the
issuer under the basis rate swap (as described below)) to the
issuer;
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* if the calculation period issuer amount is greater than the
calculation period swap provider amount, then the issuer will pay
the difference (after such difference is adjusted to take account
of amounts payable by the basis rate swap provider and the issuer
under the basis rate swap) to the basis rate swap provider; and
* if the calculation period swap provider amount is equal to the
calculation period issuer amount, neither party will make any
payment to the other party.
If a payment is to be made by the basis rate swap provider, once received by
the issuer that payment will be included in the issuer available revenue
receipts and will be applied on the relevant payment date according to the
relevant issuer priority of payments. If a payment is to be made by the issuer,
it will be made according to the relevant issuer priority of payments.
The "NOTIONAL AMOUNT OF THE BASIS RATE SWAP" in respect of any payment date
will be an amount in sterling equal to:
* the aggregate principal amount outstanding of the notes on the
immediately preceding payment date;
less
* the balance of the principal deficiency ledger on such immediately
preceding payment date;
less
* the aggregate outstanding principal balance on such immediately
preceding payment date of fixed rate mortgage loans which have
become re-fixed mortgage loans since that payment date.
In the event that the basis rate swap is terminated prior to the service of
a note enforcement notice or the final redemption of any class of notes, the
issuer shall use its best efforts to enter into a replacement basis rate swap
on terms acceptable to the rating agencies and the note trustee and with a swap
provider whom the rating agencies have previously confirmed in writing to the
issuer and the note trustee will not cause the then current ratings of the
issuer's notes to be downgraded, withdrawn or qualified.
THE DOLLAR CURRENCY SWAPS
The series 1 notes will be denominated in US dollars and investors will
receive payments of interest on, and principal of, these notes in US dollars.
However, the repayments of principal and payments of interest by Funding to the
issuer under the intercompany loan will be made in sterling. In addition, the
series 1 notes will bear interest at a rate based on three-month US dollar
LIBOR, but the payment to be made by the basis rate swap provider to the issuer
will be based on sterling LIBOR. To hedge the variance between the US dollar
LIBOR rate and the sterling LIBOR rate and its currency exchange rate exposure
in respect of these notes, the issuer will enter into six dollar currency swaps
relating to the series 1 notes with the dollar currency swap provider and the
note trustee.
Under each dollar currency swap, the issuer will pay to the dollar currency
swap provider:
* on the closing date, an amount in US dollars equal to the net
proceeds of the issue of the relevant class of series 1 notes;
* on each payment date, an amount in sterling equal to the dollar
amount of principal payments to be made on the relevant class of
series 1 notes on that payment date, such dollar amount to be
converted into sterling at the relevant dollar currency swap rate;
and
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* on each payment date, an amount in sterling based on three-month
sterling LIBOR, which the dollar currency swap provider will then
exchange for an amount in US dollars based on three-month US dollar
LIBOR with respect to the series 1 notes in order to pay to the
issuer on each payment date the interest amounts set forth below.
Under each dollar currency swap, the dollar currency swap provider will pay
to the issuer:
* on the closing date, an amount in sterling equal to the net dollar
proceeds of the issue of the relevant class of series 1 notes, such
dollar proceeds to be converted into sterling at the relevant
dollar currency swap rate;
* on each payment date, an amount in US dollars equal to the amount
of principal payments to be made on the relevant class of series 1
notes on such payment date; and
* on each payment date, an amount in dollars equal to the interest to
be paid in US dollars on the relevant class of series 1 notes on
such payment date.
As defined in this prospectus, "DOLLAR CURRENCY SWAP RATE" means the rate at
which dollars are converted to sterling or, as the case may be, sterling is
converted to dollars, under the relevant dollar currency swap.
In the event that any dollar currency swap is terminated prior to the
service of a note enforcement notice or the final redemption of the relevant
class of series 1 notes, the issuer shall use its best efforts to enter into a
replacement dollar currency swap in respect of the notes or that class of notes
to hedge against fluctuations in the exchange rate between dollars and sterling
and/or the possible variance between LIBOR for three-month sterling deposits
and the relevant interest rate on the related class of series 1 notes. Any
replacement dollar currency swap must be entered into on terms acceptable to
the rating agencies, the issuer and the note trustee and with a replacement
dollar currency swap provider that the rating agencies have previously
confirmed in writing to the issuer and the note trustee will not cause the then
current ratings of the notes to be downgraded, withdrawn or qualified.
THE EURO CURRENCY SWAPS
The series 2 notes will be denominated in euro and investors will receive
payments of interest on, and principal of, these notes in euro. However, the
repayments of principal and payments of interest by Funding to the issuer under
the intercompany loan will be made in sterling. In addition the series 2 notes
will bear interest at a rate based on EURIBOR, but the payment to be made by
the basis rate swap provider to the issuer will be based on sterling LIBOR. To
hedge the variance between the LIBOR rate and the relevant EURIBOR rate and its
currency exchange rate exposure in respect of these notes, the issuer will
enter into four euro currency swaps relating to the series 2 notes with the
euro currency swap provider and the note trustee.
Under each euro currency swap, the issuer will pay to the euro currency swap
provider:
* on the closing date, an amount in euro equal to the net proceeds of
the issue of the relevant class of series 2 notes;
* on each payment date, an amount in sterling equal to the euro
amount of principal payments to be made on the relevant class of
series 2 notes on that payment date, such euro amount to be
converted into sterling at the relevant euro currency swap rate;
and
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* on each payment date, an amount in sterling based on three-month
sterling LIBOR, which the euro currency swap provider will then
exchange for an amount in euro based on three-month EURIBOR with
respect to the series 2 notes in order to pay to the issuer on such
payment date the interest amounts set forth below.
Under each euro currency swap, the euro currency swap provider will pay to
the issuer:
* on the closing date, an amount in sterling equal to the net euro
proceeds of the issue of the relevant class of series 2 notes, such
euro proceeds to be converted into sterling at the relevant euro
currency swap rate;
* on each payment date, an amount in euro equal to the amount of
principal payments to be made on the relevant class of series 2
notes on such payment date; and
* on each payment date, an amount in euro equal to the interest to be
paid in euro on the relevant class of series 2 notes on such
payment date.
As defined in this prospectus, "EURO CURRENCY SWAP RATE" means the rate at
which euro are converted to sterling or, as the case may be, sterling is
converted to euro, under the relevant euro currency swap.
In the event that any euro currency swap is terminated prior to the service
of a note enforcement notice or the final redemption of the relevant class of
series 2 notes, the issuer shall use its best efforts to enter into a
replacement euro currency swap in respect of the notes or that class of notes
to hedge against fluctuations in the exchange rate between euro and sterling
and/or the possible variance between LIBOR for three-month sterling deposits
and EURIBOR for three-month euro deposits with respect to the series 2 notes.
Any replacement euro currency swap must be entered into on terms acceptable to
the rating agencies, the issuer and the note trustee and with a replacement
euro currency swap provider that the rating agencies have previously confirmed
in writing to the issuer and the note trustee will not cause the then current
ratings of the notes to be downgraded, withdrawn or qualified.
RATINGS DOWNGRADE OF SWAP PROVIDERS
Under the terms of the basis rate swap, in the event that the short-term,
unsecured and unsubordinated credit rating of the basis swap provider is
downgraded below "A-1" by Standard & Poor's or "F1" by Fitch, respectively, and
as a result of such downgrade the then-current ratings of the notes may, in the
reasonable opinion of Standard & Poor's or Fitch, respectively, be downgraded
or placed under review for possible downgrade, then the basis rate swap
provider will, in accordance with the basis rate swap agreement, be required to
take certain remedial measures in order to ensure that the then-current ratings
of the notes are maintained, including providing collateral for its obligations
under the basis rate swap, arranging for its obligations under the basis rate
swap agreement to be transferred to an entity with an "A-1" or a "F1" rating,
respectively, procuring another entity to become co-obligor in respect of its
obligations under the basis rate swap whose short- term, unsecured and
unsubordinated debt obligations are rated at least as high as "A-1" or "F1", as
applicable, or taking such other action as it may agree with Standard & Poor's
or Fitch, respectively, in order to maintain the then-current ratings of the
notes.
In addition, in the event that the short-term unsecured and unsubordinated
credit rating of the basis rate swap provider is further downgraded below "F2"
by Fitch and as a result of such downgrade, the then-current ratings of the
notes may, in the opinion of Fitch, be downgraded or placed under review for
possible downgrade, then the basis rate swap provider will, in accordance with
the basis rate swap agreement, provide collateral for its obligations under the
basis rate swap until it is able to arrange for its obligations under the basis
rate swap agreement to be transferred to an entity with a "F1" rating by Fitch,
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procure another entity to become co-obligor in respect of its obligations under
the basis rate swap agreement, or take such other action as it may agree with
Fitch in order to maintain the then-current ratings of the notes.
Under the terms of the basis rate swap, in the event that either the short-
term, unsecured and unsubordinated credit rating of the basis swap provider is
downgraded below "P-1" or its long-term, unsecured and unsubordinated credit
rating is downgraded below "A2" by Moody's, then the basis rate swap provider
will, in accordance with the basis rate swap agreement, provide collateral for
its obligations under the basis rate swap until it is able to transfer, on a
reasonable efforts basis, its obligations under the basis rate swap agreement
to an entity with a short-term rating of "P-1" and a long-term rating of "A1"
by Moody's, procure another entity to become co-obligor in respect of its
obligations under the basis rate swap, or take such other action as it may
agree with Moody's in order to maintain the then-current ratings of the notes.
In addition, in the event that either the short-term, unsecured and
unsubordinated credit rating of the basis rate swap provider is further
downgraded below "P-2" or its long- term, unsecured and unsubordinated credit
rating of the basis rate swap provider is further downgraded below "A3" by
Moody's, then the basis rate swap provider will, in accordance with the basis
rate swap agreement, provide additional collateral for its obligations under
the basis rate swap and will transfer, on a reasonable efforts basis, its
obligations under the basis rate swap agreement to an entity with a short-term
rating of "P-1" and a long-term rating of "A1" by Moody's, procure another
entity to become co-obligor in respect of its obligations under the basis rate
swap agreement, or take such other action as it may agree with Moody's in order
to maintain the then-current ratings of the notes.
A failure to take such steps will allow the issuer to terminate the basis
rate swap agreement.
Under the terms of the dollar currency swaps and the euro currency swaps, in
the event that the short-term, unsecured and unsubordinated credit rating of
the dollar currency swap provider, the euro currency swap provider, or any
provider of credit support, as the case may be, is downgraded below "A1+" (or,
in the case of the dollar currency swaps, the long-term, unsecured and
unsubordinated credit rating of the dollar currency swap provider or any
provider of credit support is downgraded below "AA-") by Standard & Poor's or
below "F1" (or, in the case of the dollar currency swaps, the financial
strength rating of the dollar currency swap provider or any provider of credit
support, if applicable, ceases to be rated at least "AA-") by Fitch, and, as a
result of such downgrade, the then-current ratings of the relevant notes may,
in the reasonable opinion of Standard & Poor's or Fitch, respectively, be
downgraded or placed under review for possible downgrade, then the relevant
currency swap provider will, in accordance with the relevant currency swap
agreement, be required to take certain remedial measures in order to ensure
that the then-current ratings of the notes are maintained, including providing
collateral for its obligations under the relevant currency swap, arranging for
its obligations under the relevant currency swap agreement to be transferred to
an entity with a short-term rating of "A1+" (or, in the case of the dollar
currency swaps, an entity with a long-term rating of "AA-") by Standard &
Poor's or with a short-term rating of "F1" by Fitch, as applicable, procuring
another entity to become co-obligor in respect of its obligations under the
relevant currency swaps, or taking such other action as it may agree with
Standard & Poor's or Fitch, respectively, in order to maintain the then-current
ratings of the notes.
In addition, in the event that the short-term unsecured and unsubordinated
credit rating of the relevant currency rate swap provider or any provider of
credit support, as applicable, is further downgraded below "F2" (or, in the
case of the dollar currency swaps, the financial strength rating of the dollar
currency swap provider or any provider of credit support, if applicable, ceases
to be rated at least "A-") by Fitch, and, as a result of such downgrade, the
then-current ratings of the notes may, in the opinion of Fitch, be downgraded
or placed under review for possible downgrade, then the relevant currency rate
swap provider will, in accordance with the relevant currency swap agreement,
provide
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collateral for its obligations under the relevant currency swap until it is
able to arrange for its obligations under the relevant currency swap agreement
to be transferred to an entity with a short-term rating of "F1" by Fitch,
procure another entity to become co-obligor in respect of its obligations under
the relevant currency swap agreement, or take such other action as it may agree
with Fitch in order to maintain the then-current ratings of the notes.
Under the terms of the dollar currency swaps and the euro currency swaps, in
the event that either the long-term, unsecured and unsubordinated credit rating
of the dollar currency swap provider, the euro currency swap provider, or any
provider of credit support, as the case may be, is downgraded by Moody's below
"A1" its short term unsecured and unsubordinated credit rating is downgraded
below "P-1" by Moody's then the relevant currency rate swap provider will, in
accordance with the relevant currency swap agreement, provide collateral for
its obligations under the relevant currency swap and/or (as applicable)
transfer, on a reasonable efforts basis, its obligations under the relevant
currency swap agreement to an entity with a long-term rating of "A1" and a
short-term rating of "P-1" by Moody's, procure another entity to become co-
obligor in respect of its obligations under the relevant currency swap, or take
such other action as it may agree with Moody's in order to maintain the then-
current ratings of the notes.
In addition, in the event that either the long-term, unsecured and
unsubordinated credit rating of the relevant currency rate swap provider or any
provider of credit support, is further downgraded below "A3" or its short-term
unsecured and unsubordinated credit rating is further downgraded below "P-2" by
Moody's, then the relevant currency rate swap provider will, in accordance with
the relevant currency swap agreement, provide additional collateral for its
obligations under the relevant currency swap and will transfer, on a reasonable
efforts basis, its obligations under the relevant currency swap agreement to an
entity with a short-term rating of "P-1" and a long-term rating of "A1" by
Moody's, procure another entity to become co-obligor in respect of its
obligations under the relevant currency swap, or take such other action as it
may agree with Moody's in order to maintain the then-current ratings of the
notes.
A failure to take such steps will allow the issuer to terminate the relevant
currency swap agreement.
TERMINATION OF THE SWAPS
* The basis rate swap will terminate on the earlier of the payment
date falling in January 2044 and the date on which all of the notes
are redeemed in full;
* The dollar currency swap for the series 1 class A1 notes will
terminate on the earlier of the payment date falling in January
2019 and the date on which all of the series 1 class A1 notes are
redeemed in full;
* The dollar currency swap for the series 1 class A2 notes will
terminate on the earlier of the payment date falling in January
2024 and the date on which all of the series 1 class A2 notes are
redeemed in full;
* The dollar currency swap for the series 1 class A3 notes will
terminate on the earlier of the payment date falling in January
2044 and the date on which all of the series 1 class A3 notes are
redeemed in full;
* The dollar currency swap for the series 1 class B notes will
terminate on the earlier of the payment date falling in January
2044 and the date on which all of the series 1 class B notes are
redeemed in full;
* The dollar currency swap for the series 1 class M notes will
terminate on the earlier of the payment date falling in January
2044 and the date on which all of the series 1 class M notes are
redeemed in full;
* The dollar currency swap for the series 1 class C notes will
terminate on the earlier of the payment date falling in January
2044 and the date on which all of the series 1 class C notes are
redeemed in full;
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* The euro currency swap for the series 2 class A notes will
terminate on the earlier of the payment date falling in January
2044 and the date on which all of the series 2 class A notes are
redeemed in full;
* The euro currency swap for the series 2 class B notes will
terminate on the earlier of the payment date falling in January
2044 and the date on which all of the series 2 class B notes are
redeemed in full;
* The euro currency swap for the series 2 class M notes will
terminate on the earlier of the payment date falling in January
2044 and the date on which all of the series 2 class M notes are
redeemed in full; and
* The euro currency swap for the series 2 class C notes will
terminate on the earlier of the payment date falling in January
2044 and the date on which all of the series 2 class C notes are
redeemed in full.
A swap could also terminate in the following circumstances, each referred to
as a "SWAP EARLY TERMINATION EVENT":
* at the option of one party to the swap, if there is a failure by
the other party to pay any amounts due and payable in accordance
with the terms of that swap. Certain amounts may be due but not
payable in accordance with the terms of the swap as described below
under "-- LIMITED RECOURSE AND SWAP PAYMENT OBLIGATION";
* if an event of default under the notes occurs and the note trustee
serves a note enforcement notice;
* upon the occurrence of an insolvency of one of the parties or the
merger of the relevant swap provider without an assumption of the
obligations under the swaps, or changes in law resulting in the
obligations of one of the parties becoming illegal;
* if the issuer exercises its option to redeem the notes following
the implementation of the New Basel Capital Accord in the United
Kingdom; and
* if the relevant swap provider is downgraded and fails to comply
with the requirements of the ratings downgrade provision contained
in the relevant swap agreement and described above under "--
RATINGS DOWNGRADE OF SWAP PROVIDERS".
Upon the occurrence of a swap early termination event, the issuer or the
relevant swap provider may be liable to make a termination payment to the
other. This termination payment will be calculated and made in sterling. The
amount of any termination payment will be based on the market value of the
terminated swap based on market quotations of the cost of entering into a swap
with the same terms and conditions that would have the effect of preserving the
respective full payment obligations of the parties (or based upon loss in the
event that no market quotation can be obtained). Any such termination payment
could be substantial.
If any termination payment is due by the issuer to a swap provider, then
pursuant to its obligations under the intercompany loan, Funding shall pay to
the issuer the amount required by the issuer to pay the termination payment due
to the relevant swap provider. Any such termination payment will be made by the
issuer to the swap provider only after paying interest amounts due on the
notes, and after providing for any debit balance on the issuer principal
deficiency ledger to the extent that a default was caused by the swap provider.
However, if the issuer causes a default to occur that results in a termination
payment becoming due from the issuer to a swap provider, such payment will be
made by the issuer in the same priority as it pays the relevant interest
amounts due on the notes. The issuer shall apply amounts received from Funding
under the intercompany loan in respect of termination payments in accordance
with the issuer pre-enforcement revenue priority of payments, the pre-
enforcement principal priority of payments, the relevant priority of payments
following the occurrence of a trigger event, or, as the case may be, the
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issuer post-enforcement priority of payments. The application by the issuer of
termination payments due to a swap provider may affect the funds available to
pay amounts due to the noteholders (see "RISK FACTORS -- YOU MAY BE SUBJECT TO
EXCHANGE RATE RISKS").
If the issuer receives a termination payment from the basis rate swap
provider, the dollar currency swap provider and/or the euro currency swap
provider, then the issuer shall use those funds towards meeting its costs in
effecting currency exchanges at the spot rate of exchange until a new basis
rate swap, a new dollar currency swap and/or a new euro currency swap is
entered into and/or to acquire a new dollar currency swap and/or a new euro
currency swap. You will not receive extra amounts (over and above interest and
principal payable on the notes) as a result of the issuer receiving a
termination payment.
TAXATION
The issuer is not obliged under any of the swaps to gross up payments made
by it if withholding taxes are imposed on payments made under the swaps.
A swap provider is always obliged to gross up payments made by it to the
issuer if withholding taxes are imposed on payments made under the swaps.
LIMITED RECOURSE AND SWAP PAYMENT OBLIGATION
On any payment date the issuer will only be obliged to pay an amount to a
swap provider to the extent that the issuer has received from Funding
sufficient funds under the intercompany loan to pay that amount to that swap
provider, subject to and in accordance with the relevant issuer priority of
payments. On any payment date, each of the dollar currency swap provider and
the euro currency swap provider will only be obliged to pay to the issuer an
amount that is proportionate to the amount of the payment that it has received
from the issuer on that payment date.
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CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING
The material terms of the cash management agreement are summarized in this
section. The summary does not purport to be complete and it is subject to the
provisions of the cash management agreement. A form of the cash management
agreement has been filed as an exhibit to the registration statement of which
this prospectus is a part.
Northern Rock has been appointed by the mortgages trustee, Funding and the
security trustee to provide cash management services in relation to the
mortgages trustee and Funding.
CASH MANAGEMENT SERVICES TO BE PROVIDED IN RELATION TO THE MORTGAGES TRUST
The cash manager's duties in relation to the mortgages trust include, but
are not limited to:
(A) determining the current shares and share percentages of Funding and
the seller in the trust property (including the relevant weighted
average Funding share percentage and the relevant weighted average
seller share percentage, as applicable) in accordance with the
terms of the mortgages trust deed;
(B) maintaining the following ledgers on behalf of the mortgages
trustee:
* the Funding share/seller share ledger, which will record the
current shares of the seller and Funding in the trust property;
* the losses ledger, which will record losses on the mortgage
loans;
* the principal ledger, which will record principal receipts on
the mortgage loans received by the mortgages trustee, payments
of principal from the mortgages trustee GIC account to Funding
and the seller and any mortgages trustee retained principal
receipts;
* the revenue ledger, which will record revenue receipts on the
mortgage loans received by the mortgages trustee and payments
of revenue receipts from the mortgages trustee GIC account to
Funding and the seller;
* the overpayments ledger, which will record each revenue receipt
and/ or principal receipt paid by a borrower in excess of the
amount required under the terms of the relevant mortgage loan
(and in the case of any non-flexible mortgage loan by an amount
equal to or less than [GBP]199.99), and which will be
sub-divided into subledgers to record overpayments made on
non-flexible mortgage loans and flexible mortgage loans;
* the non-flexible underpayments ledger, which will record
underpayments on non-flexible mortgage loans; and
* the re-draws ledger, which will record re-draws on the flexible
mortgage loans and which will be sub-divided into subledgers to
record cash re-draws and non-cash re-draws;
(C) distributing the mortgages trustee available revenue receipts and
the mortgages trustee available principal receipts to Funding and
the seller in accordance with the terms of the mortgages trust
deed;
(D) providing the mortgages trustee, Funding, the security trustee and
the rating agencies with a quarterly report in relation to the
trust property; and
(E) providing the mortgages trustee and Funding with quarterly
management accounts.
CASH MANAGEMENT SERVICES TO BE PROVIDED TO FUNDING
The cash manager's duties in relation to Funding include, but are not
limited to:
(A) determining no later than the distribution date immediately
preceding the relevant payment date:
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* the amount of Funding available revenue receipts to be applied
to pay interest and fees in relation to the intercompany loan
and any other intercompany loan on that relevant payment date;
and
* the amount of Funding available principal receipts to be
applied to repay the intercompany loan and any other
intercompany loan on that relevant payment date;
(B) maintaining the following ledgers on behalf of Funding:
* any issuer reserve ledger(s), which will record the amount
credited to the issuer reserve fund of the issuer and of any
other issuer from time to time, and subsequent withdrawals and
deposits in respect of such issuer reserve fund(s);
* any issuer liquidity reserve fund ledger(s), which will record
the amount credited to the issuer liquidity reserve fund from
time to time of the issuer and any other issuer, and subsequent
withdrawals and deposits in respect of such issuer liquidity
reserve fund(s);
* the Funding principal ledger, which will record the amount of
principal receipts received by Funding on each distribution
date;
* the Funding revenue ledger, which will record all other amounts
received by Funding on each distribution date;
* the Funding reserve ledger, which will record the amount
credited to the Funding reserve fund from time to time, and
subsequent withdrawals and deposits in respect of the Funding
reserve fund; and
* the intercompany loan ledger(s), which will record payments of
interest and repayments of principal made under the
intercompany loan and any other intercompany loan;
(C) investing sums standing to the credit of the Funding GIC account,
the Funding (Issuer) GIC accounts, or any other Funding bank
account in short-term authorized investments (as defined in the
glossary) on behalf of Funding or the security trustee (as the case
may be);
(D) making withdrawals from the Funding reserve account as and when
required;
(E) making withdrawals from the issuer reserve fund(s), if required;
(F) making any required withdrawals under the issuer liquidity reserve
fund(s), if any;
(G) applying the Funding available revenue receipts and Funding
available principal receipts in accordance with the relevant order
of priority of payments for Funding contained in the Funding deed
of charge;
(H) providing Funding, each issuer, the security trustee and the rating
agencies with a quarterly report in relation to Funding;
(I) making all returns and filings in relation to Funding and the
mortgages trustee and providing or procuring the provision of
company secretarial and administration services to them; and
(J) maintaining the Funding principal deficiency ledger.
For the definitions of Funding available revenue receipts, Funding available
principal receipts and the Funding pre-enforcement priorities of payments, see
"CASHFLOWS".
COMPENSATION OF CASH MANAGER
The cash manager is paid an annual fee of [GBP]100,000 for its services
which is paid in four equal installments quarterly in arrears on each payment
date. The fee is inclusive of VAT. The fee is subject to adjustment if the
applicable rate of VAT changes.
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In addition, the cash manager is entitled to be indemnified for any expenses
or other amounts properly incurred by it in carrying out its duties. The cash
manager is paid by the mortgages trustee and Funding proportionately in
accordance with and subject to the terms of the mortgages trust deed and the
relevant Funding priority of payments, prior to amounts due to any issuer under
any intercompany loan.
RESIGNATION OF CASH MANAGER
The cash manager may resign only on giving 12 months notice to the security
trustee, Funding and the mortgages trustee and provided the security trustee,
Funding and the mortgages trustee each consent in writing to the cash manager's
resignation and provided that:
* 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 then current ratings of each issuer's notes would not be
adversely affected as a result of that replacement.
TERMINATION OF APPOINTMENT OF CASH MANAGER
The security trustee may, upon written notice to the cash manager, terminate
the cash manager's rights and obligations immediately if any of the following
events occurs:
* the cash manager defaults in the payment of any amount due and
fails to remedy such default for a period of 5 London business days
after the earlier of becoming aware of the default and receiving a
written notice from the security trustee;
* the cash manager fails to comply with any of its other obligations
under the cash management agreement which in the opinion of the
security trustee, acting at the direction of the note trustee, is
materially prejudicial to the noteholders and does not remedy that
failure within 20 days after the earlier of becoming aware of the
failure and receiving written notice from the security trustee; or
* the cash manager suffers an insolvency event.
Upon termination of the appointment of the cash manager, the security
trustee has agreed to use its reasonable endeavors to appoint a substitute cash
manager. Any such substitute cash manager will be required to enter into an
agreement on substantially the same terms as the provisions of the cash
management agreement and any termination is conditional upon the rating
agencies having previously confirmed in writing to each issuer and the security
trustee that the then current ratings of each issuer's notes will not be
downgraded, withdrawn or qualified.
If the appointment of the cash manager is terminated or it resigns, the cash
manager must deliver its books of account relating to the mortgage loans to or
at the direction of the mortgages trustee, Funding or the security trustee, as
the case may be. The cash management agreement will terminate automatically
when Funding has no further interest in the trust property and the intercompany
loan and all other intercompany loans have been repaid or otherwise discharged.
GOVERNING LAW
The cash management agreement is governed by English law.
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CASH MANAGEMENT FOR THE ISSUER
The material terms of the issuer cash management agreement are summarized in
this section. The summary does not purport to be complete and it is subject to
the terms of the issuer cash management agreement. A form of the issuer cash
management agreement has been filed as an exhibit to the registration statement
of which this prospectus is a part.
On the closing date, the issuer and the note trustee will appoint Northern
Rock to provide cash management services to the issuer.
CASH MANAGEMENT SERVICES TO BE PROVIDED TO THE ISSUER
The issuer cash manager's duties will include, but are not limited to:
(A) determining no later than the distribution date immediately
preceding the relevant payment date:
* the issuer available revenue receipts to be applied to pay
interest on the notes on that relevant payment date to the
applicable swap provider or to the noteholders, as applicable,
and to pay amounts due to other creditors of the issuer;
* the issuer available principal receipts to be applied to repay
principal of the notes on that relevant payment date; and
* such other amounts as are expressed to be calculations and
determinations made by the issuer cash manager under the conditions of
the notes;
(B) applying issuer available revenue receipts and issuer available
principal receipts in accordance with the relevant order of
priority of payments for the issuer set out in the issuer cash
management agreement;
(C) maintaining the issuer principal deficiency ledger, which will
record principal deficiencies arising from losses on the mortgage
loans which have been allocated to the intercompany loan of the
issuer, the use of issuer available principal receipts to meet any
deficiency in issuer available revenue receipts and the use of
Funding available principal receipts to fund the issuer liquidity
reserve fund, if any;
(D) providing the issuer, Funding, the note trustee and the rating
agencies with quarterly reports in relation to the issuer;
(E) making all returns and filings required of the issuer and procuring
the provision of company secretarial and administration services to
the issuer;
(F) arranging payment of all fees to the London Stock Exchange plc or,
as applicable, the Financial Services Authority; and
(G) performing, if necessary, all currency and interest rate
conversions free of charge, cost or expense at the relevant
exchange rate, whether it be a conversion from sterling to dollars
or vice versa, sterling to euro or vice versa, or floating rates of
interest to fixed rates of interest or vice versa.
ISSUER'S BANK ACCOUNT
On the closing date, the issuer will maintain a bank account with the issuer
account bank (the "ISSUER TRANSACTION ACCOUNT"). The issuer may, with the prior
written consent of the note trustee, open additional or replacement bank
accounts.
If the short-term, unguaranteed and unsubordinated ratings of the issuer
account bank cease to be rated "A-1+" by Standard & Poor's, "P-1" by Moody's or
"F1+" by Fitch, then the issuer transaction account will be closed and a new
issuer transaction account opened with a bank that has the requisite ratings.
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COMPENSATION OF ISSUER CASH MANAGER
The issuer cash manager will be paid for its services an annual fee of
[GBP]117,500 which will be paid in four equal installments quarterly in arrears
on each payment date. The fee is inclusive of VAT. The fees will be subject to
adjustment if the applicable rate of VAT changes.
In addition, the issuer cash manager will be entitled to reimbursement for
any expenses or other amounts properly incurred by it in carrying out its
duties. The issuer cash manager will be paid by the issuer prior to amounts due
on the notes.
RESIGNATION OF ISSUER CASH MANAGER
The issuer cash manager may resign only on giving 12 months notice to the
note trustee and the issuer provided that we and the note trustee consent in
writing to the issuer cash manager's resignation and provided that:
* a substitute issuer cash manager has been appointed and a new
issuer cash management agreement is entered into on terms
satisfactory to the note trustee and the issuer; and
* that replacement would not adversely affect the then current
ratings of the notes.
TERMINATION OF APPOINTMENT OF ISSUER CASH MANAGER
The issuer or the note trustee may, upon written notice to the issuer cash
manager, terminate the issuer cash manager's rights and obligations immediately
if any of the following events occurs:
* the issuer cash manager defaults in the payment of any amount due
and fails to remedy such default for a period of 5 London business
days after the earlier of becoming aware of the default and
receiving written notice from us or the note trustee;
* the issuer cash manager fails to comply with any of its other
obligations under the issuer cash management agreement which in the
opinion of the note trustee is materially prejudicial to the
noteholders and does not remedy that failure within 20 days after
the earlier of becoming aware of the failure and receiving a notice
from the note trustee; or
* the issuer cash manager suffers an insolvency event.
Upon termination of the appointment of the issuer cash manager, the note
trustee will agree to use its reasonable endeavors to appoint a substitute
issuer cash manager. Any such substitute issuer cash manager will be required
to enter into an agreement on substantially the same terms as the provisions of
the issuer cash management agreement and any termination is conditional upon
the rating agencies having previously confirmed in writing to the issuer and
the note trustee that the then current ratings of the issuer's notes will not
be downgraded, withdrawn or qualified.
If the appointment of the issuer cash manager is terminated or the issuer
cash manager resigns, the issuer cash manager must deliver its books of account
relating to the notes to or at the direction of the note trustee. The issuer
cash management agreement will terminate automatically when the notes have been
fully redeemed.
GOVERNING LAW
The issuer cash management agreement will be governed by English law.
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SECURITY FOR FUNDING'S OBLIGATIONS
To provide security for its obligations under the previous intercompany loan
agreements and the other transaction documents relating to the previous
issuers, Funding has entered into the Funding deed of charge with the Funding
secured creditors. The issuer, Funding and the other Funding secured creditors
will enter into a deed of accession in relation to the Funding deed of charge
to enable the issuer to share in the Funding security with the existing Funding
secured creditors with respect to Funding's obligations to the issuer under the
intercompany loan agreement and the other transaction documents. If Funding
enters into new intercompany loan agreements with new issuers, then each new
issuer (and any new start-up loan provider (if any)) will enter into one or
more deeds of accession or a supplemental deed in relation to the Funding deed
of charge and share in the Funding security with the existing Funding secured
creditors with respect to Funding's obligations to any such new issuer under
any new intercompany loan agreement and related transaction documents. A
summary of the material terms of the Funding deed of charge is set out below.
The summary does not purport to be complete and is subject to the provisions of
the Funding deed of charge. This prospectus forms part of the registration
statement and a form of the Funding deed of charge has been filed as an exhibit
to that registration statement.
COVENANT TO PAY
Funding has covenanted in favor of the security trustee for the benefit of
the Funding secured creditors (including the security trustee) that Funding
will pay all amounts due to each of the Funding secured creditors as they
become due and payable (subject to the limited recourse provisions of the
intercompany loan and of the other transaction documents) and that Funding will
comply with its other obligations under the transaction documents.
FUNDING SECURITY
Subject as provided in the following paragraph, Funding has granted the
following security to be held by the security trustee for itself and on trust
for the benefit of the Funding secured creditors:
* a first fixed charge over the Funding share of the trust property,
save to the extent that any of the trust property is situated in
Jersey. Funding's share of the trust property that is situated in
Jersey will be assigned to the security trustee for the purpose of
creating a security interest in accordance with Jersey law;
* an assignment by way of first fixed security of all of Funding's
right, title, interest and benefit in the transaction documents
(including for the avoidance of doubt rights against the mortgages
trustee under the mortgages trust deed, but excluding all of
Funding's right, title, interest and benefit in the Funding deed of
charge) to which Funding is a party from time to time, save to the
extent that such right, title, interest and benefit are situated in
Jersey. To the extent that the same are situated in Jersey, Funding
will assign such right, title, interest and benefit to the security
trustee for the purpose of creating a security interest in those
rights, title, interest and benefit in accordance with Jersey law;
* an assignment by way of first fixed security over Funding's right,
title, interest and benefit in the Funding GIC account, the Funding
transaction account, and each other account (if any) of Funding
(other than the Funding (Issuer) GIC accounts, and any other
account established to hold the issuer reserve fund of any new
issuer), all amounts standing to the credit of those accounts
(including all interest accrued on such amounts);
* a first fixed charge (which may take effect as a floating charge)
of Funding's right, title, interest and benefit in all authorized
investments purchased from the Funding GIC account, the Funding
transaction account and each other account (if
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any) of Funding (other than the Funding (Issuer) GIC accounts, and
any other account established to hold the issuer reserve fund and
issuer liquidity reserve fund (if any) of any new issuer) and all
income on such investments; and
* a first floating charge over all the assets and the undertaking of
Funding which are not otherwise effectively subject to a fixed
charge or assignment by way of security as described in the
preceding paragraphs or as described in the following paragraph.
Security which is expressed to be fixed in nature may take effect as
floating security depending on the degree of control which the secured party is
given over the relevant assets and the degree to which the secured party
actually exercises such control.
Funding has granted a security interest to be held by the security trustee
on trust for the benefit of the relevant previous issuer over Funding's right,
title, interest and benefit in the Funding (Granite 01-1) GIC account, the
Funding (Granite 01-2) GIC account, the Funding (Granite 02-1) GIC account, the
Funding (Granite (02-2) GIC account, the Funding (Granite 03-1) GIC account or
the Funding (Granite 03-2) GIC account. In addition, Funding will grant a
security interest to be held by the security trustee on trust for the benefit
of the issuer (and will grant a separate security interest to be held by the
security trustee on trust for the benefit of each new issuer) over Funding's
right, title, interest and benefit in the Funding (Granite 03-3) GIC account
established for the issuer (or, in the case of any new issuer, in the relevant
Funding bank account established to hold any issuer reserve fund and issuer
liquidity reserve fund (if any) of that new issuer), and all amounts standing
to the credit of such account or accounts (including all interest accrued on
such amounts).
NATURE OF SECURITY -- FIXED CHARGE OR FLOATING CHARGE
Funding may not deal with those of its assets which are subject to a fixed
charge without the consent of the security trustee. Accordingly, Funding will
not be permitted to deal with the assets which are expressed to be subject to a
fixed charge in its ordinary course of business. In this way, the security is
said to "FIX" over those assets which are expressed to be subject to a fixed
charge.
Unlike fixed charges, a floating charge does not attach to specific assets
but "FLOATS" over a class of assets which may change from time to time. Funding
is able to deal with assets which are subject to a floating charge and to give
third parties title to those assets free from the floating charge in the event
of sale, discharge or modification, provided that such dealings and transfers
of title are in the ordinary course of Funding's business. Assets which are
acquired by Funding after the closing date (including assets acquired upon the
disposition of any other asset) and which are not subject to any fixed charge
mentioned in the section above will be subject to the floating charge.
The Funding deed of charge was created prior to September 15, 2003, and
therefore the prohibition in Section 72A of the Insolvency Act 1986 on the
appointment of an administrative receiver under charges created after that date
will not apply to any appointment made pursuant to the Funding deed of charge.
The existence of the floating charge may allow the security trustee to
appoint a receiver of Funding. Whether such a receiver would be deemed to be an
administrative receiver under the English insolvency legislation is unclear as
Funding is incorporated in Jersey. However, as the receiver will be given wide
powers in the Funding deed of charge, the main advantage of the receiver being
an administrative receiver is that a person entitled to appoint an
administrative receiver can prevent the appointment of an administrator,
ensuring that in the event of enforcement proceedings commenced in respect of
amounts due and owing by Funding, the security trustee will be able to control
those proceedings in the best interest of the Funding secured creditors.
However, the same uncertainties arise as to whether the English court has
jurisdiction to make an administration order in respect of a foreign company.
As Funding is incorporated in Jersey,
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the better view is that an English court would not have jurisdiction to appoint
an administrator over Funding unless requested to do so by a court in Jersey. If
an administrator of Funding were appointed this would prevent the appointment of
a receiver and freeze the enforcement of rights and remedies without the consent
of the administrator or leave of the court. The interest of the Funding secured
creditors in property and assetsover 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 amounts due to preferential creditors will be paid ahead of amounts
due to the issuer under the intercompany loan agreement.
The floating charge created by the Funding deed of charge may "CRYSTALLIZE"
and become a fixed charge over the relevant class of assets owned by Funding at
the time of crystallization. Crystallization will occur automatically following
the occurrence of specific events set out in the Funding deed of charge,
including, among other events, notice to Funding from the security trustee
following an intercompany loan event of default. A crystallized floating charge
will continue to rank behind the claims of preferential creditors (as referred
to in this section) on enforcement of the Funding security.
FUNDING PRE-ENFORCEMENT AND POST-ENFORCEMENT PRIORITY OF PAYMENTS
The Funding deed of charge also sets out the order of priority, as at the
closing date, for the application by the cash manager, prior to the service of
an intercompany loan enforcement notice, of amounts standing to the credit of
the Funding transaction account on each payment date. This order of priority is
described under "CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE REVENUE
RECEIPTS" and "CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL
RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY".
The Funding deed of charge sets out the order of priority, as at the closing
date, for the application by the security trustee (or the cash manager on
behalf of the security trustee), following service of an intercompany loan
enforcement notice, of amounts received or recovered by the security trustee or
a receiver appointed on its behalf. This order of priority is described under
"CASHFLOWS -- DISTRIBUTION OF MONIES FOLLOWING ENFORCEMENT OF THE FUNDING
SECURITY".
As new issuers are established to issue new notes and accordingly to make
new advances to Funding, those new issuers (together with the new start-up loan
providers (if any)) will enter into deeds of accession or supplemental deeds in
relation to the Funding deed of charge which may, depending on the type of
notes to be issued, require amendments to any of the Funding pre-enforcement
revenue priority of payments, the Funding pre-enforcement principal priority of
payments, and the Funding post-enforcement priority of payments.
ENFORCEMENT
The Funding deed of charge sets out the circumstances upon which and the
procedures by which the security trustee may take steps to enforce the Funding
security. The Funding security will become enforceable upon the service on
Funding by the security trustee of an intercompany loan enforcement notice (see
"THE INTERCOMPANY LOAN AGREEMENT -- INTERCOMPANY LOAN EVENTS OF DEFAULT")
provided that, if the Funding security has become enforceable otherwise than by
reason of a default in payment of any amount due in respect of any intercompany
loan which would be utilized to fund the payment of any class A notes of any
issuer under any intercompany loan, the security trustee will not be entitled
to dispose of all or part of the assets comprised in the Funding security
unless either:
* a sufficient amount would be realized to allow a full and immediate
discharge of such amount under each intercompany loan as would be
sufficient to fund the payment in full of all amounts owing in
respect of the class A notes of any issuer series and all prior
ranking amounts due by Funding; or
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* the security trustee is of the opinion (which shall be binding on
the Funding secured creditors), reached after considering the
advice of any financial or professional advisers selected by the
security trustee (and if the security trustee is unable to obtain
such advice having made reasonable efforts to do this, this
proviso shall not apply), that the cash flow expected to be
received by Funding will not, or that there is a significant risk
that it will not, be sufficient (as certified to it by Funding),
having regard to any other relevant actual, contingent or
prospective liabilities of Funding, to discharge in full over
time such amount under each intercompany loan as would be
sufficient to fund the payment in full of all amounts owing in
respect of the class A notes of each issuer and all prior ranking
amounts due by Funding; and
* the security trustee shall not be bound to make the determination
set out above unless it shall have been indemnified and/or secured
to its satisfaction against all liabilities to which it may thereby
become liable or which it may incur by so doing.
In respect of property which is secured in accordance with Jersey law, the
security will not be enforceable until the security trustee serves a Jersey
enforcement notice on Funding. Enforcement must take place in accordance with
Jersey security law, which provides that the Jersey enforcement notice must
specify the event of default and, if the event of default is remediable,
require the assignor to remedy the default within 14 days of receiving the
notice. Thereafter enforcement may take place, and in order to enforce the
Jersey security interest, the security trustee is required to take all
reasonable steps to ensure that the property secured by Funding is sold within
a reasonable time and for a price corresponding to the value on the open market
at the time that the collateral is sold.
CONFLICTS
The Funding deed of charge provides that, when exercising its discretion
and/or when exercising the rights, benefits, powers, trusts, authorities,
directions and obligations expressed to be granted by the Funding deed of
charge, the security trustee shall act only at the request or direction of the
note trustee. The authority of the note trustee to direct the security trustee
to act derives from the issuer's (and each other issuer's) assignment to the
note trustee of its rights under the relevant intercompany loan made by such
issuer to Funding. If notes are outstanding that have been issued by the issuer
and one or more other issuers, and resolutions of holders of such notes result
in conflicting directions being given to the note trustee (and, ultimately,
from the note trustee to the security trustee), the note trustee shall have
regard only to the directions of the noteholders of the issuer or other issuers
that has or have the highest ranking class of notes outstanding at such time
(meaning the class A notes for so long as there are any class A notes
outstanding and thereafter the class B notes so long as there are no class A
notes outstanding and thereafter the class M notes so long as there are neither
class A notes nor class B notes outstanding and thereafter the class C notes so
long as there are no class A notes, class B notes or class M notes outstanding
and thereafter special repayment notes so long as there are no class A notes,
class B notes, class M notes or class C notes outstanding). However, if more
than one issuer has notes outstanding that are the highest ranking notes
outstanding among all issuers, the note trustee shall instead have regard to
the resolutions of the holders of notes of that issuer that has the greatest
aggregate principal amount of notes of the highest rank outstanding at such
time. In all cases, the note trustee and the security trustee will only be
obligated to act if they are indemnified to their satisfaction.
DELEGATION BY THE SECURITY TRUSTEE TO AN AUTHORIZED THIRD PARTY
Subject as provided further in the transaction documents, the security
trustee shall be entitled to delegate certain of its functions and rights under
the transaction documents pursuant to the administration agreement to one or
more authorized third parties whom the rating agencies have previously
confirmed in writing to the security trustee and the issuer
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will not result in the ratings on the notes being downgraded, qualified or
withdrawn. The security trustee shall be obliged to use reasonable endeavors to
procure the appointment of an authorized third party and in the event of any
such appointment shall not be required to monitor or supervise the third party's
performance and shall not be responsible for any act or omission of such third
party or for any loss caused thereby.
NO ENFORCEMENT BY FUNDING SECURED CREDITORS
Each of the Funding secured creditors (other than the security trustee and
any receiver) has agreed under the Funding deed of charge that only the
security trustee may enforce the security created by the Funding deed of
charge.
MODIFICATION AND WAIVER, FEES, RETIREMENT AND RESPONSIBILITIES OF THE SECURITY
TRUSTEE
MODIFICATION AND WAIVER
Without the consent of any of the Funding secured creditors, the security
trustee (at the direction of the note trustee) may:
* agree to modifications to the transaction documents provided that
the security trustee is of the opinion that any such modification
would not materially harm the interests of the noteholders or that
such modification is of a formal, minor or technical nature or is
required by the rating agencies in respect of any new issuer or new
start-up loan provider or other person which accedes to the Funding
deed of charge. Any such modification will be binding on the
Funding secured creditors; and
* authorize or waive a proposed or actual breach of any provisions of
the transaction documents provided that the security trustee is of
the opinion that such breach would not materially harm the
interests of the noteholders. Any such authorization or waiver will
be binding on the Funding secured creditors.
FEES, EXPENSES AND INDEMNITY
Funding shall reimburse the security trustee for all its costs and expenses
properly incurred in acting as security trustee (including but not limited to
the cost of using its reasonable endeavors to appoint and maintain an
authorized third party). In addition, Funding shall pay to the security trustee
a fee of such amount and on such dates as will be agreed from time to time by
the security trustee and Funding. Funding shall indemnify the security trustee
from and against all proceedings, claims, demands, losses, costs, charges,
expenses and liabilities incurred by it or to which it may become liable in
connection with the exercise of its trusts, powers, authorities and
discretions, or otherwise in respect of any matter done or not done relating to
the transaction documents, except where the same is caused by the fraud, gross
negligence, willful default or breach of the terms of the Funding deed of
charge by the security trustee or any of its officers or employees.
RETIREMENT AND REMOVAL
Subject to the appointment of a successor security trustee, the security
trustee may retire after giving three months' notice in writing to Funding. If
within 60 days of having given notice of its intention to retire, Funding has
failed to appoint a replacement security trustee, the outgoing security trustee
will be entitled to appoint its successor (provided that such successor is
acceptable to the rating agencies and agrees to be bound by the terms of the
Funding deed of charge). Funding may remove the security trustee or appoint a
new security trustee at any time provided that it has the approval, which must
not be unreasonably withheld or delayed, of each of the Funding secured
creditors. In addition, the security trustee may, subject to conditions
specified in the Funding deed of charge, appoint a co-trustee to act jointly
with it.
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ADDITIONAL PROVISIONS OF THE FUNDING DEED OF CHARGE
The Funding deed of charge contains a range of provisions limiting the scope
of the security trustee's duties and liabilities. These provisions include,
among others, that the security trustee:
* may rely on instructions or directions given to it by the note
trustee as being given on behalf of the relevant class of
noteholders without inquiry about compliance with the trust deed
and on the advice of any lawyer, banker, accountant or other
expert;
* is not responsible for the legality, admissibility in evidence,
adequacy or enforceability of the Funding deed of charge or any
other transaction document;
* may rely on documents believed by it to be genuine provided by any
of the mortgages trustee, Funding or the cash manager and on the
advice of any lawyer, banker, accountant or other expert;
* may assume that no intercompany loan event of default has occurred
unless it has received notice from a Funding secured creditor
stating that an intercompany loan event of default has occurred and
describing that intercompany loan event of default;
* is not required to monitor or supervise the functions of the
account bank or of any other person under any transaction document;
* has the power to determine all questions arising in relation to the
Funding deed of charge or other transaction document and every
determination made shall bind all of the Funding secured creditors;
* each Funding secured creditor must make its own independent
appraisal, without reliance on the security trustee, as to the
financial condition and affairs of Funding;
* the security trustee will not be liable for any loss, cost, damage
or expense which may be caused by anything done or not done by it
under the Funding deed of charge or any other transaction document
unless caused by the security trustee's fraud, negligence, willful
default or breach of the terms of the Funding deed of charge;
* the security trustee may accept such title as Funding has to the
Funding charged property and will not be required to investigate or
make inquiry into Funding's titles to such property; and
* the security trustee will not be responsible for any shortfall
which may arise because it is liable to tax in respect of the
Funding charged property or the proceeds of such property.
The security trustee makes no statement or representation in this
prospectus, has not authorized or caused the issue of any part of it and takes
no responsibility for any part of it. The security trustee does not guarantee
the performance of the notes or the payment of principal or interest on the
notes.
GOVERNING LAW
The Funding deed of charge will be governed by English law, except for the
provisions which relate to security interests created in property situated in
Jersey, which are governed by Jersey law.
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SECURITY FOR THE ISSUER'S OBLIGATIONS
To provide security for its obligations under the notes and the other
transaction documents, the issuer will enter into the issuer deed of charge
with the issuer secured creditors. A summary of the material terms of the
issuer deed of charge is set out below. The summary does not purport to be
complete and is subject to the provisions of the issuer deed of charge. This
prospectus is a part of the registration statement, and a form of the issuer
deed of charge has been filed as an exhibit to that registration statement.
COVENANT TO PAY
The issuer will covenant in favor of the note trustee for the benefit of the
issuer secured creditors (including the note trustee) that the issuer will pay
all amounts due to each of the issuer secured creditors as they become due and
payable and that the issuer will comply with its other obligations under the
transaction documents.
ISSUER SECURITY
The issuer will grant the following security to be held by the note trustee
for itself and on trust for the benefit of the issuer secured creditors (which
definition includes the noteholders):
* an assignment by way of first fixed security of the issuer's rights
and claims in respect of all security and other rights held on
trust by the security trustee pursuant to the Funding deed of
charge, save to the extent that any of those issuer's rights and
claims derive from property that is situated in Jersey, which will
be assigned to the note trustee for the purpose of creating a
security interest in accordance with Jersey law;
* an assignment by way of first fixed security of the issuer's right,
title, interest and benefit in the transaction documents to which
it is a party, including the intercompany loan agreement, the
Funding deed of charge, any swap agreement, the paying agent and
agent bank agreement, the subscription agreement, the underwriting
agreement, the corporate services agreement, the issuer bank
account agreement, the issuer cash management agreement, the trust
deed, save to the extent that such right, title, interest and
benefit derive from property that is situated in Jersey. To the
extent that the same are derived from property situated in Jersey,
the issuer will assign such right, title, interest and benefit to
the note trustee for the purpose of creating a security interest in
those rights, title, interest and benefit in accordance with Jersey
law;
* an assignment by way of first fixed security over the issuer's
right, title, interest and benefit in the issuer transaction
accounts, any swap collateral account and each other account (if
any) of the issuer, and all amounts or securities standing to the
credit of those accounts (including all interest or other income or
distributions earned on such amounts or securities);
* a first fixed charge (which may take effect as a floating charge)
of the issuer's right, title, interest and benefit in all
authorized investments made by or on behalf of the issuer,
including all monies and income payable under those investments;
and
* a first floating charge over all the assets and undertaking of the
issuer which are not otherwise effectively subject to a fixed
charge or assignment by way of security as described in the
preceding paragraphs.
NATURE OF SECURITY -- FIXED CHARGE OR FLOATING CHARGE
For a description of the nature and certain consequences of taking fixed
charges and floating charges see "SECURITY FOR FUNDING'S OBLIGATIONS -- FUNDING
SECURITY -- NATURE OF SECURITY -- FIXED CHARGE OR FLOATING CHARGE". However,
unlike Funding, the issuer is incorporated in England and an English court may,
in certain circumstances, appoint an
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administrator of the issuer. However, the existence of the floating charge will
allow the note trustee to appoint an administrative receiver of the issuer and
thereby prevent the appointment of an administrator. We expect that an
appointment of an administrative receiver by the note trustee under the issuer
deed of charge will not be prohibited by Section 72A of the Insolvency Act 1986
as the appointment will fall within the exception set out under Section 72B of
the Insolvency Act 1986 (First Exception: Capital Market). In addition, see
"RISK FACTORS -- CHANGES OF LAW MAY ADVERSELY AFFECT YOUR INTERESTS".
ISSUER PRE-ENFORCEMENT AND POST-ENFORCEMENT PRIORITY OF PAYMENTS
The issuer cash management agreement sets out the order of priority for the
application of cash by the issuer cash manager prior to the service of a note
enforcement notice. This payment order of priority is described under
"CASHFLOWS".
The issuer deed of charge will also set out the order of priority for the
application by the note trustee (or the issuer cash manager on its behalf),
following service of a note enforcement notice, of amounts received or
recovered by the note trustee or a receiver appointed on its behalf. This order
of priority is described under "CASHFLOWS".
ENFORCEMENT
The issuer deed of charge will set out the circumstances in which and the
procedures by which the note trustee may take steps to enforce the issuer
security.
The issuer security will become enforceable upon either (1) the enforcement
of the Funding security or (2) the occurrence of a note event of default which
is not waived by the note trustee. However, as the note trustee will not be
entitled to assign to a third party its or the issuer's rights under the
intercompany loan agreement following the service of a note enforcement notice,
the most likely consequence of the issuer security becoming enforceable will be
that monies received by the note trustee from Funding will be applied in
accordance with the issuer post-enforcement priority of payments.
In respect of property which is secured in accordance with Jersey law, the
security will not be enforceable until the note trustee serves a Jersey
enforcement notice on the issuer. Enforcement must take place in accordance
with Jersey security law, which provides that the Jersey enforcement notice
must specify the event of default and, if the event of default is remediable,
require the assignor to remedy the default within 14 days of receiving the
notice.
CONFLICTS
The issuer deed of charge will contain provisions which require the note
trustee to consider the interests of the noteholders as to the exercise of its
powers, trusts, authorities, duties and discretions. In the event of a conflict
between the interests of the noteholders and the interests of any other issuer
secured creditor, the note trustee is required to consider only, unless stated
otherwise, the interests of the noteholders. If, in the sole opinion of the
note trustee, there may be a conflict as among noteholders, the note trustee
will have regard to the interests of the class of noteholders with the highest-
ranking notes only. If there is a conflict between the interests of the class A
noteholders of one series and the class A noteholders of another series, or
conflict between the class B noteholders of one series and the class B
noteholders of another series, or conflict between the class M noteholders and
of one series and the class M noteholders of another series, or conflict
between the class C noteholders of one series and the class C noteholders of
another series then a resolution directing the note trustee to take any action
must be passed at a single meeting comprising the holders of each series of the
class A notes or, as applicable, each series of the class B notes, each series
of the class M notes or each series of the class C notes subject to the
conflict. In all cases, the note trustee will only be obliged to act if it is
indemnified to its satisfaction. For more information on how the note trustee
will resolve conflicts between noteholders, see "DESCRIPTION OF THE OFFERED
NOTES -- 11. MEETINGS OF NOTEHOLDERS, MODIFICATIONS AND WAIVER".
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NO ENFORCEMENT BY ISSUER SECURED CREDITORS
Each of the issuer secured creditors (other than the note trustee acting on
behalf of the noteholders) will agree under the issuer deed of charge that only
the note trustee may enforce the security created by the issuer deed of charge
and it will not take steps directly against the issuer to recover amounts owing
to it by the issuer unless the note trustee has become bound to enforce the
issuer security but has failed to do so within 30 days of becoming so bound.
MODIFICATION AND WAIVER, FEES, RETIREMENT AND RESPONSIBILITIES OF THE NOTE
TRUSTEE
MODIFICATION AND WAIVER
Without the consent of any of the issuer secured creditors, the note trustee
may:
* agree to modifications to the transaction documents provided that
the note trustee is of the opinion that such modification will not
materially harm the interests of the noteholders or that such
modification is of a formal, minor or technical nature. A proposed
modification will not materially harm the interest of any
noteholders solely because new issuers accede to the Funding deed
of charge. Any such modification will be binding on the issuer
secured creditors; and
* authorize or waive a proposed or actual breach of any provisions of
the notes or of any other transaction documents provided that the
note trustee is of the opinion that such breach will not materially
harm the interests of the noteholders. Any such authorization or
waiver will be binding on the noteholders and the other issuer
secured creditors.
FEES, EXPENSES AND INDEMNITY
The issuer will reimburse the note trustee for all costs and expenses
properly incurred in acting as note trustee. In addition, the issuer shall pay
to the note trustee a fee of such amount and on such dates as will be agreed
from time to time by the note trustee and the issuer. The issuer shall
indemnify the note trustee from and against all proceedings, claims, demands,
losses, costs, charges, expenses and liabilities incurred by it or to which it
may become liable in connection with the exercise of its trusts, powers,
authorities and discretions, or otherwise in respect of any matter done or not
done relating to the transaction documents, except where the same is caused by
the fraud, gross negligence, willful default or breach of the terms of the
issuer deed of charge by the note trustee or any of its officers or employees.
RETIREMENT AND REMOVAL
Subject to the appointment of a successor note trustee, the note trustee may
retire after giving three months' notice in writing to the issuer. If within 60
days of having given notice of its intention to retire, the issuer has failed
to appoint a replacement note trustee, the outgoing note trustee will be
entitled to appoint a successor (provided that such successor is acceptable to
the rating agencies and agrees to be bound by the terms of the issuer deed of
charge). The issuer may remove the note trustee or appoint a new note trustee
at any time provided that it has the approval, which must not be unreasonably
withheld or delayed, of the issuer secured creditors. In addition, the note
trustee may, subject to the conditions specified in the issuer deed of charge,
appoint a co-trustee to act jointly with it.
ADDITIONAL PROVISIONS OF THE ISSUER DEED OF CHARGE
The issuer deed of charge will contain a range of provisions regulating the
scope of the note trustee's duties and liabilities. These include the
following:
* the note trustee is not responsible for the legality, admissibility
in evidence, adequacy or enforceability of the issuer deed of
charge or any other transaction document;
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* the note trustee may assume that no note event of default has
occurred unless the note trustee has received notice from an issuer
secured creditor stating that a note event of default has occurred
and describing that note event of default;
* the note trustee is not required to monitor or supervise the
functions of the account bank or of any other person under any
transaction document;
* the note trustee has the power to determine all questions arising
in relation to the issuer deed of charge or other transaction
document entered into by the issuer and every determination made
shall bind the note trustee and all of the issuer secured
creditors;
* each issuer secured creditor must make its own independent
appraisal, without reliance on the note trustee, as to the
financial condition and affairs of the issuer;
* the note trustee will not be liable for any loss, cost, damage or
expense which may be caused by anything done or not done by it
under the issuer deed of charge or any other transaction document
unless caused by the note trustee's fraud, gross negligence,
willful default or breach of the terms of the issuer deed of
charge;
* the note trustee may accept such title as the issuer has to the
issuer charged property and will not be required to investigate or
make inquiry into the issuer's title to such property;
* the note trustee will not be responsible for any shortfall which
may arise because it is liable to tax in respect of the issuer
charged property or the proceeds of such property; and
* the note trustee is not required to take steps or action in
connection with the transaction documents (including enforcing the
issuer security) unless (1) it has been directed or instructed to
do so by an extraordinary resolution of a class of noteholders or
in writing by the holders of at least 25% of the aggregate
principal amount of the notes of a class then outstanding or (if
there are no remaining notes outstanding) by any other issuer
secured creditor provided that:
(1) the note trustee will not act at the direction or request of
the class B noteholders unless either to do so would not, in
its opinion, be materially prejudicial to the interests of the
class A noteholders or such action is sanctioned by an
extraordinary resolution of the class A noteholders;
(2) the note trustee will not act at the direction or request of
the class M noteholders unless either to do so would not, in
its opinion, be materially prejudicial to the interests of the
class A noteholders and/or the class B noteholders or such
action is sanctioned by extraordinary resolutions of the class
A noteholders and/or the class B noteholders, as the case may
be;
(3) the note trustee will not act at the direction or request of
the class C noteholders unless either to do so would not, in
its opinion, be materially prejudicial to the interests of the
class A noteholders and/or the class B noteholders and/or the
class M noteholders or such action is sanctioned by
extraordinary resolutions of the class A noteholders and/or the
class B noteholders and/or the class M noteholders, as the case
may be; and
(4) it has been indemnified to its satisfaction against all costs,
liabilities and claims which it may incur or in respect of
which it may become liable.
The note trustee makes no statement or representation in this prospectus,
has not authorized or caused the issue of any part of it and takes no
responsibility for any part of it. The note trustee does not guarantee the
performance of the notes or the payment of principal or interest on the notes.
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GOVERNING LAW
The issuer deed of charge will be governed by English law, except for the
provisions which relate to security interests created in property situated in
Jersey, which will be governed by Jersey law.
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DESCRIPTION OF THE TRUST DEED
The principal agreement governing the notes will be the trust deed dated on
or about the closing date and made between the issuer and the note trustee. A
summary of the material terms of the trust deed is set out below. The summary
does not purport to be complete and it is subject to the provisions of the
trust deed. A form of the trust deed has been filed as an exhibit to the
registration statement and this prospectus forms part of the registration
statement.
The trust deed sets out the forms of the global note certificates and the
individual note certificates. It also sets out the terms and conditions of the
notes, and the conditions for the issue of individual note certificates and/or
the cancellation of any notes. The paying agent and agent bank agreement
contains detailed provisions regulating the appointments of the paying agents
and other agents.
The trust deed also contains covenants made by the issuer in favor of the
note trustee and the noteholders. The main covenants are that the issuer will
pay interest and repay principal of each of the notes when due. Some of the
covenants also appear in the terms and conditions of the notes (see "TERMS AND
CONDITIONS OF THE OFFERED NOTES"). The issuer also covenants that it will do
all things necessary to maintain the listing on the official list of the UK
Listing Authority and to maintain trading of the notes on the London Stock
Exchange plc and to keep in place a common depository, paying agents and an
agent bank, and further covenants with the note trustee that it will comply
with and perform and observe all its obligations in the trust deed. The trust
deed provides for delivery to the note trustee of an annual statement signed by
an officer of the issuer to the effect that the issuer has fulfilled its
material obligations under the trust deed throughout the preceding financial
year, except as specified in such statement.
The trust deed provides that the class A noteholders' interests take
precedence for so long as the class A notes are outstanding and thereafter the
interests of class B noteholders take precedence for so long as the class B
notes are outstanding and thereafter the interests of class M noteholders take
precedence for so long as the class M notes are outstanding. Certain basic
terms of each class of notes may not be amended without the consent of the
majority of the holders of that class of note and the consent of the majority
of the holders of the other classes of notes outstanding (see "TERMS AND
CONDITIONS OF THE OFFERED NOTES").
The trust deed sets out the terms under which the note trustee is appointed,
the indemnification of the note trustee, the payment it receives and the extent
of the note trustee's authority to act beyond its statutory powers under
English law. The note trustee is also given the ability to appoint a delegate
or agent in the execution of any of its duties under the trust deed. The trust
deed sets out the circumstances in which the note trustee may resign or retire.
The trust deed includes certain provisions required by the US Trust
Indenture Act of 1939. These provisions include, but are not limited to:
(a) maintenance of a noteholder list by the note trustee;
(b) provision of annual reports and other information by the issuer to
the note trustee;
(c) ability of noteholders to waive certain past defaults of the
issuer;
(d) duty of the note trustee (following a note event of default) to use
the same degree of care in exercising its responsibilities as would
be exercised by a prudent person conducting their own affairs;
(e) duty of the note trustee to notify all noteholders of any note
event of default of which it has actual knowledge; and
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(f) right of the note trustee to resign at any time by notifying the
issuer in writing, and the ability of the issuer to remove the note
trustee under certain circumstances.
Finally, the trust deed provides that until the notes have been paid in
full, they shall be entitled to the benefit of and be bound by the terms and
conditions of the trust deed. The trust deed will be discharged with respect to
the collateral securing the notes upon the delivery to the note trustee for
cancellation of all the notes or, with certain limitations, upon deposit with
the note trustee of funds sufficient for the payment in full of all the notes.
TRUST INDENTURE ACT PREVAILS
The trust deed contains a stipulation that, if any provision of the trust
deed limits, qualifies or conflicts with another provision which is required to
be included in the trust deed by, and is not subject to a contractual waiver
under, the US Trust Indenture Act of 1939, as amended, the required provision
of that Act shall be deemed to be incorporated into the trust deed and shall
prevail.
GOVERNING LAW
The trust deed will be governed by English law.
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THE NOTES
The issue of the notes will be authorized by a resolution of the board of
directors of the issuer passed prior to the closing date. The notes will be
constituted by a trust deed to be dated the closing date, between the issuer
and the note trustee, as trustee for, among others, the holders for the time
being of the notes. The trust deed includes provisions which enable it to be
modified or supplemented and any reference to the trust deed is a reference
also to the document as modified or supplemented in accordance with its terms.
The material terms of the notes are described in this prospectus. However,
the statements set out in this section with regard to the notes and the global
note certificates representing the notes are subject to the detailed provisions
of the trust deed. The trust deed will include the forms of the global note
certificates and the forms of the individual note certificates. A paying agent
and agent bank agreement between the issuer, the note trustee, Citibank, N.A.
in London as "PRINCIPAL PAYING AGENT", the other paying agents (together with
the principal paying agent, called the "PAYING AGENTS"), the transfer agent,
the registrar and the agent bank, regulates how payments will be made on the
notes and how determinations and notifications will be made. It will be dated
as of the closing date and the parties will include, on an ongoing basis, any
successor party appointed in accordance with its terms.
Each class of each series of notes will be represented initially by a global
note certificate in registered form without interest coupons attached. The
series 1 notes will initially be offered and sold pursuant to a registration
statement, of which this prospectus forms a part, filed with the SEC. The
series 2 notes and the series 3 notes, which are not being offered by this
prospectus, will initially be offered and sold outside the United States to
non-US persons pursuant to Regulation S under the Securities Act. The global
note certificates representing the series 1 notes offered by this prospectus
(the "OFFERED GLOBAL NOTE CERTIFICATES") will be deposited with Citibank, N.A.,
as the custodian for, and registered in the name of Cede & Co., as nominee of
The Depository Trust Company, referred to in this prospectus as "DTC". On
confirmation from the custodian that it holds the offered global note
certificates, DTC will record book-entry interests in the beneficial owner's
account or the participant account through which the beneficial owner holds its
interests in the notes. These book-entry interests will represent the
beneficial owner's beneficial interest in the relevant offered global note
certificates.
The amount of notes represented by each global note certificate is evidenced
by the register maintained for that purpose by the registrar. Together, the
notes represented by the global note certificates and any outstanding
individual note certificates will equal the aggregate principal amount of the
notes outstanding at any time. However, except as described under "--
INDIVIDUAL NOTE CERTIFICATES", individual note certificates shall not be
issued.
Beneficial owners may hold their interests in the global note certificates
only through DTC, Clearstream, Luxembourg or Euroclear, as applicable, or
indirectly through organizations that are participants in any of those systems.
Ownership of these beneficial interests in a global note certificate will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC, Clearstream, Luxembourg or Euroclear (with respect
to interests of their participants) and the records of their participants (with
respect to interests of persons other than their participants). By contrast,
ownership of direct interests in a global note certificate will be shown on,
and the transfer of that ownership will be effected through, the register
maintained by the registrar. Because of this holding structure of the notes,
beneficial owners of notes may look only to DTC, Clearstream, Luxembourg or
Euroclear, as applicable, or their respective participants for their beneficial
entitlement to those notes. The issuer expects that DTC, Clearstream,
Luxembourg or Euroclear will take any action permitted to be taken by a
beneficial owner of notes only at the direction of one or more participants to
whose account the interests in
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a global note certificate is credited and only in respect of that portion of
the aggregate principal amount of notes as to which that participant or those
participants has or have given that direction.
Beneficial owners will be entitled to the benefit of, will be bound by and
will be deemed to have notice of, all the provisions of the trust deed and the
paying agent and agent bank agreement. Beneficial owners can see copies of
these agreements at the principal office for the time being of the note
trustee, which is, as of the date of this document, The Bank of New York,
London Branch and at the specified office for the time being of each of the
paying agents. Pursuant to its obligations under the Listing Rules made by the
UK Listing Authority, the issuer will maintain a paying agent in the United
Kingdom until the date on which the notes are finally redeemed.
PAYMENT
Principal and interest payments on the offered notes will be made via the
paying agents to DTC or its nominee, as the registered holder of the offered
global note certificates. DTC's practice is to credit its participants'
accounts on the applicable payment date according to their respective holdings
shown on DTC's records unless DTC has reason to believe that it will not
receive payment on that payment date.
Payments by DTC, Clearstream, Luxembourg and Euroclear participants to the
beneficial owners of notes will be governed by standing instructions, customary
practice, and any statutory or regulatory requirements as may be in effect from
time to time, as is now the case with securities held by the accounts of
customers registered in "STREET NAME". These payments will be the
responsibility of the DTC, Clearstream, Luxembourg or Euroclear participant and
not of DTC, Clearstream, Luxembourg, Euroclear, any paying agent, the note
trustee or the issuer. None of the issuer, the note trustee, any underwriter
nor any paying agent will have any responsibility or liability for any aspect
of the records of DTC, Clearstream, Luxembourg or Euroclear relating to or
payments made by DTC, Clearstream, Luxembourg or Euroclear on account of
beneficial interests in the global note certificates or for maintaining,
supervising or reviewing any records of DTC, Clearstream, Luxembourg or
Euroclear relating to those beneficial interests.
CLEARANCE AND SETTLEMENT
THE CLEARING SYSTEMS
DTC has advised us and the underwriters that it intends to follow the
following procedures:
DTC will act as securities depository for the offered global note
certificates. The offered notes represented by the series 1 global note
certificates will be issued as securities registered in the name of Cede & Co.
(DTC's nominee).
DTC has advised us that it is a:
* limited-purpose trust company organized under New York Banking Law;
* "BANKING ORGANIZATION" within the meaning of New York Banking Law;
* member of the Federal Reserve System;
* "CLEARING CORPORATION" within the meaning of the New York Uniform
Commercial Code; and
* "CLEARING AGENCY" registered under the provisions of Section 17A of
the Exchange Act.
DTC holds securities for its participants and facilitates the clearance and
settlement among its participants of securities transactions, including
transfers and pledges, in deposited securities through electronic book-entry
changes in its participants' accounts. This eliminates the need for physical
movement of securities certificates. DTC participants include securities
brokers and dealers, banks, trust companies, clearing corporations and other
organizations. Indirect access to the DTC system is also available to others
including
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securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the SEC.
Transfers between participants on the DTC system will occur under DTC rules.
Transfers between participants on the Clearstream, Luxembourg system and
participants in the Euroclear system will occur under their rules and operating
procedures.
Purchases of notes under the DTC system must be made by or through DTC
participants, which will receive a credit for the notes on DTC's records. The
ownership interest of each actual beneficial owner is in turn to be recorded on
the DTC participants' and indirect participants' records. Beneficial owners
will not receive written confirmation from DTC of their purchase. However,
beneficial owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their holdings,
from the DTC participant or indirect participant through which the beneficial
owner entered into the transaction. Transfer of ownership interests in the
offered notes are to be accomplished by entries made on the books of DTC
participants acting on behalf of beneficial owners. Beneficial owners will not
receive certificates representing their ownership interest in notes unless use
of the book-entry system for the notes described in this section is
discontinued.
To facilitate subsequent transfers, all offered global note certificates
deposited with DTC are registered in the name of DTC's nominee, Cede & Co. The
deposit of these offered global note certificates with DTC and their
registration in the name of Cede & Co. effect no change in beneficial
ownership. DTC has no knowledge of the ultimate beneficial owners of the notes.
DTC's records reflect only the identity of the DTC participants to whose
accounts the beneficial interests are credited, which may or may not be the
actual beneficial owners of the notes. The DTC participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC participants,
by DTC participants to indirect participants, and by DTC participants and
indirect participants to beneficial owners will be governed by arrangements
among them and by any statutory or regulatory requirements in effect from time
to time.
Redemption notices for the offered notes represented by the offered global
note certificates will be sent to DTC. If less than all of those notes are
being redeemed by investors, DTC's practice is to determine by lot the amount
of the interest of each participant in those notes to be redeemed.
Neither DTC nor Cede & Co. will consent or vote on behalf of the offered
notes. Under its usual procedures, DTC will mail an omnibus proxy to the issuer
as soon as possible after the record date, which assigns the consenting or
voting rights of Cede & Co. to those DTC participants to whose accounts the
book-entry interests are credited on the record date, identified in a list
attached to the proxy.
The issuer understands that under existing industry practices, when the
issuer requests any action of noteholders or when a beneficial owner desires to
give or take any action which a noteholder is entitled to give or take under
the trust deed, DTC generally will give or take that action, or authorize the
relevant participants to give or take that action, and those participants would
authorize beneficial owners owning through those participants to give or take
that action or would otherwise act upon the instructions of beneficial owners
through them.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the issuer believes to be reliable, but the
issuer takes no responsibility for the accuracy thereof.
Clearstream, Luxembourg and Euroclear each hold securities for their
participating organizations and facilitate the clearance and settlement of
securities transactions between their respective participants through
electronic book-entry changes in accounts of those participants, thereby
eliminating the need for physical movement of securities. Clearstream,
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Luxembourg and Euroclear provide various services including safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream, Luxembourg and Euroclear
also deal with domestic securities markets in several countries through
established depository and custodial relationships. Clearstream, Luxembourg and
Euroclear have established an electronic bridge between their two systems
across which their respective participants may settle trades with each other.
Transactions may be settled in Clearstream, Luxembourg and Euroclear in any of
numerous currencies, including United States dollars and euro.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream, Luxembourg participants are financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, and clearing corporations. Indirect access to
Clearstream, Luxembourg is also available to others, including banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Clearstream, Luxembourg participant, either directly or
indirectly.
The Euroclear system was created in 1968 to hold securities for its
participants and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment. The Euroclear system is operated by Euroclear Bank S.A./N.V. (the
"EUROCLEAR OPERATOR"). All operations are conducted by the Euroclear operator.
All Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear operator.
Euroclear participants include banks -- including central banks --
securities brokers and dealers and other professional financial intermediaries.
Indirect access to the Euroclear system is also available to other firms that
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing use of Euroclear and the
related Operating Procedures of the Euroclear system. These terms and
conditions govern transfers of securities and cash within the Euroclear system,
withdrawal of securities and cash from the Euroclear system, and receipts of
payments for securities in the Euroclear system. All securities in the
Euroclear system are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear operator
acts under these terms and conditions only on behalf of Euroclear participants
and has no record of or relationship with persons holding through Euroclear
participants.
As the holders of book-entry interests, beneficial owners will not have the
right under the trust deed to act on solicitations by the issuer for action by
noteholders. Beneficial owners will only be able to act to the extent they
receive the appropriate proxies to do so from DTC, Clearstream, Luxembourg or
Euroclear or, if applicable, their respective participants. No assurances are
made about these procedures or their adequacy for ensuring timely exercise of
remedies under the trust deed.
No beneficial owner of an interest in a note represented by a global note
certificate will be able to transfer that interest except in accordance with
applicable procedures, in addition to those provided for under the trust deed,
of DTC, Clearstream, Luxembourg and Euroclear, as applicable. The laws of some
jurisdictions require that some purchasers of securities take physical delivery
of those securities in definitive form. These laws and limitations may impair
the ability to transfer beneficial interests in a note represented by a global
note certificate. See "RISK FACTORS -- YOU WILL NOT RECEIVE PHYSICAL NOTES,
WHICH MAY CAUSE DELAYS IN DISTRIBUTIONS AND HAMPER YOUR ABILITY TO PLEDGE OR
RESELL THE NOTES".
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CLEARANCE AND SETTLEMENT
Initial settlement
The offered global note certificates will be delivered on the closing date
to Citibank, N.A., as custodian for DTC. Customary settlement procedures will
be followed for participants of each system on the closing date. Notes will be
credited to investors' securities accounts on the closing date against payment
in same-day funds.
Secondary trading
Secondary market sales of book-entry interests in offered notes between DTC
participants will occur in the ordinary way in accordance with DTC rules and
will be settled using the procedures applicable to conventional United States
corporate debt obligations.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to these
procedures to facilitate transfers of interests in securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are not
obligated to perform these procedures. Additionally, these procedures may be
discontinued at any time. None of the issuer, any agent, the underwriters or
any affiliate of any of the foregoing, or any person by whom any of the
foregoing is controlled for the purposes of the Securities Act, will have any
responsibility for the performance by DTC, Clearstream, Luxembourg, Euroclear
or their respective direct or indirect participants or accountholders of their
respective obligations under the rules and procedures governing their
operations or for the sufficiency for any purpose of the arrangements described
in this prospectus.
INDIVIDUAL NOTE CERTIFICATES
Beneficial owners of offered notes will only be entitled to receive
individual note certificates under the following limited circumstances:
* as a result of any amendment to, or change in, the laws or
regulations of the United Kingdom (or any political subdivision
thereof) or of any authority therein or thereof having power to tax
or in the interpretation or administration of such laws or
regulations which becomes effective on or after the closing date,
the issuer or any paying agent is or will be required to make any
deduction or withholding from any payment on the notes that would
not be required if the notes were represented by individual note
certificates; or
* DTC notifies the issuer that it is unwilling or unable to hold the
offered global note certificates or is unwilling or unable to
continue as, or has ceased to be, a clearing agency registered
under the Exchange Act and, in each case, the issuer cannot appoint
a successor within 90 days of such notification.
In no event will individual note certificates in bearer form be issued. Any
individual note certificate will be issued in registered form in denominations
of $10,000 and $1,000 in the case of individual note certificates representing
the series 1 notes. Any individual note certificates will be registered in that
name or those names as the registrar shall be instructed by DTC, Clearstream,
Luxembourg and Euroclear, as applicable. It is expected that these instructions
will be based upon directions received by DTC, Clearstream, Luxembourg and
Euroclear from their participants reflecting the ownership of book-entry
interests. To the extent permitted by law, the issuer, the note trustee and any
paying agent shall be entitled to treat the person in whose names any
individual note certificate is registered as the absolute owner thereof. The
paying agent and agent bank agreement contains provisions relating to the
maintenance by a registrar of a register reflecting ownership of the notes and
other provisions customary for a registered debt security.
Any person receiving individual note certificates will not be obligated to
pay or otherwise bear the cost of any tax or governmental charge or any cost or
expense relating to insurance, postage, transportation or any similar charge,
which will be solely the responsibility of the issuer. No service charge will
be made for any registration of transfer or exchange of any individual note
certificates.
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DESCRIPTION OF THE OFFERED NOTES
The following is a summary of the material terms and conditions of the
series 1 notes, numbered 1 to 15. This summary does not need to be read with
the actual terms and conditions of the series 1 notes in order to learn all the
material terms and conditions of the series 1 notes. The complete terms and
conditions of the series 1 notes are set out in the trust deed, a form of which
has been filed as an exhibit to the registration statement, and in the event of
a conflict, the terms and conditions of the notes set out in the trust deed
will prevail.
References in this section to the "OFFERED NOTES" mean the series 1 notes
offered by this prospectus. References in this section to the "NOTES" mean
collectively the series 1 notes, the series 2 notes and the series 3 notes.
Furthermore, this section, as elsewhere in this prospectus, provides
information on the series 2 notes and the series 3 notes that are not being
offered to the public in the United States by this prospectus. This information
is provided only to enhance your understanding of the offered notes. You should
be aware that, as explained elsewhere in this prospectus, the series 2 notes
and the series 3 notes as a group do not provide credit support for the series
1 notes, the series 1 notes and the series 3 notes as a group do not provide
credit support for the series 2 notes and the series 1 notes and the series 2
notes do not provide credit support for the series 3 notes.
The notes are the subject of the following documents:
* a trust deed dated the closing date between the issuer and the note
trustee;
* a paying agent and agent bank agreement dated the closing date
between the issuer, the principal paying agent, the agent bank, the
other paying agents, the transfer agent, the registrar and the note
trustee;
* an issuer deed of charge dated the closing date between the issuer,
the note trustee, the swap providers and certain other parties;
* the dollar currency swap agreements dated the closing date between
the issuer, the dollar currency swap provider and the note trustee;
* the euro currency swap agreements dated the closing date between
the issuer, the euro currency swap provider and the note trustee;
and
* the basis rate swap agreement dated the closing date between the
issuer, the basis rate swap provider and the note trustee.
When we refer to the parties to these documents, the reference includes any
successor to that party validly appointed.
Initially the parties will be as follows:
* Granite Mortgages 03-3 plc, as issuer;
* Citibank, N.A., as principal paying agent, US paying agent, agent
bank, transfer agent and registrar;
* The Bank of New York, as security trustee and note trustee;
* Swiss Re Financial Products Corporation, as dollar currency swap
provider;
* Citibank, N.A., London branch, as euro currency swap provider; and
* Northern Rock plc, as basis rate swap provider.
The noteholders are bound by and deemed to have notice of all of the
provisions of the trust deed, the issuer deed of charge, the intercompany loan
agreement, the Funding deed of charge, the issuer cash management agreement,
the paying agent and agent bank agreement, the basis rate swap agreement, the
dollar currency swap agreements and the euro currency swap agreements which are
applicable to them. Noteholders can view drafts of those documents at the
specified office of any of the paying agents after the closing date.
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There is no English law which prohibits US residents from holding notes
solely because of their residence outside the UK.
There are no UK governmental laws or regulations other than in relation to
withholding tax, as described under "MATERIAL UNITED KINGDOM TAX CONSEQUENCES
- -- WITHHOLDING TAX", that restrict payments made to non-UK resident
noteholders.
1. FORM, DENOMINATION, REGISTER, TITLE AND TRANSFERS
The offered notes are being offered and sold to the public in the United
States and to institutional investors outside the United States.
The offered notes are in global registered form, without coupons attached.
Transfers and exchanges of beneficial interests in notes represented by global
note certificates are made in accordance with the rules and procedures of DTC,
Euroclear and/or Clearstream, Luxembourg, as applicable. The offered notes are
being offered in denominations of $10,000 and $1,000.
Global note certificates will be exchanged for individual note certificates
in definitive registered form only under certain limited circumstances. If
individual note certificates are issued, they will be serially numbered and
issued in an aggregate principal amount equal to the principal amount
outstanding of the relevant global note certificates and in registered form
only.
The registrar will maintain a register in respect of the offered notes in
accordance with the provisions of the paying agent and agent bank agreement.
References in this section to a "HOLDER" of an offered note means the person in
whose name such offered note is for the time being registered in the register
(or, in the case of a joint holding, the first named thereof) and "NOTEHOLDER"
shall be construed accordingly. A "NOTE CERTIFICATE" will be issued to each
noteholder in respect of its registered holding. Each note certificate will be
numbered serially with an identifying number which will be recorded in the
register.
The holder of each offered note shall (except as otherwise required by law)
be treated as the absolute owner of such offered note for all purposes (whether
or not it is overdue and regardless of any notice of ownership, trust or any
other interest therein, any writing on the note certificate relating thereto
(other than the endorsed form of transfer) or any notice of any previous loss
or theft of such note certificate) and no person shall be liable for so
treating such holder.
Subject to the provisions below, an offered note may be transferred upon
surrender of the relevant note certificate, with the endorsed form of transfer
duly completed, at the offices of the registrar or any transfer agent specified
in the paying agent and agent bank agreement, together with such evidence as
the registrar or (as the case may be) such transfer agent may reasonably
require to prove the title of the transferor and the authority of the
individuals who have executed the form of transfer; provided, however, that an
offered note may not be transferred unless the principal amount of offered
notes transferred and (where not all of the offered notes held by a holder are
being transferred) the principal amount of the balance of offered notes not
transferred are authorized holdings. "AUTHORIZED HOLDINGS" means holdings of
$1,000 and integral multiples in excess thereof. Where not all the offered
notes represented by the surrendered note certificate are the subject of the
transfer, a new note certificate in respect of the balance of the offered notes
will be issued to the transferor.
Within five business days of such surrender of a note certificate, the
registrar will register the transfer in question and deliver a new note
certificate of a like principal amount to the offered notes transferred to each
relevant holder at its office or (as the case may be) the office of any
transfer agent specified in the paying agent and agent bank agreement or (at
the request and risk of any such relevant holder) by uninsured first class mail
(and by airmail if the holder is overseas) to the address specified for the
purpose by such relevant holder. In this paragraph, "BUSINESS DAY" means a day
on which
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commercial banks are open for business (including dealings in foreign
currencies) in the city where the registrar or (as the case may be) the
relevant transfer agent has its specified office.
The transfer of an offered note will be effected without charge by or on
behalf of the issuer, the registrar or any transfer agent but against such
indemnity as the registrar or (as the case may be) such transfer agent may
require in respect of any tax or other duty of whatsoever nature which may be
levied or imposed in connection with such transfer.
Noteholders may not require transfers to be registered during the period of
15 days ending on the due date for any payment of principal or interest in
respect of the offered notes.
All transfers of offered notes and entries on the register are subject to
the detailed regulations concerning the transfer of offered notes scheduled to
the paying agent and agent bank agreement. The regulations may be changed by
the issuer with the prior written approval of the note trustee and the
registrar. A copy of the current regulations will be mailed (free of charge) by
the registrar to any noteholder who requests in writing a copy of such
regulations.
2. STATUS, SECURITY AND PRIORITY
The class A notes, the class B notes, the class M notes and the class C
notes are direct, secured and unconditional obligations of the issuer and are
all secured by the same security. Payments on each class of notes will be made
equally amongst all notes of that class.
(A) Interest
Among the series 1 notes, payments of interest on the series 1 class A notes
will be made ahead of payments of interest on the series 1 class B notes, the
series 1 class M notes and the series 1 class C notes, payments of interest on
the series 1 class B notes will be made ahead of payments of interest on the
series 1 class M notes and the series 1 class C notes, and payments of interest
on the series 1 class M notes will be made ahead of payments of interest on the
series 1 class C Notes.
Among the series 2 notes, payments of interest on the series 2 class A notes
will be made ahead of payments of interest on the series 2 class B notes, the
series 2 class M notes and the series 2 class C notes, payments of interest on
the series 2 class B notes will be made ahead of payments of interest on the
series 2 class M notes and the series 2 class C notes, and payments of interest
on the series 2 class M notes will be made ahead of payments of interest on the
series 2 class C notes.
Among the series 3 notes, payments of interest on the series 3 class A notes
will be made ahead of payments of interest on the series 3 class B notes, the
series 3 class M notes and the series 3 class C notes, payments of interest on
the series 3 class B notes will be made ahead of payments of interest on the
series 3 class M notes and the series 3 class C notes, and payments of interest
on the series 3 class M notes will be made ahead of payments of interest on the
series 3 class C notes.
As among the series 1 notes, the series 2 notes and the series 3 notes:
* payments of interest on the series 1 class A1 notes, the series 1
class A2 notes, the series 1 class A3 notes, the series 2 class A
notes and the series 3 class A notes will be made in no order of
priority among them but in proportion to the respective amounts due
on the class A notes. These payments of interest will be made ahead
of payments of interest on each series of class B notes, each
series of class M notes and each series of class C notes;
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* payments of interest on the series 1 class B notes, the series 2
class B notes and the series 3 class B notes will be made in no
order of priority among them but in proportion to the respective
amounts due on the class B notes. These payments of interest will
be made ahead of payments of interest on each series of class M
notes and each series of class C notes;
* payments of interest on the series 1 class M notes, the series 2
class M notes and the series 3 class M notes will be made in no
order of priority among them but in proportion to the respective
amounts due on the class M notes. These payments of interest will
be made ahead of payments of interest on each series of the class C
notes; and
* payments of interest on the series 1 class C notes, the series 2
class C notes and the series 3 class C notes will be made in no
order of priority among them but in proportion to the respective
amounts due on the class C notes.
(B) Principal
Subject to there being no trigger event and no enforcement of the Funding
security and/or the issuer security, no class of notes will be repaid an amount
of principal which is greater than the controlled amortization amount in
respect of that class of notes for the relevant payment date and, subject also
to the satisfaction of certain conditions in relation to the payment of
principal of the class B notes, the class M notes and the class C notes at any
time when class A notes are outstanding as specified below, payments of
principal will be made in accordance with the following priority.
Repayment of principal in respect of the controlled amortization amount on
the series 1 class A1 notes will be made ahead of repayment of principal in
respect of the controlled amortization amount on each of the series 1 class A2
notes, the series 1 class A3 notes, the series 2 class A notes and the series 3
class A notes. Repayment of principal in respect of the controlled amortization
amount on the series 1 class A2 notes will be made ahead of repayment of
principal in respect of the controlled amortization amount on each of the
series 1 class A3 notes, the series 2 class A notes and the series 3 class A
notes. Repayment of principal in respect of the controlled amortization amount
on the series 1 class A3 notes, the series 2 class A notes and the series 3
class A notes will be made in no order of priority between them but in
proportion to the respective controlled amortization amounts due on the series
1 class A3 notes, the series 2 class A notes and the series 3 class A notes and
will be made ahead of repayment of principal in respect of the controlled
amortization amount on the class B notes. Repayment of principal in respect of
the controlled amortization amount on the series 1 class B notes, series 2
class B notes and the series 3 class B notes will be made in no order of
priority among them but in proportion to the respective controlled amortization
amounts due on the class B notes. However, repayment of principal in respect of
the controlled amortization amount on the class B notes will be made ahead of
repayment of principal in respect of the controlled amortization amount on the
class M notes. Repayment of principal in respect of the controlled amortization
amount on the series 1 class M notes, the series 2 class M notes and the series
3 class M notes will be made in no order of priority among them but in
proportion to the respective controlled amortization amounts due on the class M
notes. However, repayment of principal in respect of the class M notes will be
made ahead of repayment of principal in respect of the controlled amortization
amount on the class C notes. Repayment of principal in respect of the
controlled amortization amount on the series 1 class C notes, series 2 class C
notes and the series 3 class C notes will be made in no order of priority among
them but in proportion to the respective controlled amortization amounts due on
the class C notes.
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The above priority of payments will change and the issuer will make
repayments of principal in accordance with and subject to the relevant issuer
priority of payments as set out in the issuer cash management agreement or, as
the case may be, the issuer deed of charge (1) following the occurrence of a
trigger event, and/or (2) following the enforcement of the Funding security
and/or the enforcement of the issuer security.
If any class A notes remain outstanding and any of the issuer arrears test,
the issuer reserve requirement or the subordinated principal test are not
satisfied on the relevant payment date, no amount of principal will be payable
in respect of the class B notes, the class M notes or the class C notes.
Notwithstanding the foregoing priorities, the controlled amortization amount
payable in respect of each class of notes is determined by a schedule that
indicates the target balance for that class of notes on the relevant payment
date and not all classes of notes are scheduled to receive payments of
principal on each payment date, with some lower ranking classes of notes being
repaid principal before higher ranking classes of notes. The controlled
amortization amount payable on some classes of notes will also be zero.
The issuer reserve fund provides credit enhancement for the class C notes.
The issuer reserve fund and the class C notes provide credit enhancement for
the class M notes. The issuer reserve fund, the class C notes and the class M
notes provide credit enhancement for the class B notes. The issuer reserve
fund, the class C notes, the class M notes and the class B notes provide credit
enhancement for the class A notes. You should note, however, that the series 3
notes as a group do not provide credit enhancement for either the series 1
notes or the series 2 notes, and the series 2 notes and the series 3 notes as a
group do not provide credit enhancement for the series 1 notes.
For more information on the priority of principal repayments to you, see
"CASHFLOWS". For more information on the redemption of the notes, including a
description of asset trigger events, non-asset trigger events and seller share
events, see "THE MORTGAGES TRUST -- CASH MANAGEMENT OF TRUST PROPERTY --
PRINCIPAL RECEIPTS" and "CASHFLOWS".
The note trustee is required to have regard to the interests of all classes
of noteholders equally. However, if there are any class A notes outstanding and
if there is or may be a conflict between the interests of the class A
noteholders and the interests of the class B noteholders and/or the class M
noteholders and/or the class C noteholders, then the note trustee will have
regard to the interests of the class A noteholders only. If there are no class
A notes outstanding and there are any class B notes outstanding, and if there
is or may be a conflict between the interests of the class B noteholders and
the interests of the class M noteholders and/or the class C noteholders, then
the note trustee will have regard to the interests of the class B noteholders
only. If there are no class A notes outstanding and no class B notes
outstanding and there are any class M notes outstanding, and if there is or may
be a conflict between the interests of the class M noteholders and the
interests of the class C noteholders, then the note trustee will have regard to
the interests of the class M noteholders only.
Except in certain limited circumstances described in number 11, there is no
limitation on the power of class A noteholders to pass an effective
extraordinary resolution the exercise of which is binding on the class B
noteholders, the class M noteholders and the class C noteholders. As described
in number 11 there are provisions limiting the power of the class B
noteholders, the class M noteholders and the class C noteholders to pass an
effective extraordinary resolution, depending on its effect on the class A
noteholders. Likewise, except in the limited circumstances described in number
11, there is no limitation on the power of class B noteholders to pass an
effective extraordinary resolution the exercise of which is binding on the
class M noteholders and the class C noteholders. As described in number 11
there are provisions limiting the power of the class M noteholders and the
class C noteholders to pass an effective extraordinary resolution, depending on
its effect on the class B noteholders. Likewise, except in the limited
circumstances described in number 11, there is no limitation on the power of
class M noteholders to pass an
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effective extraordinary resolution the exercise of which is binding on the
class C noteholders. As described in number 11 there are provisions limiting
the power of the class C noteholders to pass an effective extraordinary
resolution, depending on its effect on the class M noteholders.
The note trustee is entitled to assume that any exercise by it of any power,
discretion or duty under the transaction documents will not be materially
prejudicial to the interests of the noteholders (or any series and/or class of
noteholders) if the rating agencies have confirmed that the current ratings of
the notes will not be adversely affected by that exercise.
The security for the payment of amounts due under the notes is created by
the issuer deed of charge. The security is created by the issuer in favor of
the note trustee who will hold it for itself and on behalf of the issuer
secured creditors (which definition includes the noteholders). The security
consists of the following:
(1) an assignment by way of first fixed security of the issuer's rights
and claims in respect of all security and other rights held on
trust by the security trustee pursuant to the Funding deed of
charge, save to the extent that any of those issuer's rights and
claims derive from property that is situated in Jersey, which will
be assigned to the note trustee for the purpose of creating a
security interest in accordance with Jersey law;
(2) an assignment by way of first fixed security of the issuer's
rights, title, interest and benefit in and to the transaction
documents to which it is a party, including the intercompany loan
agreement, the funding deed of charge, the basis rate swap
agreement, the dollar currency swap agreements, the euro currency
swap agreements, any swap collateral ancillary document, the paying
agent and agent bank agreement, the subscription agreement, the
underwriting agreement, the corporate services agreement, the
issuer bank account agreement, the issuer cash management agreement
and the trust deed, save to the extent that such rights, title,
interest and benefit derive from property that is situated in
Jersey. To the extent that the same are derived from property
situated in Jersey, the issuer will assign such rights, title,
interest and benefit to the note trustee for the purpose of
creating a security interest in those rights, title, interest and
benefit in accordance with Jersey law;
(3) an assignment by way of first fixed security of the issuer's right,
title, interest and benefit in the issuer transaction account, any
swap collateral account and each other account (if any of the
issuer), and all amounts or securities standing to the credit of
those accounts (including all interest or other income or
distributions accrued on such amounts or securities);
(4) a first fixed charge (which may take effect as a floating charge)
of the issuer's right, title, interest and benefit in all
authorized investments made by or on behalf of the issuer,
including all monies and income payable under those investments;
and
(5) a first ranking floating charge over all the assets and undertaking
of the issuer which are not otherwise effectively subject to a
fixed charge or assignment by way of security as described in (1),
(2), (3) or (4) above.
3. COVENANTS
If any note is outstanding, the issuer will not, unless it is provided in or
permitted by the terms of the transaction documents to which the issuer is a
party or by the written consent of the note trustee:
* create or permit to subsist any mortgage, pledge, lien, charge or
other security interest on the whole or any part of its present or
future assets or undertakings;
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* sell, assign, transfer, lease or otherwise dispose of or grant any
option or right to acquire over, all or any of its assets,
properties or undertakings or any interest or benefit in its assets
or undertakings;
* permit any other person other than itself and the note trustee (as
to itself and on behalf of the issuer secured creditors) to have
any equitable interest in any of its assets or undertakings;
* have an interest in any bank account other than the bank accounts
of the issuer maintained pursuant to the transaction documents;
* carry on any business other than as described in this prospectus or
as contemplated in the transaction documents relating to the issue
of the notes and the making of the intercompany loan;
* incur any indebtedness in respect of borrowed money whatsoever or
give any guarantee or indemnity in respect of any indebtedness or
obligation of any person;
* consolidate with or merge with any person or transfer substantially
all of its properties or assets to any person;
* waive or consent to the modification or waiver of any of the
obligations relating to the security;
* have any employees, premises or subsidiaries;
* pay any dividend or make any other distributions to its
shareholders or issue any further shares or alter any rights
attaching to its shares as at the date of the issuer deed of
charge;
* purchase or otherwise acquire any notes; or
* engage in any activities in the United States (directly or through
agents), or derive any income from United States sources as
determined under United States income tax principles, or hold any
property if doing so would cause it to be engaged in a trade or
business within the United States as determined under United States
income tax principles.
4. INTEREST
Each note bears interest on its principal amount outstanding from, and
including, the closing date. Interest will stop accruing on the principal
amount outstanding of any note from the date it is due for redemption unless,
when it is presented, payment of principal is improperly withheld or refused.
If this happens it will continue to bear interest on the unpaid amount both
before and after any judgement is given, up to (but excluding) whichever is the
earlier of the following:
* the day on which all sums due in respect of that note, up to that
day, are paid; and
* the day which is seven days after the principal paying agent or
other paying agent has notified the relevant noteholder or class of
noteholders, either in accordance with number 14 or individually,
that such payment will be made, provided that subsequently on
presentation of the note payment is in fact made.
Interest on the offered notes will be paid in arrears on each payment date
for such note. Each period (i) with respect to the first payment date, from and
including the closing date to but excluding January 20, 2004 and (ii)
thereafter, with respect to each payment date, from and including the preceding
payment date to but excluding such current payment date is called an interest
period.
The order of payments of interest to be made on the classes of notes will be
prioritized so that interest payments due and payable on the class C notes will
be subordinated to interest payments due and payable on the class M notes, the
class B notes and the class A notes, interest payments due and payable on the
class M notes will
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be subordinated to interest payments due and payable on the class B notes and
the class A notes and interest payments due and payable on the class B notes
will be subordinated to interest payments due and payable on the class A notes,
in each case in accordance with the issuer priority of payments.
Any revenue shortfall in payments of interest on the class B notes and/or
the class M notes and/or the class C notes (for the reason that the issuer has
not received sufficient interest payments from Funding under the intercompany
loan to fund such payments) will not be an event of default and the unpaid
interest will be deferred until the first payment date after such date when
funds are available (after allowing for liabilities of the issuer having a
higher priority and subject to and in accordance with the relevant issuer
priority of payments), to the issuer to pay such interest. Any interest so
deferred will bear interest at the rate of interest applicable to the relevant
class of notes from time to time and payment of such additional interest will
also be deferred until the first payment date after such date when funds are
available (after allowing for liabilities of the issuer having a higher
priority) to the issuer to pay such additional interest. Neither deferred
interest nor additional interest shall be deferred beyond the final maturity
date of the relevant class of notes when such amounts will be due and payable,
at which point, if the issuer has not received sufficient interest payments
from Funding under the intercompany loan to pay interest on the class B notes
and/or the class M notes and/or the class C notes, as the case may be, then
noteholders may never receive all interest amounts payable on those classes of
notes.
Payments of interest due on a payment date in respect of the class A notes
will not be deferred. In the event of the delivery of a class A note
enforcement notice (as described in number 9), the amount of interest that was
due but not paid on any payment date will itself bear interest at the
applicable rate until both the unpaid interest and the interest on that
interest are paid.
The rate of interest applicable to the offered notes for each interest
period will be determined by the agent bank on the following basis:
(1) on the interest determination date for each class of the offered
notes, the agent bank will determine the offered quotation to
leading banks for US dollar deposits for a period equal to the
relevant interest period. This will be determined by reference to
the display as quoted on the Dow Jones/Telerate Monitor at Telerate
Page No. 3750. If the Telerate Page No. 3750 stops providing these
quotations, the replacement page for the purposes of displaying
this information will be used. If the replacement page stops
displaying the information, another service as determined by the
issuer (with the approval of the note trustee, in its sole
discretion) will be used. In each of these cases, the determination
will be made as at or about 11:00 a.m., London time, on that date.
This is called the "SCREEN RATE" for the respective classes of the
offered notes. The "INTEREST DETERMINATION DATE" for the offered
notes means the second London business day before the first day of
an interest period;
(2) if, on any interest determination date, the screen rate is
unavailable, the agent bank will:
* request the principal London office of each of four major banks --
the reference banks -- in the London interbank market to provide
the agent bank with its offered quotation to leading banks of the
equivalent of the screen rate on that interest determination date
in an amount that represents a single transaction in that market at
that time; and
* 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
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(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 or such banks do not provide a quotation then the
relevant rate for that interest period will be the rate in effect
for the immediately preceding interest period for which (1) or (2)
was applicable (taking account of any relevant change in margin).
The rate of interest for each interest period for the:
* series 1 class A1 notes will be the sum of [__]% per annum up to
and including the interest period ending on the payment date in
January 2009 and thereafter [__]% per annum and the screen rate or
rate calculated to replace the screen rate;
* series 1 class A2 notes will be the sum of [__]% per annum up to
and including the interest period ending on the payment date in
January 2009 and thereafter [__]% per annum and the screen rate or
rate calculated to replace the screen rate;
* series 1 class A3 notes will be the sum of [__]% per annum up to
and including the interest period ending on the payment date in
January 2009 and thereafter [__]% per annum and the screen rate or
rate calculated to replace the screen rate;
* series 1 class B notes will be the sum of [__]% per annum up to and
including the interest period ending on the payment date in January
2009 and thereafter [__]% per annum and the screen rate or rate
calculated to replace the screen rate;
* series 1 class M notes will be the sum of [__]% per annum up to and
including the interest period ending on the payment date in January
2009 and therefore [__]% per annum and the screen rate or rate
calculated to replace the screen rate;
* series 1 class C notes will be the sum of [__]% per annum up to and
including the interest period ending on the payment date in January
2009 and thereafter [__]% per annum and the screen rate or rate
calculated to replace the screen rate.
The agent bank will, as soon as practicable after 11:00 a.m. (London time)
on each interest determination date, calculate the amount of interest payable
on each offered note for that interest period. The amount of interest will be
calculated by applying the rate of interest for that interest period to the
principal amount outstanding of that note during that interest period and, in
the case of the offered notes, multiplying the product by the actual number of
days in that interest period divided by 360 and rounding to the nearest US
dollars 0.01, half a cent being rounded upwards.
The rates and amounts determined by the agent bank will be notified to the
issuer, the issuer cash manager, the note trustee and the paying agents. The
agent bank will also notify such rates and amount, to each stock exchange on
which the notes are listed and to the relevant class of noteholders in
accordance with number 14 as soon as possible.
If the agent bank fails to make a required determination or calculation as
described, the note trustee will make this determination or calculation as it
shall in its sole discretion deem fair and reasonable or as described in this
number 4. If this happens, the determination or calculation will be deemed to
have been made by the agent bank.
The issuer, the issuer cash manager, the note trustee, the reference banks,
the agent bank and the noteholders will be bound by the determinations properly
made as described above.
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The agent bank will ensure that there will be four reference banks with
offices in London and an agent bank while there are notes outstanding.
5. REDEMPTION, PURCHASE AND CANCELLATION
(A) Final Redemption
If the offered notes have not previously been redeemed in full as described
in this number 5, the issuer will redeem each class of notes at their then
principal amount outstanding together with all accrued interest on the final
maturity date in respect of such class of notes.
(B) Mandatory Redemption of the Notes in Part
On each payment date, other than a payment date on which the notes are to be
redeemed under numbers 5(A), (D), (E) or (F), the issuer shall repay principal
in respect of the notes in accordance with and subject to the relevant issuer
priority of payments applicable to the issuer on such payment date and then
only to the extent of issuer available principal receipts on such payment date
in the manner described in and subject to the issuer cash management agreement
and/or, as applicable, the issuer deed of charge. See "CASHFLOWS --
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS".
(C) Note Principal Payments, Principal Amount Outstanding and Pool Factor
On the distribution date immediately preceding each payment date (the "NOTE
DETERMINATION DATE"), the issuer or the issuer cash manager will determine the
following:
* the amount of each principal payment payable on each offered note,
called the "NOTE PRINCIPAL PAYMENT";
* the principal amount outstanding of each offered note of that class
on the note determination date which is the principal amount
outstanding of that offered note as at the closing date less the
aggregate of all note principal payments that have been paid in
respect of that note; and
* the fraction, or pool factor, obtained by dividing the principal
amount outstanding of each offered note by the original principal
amount outstanding of each note as at the closing date.
The issuer will notify the amounts and dates determined to the agent bank,
paying agents, note trustee, the registrar and each stock exchange on which the
notes are listed and the agent bank shall publish such amounts and dates in
accordance with number 14 by no later than the business day after the relevant
payment date or as soon as reasonably practicable thereafter in the case of
individual note certificates.
If the issuer or issuer cash manager fails to make a determination as
described, the note trustee will calculate the note principal payment,
principal amount outstanding and pool factor as described in this paragraph (C)
in the manner the note trustee in its discretion considers fair and reasonable
in the circumstances, having regard to paragraph (C) above, and each of these
determinations or calculations will be deemed to have been made by the issuer.
If this happens, the issuer, the issuer cash manager and the noteholders will
be bound by the determinations made.
(D) Optional Redemption in Full
The issuer may by giving not less than thirty and not more than sixty days
prior notice to the note trustee and the noteholders redeem all (but not some
only) of the notes specified below at the principal amount outstanding together
with any accrued interest on the following dates:
* the payment date falling in January 2009 and on any payment date
thereafter. This gives the issuer the option to redeem the notes on
or after the January 2009 step-up date for interest; and
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* any payment date on which the aggregate principal amount
outstanding of the notes is less than 10% of the aggregate
principal amount outstanding of the notes as at the closing date.
The issuer may only redeem the notes as described above if it has prior to
the date of such redemption provided to the note trustee a certificate to the
effect that it will have funds available to it to make the required payment of
principal and interest due in respect of the notes on the relevant payment
date, including any amounts required to be paid in priority to or in the same
priority as the notes outstanding in accordance with the issuer cash management
agreement, and the note trustee is satisfied in accordance with the transaction
documents that such funds are available.
(E) Optional Redemption for Tax and Other Reasons
If the issuer satisfies the note trustee that on the next payment date
either:
(i) the issuer would be required to withhold or deduct from amounts due
on the notes, any amount on account of any present or future taxes
or duties or governmental charges; or
(ii) Funding would be required to withhold or deduct from amounts due on
the intercompany loan, any amount on account of any present or
future taxes or duties or governmental charges; and
(iii) such obligation of the issuer or Funding, as the case may be,
cannot be avoided by the issuer or Funding, as the case may be,
taking reasonable measures available to it,
then the issuer will use reasonable endeavors to arrange the substitution of
a company incorporated in another jurisdiction and approved by the note trustee
in order to avoid such a situation, provided that the issuer will not be
required to do so if that would require registration of any new security under
US securities laws or would materially increase the disclosure requirements
under US law or the costs of issuance.
If the issuer is unable to arrange a substitution as described above, then
the issuer may, by giving not less than thirty and not more than sixty days'
prior notice to the note trustee and the noteholders, redeem all (but not some
only) of the notes at their principal amount outstanding together with any
accrued interest on the next following payment date, provided that, prior to
giving any such notice, the issuer shall deliver to the note trustee (1) a
certificate signed by two directors of the issuer stating that the
circumstances referred to in (i) or (ii) and (iii) above prevail and setting
out details of such circumstances, and (2) an opinion in form and substance
satisfactory to the note trustee of independent legal advisers of recognized
standing to the effect that the issuer has or will become obliged to pay such
additional amounts as a result of such change or amendment. The note trustee
shall be entitled to accept such certificate and opinion as sufficient evidence
of the satisfaction of the circumstance set out in (i) or (ii) and (iii) above,
in which event they shall be conclusive and binding on the noteholders. The
issuer may only redeem the notes as described above if the note trustee is
satisfied in accordance with the transaction documents that the issuer will
have funds available to it to make the required payment of principal and
interest due in respect of the notes on the relevant payment date, including
any amounts required to be paid in priority to or in the same priority as the
notes outstanding in accordance with the issuer pre-enforcement priority of
payments.
In addition to the foregoing, if at any time it becomes unlawful for the
issuer to make, fund or allow to remain outstanding the intercompany loan, then
the issuer may require Funding upon giving not more than 60 nor less than 30
days' (or such shorter period as may be required under any relevant law) prior
written notice to the issuer and the note trustee, to prepay the intercompany
loan on any payment date subject to and in accordance with the provisions of
the intercompany loan agreement to the extent necessary to cure such
illegality. Such monies received by the issuer shall be used to prepay the
notes in full on that payment date.
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(F) Optional Redemption for Implementation of New Basel Capital Accord
If the New Basel Capital Accord has been implemented in the United Kingdom,
whether by rule of law, recommendation or best practice or by any other
regulation, then on the payment date falling in July 2008 and any payment date
thereafter, the issuer may, by giving not more than 60 nor less than 30 days'
(or such shorter period as may be required under any relevant law) prior notice
to the note trustee and the noteholders, redeem all (but not some only) of the
notes at their principal amount outstanding together with any accrued interest
on the next following payment date, provided that a note enforcement notice has
not been served. The issuer may only redeem the notes as described above if the
note trustee is satisfied in accordance with the transaction documents that the
issuer will have funds available to it to make the required payment of
principal and interest due in respect of the notes on the relevant payment
date, including any amounts required to be paid in priority to or in the same
priority as the notes outstanding in accordance with the issuer pre-enforcement
priority of payments.
6. PAYMENTS
Payments of principal and interest in respect of the notes will be made to
the persons in whose names the global note certificates are registered on the
register at the opening of business in the place of the registrar's specified
office on the fifteenth day before the due date for such payment. Such date is
called the "RECORD DATE". Payments shall be made by wire transfer of
immediately available funds, if such registered holder shall have provided
wiring instructions no less than five business days prior to the record date,
or otherwise by check mailed to the address of such registered holder as it
appears in the register at the opening of business on the record date. In the
case of the final redemption, and provided that payment is made in full,
payment will only be made against surrender of those global note certificates
to the registrar.
All payments on the offered notes are subject to any applicable fiscal or
other laws and regulations. Noteholders will not be charged commissions or
expenses on these payments.
If the due date for payment of any amount on the offered notes is not a
business day in the place it is presented, noteholders will not be entitled to
payment of the amount due in that place until the next business day in that
place and noteholders shall not be entitled to any further interest or other
payment as a result of that delay.
If a paying agent makes a partial payment on an offered note, the registrar
will endorse on that offered global note certificate a statement indicating the
amount and date of that payment.
If a noteholder holds individual note certificates with respect to offered
notes, payments of principal and interest on an offered note (except in the
case of a final payment that pays off the entire principal of the offered note)
will be made by US dollar check and mailed to the noteholder at the address
shown in the register. In the case of final redemption, payment will be made
only when the offered note certificate is surrendered. If the noteholder makes
an application to the registrar, payments can instead be made by transfer to a
bank account.
If payment of principal of an offered note is improperly withheld or
refused, the interest which continues to accrue will still be payable in
accordance with the usual procedures.
The issuer can, at any time, vary or terminate the appointment of any paying
agent and can appoint successor or additional paying agents, registrar or
transfer agent. If the issuer does this it must ensure that it maintains a
paying agent in London, a paying agent in New York and a registrar. The issuer
will ensure that at least 30 days' notice of any change in the paying agents,
registrar or transfer agent or their specified offices is given to noteholders
in accordance with number 14.
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Subject as described earlier in relation to the deferral of interest, if
payment of interest on a note is not paid for any other reason when due and
payable, the unpaid interest will itself bear interest at the applicable rate
until both the unpaid interest and the interest on that interest are paid.
7. PRESCRIPTION
Claims against the issuer for payment of interest and principal on
redemption will become void if the relevant note certificates are not
surrendered for payment within the time limit for payment. That time limit is
ten years from the due date of such notes. If there is a delay in the paying
agents or, as applicable, the note trustee, receiving the funds, then the due
date, for the purposes of this time limit, is the date on which it notifies
you, in accordance with number 14, that it has received the relevant payment.
8. TAXATION
Payments of interest and principal will be made without making any
withholding or deduction for any tax unless a withholding or deduction is
required by any applicable law. If a withholding or deduction for tax is made,
the issuer or the relevant paying agent will account to the relevant authority
for the amount so withheld or deducted. Neither the issuer nor any paying agent
is required to make any additional payments to noteholders for such withholding
or deduction.
9. EVENTS OF DEFAULT
(A) class A noteholders
The note trustee in its absolute discretion may give notice to the issuer of
a class A note event of default (as defined below) in respect of the class A
notes (a "CLASS A NOTE ENFORCEMENT NOTICE"), and shall give such notice if it
is indemnified to its satisfaction and it is:
* requested to do so in writing by the holders of at least one
quarter of the aggregate principal amount outstanding of the class
A notes; or
* directed to do so by an extraordinary resolution passed at a
meeting of the class A noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS A NOTE EVENT OF DEFAULT":
* the issuer fails to pay for a period of seven business days any
amount of principal of the class A notes when such payment is due
and payable in accordance with the conditions or the issuer fails
to pay for a period of fifteen business days any amount of interest
on the class A notes when such payment is due and payable in
accordance with the conditions; or
* the issuer fails to perform or observe any of its other obligations
under the class A notes, the trust deed, the issuer deed of charge
or any other transaction document, and (except where the note
trustee certifies that, in its opinion, such failure is incapable
of remedy, in which case no notice will be required) it remains
unremedied for 30 days after the note trustee has given notice of
it to the issuer requiring the same to be remedied; and the note
trustee has certified that the failure to perform or observe is
materially prejudicial to the interests of the class A noteholders;
or
* except for the purposes of an amalgamation or restructuring as
described in the point immediately following, the issuer ceases or
threatens to cease carrying on all or a substantial part of its
business or the issuer is deemed unable to pay its debts within the
meaning of section 123(1)(a), (b), (c) or (d) of the Insolvency Act
1986 (as that section may be amended, modified or re-enacted) or
becomes unable to pay its debts within the meaning of section
123(2) of the Insolvency Act 1986 (as that section may be amended,
modified or re-enacted); or
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* an order is made or an effective resolution is passed for the
winding up of the issuer except for the purposes of or pursuant to
an amalgamation, restructuring or merger previously approved by the
note trustee in writing or by an extraordinary resolution (as
defined in the trust deed) of the class A noteholders; or
* proceedings are otherwise initiated against the issuer under any
applicable liquidation, insolvency, composition, reorganization or
other similar laws (including, but not limited to, presentation of
a petition for administration or the filing of documents with the
court for an administration) and (except in the case of
presentation of a petition for an administration order) such
proceedings are not, in the opinion of the note trustee, being
disputed in good faith with a reasonable prospect of success, a
formal notice is given of intention to appoint an administrator in
relation to the issuer or an administration order being granted or
an administrative receiver or other receiver, liquidator or other
similar official being appointed in relation to the issuer or in
relation to the whole or any substantial part of the undertaking or
assets of the issuer, or an encumbrancer taking possession of the
whole or any substantial part of the undertaking or assets of the
issuer, or a distress, execution, diligence or other process being
levied or enforced upon or sued out against the whole or any
substantial part of the undertaking or assets of the issuer and
such possession or process (as the case may be) not being
discharged or not otherwise ceasing to apply within 30 days, or the
issuer initiating or consenting to judicial proceedings relating to
itself under applicable liquidation, insolvency, composition,
reorganization or other similar laws or making a conveyance or
assignment for the benefit of its creditors generally or a
composition or similar arrangement with the creditors or takes
steps with a view to obtaining a moratorium in respect of its
indebtedness, including without limitation, the filing of documents
with the court; or
* if an intercompany loan enforcement notice is served in respect of
any intercompany loan agreement while any of the class A notes are
outstanding.
(B) class B noteholders
The terms described in this number 9(B) will have no effect so long as any
of the class A notes are outstanding. Subject thereto, for so long as any class
B notes are outstanding, the note trustee may in its absolute discretion give
notice of a class B note event of default (as defined below) in respect of the
class B notes (a "CLASS B NOTE ENFORCEMENT NOTICE"), and shall give such notice
if it is indemnified to its satisfaction and it is:
* requested to do so in writing by the holders of at least one
quarter of the aggregate principal amount outstanding of the class
B notes; or
* directed to do so by an extraordinary resolution passed at a
meeting of the class B noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS B NOTE EVENT OF DEFAULT":
* the issuer fails to pay for a period of seven business days any
amount of principal of the class B notes when such payment is due
and payable in accordance with the conditions or the issuer fails
to pay for a period of fifteen business days any amount of interest
on the class B notes when such payment is due and payable in
accordance with the conditions; or
* the occurrence of any of the events in number 9(A) described above
but so that any reference to the class A notes and the class A
noteholders shall be read as references to the class B notes and
the class B noteholders.
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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 notes or the class B notes are outstanding. Subject thereto, for
so long as any class M notes are outstanding, the note trustee may in its
absolute discretion give notice of a class M note event of default (as defined
below) in respect of the class M notes (a "CLASS M NOTE ENFORCEMENT NOTICE"),
and shall give such notice if it is indemnified to its satisfaction and it is:
* requested to do so in writing by the holders of at least one
quarter of the aggregate principal amount outstanding of the class
M notes; or
* directed to do so by an extraordinary resolution passed at a
meeting of the class M noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS M NOTE EVENT OF DEFAULT":
* the issuer fails to pay for a period of seven business days any
amount of principal of the class M notes when such payment is due
and payable in accordance with the conditions or the issuer fails
to pay for a period of fifteen business days any amount of interest
on the class M notes when such payment is due and payable in
accordance with the conditions; or
* the occurrence of any of the events in number 9(A) described above
but so that any reference to the class A notes and the class A
noteholders shall be read as references to the class M notes and
the class M noteholders.
(D) class C noteholders
The terms described in this number 9(D) will have no effect so long as any
of the class A notes, the class B notes or the class M notes are outstanding.
Subject thereto, for so long as any class C notes are outstanding, the note
trustee may in its absolute discretion give notice of a class C note event of
default (as defined below) in respect of the class C notes (a "CLASS C NOTE
ENFORCEMENT NOTICE"), and shall give such notice if it is indemnified to its
satisfaction and it is:
* requested to do so in writing by the holders of at least one
quarter of the aggregate principal amount outstanding of the class
C notes; or
* directed to do so by an extraordinary resolution passed at a
meeting of the class C noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS C NOTE EVENT OF DEFAULT":
* the issuer fails to pay for a period of seven business days any
amount of principal of the class C notes when such payment is due
and payable in accordance with the conditions or the issuer fails
to pay for a period of fifteen business days any amount of interest
on the class C notes when such payment is due and payable in
accordance with the conditions; or
* the occurrence of any of the events in number 9(A) described above
but so that any reference to the class A notes and the class A
noteholders shall be read as references to the class C notes and
the class C noteholders.
The security created under the issuer deed of charge will become enforceable
on the occurrence of a class A note event of default, a class B note event of
default, a class M note event of default or, as the case may be, a class C note
event of default.
A class A note enforcement notice, a class B note enforcement notice, a
class M note enforcement notice and a class C note enforcement notice are alone
or together referred to in this prospectus as a "NOTE ENFORCEMENT NOTICE". A
note enforcement notice is a written notice from the note trustee to the issuer
and the security trustee declaring the
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notes to be immediately due and payable. When it is given, all notes will
become immediately due and payable at their principal amount outstanding
together with accrued and unpaid interest without further action or formality.
10. ENFORCEMENT OF NOTES
The note trustee may, at its discretion and without notice at any time and
from time to time, take such steps and institute such proceedings against the
issuer or any other person as it may think fit to enforce the provisions of the
notes, the trust deed, the issuer deed of charge or any of the other
transaction documents. The note trustee may, at its discretion and without
notice, at any time after the issuer security has become enforceable, take such
steps as it may think fit to enforce the issuer security. The note trustee
shall not be bound to take any such proceedings or steps unless:
* (subject in all cases to restrictions contained in the trust deed
or, as the case may be, the issuer deed of charge to protect the
interests of any higher ranking class of noteholders) it shall have
been so directed by an extraordinary resolution (as described in
number 11) of the class A noteholders, the class B noteholders, the
class M noteholders or the class C noteholders or so requested in
writing by the holders of at least 25% in principal amount
outstanding of the class A notes, the class B notes, the class M
notes or the class C notes (as the case may be); and
* it shall have been indemnified to its satisfaction.
Amounts available for distribution after enforcement of the issuer security
shall be distributed in accordance with the terms of the issuer deed of charge.
No noteholder may institute any proceedings against the issuer to enforce
its rights under or in respect of the notes or the trust deed unless (1) the
note trustee has become bound to institute proceedings and has failed to do so
within 30 days of becoming so bound and (2) such failure is continuing;
provided that, notwithstanding the foregoing and notwithstanding any other
provision of the trust deed, the right of any noteholder to receive payment of
principal of and interest on its notes on or after the due date for such
principal or interest, or to institute suit for the enforcement of payment of
that principal or interest, may not be impaired or affected without the consent
of that noteholder. In addition, no class B noteholder, class M noteholder or
class C noteholder will be entitled to commence proceedings for the winding up
or administration of the issuer unless there are no outstanding notes of a
class with higher priority, or if notes of a class with higher priority are
outstanding, there is consent of noteholders of at least 25% of the aggregate
principal amount of the class or classes of notes outstanding (as defined in
the trust deed) with higher priority.
In the event that (a) the issuer security is enforced and the proceeds of
that enforcement (such proceeds having been distributed) are insufficient,
after payment of all other claims ranking in priority, to pay in full any
amount due on the notes and any claims ranking equally with such claims, or (b)
within 20 days following the final maturity date of the latest maturing note
the note trustee certifies that there is no further amount outstanding under
the related intercompany loan, the noteholders are required and the note
trustee is required on their behalf, at the request of GPCH Limited, to
transfer or (as the case may be) to procure the transfer of all of the notes to
GPCH Limited pursuant to the option granted by the note trustee to GPCH
Limited. The option is granted to acquire all of the notes plus accrued
interest on the notes. This is called the post enforcement call option. The
noteholders will not be paid for that transfer. Each noteholder acknowledges
that the note trustee has the authority and the power to bind it in accordance
with the terms and conditions set out in the post enforcement call option and,
by subscribing for or acquiring the notes, it agrees to be bound in this way.
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11. MEETINGS OF NOTEHOLDERS, MODIFICATIONS AND WAIVER
(1) MEETINGS OF NOTEHOLDERS
The trust deed contains provisions for convening meetings of each class of
noteholders to consider any matter affecting their interests, including the
sanctioning by extraordinary resolution of a modification of any provision of
the terms and conditions of the notes or the provisions of any of the
transaction documents.
In respect of the class A notes the trust deed provides that:
* a single meeting of the holders of all series of the class A notes
may be held whether or not there is a conflict of interest between
the holders of such series of the class A notes; there shall be no
provision for meetings of the holders of one series only of the
class A notes; and
* as the class A notes are not all denominated in the same currency,
the principal amount outstanding of any class A note denominated in
US dollars or euro shall be converted into sterling at the dollar
currency swap rate or the euro currency swap rate, as the case may
be.
In respect of the class B notes the trust deed provides that:
* a single meeting of the holders of all series of the class B notes
may be held whether or not there is a conflict of interest between
the holders of such series of the class B notes; there shall be no
provision for meetings of the holders of one series only of the
class B notes; and
* as the class B notes are not all denominated in the same currency,
the principal amount outstanding of any class B note denominated in
US dollars or euro shall be converted into sterling at the dollar
currency swap rate or the euro currency swap rate, as the case may
be.
In respect of the class M notes the trust deed provides that:
* a single meeting of the holders of all series of the class M notes
may be held whether or not there is a conflict of interest between
the holders of such series of the class M notes; there shall be no
provision for meetings of the holders of one series only of the
class M notes; and
* as the class M notes are not all denominated in the same currency,
the principal amount outstanding of any class M note denominated in
US dollars or euro shall be converted into sterling at the dollar
currency swap rate or the euro currency swap rate, as the case may
be.
In respect of the class C notes the trust deed provides that:
* a single meeting of the holders of all series of the class C notes
may be held whether or not there is a conflict of interest between
the holders of such series of the class C notes; there shall be no
provision for meetings of the holders of one series only of the
class C notes; and
* as the class C notes are not all denominated in the same currency,
the principal amount outstanding of any class C note denominated in
US dollars or euro shall be converted into sterling at the dollar
currency swap rate or the euro currency swap rate, as the case may
be.
Subject as provided in the following paragraph, the quorum for any meeting
of the noteholders of any class convened to consider an extraordinary
resolution will be two or more persons holding or representing not less than
half of the aggregate principal amount outstanding of the notes of that class
or, at any adjourned meeting, two or more persons representing noteholders of
that class, whatever the total principal amount of the outstanding notes so
represented.
256
Certain terms including the alteration of the amount, rate or timing of
payments on the notes, the currency of payment, the priority of payments or the
quorum or majority required in relation to these terms, require a quorum for
passing an extraordinary resolution of two or more persons holding or
representing in total not less than three quarters of the total principal
amount outstanding of the notes of that class or, at any adjourned meeting, at
least one quarter of the total principal amount of the notes outstanding of
such class. These modifications are called "BASIC TERMS MODIFICATIONS".
A resolution signed by or on behalf of all the noteholders of the relevant
class who for the time being are entitled to receive notice of a meeting under
the issuer trust deed shall for all purposes be as valid and effective as an
extraordinary resolution passed at a meeting of such class of noteholders.
Subject as provided below in relation to an extraordinary resolution
concerning a basic terms modification, no extraordinary resolution of the class
B noteholders shall take effect while any class A notes remain outstanding
unless sanctioned by an extraordinary resolution of the class A noteholders, or
the note trustee is of the opinion that it would not be materially prejudicial
to the interests of the class A noteholders.
Subject as provided below in relation to an extraordinary resolution
concerning a basic terms modification, no extraordinary resolution of the class
M noteholders shall take effect while any class A notes or class B notes remain
outstanding unless sanctioned by an extraordinary resolution of the class A
noteholders and an extraordinary resolution of the class B noteholders, or the
note trustee is of the opinion that it would not be materially prejudicial to
the interests of the class A noteholders and the class B noteholders.
Subject as provided below in relation to an extraordinary resolution
concerning a basic terms modification, no extraordinary resolution of the class
C noteholders shall take effect while any class A notes, class B notes or class
M notes remain outstanding unless sanctioned by an extraordinary resolution of
the class A noteholders, an extraordinary resolution of the class B noteholders
and an extraordinary resolution of the class M noteholders, or the note trustee
is of the opinion that it would not be materially prejudicial to the interests
of the class A noteholders, the class B noteholders and the class M
noteholders.
Furthermore, an extraordinary resolution of the class A noteholders
concerning a basic terms modification will not be effective unless it is also
sanctioned by extraordinary resolutions of the class B noteholders, the class M
noteholders and the class C noteholders. An extraordinary resolution of the
class B noteholders concerning a basic terms modification will not be effective
unless it is also sanctioned by extraordinary resolutions of the class A
noteholders, the class M noteholders and the class C noteholders. An
extraordinary resolution of the class M noteholders concerning a basic terms
modification will not be effective unless it is also sanctioned by
extraordinary resolutions of the class A noteholders, the class B noteholders
and the class C noteholders. An extraordinary resolution of the class C
noteholders concerning a basic terms modification will not be effective unless
it is also sanctioned by extraordinary resolutions of the class A noteholders,
the class B noteholders and the class M noteholders.
(2) MODIFICATIONS AND WAIVER
The note trustee may agree, without the consent of the relevant class of
noteholders, (1) to any modification (other than a basic terms modification)
of, or to the waiver or authorization of any breach or proposed breach of, the
terms and conditions of the notes or any of the transaction documents which is
not, in the opinion of the note trustee, materially prejudicial to the
interests of the relevant class or classes of noteholders or (2) to any
modification of any of the terms and conditions or any of the transaction
documents which, in the opinion of the note trustee, is of a formal, minor or
technical nature or is to correct a manifest error.
257
For the avoidance of doubt (in the context of deciding material prejudice in
respect of the above provisions), if the note trustee considers in its sole
opinion that the noteholders of the same class of one or more series to which
the modification or waiver relates are materially prejudiced, the note trustee
will not be able to sanction such modification or waiver itself, and will
instead require an extraordinary resolution of the noteholders of the notes of
such class outstanding to be passed by means of a meeting. In accordance with
the general provisions contained herein, such extraordinary resolution must
also be ratified by the noteholders of the notes of the higher class or classes
in order for the extraordinary resolution which seeks approval of the
modification or waiver to be valid and effective.
Any of these modifications, authorizations or waivers will be binding on the
noteholders and, unless the note trustee agrees otherwise, shall be promptly
notified to the noteholders and the rating agencies in accordance with number
14 as soon as practicable thereafter.
Where the note trustee is required in connection with the exercise of its
powers to have regard to the interests of the noteholders of one class of any
series, it shall have regard to the interests of such noteholders as a class.
In particular, the note trustee shall not have regard to, or be liable for, the
consequences of such exercise for individual noteholders resulting from their
being domiciled or resident in or connected with any particular territory. In
connection with any such exercise, the note trustee shall not be entitled to
require, and no noteholder shall be entitled to claim, from the issuer or any
other person, any indemnification or payment in respect of any tax consequence
of any such exercise upon individual noteholders.
12. INDEMNIFICATION OF THE NOTE TRUSTEE
The note trustee is entitled to be indemnified and relieved from
responsibility in certain circumstances, including provisions, among others,
relieving them from taking enforcement proceedings unless indemnified to its
satisfaction. The note trustee is also entitled to be paid its costs and
expenses in priority to any interest payments to noteholders.
The note trustee and its related companies are entitled to enter into
business transactions with the issuer, Northern Rock plc or related companies
of either of them and to act as note trustee for the holders of any new notes
and for any person who is a party to any transaction document or whose
obligations are comprised in the issuer security or any of their subsidiary or
associated companies, without accounting for any profit resulting from those
transactions.
The note trustee will not be responsible for any loss or liability suffered
as a result of any assets in the issuer security being uninsured or
inadequately insured or being held by clearing operations or their operators or
by intermediaries on behalf of the note trustee.
Furthermore, the note trustee will be relieved of liability for making
searches or other inquiries in relation to the assets comprising the issuer
security. The note trustee does not have any responsibility in relation to the
legality and the enforceability of the trust arrangements and the related
issuer security. The note trustee will not be obliged to take any action which
might result in its incurring personal liabilities. The note trustee is not
obliged to monitor or investigate the performance of any other person under the
issuer related documents or the documents relating to the intercompany loan and
the mortgages trust and is entitled to assume, until it has actual knowledge to
the contrary, that all such persons are properly performing their duties,
unless it receives express notice to the contrary.
The note trustee will not be responsible for any deficiency which may arise
because it is liable to tax in respect of the proceeds of any security.
Similar provisions in respect of the indemnification of the security trustee
are set out in the transaction documents.
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13. REPLACEMENT OF NOTES
If individual note certificates are lost, stolen, mutilated, defaced or
destroyed, the noteholder can replace them at the specified office of any
paying agent. The noteholder will be required both to pay the expenses of
producing a replacement and to comply with the issuer's, registrar's and paying
agent's reasonable requests for evidence and indemnity. The noteholder must
surrender any defaced or mutilated note certificates before replacements will
be issued.
If a global note certificate is lost, stolen, mutilated, defaced or
destroyed, the issuer will deliver a replacement global note certificate to the
registered holder upon satisfactory evidence and surrender of any defaced or
mutilated global note certificate. Replacement will only be made upon payment
of the expenses for a replacement and compliance with the issuer's, registrar's
and paying agents' reasonable requests as to evidence and indemnity.
14. NOTICE TO NOTEHOLDERS
Notices to noteholders will be sent to them by first class mail (or its
equivalent) or (if posted to a non-UK address) by airmail at the respective
addresses on the register. Any such notice shall have been deemed to have been
given on the fourth day after the date of mailing. In addition, so long as
amounts are outstanding on the offered notes, notices to noteholders will be
published on the date of such mailing in a daily newspaper of general
circulation in New York (which is expected to be The New York Times) or, if
such publication is not practicable, in a leading English language daily
newspaper having general circulation in the United States; provided that if, at
any time, the issuer procures that the information concerned in such notice
shall appear on a page of the Reuters screen, or any other medium for
electronic display of data as may be previously approved in writing by the note
trustee and notified to noteholders (in each case a "RELEVANT SCREEN"),
publication in the newspapers set out above or such other newspaper or
newspapers shall not be required with respect to such information, provided
however, that in the case that any notes are listed on the Official List of the
UK Listing Authority and admitted to trading by the London Stock Exchange plc,
notices of noteholder meetings shall continue to be published as set forth
above. Any such notice shall be deemed to have been given on the date of such
publication or, if published more than once or on different dates, on the first
date on which publication shall have been made in the newspaper or newspapers
in which (or on the relevant screen on which) publication is required.
So long as any notes are represented by global note certificates, and such
global note certificates are held by or on behalf of DTC, Euroclear,
Clearstream, Luxembourg or any other clearing system (an "ALTERNATIVE CLEARING
SYSTEM"), notices to holders of the notes represented by such global note
certificates may be given by delivery of the relevant notice to DTC, Euroclear,
Clearstream, Luxembourg or (as the case may be) such alternative clearing
system. Any notice delivered to DTC, Euroclear, Clearstream, Luxembourg or (as
the case may be) such alternative clearing system shall be deemed to have been
given on the day of delivery.
The note trustee shall be at liberty to sanction some other method of giving
notice to noteholders or any class or category of noteholders if, in its
opinion, such other method is reasonable having regard to market practice then
prevailing and to the requirements of the stock exchanges on which the notes
are then listed and provided that notice of such other method is given to the
noteholders in such manner as the note trustee shall require.
15. GOVERNING LAW
The transaction documents and the notes will be governed by English law,
except for those provisions in which security is taken over property situated
in Jersey, to which Jersey law shall apply. The courts of England are to have
non-exclusive jurisdiction to
259
settle any disputes which may arise out of or in connection with the
transaction documents and the notes. The issuer and the other parties to the
transaction documents irrevocably submit to the non-exclusive jurisdiction of
the courts of England.
260
RATINGS OF THE SERIES 1 NOTES
The series 1 notes are expected to be issued with the following ratings
assigned by Moody's, Standard & Poor's and Fitch. A rating is not a
recommendation to buy, sell or hold securities and may be subject to revision,
suspension or withdrawal at any time by the assigning rating organization if,
in its judgement, circumstances (including, without limitation, a reduction in
the credit rating of the mortgages trustee GIC provider and/or the Funding GIC
providers and/or the swap providers) in the future so warrant.
EXPECTED RATINGS
------------------------
STANDARD
CLASS OF NOTES MOODY'S & POOR'S FITCH
- ----------------- ------- -------- -----
Series 1 class A1 Aaa AAA AAA
Series 1 class A2 Aaa AAA AAA
Series 1 class A3 Aaa AAA AAA
Series 1 class B Aa3 AA AA
Series 1 class M A2 A A
Series 1 class C Baa2 BBB BBB
The ratings assigned to each class of the series 1 notes address the
likelihood of full and timely payment to you of all payments of interest on
each payment date under those classes of notes. The ratings also address the
likelihood of ultimate repayment of principal on or before the final maturity
date of each class of notes. The ratings do not address the likely actual rate
of prepayments on the mortgage loans. The rate of prepayments, if different
than originally anticipated, could adversely affect the yield realized on your
notes.
Assignment of the expected ratings to the notes of each class will be a
condition to issue of the series 1 notes.
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MATURITY AND REPAYMENT CONSIDERATIONS
The average lives of the series 1 notes cannot be stated, because the actual
rate of repayment of the mortgage loans and redemption of the mortgage loans
and a number of other relevant factors are unknown. Calculations of the
possible average lives of the series 1 notes can be made, however, based on
certain assumptions. The assumptions used to calculate the possible average
lives of the series 1 notes in the following table include that:
(1) each class of notes is repaid in full by its final maturity date;
(2) neither the issuer security nor the Funding security has been
enforced;
(3) the aggregate current balance of mortgage loans in the mortgages
trust will not fall below an amount equal to the product of 1.05
and the principal amount outstanding of all notes of all issuers at
any time;
(4) no asset trigger event or non-asset trigger event occurs;
(5) no event occurs that would cause payments on the notes to be
deferred;
(6) the issuer exercises its option to redeem the notes on the payment
date falling in January 2009, and each previous issuer exercises
its option to redeem the previous notes on the step-up date
relating to such issuer;
(7) the notes are issued on September 24, 2003;
(8) each payment made by the issuer to the noteholders is paid on the
20th day of the relevant month in which such payment is payable,
regardless of whether such date is a business day;
(9) no interest or fees are paid from mortgages trustee principal
receipts, Funding available principal receipts or issuer available
principal receipts;
(10) the mortgage loans are not subject to any defaults or losses, and
no mortgage loan falls into arrears; and
(11) the long-term, unsecured, unsubordinated and unguaranteed debt
obligations of the seller continue to be rated at least "A2" by
Moody's, "A+" by Fitch and "A" by Standard & Poor's.
Assumptions (1), (6) and (7) reflect the issuer's current expectations,
although no assurance can be given that repayment of the notes will occur as
described. Assumptions (2) through (5) and (9) through (11) relate to
unpredictable circumstances.
Based upon the foregoing assumptions, the approximate average lives of the
series 1 notes, at various constant payment rates for the mortgage loans, would
be as follows:
POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
LIFE OF THE LIFE OF THE LIFE OF THE LIFE OF THE LIFE OF THE LIFE OF THE
SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 1
CONSTANT PAYMENT CLASS A1 CLASS A2 CLASS A3 CLASS B CLASS M CLASS C
RATE (% PER ANNUM) NOTES NOTES NOTES NOTES NOTES NOTES
- ------------------ ----------- ----------- ----------- ----------- ----------- -----------
(YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS)
----------- ----------- ----------- ----------- ----------- -----------
5% [2.71] [5.32] [5.32] [5.32] [5.32] [5.32]
10% [1.39] [4.08] [5.32] [5.32] [5.32] [5.32]
15% [0.83] [2.33] [4.69] [5.13] [5.23] [5.32]
20% [0.71] [2.07] [4.53] [4.98] [4.98] [4.98]
25% [0.71] [2.07] [4.53] [4.98] [4.98] [4.98]
30% [0.71] [2.07] [4.53] [4.98] [4.98] [4.98]
35% [0.71] [2.07] [4.53] [4.98] [4.98] [4.98]
262
The average lives of the notes are subject to factors largely outside the
control of the issuer and consequently no assurance can be given that these
assumptions and estimates are realistic and they must therefore be viewed with
considerable caution. For more information relating to the risks involved in
the use of these estimated average lives, see "RISK FACTORS -- THE YIELD TO
MATURITY OF THE NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENTS OR REDEMPTIONS
ON THE MORTGAGE LOANS OR REPURCHASES OF MORTGAGE LOANS BY THE SELLER".
263
MATERIAL LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE RELATED SECURITY
The following discussion describes, in summary, the material legal aspects
in respect of the assignment of the mortgage loans and related security and of
English residential property and mortgages. It is a brief summary and not an
exhaustive analysis of the relevant law.
GENERAL
The parties to a mortgage are the mortgagor, who is the borrower and
homeowner and who grants the mortgage over its property, and the mortgagee, who
is the lender. Each mortgage loan is secured by a mortgage on the property (the
mortgaged property). Since the most common form of creating a mortgage on
residential property, namely, by means of a legal charge by deed, means that a
mortgagor does not cease to be the owner of the property, generally a mortgagor
will be free to create further mortgages on the mortgaged property (subject to
any restrictions imposed by the mortgagee in the mortgage deed). Each mortgage
loan to be assigned to the mortgages trustee will be secured by a mortgage
which has a first ranking priority over all other mortgages secured on the
mortgaged property and over all unsecured creditors of the borrower, except in
respect of certain statutory rights, such as the rights of the Inland Revenue,
which are granted statutory priority. There are two forms of title to land in
England and Wales: registered and unregistered. Both systems of title can
include both freehold and leasehold estates.
REGISTERED TITLE
Title to registered land is registered at H.M. Land Registry. The registrar
allocates a unique title number. Consequently if there are freehold and
leasehold registered interests then there will be more than one register of
title and more than one title number to a particular property. Each individual
register consists of three parts: the property register, the proprietorship
register and the charges register.
The property register describes the land and the type of estate, freehold or
leasehold. In some instances it may also refer to third party rights that
burden the property although these may also be mentioned in the charges
register as practice varies between the various District Land Registries around
the country.
The proprietorship register details the following:
* The class of registered title. There are three classes of
registered title for freehold and four classes for leasehold. The
most common title (and the best grade of title available) is title
absolute. A person registered with title absolute owns the estate
in the land free from all interests other than those entered on the
register, those classified as overriding interests or minor
interests (referred to below) and (in the case of leasehold land)
all express and implied covenants, obligations and liabilities
imposed by the lease or incidental to the land.
* Restrictions on the ability of the registered proprietor to deal
with the property e.g. a restriction imposed by a mortgagee
prohibiting registration of subsequent mortgagees.
The charges register details security interests and encumbrances registered
against the property.
The property is also identified by a plan retained at H.M. Land Registry
indicating the location of the related land (the "FILED PLAN"). However, the
filed plan is not conclusive as to matters such as the location of boundaries.
The Land Registration Act 1925 provides that some interests in land will
bind the land even though they are not capable of registration at H.M. Land
Registry. These fall into two categories:
264
* Overriding interests; and
* Minor interests (which are relevant only as between the landowner
and the beneficiary of those interests).
Title to registered land is established by the register and evidenced by a
land or (in the case of land which is subject to a registered mortgage or
charge) charge certificate containing official copies of the entries on the
register relating to that land. The land certificate or charge certificate
relating to a first mortgage will also contain a copy of the filed plan. The
land certificate is normally in the possession of the estate owner where the
property is not mortgaged. If the property is mortgaged H.M. Land Registry
retains the land certificate and a charge certificate is issued which is
usually held by the mortgagee.
UNREGISTERED TITLE
All land in England and Wales is now subject to compulsory registration on
the happening of any of a number of trigger events. The most common trigger
event is a sale of the land, but since April 1998 the triggers have also
included the creation of a first priority legal mortgage over unregistered
land. However, an increasingly small but still significant proportion of land
in England and Wales (typically where the land has been in the same ownership
for a number of years) is still unregistered. Title to unregistered land is
proved by establishing a chain of documentary evidence to title going back at
least 15 years. Where the land is affected by third party rights, some of those
rights or interests, including a legal mortgage where the mortgagee has taken
possession of the title deeds, can be proved by documentary evidence or by
proof of continuous exercise of the rights for a prescribed period and do not
require registration. However, other interests, including equitable charges,
must be registered at H.M. Land Charges Registry in order to be effective
against a subsequent purchaser or mortgagee of the land.
TAKING SECURITY OVER LAND
A legal mortgage of registered land may only be effected once the charge has
been registered with H.M. Land Registry. Prior to registration, it will take
effect only as an equitable mortgage or charge. An equitable mortgage of
registered land (including legal mortgages prior to registration) is only
protected by registration. If protected by registration, the equitable mortgage
will take priority over all subsequent mortgages. If not so protected, a later
purchaser or mortgagee of a legal interest will generally take the land free of
the earlier unregistered equitable mortgage. Where land is registered
therefore, a mortgagee must register its mortgage at H.M. Land Registry in
order to secure priority over any subsequent mortgagee. Priority of mortgages
(whether legal or equitable) over registered land is generally governed by the
date of registration of the mortgage rather than the date of creation. However,
a prospective mortgagee is able to obtain a priority period within which to
register its mortgage. If the mortgagee submits a proper application for
registration during this period, its interest will take priority over any
application for registration of any interest which is received by H.M. Land
Registry during this priority period.
In the system of unregistered land, the mortgagee protects its interest by
retaining possession of the title deeds to the mortgaged property. Without the
title deeds to the mortgaged property, the borrower is unable to establish the
necessary chain of ownership, and is therefore prevented from dealing with its
land without the consent of the mortgagee. Priority of mortgages over
unregistered land depends on a number of factors including, whether the
mortgagee has taken possession of the title deeds, whether the interest is
registerable and whether it has been registered at H.M. Land Charges Registry
and the date of creation of the charge. Generally speaking where all else is
equal between two competing mortgages, the priority will be determined by the
date of creation of the charge.
265
THE SELLER AS MORTGAGEE
The sale to the mortgages trustee of the mortgage loans together with their
related security will take effect in equity only and the mortgages trustee will
not apply to H.M. Land Registry or H.M. Land Charges Registry to register or
record its equitable interest in the mortgages. The consequences of this are
explained in the section "RISK FACTORS -- THERE MAY BE RISKS ASSOCIATED WITH
THE FACT THAT THE MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGE LOANS
AND THEIR RELATED SECURITY, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES".
ENFORCEMENT OF MORTGAGES
If a borrower breaches the mortgage conditions of its mortgage loan, the
mortgage loan generally provides that all monies under the mortgage loan will
become immediately due and payable. The mortgagee would then be entitled to
recover all outstanding principal, interest and fees under the covenant of the
borrower contained expressly or impliedly in the mortgage deed to pay or repay
those amounts. In addition, the mortgagee would then be entitled to enforce its
mortgage in relation to the defaulted mortgage loan. Enforcement may occur in a
number of ways, including the following:
* The mortgagee may enter into possession of the mortgaged property.
If it does so, it does so in its own right and not as agent of the
mortgagor, and so may be personally liable for mismanagement of the
mortgaged property and to third parties as occupier of the
mortgaged property.
* The mortgagee may lease the mortgaged property to third parties.
* The mortgagee may foreclose on the mortgaged property. Under
foreclosure procedures, the mortgagor's title to the mortgaged
property is extinguished so that the mortgagee becomes the owner of
the mortgaged property. The remedy is, because of procedural
constraints, rarely used.
* The mortgagee may appoint a receiver to deal with income from the
mortgaged property or exercise other rights delegated to the
receiver by the mortgagee. A receiver is the agent of the mortgagor
and so, unlike when the mortgagee enters into possession of the
mortgaged property, in theory the mortgagee is not liable for the
receiver's acts or as occupier of the mortgaged property. In
practice, however, the receiver will require indemnities from the
mortgagee that appoints it. Similar duties of care will apply to a
sale by a receiver as set out below in relation to a sale by a
mortgagee.
* The mortgagee may sell the mortgaged property, subject to various
duties to ensure that the mortgagee exercises proper care in
relation to the sale. This power of sale arises under the Law of
Property Act 1925. The purchaser of a mortgaged property sold
pursuant to a mortgagee's power of sale becomes the owner of the
mortgaged property.
Notwithstanding the above, in order to enforce a power of sale in respect of
a mortgaged property, the mortgagee must generally obtain possession of the
mortgaged property (to sell the mortgaged property with vacant possession)
either voluntarily or by a court order. Actions for possession are regulated by
statute and the courts have certain powers to adjourn possession proceedings,
to stay any possession order or postpone the date for delivery of possession.
The court will exercise such powers in favor of a borrower broadly where it
appears to the court that the borrower is likely to be able, within a
reasonable time period, to pay any sums due under the mortgage loan or to
remedy any other breach of obligation under the mortgage loan or its related
security. If a possession order in favor of the mortgagee is granted it may be
suspended to allow the borrower more time to pay. Once possession is obtained
the mortgagee has a duty to the borrower to take reasonable care to obtain a
proper price for the mortgaged property. Failure to do so will put the
mortgagee at risk of an action by the borrower for breach of such duty,
266
although it is for the borrower to prove breach of such duty. There is also a
risk that a borrower may also t ake court action to force the relevant mortgagee
to sell the property within a reasonable time.
267
MATERIAL UNITED KINGDOM TAX CONSEQUENCES
The following section summarizes the material UK tax consequences of the
purchase, ownership and disposition of the notes based on current law and
practice in the UK. Sidley Austin Brown & Wood, UK tax advisers to the issuer
("UK TAX COUNSEL"), has prepared and reviewed this summary and the opinions of
UK tax counsel are contained in this summary. The summary assumes that the
final documentation conforms with the description in the prospectus. The
summary also assumes that the representations made by each of Funding and the
issuer, respectively, to UK tax counsel that the profit in Funding's profit and
loss account will not exceed 0.01% of the Funding available revenue receipts
and that the profit in the issuer's profit and loss account will not exceed
0.01% of the interest on the intercompany loan are correct. It further assumes
that all payments made pursuant to the final documentation are calculated on
arms' length terms. The summary does not purport to be a complete analysis of
all tax considerations of the purchase, ownership and disposition of the notes.
It relates to the position of persons who are the absolute beneficial owners of
notes such as individuals, partnerships and non-financial trade corporate
entities, and may not apply to certain classes of persons such as financial
trade corporate entities (such as banks, securities dealers and securities
brokers), investment managers, insurance companies, pension funds and UK unit
and investment trusts. You should consult your own tax adviser if you are
uncertain of your current tax position.
TAXATION OF US RESIDENTS
As discussed in more detail under "-- WITHHOLDING TAX" below, UK tax counsel
is of the opinion that a noteholder who is resident in the US for US tax
purposes may obtain payment of interest on his notes without deduction of UK
tax if and for so long as the notes are listed on a "RECOGNISED STOCK
EXCHANGE". If the notes cease to be listed on a recognised stock exchange, an
amount must be withheld from interest on account of UK income tax at the lower
rate (currently 20%), subject to any direction to the contrary from the Inland
Revenue in respect of such relief as may be available pursuant to the
provisions of an applicable double taxation treaty.
Residents of the US are generally not subject to tax in the UK on payments
of interest on the notes under the double taxation treaty between the US and
the UK, subject to completion of administrative formalities, except where the
notes are effectively connected with a permanent establishment or a fixed base
of the noteholder situated in the UK.
The benefit of the double taxation treaty between the US and the UK is also
excluded in respect of any interest paid under, or as part of, a conduit
arrangement and is also subject to comprehensive limitation on benefits
provisions.
In addition, UK tax counsel is of the opinion that, as discussed in more
detail under "-- DIRECT ASSESSMENT OF NON-UK RESIDENT HOLDERS OF NOTES TO UK
TAX ON INTEREST" below, a noteholder who is resident in the US for US tax
purposes and who is not resident in the UK for UK tax purposes will not be
subject to UK tax (other than any withholding tax, as regards which see above)
in respect of any payments on the notes unless they are held by or for a trade,
profession or vocation carried on by him through a branch or agency (or, in the
case of a noteholder which is a company and for accounting periods beginning on
or after January 1, 2003, for a trade carried on by it through a permanent
establishment) in the UK.
It is the opinion of UK tax counsel that US resident noteholders will not be
liable to UK tax in respect of a disposal of the notes provided they are not
within the charge to UK corporation tax and (i) are not resident or ordinarily
resident in the UK, or (ii) do not carry on a trade, profession or vocation in
the UK through a branch or agency in connection with which interest is
received or to which the notes are attributable.
268
It is the opinion of UK tax counsel that, as discussed in more detail below
under
"-- UK TAXATION OF FUNDING AND THE ISSUER", Funding and the issuer will
generally be subject to UK corporation tax, currently at a rate of 30%, on the
profit reflected in their respective profit and loss accounts as increased by
the amounts of any non-deductible expenses or losses.
It is the opinion of UK tax counsel that, as discussed in more detail below
under
"-- UK TAXATION OF THE MORTGAGES TRUSTEE", the mortgages trustee will have no
liability to UK tax in relation to amounts which it receives on behalf of
Funding or the seller under the mortgages trust.
Except as described in the preceding paragraphs (and as further developed in
the corresponding opinions below), UK tax counsel will render no opinions
relating to the notes, the parties to the transaction, or any aspects of the
transaction.
WITHHOLDING TAX
For so long as the notes are and continue to be listed on a "RECOGNISED
STOCK EXCHANGE" within the meaning of section 841 of the Income and Corporation
Taxes Act 1988 (the London Stock Exchange plc is such a recognised stock
exchange for this purpose) interest payments on each of the notes will be
treated as a "PAYMENT OF INTEREST ON A QUOTED EUROBOND" within the meaning of
section 349 of the Income and Corporation Taxes Act 1988. Under an Inland
Revenue interpretation, securities will be regarded as listed on a recognised
stock exchange if they are listed by a competent authority in a country which
is a member state of the European Union or which is part of the European
Economic Area and are admitted to trading on a recognised stock exchange in
that country. In these circumstances, payments of interest on the notes may be
made without withholding or deduction for or on account of UK income tax
irrespective of whether the notes are in global form or in definitive form.
If the notes cease to be listed on a recognised stock exchange, an amount
must be withheld on account of UK income tax at the lower rate (currently 20%)
from interest paid on them, subject to any direction to the contrary from the
Inland Revenue in respect of such relief as may be available pursuant to the
provisions of an applicable double taxation treaty or to the interest being
paid to the persons (including companies within the charge to UK corporation
tax) and in the circumstances specified in sections 349A to 349D of the Income
and Corporation Taxes Act 1988.
On June 3, 2003 the Council of the European Union adopted a directive on the
taxation of savings income (the "DIRECTIVE") under which member states will
generally be required to provide to the tax authorities of another member state
details of payments of interest or other similar income paid by a person within
its jurisdiction to or for an individual resident in that other member state.
Exceptionally (and for a transitional period only which will end after
agreement on exchange of information is reached between the European Union and
certain non-European Union states) Belgium, Luxembourg and Austria will instead
be required to withhold tax from such payments unless the noteholder authorizes
the person making the payment to report the payment or presents a certificate
from the relevant tax authority establishing exemption therefrom. The Directive
will, subject to certain conditions being satisfied, apply from January 1,
2005.
Payments of interest and principal with respect to the notes will be subject
to any applicable withholding taxes and the issuer will not be obliged to pay
additional amounts in relation thereto.
DIRECT ASSESSMENT OF NON-UK RESIDENT HOLDERS OF NOTES TO UK TAX ON INTEREST
Interest on the notes constitutes UK source income and, as such, may be
subject to income tax by direct assessment even where paid without withholding,
subject to any direction to the contrary from the Inland Revenue in respect of
such relief as may be available pursuant to the provisions of an applicable
double taxation treaty.
269
However, interest with a UK source received without deduction or withholding
on account of UK tax will not be chargeable to UK tax in the hands of a
noteholder (other than certain trustees) who is not resident for tax purposes
in the UK unless that noteholder carries on a trade, profession or vocation
through a branch or agency (or, in the case of a noteholder which is a company
and for accounting periods beginning on or after January 1, 2003, which carries
on a trade through a permanent establishment)in the UK in connection with which
the interest is received or to which the notes are attributable. There are
exemptions for interest received by certain categories of agent (such as some
brokers and investment managers).
Where interest has been paid under deduction of UK income tax, noteholders
who are not resident in the UK may be able to recover all or part of the tax
deducted if there is an appropriate provision under an applicable double
taxation treaty.
TAXATION OF RETURNS: COMPANIES WITHIN THE CHARGE TO UK CORPORATION TAX
In general, noteholders which are within the charge to UK corporation tax in
respect of notes will be charged to tax and obtain relief as income on all
returns on and fluctuations in value of the notes (whether attributable to
currency fluctuations or otherwise) broadly in accordance with their statutory
accounting treatment.
TAXATION OF RETURNS: OTHER NOTEHOLDERS
Noteholders who are not within the charge to UK corporation tax and who are
resident or ordinarily resident in the UK for tax purposes or who carry on a
trade, profession or vocation in the UK through a branch or agency in
connection with which interest on the notes is received or to which the notes
are attributable will generally be liable to UK tax on the amount of any
interest received in respect of the notes.
As the series 1 notes are denominated in US dollars and the series 2 notes
are denominated in euro, the series 1 notes and the series 2 notes will not be
regarded by the Inland Revenue as constituting "QUALIFYING CORPORATE BONDS"
within the meaning of Section 117 of the Taxation of Chargeable Gains Act 1992.
Accordingly, a disposal of any of these notes may give rise to a chargeable
gain or an allowable loss for the purposes of the UK taxation of chargeable
gains.
It is expected that the series 3 notes will be regarded by the Inland
Revenue as constituting "QUALIFYING CORPORATE BONDS" within the meaning of
Section 117 of the Taxation of Chargeable Gains Act 1992. Accordingly, a
disposal of any of these notes is not expected to give rise to a chargeable
gain or an allowable loss for the purposes of the UK taxation of chargeable
gains.
There are provisions to prevent any particular gain (or loss) from being
charged (or relieved) at the same time under these provisions and also under
the provisions of the "ACCRUED INCOME SCHEME" described below.
On a disposal of notes by a noteholder, any interest which has accrued since
the last payment date may be chargeable to tax as income under the rules of the
"ACCRUED INCOME SCHEME" if that noteholder is resident or ordinarily resident
in the UK or carries on a trade in the UK through a branch or agency to which
the notes are attributable.
STAMP DUTY AND STAMP DUTY RESERVE TAX
No UK stamp duty or stamp duty reserve tax is payable on the issue or
transfer of the offered notes, whether such offered note is in global or
definitive form.
UK TAXATION OF FUNDING AND THE ISSUER
It is the opinion of UK tax counsel that Funding and the issuer will
generally be subject to UK corporation tax, currently at a rate of 30%, on the
profit reflected in their respective profit and loss accounts as increased by
the amounts of any non-deductible expenses or losses. Examples of non-
deductible expenses and losses include general
270
provisions for bad debts. In respect of Funding, the profit in the profit and
loss account will not exceed 0.01% of the Funding available revenue receipts.
In respect of the issuer, the profit in the profit and loss account will not
exceed 0.01% of the interest on the intercompany loan. Any liability to UK
corporation tax will be paid out of the available revenue receipts of Funding
and the issuer, respectively.
UK TAXATION OF THE MORTGAGES TRUSTEE
It is the opinion of UK tax counsel that the mortgages trustee will have no
liability to UK tax in respect of any income, profit or gain arising under
these arrangements. Accordingly, the mortgages trustee will have no liability
to UK tax in relation to amounts which it receives on behalf of Funding or the
seller under the mortgages trust.
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MATERIAL UNITED STATES TAX CONSEQUENCES
GENERAL
The following section summarizes the material United States federal income
tax consequences of the purchase, ownership and disposition of the series 1
class A1 notes, series 1 class A2 notes, the series 1 class A3 notes, the series
1 class B notes, the series 1 class M notes and the series 1 class C notes (the
"US NOTES") that may be relevant to a holder of US notes that is a "UNITED
STATES PERSON" (as defined later in this section) or that otherwise is subject
to US federal income taxation on a net income basis in respect of a US note (any
such United States person or holder, a "US HOLDER"). In general, the summary
assumes that a holder acquires a US note at original issuance and holds such
note as a capital asset. It does not purport to be a comprehensive description
of all the tax considerations that may be relevant to a decision to purchase the
US notes. In particular, it does not discuss special tax considerations that may
apply to certain types of taxpayers, including dealers in stocks, securities or
notional principal contracts; traders in securities electing to mark to market;
banks, savings and loan associations and similar financial institutions;
taxpayers whose functional currency is other than the US dollar; taxpayers that
hold a US note as part of a hedge or straddle or a conversion transaction,
within the meaning of section 1258 of the US Internal Revenue Code of 1986, as
amended (the "CODE"); and subsequent purchasers of US notes. In addition, this
summary does not describe any tax consequences arising under the laws of any
taxing jurisdiction other than the US federal government.
This summary is based on the US tax laws, regulations, rulings and decisions
in effect or available as of the date of this prospectus. All of the foregoing
are subject to change, and any change may apply retroactively and could affect
the continued validity of this summary.
Sidley Austin Brown & Wood LLP, US tax advisers to the issuer ("US TAX
COUNSEL"), has prepared and reviewed this summary of material US federal income
tax consequences. As described under "-- TAX STATUS OF THE ISSUER, FUNDING,
MORTGAGES TRUSTEE AND MORTGAGES TRUST", US tax counsel is of the opinion that
the mortgages trustee acting as trustee of the mortgages trust, Funding, and
the issuer will not be subject to US federal income tax as a result of their
contemplated activities. As described further under "-- CHARACTERIZATION OF THE
US NOTES", US tax counsel is also of the opinion that, although there is no
authority on the treatment of instruments substantially similar to the US
notes, and while not free from doubt, the US notes will be treated as debt for
US federal income tax purposes. Except as described in the two preceding
sentences (and set forth in the corresponding opinions), US tax counsel will
render no opinions relating to the notes or the parties to the transaction.
An opinion of US tax counsel is not binding on the US Internal Revenue
Service (the "IRS") or the courts, and no rulings will be sought from the IRS
on any of the issues discussed in this section. ACCORDINGLY, THE ISSUER
SUGGESTS THAT PERSONS CONSIDERING THE PURCHASE OF US NOTES CONSULT THEIR OWN
TAX ADVISORS AS TO THE US FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE US NOTES, INCLUDING THE POSSIBLE APPLICATION
OF STATE, LOCAL, NON-US OR OTHER TAX LAWS, AND OTHER US TAX ISSUES AFFECTING
THE TRANSACTION.
As used in this section the term "UNITED STATES PERSON" means (a) an
individual who is a citizen or resident of the United States, (b) an entity
treated as a corporation or partnership for United States federal income tax
purposes that is organized or created under the law of the United States, a
State thereof, or the District of Columbia, (c) any estate the income of which
is subject to taxation in the United States regardless of source, and (d) any
trust if a court within the United States is able to exercise primary
supervision over its administration and one or more United States persons have
the authority to control
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all substantial decisions of the trust, or the trust was in existence on August
20, 1996 and is eligible to elect, and has made a valid election, to be treated
as a United States person despite not meeting those requirements.
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
mortgaged property if doing so would cause it to be engaged or deemed to be
engaged in a trade or business within the United States as determined under US
federal income tax principles. US tax counsel is of the opinion that, assuming
compliance with the transaction documents, none of the issuer, Funding or the
mortgages trustee, acting in its capacity as trustee of the mortgages trust,
will be subject to US federal income tax. No elections will be made to treat the
issuer, Funding, or the mortgage trust or any of their assets as a REMIC or a
FASIT (two types of securitization vehicles having a special tax status under
the Code).
CHARACTERIZATION OF THE US NOTES
Although there is no authority regarding the treatment of instruments that
are substantially similar to the US notes, and while not free from doubt, it is
the opinion of US tax counsel that the US notes will be treated as debt for US
federal income tax purposes. The issuer intends to treat the US notes as
indebtedness of the issuer for all purposes, including US tax purposes. The
discussion in the next section assumes this result.
The US notes will not be qualifying real property mortgage loans in the
hands of domestic savings and loan associations, real estate investment trusts,
or REMICs under sections 7701(a)(19)(C), 856(c) or 860G(a)(3) of the Code,
respectively.
TAXATION OF US HOLDERS OF THE US NOTES
Qualified Stated Interest and Original Issue Discount ("OID"). The issuer
intends to treat interest on the US notes as "QUALIFIED STATED INTEREST" under
United States Treasury regulations relating to original issue discount
(hereafter the "OID REGULATIONS"). As a consequence, discount on the US notes
arising from an issuance at less than par will only be required to be accrued
under the OID regulations if such discount exceeds a statutorily defined de
minimis amount. Qualified stated interest, which generally must be
unconditionally payable at least annually, is taxed under a holder's normal
method of accounting. De minimis OID is included in income on a pro rata basis
as principal payments are made on the US notes. It is possible that interest on
the US notes (other than interest on the series 1 class A notes) could be
treated as OID because such interest is subject to deferral in certain limited
circumstances.
A US holder of a US note issued with OID must include OID in income over the
term of such US note under a constant yield method that takes into account the
compounding of interest. Under the Code, OID is calculated and accrued using
prepayment assumptions where payments on a debt instrument may be accelerated
by reason of prepayments of other obligations securing such debt instrument.
Moreover, the legislative history to the provisions provides that the same
prepayment assumptions used to price a debt instrument be used to calculate
OID, as well as to accrue market discount and amortize premium. Here,
prepayment of the mortgage loans is not expected to alter the scheduled
principal payments on the US notes and accordingly, the issuer intends to
assume that the US notes will have their principal repaid according to the
schedule for purposes of accruing any OID. No representation is made that the
mortgage loans will pay on the basis of such prepayment assumption or in
accordance with any other prepayment scenario.
273
As an alternative to the above treatments, US holders may elect to include
in gross income all interest with respect to the US notes, including stated
interest, acquisition discount, OID, de minimis OID, market discount, de
minimis market discount, and unstated interest, as adjusted by any amortizable
bond premium or acquisition premium, using the constant yield method described
above.
Sales and Retirement. In general, a US holder of a US note will have a basis
in such note equal to the cost of the note to such holder, and reduced by any
payments thereon other than payments of stated interest. Upon a sale or
exchange of the note, a US holder will generally recognize gain or loss equal
to the difference between the amount realized (less any accrued interest, which
would be taxable as such) and the holder's tax basis in the note. Such gain or
loss will be long-term capital gain or loss if the US holder has held the note
for more than one year at the time of disposition. In certain circumstances, US
holders that are individuals may be entitled to preferential treatment for net
long-term capital gains. The ability of US holders to offset capital losses
against ordinary income is limited.
Alternative Characterization of the US Notes. The proper characterization of
the arrangement involving the issuer and the holders of the US notes is not
clear because there is no authority on transactions comparable to that
contemplated herein. The issuer intends to treat the US notes as debt of the
issuer for all US federal income tax purposes. Prospective investors should
consult their own tax advisors with respect to the potential impact of an
alternative characterization of the US notes for US tax purposes.
One possible alternative characterization is that the IRS could assert that
the series 1 class C notes or any other class of notes should be treated as
equity in the issuer for US federal income tax purposes. If the series 1 class
C notes or any other class of notes were treated as equity, US holders of such
notes would be treated as owning equity in a passive foreign investment company
("PFIC") which, depending on the level of ownership of such US holder and
certain other factors, might also constitute an interest in a controlled
foreign corporation for such US holder. This would have certain timing and
character consequences for US holders and could require certain elections and
disclosures that would need to be made shortly after acquisition to avoid
potentially adverse US tax consequences.
If the issuer was treated as a PFIC, unless a United States person makes a
"QEF ELECTION" or "MARK TO MARKET ELECTION", such person will be subject to a
special tax regime (I) in respect of gains realized on the sale or other
disposition of its US notes, and (ii) in respect of distributions on its US
notes held for more than one taxable year to the extent those distributions
constitute "EXCESS DISTRIBUTIONS". Although not free from doubt, the PFIC rules
should not apply to gain realized in respect of any US notes disposed of during
the same taxable year in which such US notes are acquired. An excess
distribution generally includes dividends or other distributions received from a
PFIC in any taxable year to the extent the amount of such distributions exceeds
125% of the average distributions for the three preceding years (or, if shorter,
the investor's holding period). Because the US notes pay interest at a floating
rate, it is possible that a United States person will receive "EXCESS
DISTRIBUTIONS" as a result of fluctuations in the rate of three-month US dollar
LIBOR over the term of the US notes. In general, under the PFIC rules, a United
States person will be required to allocate such excess distributions and any
gain realized on a sale of its US notes to each day during the such person's
holding period for the US notes, and will be taxable at the highest rate of
taxation applicable to the US notes for the year to which the excess
distribution or gain is allocable (without regard to the such person's other
items of income and loss for such taxable year) (the "DEFERRED TAX"). The
deferred tax (other than the tax on amounts allocable to the year of disposition
or receipt of the distribution) will then be increased by an interest charge
computed by reference to the rate generally applicable to underpayments of tax
(which interest charge generally will be non-deductible interest expense for
individual taxpayers).
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BACKUP WITHHOLDING
Backup withholding of US Federal income tax may apply to payments made in
respect of the notes to registered owners who are not "EXEMPT RECIPIENTS" and
who fail to provide certain identifying information (such as the registered
owner's taxpayer identification number) in the required manner. Generally,
individuals are not exempt recipients, whereas corporations and certain other
entities generally are exempt recipients. Payments made in respect of the US
notes to a United States person must be reported to the IRS, unless such person
is an exempt recipient or establishes an exemption. With respect to non-United
States persons investing in the US notes, to ensure they qualify for an
exemption, the paying agent will require such beneficial holder to provide a
statement from the individual or corporation that:
* is signed under penalties of perjury by the beneficial owner of the
note,
* certifies that such owner is not a United States person, and
* provides the beneficial owner's name and address.
Generally, this statement is made on an IRS Form W-8BEN ("W-8BEN"), which is
effective for the remainder of the year of signature plus three full calendar
years unless a change in circumstances makes any information on the form
incorrect. The noteholder must inform the paying agent within 30 days of such
change and furnish a new W-8BEN. A noteholder that is not an individual or an
entity treated as corporation for US federal income tax purposes or that is not
holding the notes on its own behalf may have substantially increased reporting
requirements. For example, a non-US partnership or non-US trust generally must
provide the certification from each of its partners or beneficiaries along with
certain additional information. Certain securities clearing organizations, and
other entities who are not beneficial owners, may be able to provide a signed
statement to the paying agent. However, in such case, the signed statement may
require a copy of the beneficial owner's W-8BEN (or the substitute form).
In addition, upon the sale of a note to (or through) a broker, the broker
must report the sale and backup withholding on the entire purchase price, unless
(I) the broker determines that the seller is a corporation or other exempt
recipient, (ii) the seller certifies (as described above) that such seller is a
non-United States person and certain other conditions are met or (iii) the
broker has the taxpayer identification number of the recipient properly
certified as correct.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's US federal income tax provided the required information is
furnished to the IRS.
Prospective investors should consult their own tax advisors with respect to
the foregoing withholding tax requirements.
THE US FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON AN OWNER'S PARTICULAR
SITUATION. HOLDERS OF US NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF US
NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL AND OTHER TAX LAWS.
275
MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSIDERATIONS
TAX STATUS OF THE MORTGAGES TRUSTEE AND THE MORTGAGES TRUST
It is the opinion of Jersey (Channels Islands) tax counsel that the
mortgages trustee will be resident in Jersey for taxation purposes and will be
liable to income tax in Jersey at a rate of 20% in respect of the profits it
makes from acting as trustee of the mortgages trust. The mortgages trustee will
not be liable for any income tax in Jersey in respect of any income it receives
in its capacity as mortgages trustee on behalf of the beneficiaries of the
mortgages trust.
TAX STATUS OF FUNDING
Funding has "EXEMPT COMPANY" status within the meaning of Article 123A of
the Income Tax (Jersey) Law, 1961, as amended, for the calendar year ending
December 31, 2003. Funding will be required to pay an annual exempt company
charge (currently [GBP]600) in respect of each calendar year during which it
wishes to retain exempt company status. The retention of exempt company status
(for as long as such status is available under Jersey law) is conditional upon
the exempt company charge being paid, Funding disclosing its beneficial
ownership within the required time limits and the Comptroller of Income Tax in
Jersey being satisfied that no Jersey resident has a beneficial interest in
Funding, except as permitted by concessions granted by the Comptroller of
Income Tax. As at the date of this prospectus no Jersey resident person has or
is anticipated to have any beneficial interest in Funding, and therefore such
concessions are not expected to be relied upon.
As an exempt company, Funding will not be liable to Jersey income tax other
than on Jersey source income (except bank deposit interest on Jersey bank
accounts). It is the opinion of Jersey (Channel Islands) tax counsel that, for
so long as Funding is an exempt company, payments in respect of the
intercompany loan will not be subject to Jersey taxation and no withholding in
respect of taxation will be required on such payments to the issuer under the
intercompany loan.
It is the opinion of Jersey (Channel Islands) tax counsel that the income of
Funding will not be Jersey source income insofar as the income of Funding
arises only from the mortgages trust property and that property is either
situated outside Jersey or is interest on bank or building society deposits in
Jersey.
On June 3, 2003, the European Union Council of Economic and Finance
Ministers reached political agreement on the adoption of a Code of Conduct on
Business Taxation. Although Jersey is not a member of the European Union, the
Policy & Resources Committee of the States of Jersey has announced that, in
keeping with Jersey's policy of constructive international engagement, it
intends to propose legislation to replace the Jersey exempt company regime by
the end of 2008 with a general zero rate of corporate tax.
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ERISA CONSIDERATIONS
The series 1 notes are eligible for purchase by employee benefit plans and
other plans subject to the US Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and/or the provisions of Section 4975 of the Code and by
governmental plans that are subject to state, local or other federal law of the
United States that is substantially similar to ERISA or Section 4975 of the
Code, subject to consideration of the issues described in this section. ERISA
imposes certain requirements on "EMPLOYEE BENEFIT PLANS" (as defined in Section
3(3) of ERISA) subject to ERISA, including entities such as collective
investment funds and separate accounts whose underlying assets include the
assets of such plans (collectively, "ERISA PLANS") and on those persons who are
fiduciaries with respect to ERISA Plans. Investments by ERISA Plans are subject
to ERISA's general fiduciary requirements, including the requirements of
investment prudence and diversification and the requirement that an ERISA
Plan's investments be made in accordance with the documents governing the Plan.
The prudence of a particular investment must be determined by the responsible
fiduciary of an ERISA Plan by taking into account the ERISA Plan's particular
circumstances and all of the facts and circumstances of the investment
including, but not limited to, the matters discussed under "RISK FACTORS" and
the fact that in the future there may be no market in which such fiduciary will
be able to sell or otherwise dispose of the notes.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those plans that
are not subject to ERISA but which are subject to Section 4975 of the Code,
such as individual retirement accounts (together with ERISA Plans, the
"PLANS")) and certain persons (referred to as "PARTIES IN INTEREST" or
"DISQUALIFIED PERSONS") having certain relationships to such Plans, unless a
statutory or administrative exemption is applicable to the transaction. A party
in interest or disqualified person who engages in a prohibited transaction may
be subject to excise taxes and other penalties and liabilities under ERISA and
the Code.
The seller, the issuer, the administrator, the mortgages trustee, Funding or
any other party to the transactions contemplated by the transaction documents
may be parties in interest or disqualified persons with respect to many Plans.
Prohibited transactions within the meaning of Section 406 of ERISA or Section
4975 of the Code may arise if any of the series 1 notes is acquired or held by
a Plan with respect to which the issuer, the administrator, the mortgages
trustee, Funding or any other party to such transactions, is a party in
interest or a disqualified person. Certain exemptions from the prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code may
be applicable, however, depending in part on the type of Plan fiduciary making
the decision to acquire any such notes and the circumstances under which such
decision is made. Included among these exemptions are Prohibited Transaction
Class Exemption ("PTCE") 91-38 (relating to investments by bank collective
investment funds), PTCE 84-14 (relating to transactions effected by a
"QUALIFIED PROFESSIONAL ASSET MANAGER"), PTCE 95-60 (relating to transactions
involving insurance company general accounts), PTCE 90-1 (relating to
investments by insurance company pooled separate accounts) and PTCE 96-23
(relating to transactions determined by in-house asset managers). There can be
no assurance that any of these class exemptions or any other exemption will be
available with respect to any particular transaction involving the notes.
Each purchaser and subsequent transferee of any series 1 note will be deemed
by such purchase or acquisition of any such note to have represented and
warranted, on each day from the date on which the purchaser or transferee
acquires such note through and including the date on which the purchaser or
transferee disposes of such note, either that (A) it is not an ERISA Plan or
other Plan, an entity whose underlying assets include the assets of any such
ERISA Plan or other Plan, or a governmental plan which is subject to any
federal, state or local law of the United States that is substantially similar
to the provisions of section 406 of ERISA or section 4975 of the Code or (B)
its purchase, holding and disposition of such note will not result in a
prohibited transaction under section
277
406 of ERISA or section 4975 of the Code (or, in the case of a governmental
plan, any substantially similar federal, state or local law of the United
States) for which an exemption is not available.
In addition, the US Department of Labor has promulgated a regulation, 29
C.F.R. Section 2510.3-101 (the "PLAN ASSET REGULATION"), describing what
constitutes the assets of a Plan with respect to the Plan's investment in an
entity for purposes of certain provisions of ERISA, including the fiduciary
responsibility provisions of Title I of ERISA, and Section 4975 of the Code.
Under the Plan Asset Regulation, if a Plan invests in an "EQUITY INTEREST" of
an entity that is neither a "PUBLICLY-OFFERED SECURITY" nor a security issued
by an investment company registered under the 1940 Act, the Plan's assets
include both the equity interest and an undivided interest in each of the
entity's underlying assets, unless one of the exceptions to such treatment
described in the Plan Asset Regulation applies. Under the Plan Asset
Regulation, a security which is in debt form may be considered an "EQUITY
INTEREST" if it has "SUBSTANTIAL EQUITY FEATURES". If the issuer were deemed
under the Plan Asset Regulation to hold plan assets by reason of a Plan's
investment in any of the series 1 notes, series 2 notes or series 3 notes, such
plan assets would include an undivided interest in the assets held by the
issuer and transactions by the issuer would be subject to the fiduciary
responsibility provisions of Title I of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code. Investors should note that
concerns in respect of the foregoing may be magnified here, particularly in the
case of the series 1 class C notes. In addition, in analyzing these issues with
their own counsel, prospective purchasers of notes should consider, among other
things, that, although special tax counsel has concluded that the notes are
debt for federal income tax purposes, see "MATERIAL UNITED STATES TAX
CONSEQUENCES", it is not clear whether the debt would be treated for tax
purposes as issued by the issuer. If the underlying assets of the issuer are
deemed to be Plan assets, the obligations and other responsibilities of Plan
sponsors, Plan fiduciaries and Plan administrators, and of parties in interest
and disqualified persons, under parts 1 and 4 of subtitle B of title I of ERISA
and section 4975 of the Code, as applicable, may be expanded, and there may be
an increase in their liability under these and other provisions of ERISA and
the Code (except to the extent (if any) that a favorable statutory or
administrative exemption or exception applies). In addition, various providers
of fiduciary or other services to the issuer, and any other parties with
authority or control with respect to the issuer, could be deemed to be Plan
fiduciaries or otherwise parties in interest or disqualified persons by virtue
of their provision of such services.
Any insurance company proposing to purchase any of the series 1 notes using
the assets of its general account should consider the extent to which such
investment would be subject to the requirements of ERISA in light of the US
Supreme Court's decision in John Hancock Mutual Life Insurance Co. v. Harris
Trust and Savings Bank and under any subsequent guidance that may become
available relating to that decision. In particular, such an insurance company
should consider the retroactive and prospective exemptive relief granted by the
Department of Labor for transactions involving insurance company general
accounts in PTCE 95-60, 60 Fed. Reg. 35925 (July 12, 1995), the enactment of
Section 401(c) of ERISA by the Small Business Job Protection Act of 1996
(including, without limitation, the expiration of any relief granted
thereunder) and the regulations thereunder.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold any of the series 1 notes
should determine whether, under the documents and instruments governing the
Plan, an investment in the notes is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment mortgage portfolio. Any Plan proposing to invest in such
notes (including any governmental plan) should consult with its counsel to
confirm, among other things, that such investment will not result in a non-
exempt
278
prohibited transaction and will satisfy the other requirements of ERISA and the
Code (or, in the case of a governmental plan, any substantially similar state,
local or other federal law).
The sale of any notes to a Plan is in no respect a representation by the
seller, the issuer, the administrator, the mortgages trustee, Funding or any
other party to the transactions that such an investment meets all relevant
legal requirements with respect to investments by Plans generally or any
particular Plan, or that such an investment is appropriate for Plans generally
or any particular Plan.
279
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES
The issuer is a UK public company incorporated with limited liability in
England and Wales.
Any final and conclusive judgment of any New York State or United States
Federal Court sitting in the Borough of Manhattan in the City of New York
having jurisdiction recognized by England or Wales in respect of an obligation
of the issuer in respect of the notes for a fixed sum of money and which has
not been stayed or satisfied in full, would be enforceable by action against
the issuer in the courts of England and Wales without a re- examination of the
merits of the issues determined by the proceedings in the New York State or
United States Federal Court.
This will be the case unless the following occurs:
* the proceedings in the New York State or the United States Federal
Court in which the judgment was obtained were contrary to the
principles of natural or substantive justice;
* enforcement of the judgment is contrary to the public policy of
England or Wales;
* the judgment was obtained by fraud or duress or was based on a
clear mistake of fact;
* the judgment is of a public nature (for example, a penal or revenue
judgment);
* there has been a prior judgment in another court concerning the
same issues between the same parties as are dealt with in the
judgment of the New York State or the United States Federal Court;
* the enforcement would contravene section 5 of the Protection of
Trading Interests Act 1980; or
* the enforcement proceedings are not instituted within six years
after the date of the judgment.
The issuer expressly submits to the non-exclusive jurisdiction of the courts
of England for the purpose of any suit, action or proceedings arising out of
this offering. A judgment by a court may be given in some cases only in
sterling.
All of the directors and executive officers of the issuer reside outside the
United States. Substantially all of the assets of all or many of such persons
are located outside the United States. As a result, it may not be possible for
the noteholders to effect service of process within the United States upon such
persons with respect to matters arising under the federal securities laws of
the United States or to enforce against them judgments obtained in United
States courts predicated upon the civil liability provisions of such laws.
The issuer has been advised by Sidley Austin Brown & Wood, its English
counsel, that there is doubt as to the enforceability in England and Wales, in
original actions or in actions for enforcement of judgments of United States
courts, of civil liabilities predicated upon the Federal securities laws of the
United States based on the restrictions referred to above.
280
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS
None of the notes is a "MORTGAGE RELATED SECURITY" under the United States
Secondary Mortgage Market Enhancement Act of 1984, as amended.
The appropriate characterization of the notes under various legal investment
restrictions and, consequently, the ability of investors subject to these
restrictions to purchase such notes, is subject to significant interpretative
uncertainties. These uncertainties may adversely affect the liquidity of, and
the creation of any secondary market for, the notes. Accordingly, investors
should consult their own legal advisors in determining whether and the extent
to which the notes constitute legal investments or are subject to investment,
capital or other restrictions.
EXPERTS
The financial statements of Granite Finance Funding Limited for the period
from January 1, 2002 to December 31, 2002 and as at December 31, 2002 and for
the period from February 14, 2001 to December 31, 2001 and as at December 31,
2001 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in auditing and accounting.
The balance sheet of Granite Mortgages 03-3 plc as at August 31, 2003
included in this prospectus has been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in auditing and accounting.
LEGAL MATTERS
Certain matters of English law and United States law regarding the notes,
including matters relating to the validity of the issuance of the notes, will
be passed upon for the issuer by Sidley Austin Brown & Wood, London. Certain
matters of United States law regarding matters of United States federal income
tax law with respect to the series 1 notes will be passed upon for the issuer
by Sidley Austin Brown & Wood LLP, New York. Certain matters of English law and
United States law will be passed upon for the underwriters by Allen & Overy,
London.
Certain matters of Jersey (Channel Islands) law regarding the mortgages
trustee and Funding will be passed upon for the mortgages trustee and Funding,
respectively, by Mourant du Feu & Jeune, London.
281
UNDERWRITING
UNITED STATES
The issuer has agreed to sell, and J.P. Morgan Securities Inc. and Lehman
Brothers Inc. (the "LEAD UNDERWRITERS") and the other underwriters for the
series 1 notes listed in the following table have agreed to purchase, the
principal amount of those notes listed in that table (also called the "OFFERED
NOTES"). The terms of these purchases are governed by an underwriting agreement
among the issuer, the lead underwriters and the underwriters. The underwriters
or affiliates of certain of the underwriters have also agreed to pay and
subscribe for the other classes of notes not being offered pursuant to this
prospectus on the closing date.
PRINCIPAL
AMOUNT OF THE
SERIES 1 CLASS
UNDERWRITERS OF THE SERIES 1 CLASS A1 NOTES A1 NOTES
- ------------------------------------------- --------------
J.P. Morgan Securities Inc. USD[__]
Lehman Brothers Inc. USD[__]
Citigroup Global Markets Inc. USD[__]
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD[__]
UBS Securities LLC USD[__]
--------------
Total USD[__]
==============
PRINCIPAL
AMOUNT OF THE
SERIES 1 CLASS
UNDERWRITERS OF THE SERIES 1 CLASS A2 NOTES A2 NOTES
- ------------------------------------------- --------------
J.P. Morgan Securities Inc. USD[__]
Lehman Brothers Inc. USD[__]
Citigroup Global Markets Inc. USD[__]
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD[__]
UBS Securities LLC USD[__]
--------------
Total USD[__]
==============
PRINCIPAL
AMOUNT OF THE
SERIES 1 CLASS
UNDERWRITERS OF THE SERIES 1 CLASS A3 NOTES A3 NOTES
- ------------------------------------------- --------------
J.P. Morgan Securities Inc. USD[__]
Lehman Brothers Inc. USD[__]
Citigroup Global Markets Inc. USD[__]
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD[__]
UBS Securities LLC USD[__]
--------------
Total USD[__]
==============
282
PRINCIPAL
AMOUNT OF THE
SERIES 1 CLASS
UNDERWRITERS OF THE SERIES 1 CLASS B NOTES B NOTES
- ------------------------------------------ --------------
J.P. Morgan Securities Inc. USD[__]
Lehman Brothers Inc. USD[__]
--------------
Total USD[__]
==============
PRINCIPAL
AMOUNT OF THE
SERIES 1 CLASS
UNDERWRITERS OF THE SERIES 1 CLASS M NOTES M NOTES
- ------------------------------------------ --------------
J.P. Morgan Securities Inc. USD[__]
Lehman Brothers Inc. USD[__]
--------------
Total USD[__]
==============
PRINCIPAL
AMOUNT OF THE
SERIES 1 CLASS
UNDERWRITERS OF THE SERIES 1 CLASS C NOTES C NOTES
- ------------------------------------------ --------------
J.P. Morgan Securities Inc. USD[__]
Lehman Brothers Inc. USD[__]
--------------
Total USD[__]
==============
The price to the public as a percentage of the principal balance of the
offered notes will be [__]%.
The issuer has agreed to pay to the underwriters of the series 1 class A1
notes a selling commission of [__]% of the aggregate principal amount of the
series 1 class A1 notes and a management and underwriting fee of [__]% of the
aggregate principal amount of the series 1 class A1 notes. The issuer has also
agreed to pay to the underwriters of the series 1 class A2 notes a selling
commission of [__]% of the aggregate principal amount of the series 1 class A2
notes and a management and underwriting fee of [__]% of the aggregate principal
amount of the series 1 class A2 notes. The issuer has also agreed to pay to the
underwriters of the series 1 class A3 notes a selling commission of [__]% of
the aggregate principal amount of the series 1 class A3 notes and a management
and underwriting fee of [__]% of the aggregate principal amount of the series 1
class A3 notes. The issuer has also agreed to pay to the underwriters of the
series 1 class B notes a selling commission of [__]% of the aggregate principal
amount of the series 1 class B notes and a management and underwriting fee of
[__]% of the aggregate principal amount of the series 1 class B notes. The
issuer has also agreed to pay to the underwriters of the series 1 class M notes
a selling commission of [__]% of the aggregate principal amount of the series 1
class M notes and a management and underwriting fee of [__]% of the aggregate
principal amount of the series 1 class M notes. The issuer has also agreed to
pay to the underwriters of the series 1 class C notes a selling commission of
[__]% of the aggregate principal amount of the series 1 class C notes and a
management and underwriting fee of [__]% of the aggregate principal amount of
the series 1 class C notes.
The lead underwriters of the offered notes have advised the issuer that the
underwriters propose initially to offer the series 1 class A1 notes to the
public at the public offering price stated on the cover page of this
prospectus, and to some dealers at that
283
price, less a concession up to [__]% for each series 1 class A1 note. The
underwriters may allow, and those dealers may re-allow, concessions up to [__]%
of the principal amount of the series 1 class A1 notes to some brokers and
dealers.
The lead underwriters of the offered notes have also advised the issuer that
the underwriters propose initially to offer the series 1 class A2 notes to the
public at the public offering price stated on the cover page of this
prospectus, and to some dealers at that price, less a concession up to [__]%
for each series 1 class A2 note. The underwriters may allow, and those dealers
may re-allow, concessions up to [__]% of the principal amount of the series 1
class A2 notes to some brokers and dealers.
The lead underwriters of the offered notes have also advised the issuer that
the underwriters propose initially to offer the series 1 class A3 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 [__]%
for each series 1 class A3 note. The underwriters may allow, and those dealers
may re-allow, concessions up to [__]% of the principal amount of the series 1
class A3 notes to some brokers and dealers.
The lead underwriters of the offered notes have also advised the issuer that
the underwriters propose initially to offer the series 1 class B notes to the
public at the public offering price stated on the cover page of this
prospectus, and to some dealers at that price, less a concession up to [__]%
for each series 1 class B note. The underwriters may allow, and those dealers
may re-allow, concessions up to [__]% of the principal amount of the series 1
class B notes to some brokers and dealers.
The lead underwriters of the offered notes have also advised the issuer that
the underwriters propose initially to offer the series 1 class M 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 [__]%
for each series 1 class M note. The underwriters may allow, and those dealers
may re-allow, concessions up to [__]% of the principal amount of the series 1
class M notes to some brokers and dealers.
The lead underwriters of the offered notes have also advised the issuer that
the underwriters propose initially to offer the series 1 class C notes to the
public at the public offering price stated on the cover page of this
prospectus, and to some dealers at that price, less a concession up to [__]%
for each series 1 class C note. The underwriters may allow, and those dealers
may re-allow, concessions up to [__]% of the principal amount of the series 1
class C notes to some brokers and dealers.
Additional offering expenses are estimated to be approximately $[__].
The issuer and Northern Rock have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the United States
Securities Act of 1933, as amended.
The underwriters may engage in over-allotment transactions (also known as
short sales), stabilizing transactions, syndicate covering transactions and
penalty bids for the notes under Regulation M under the United States
Securities Exchange Act of 1934, as amended.
* Over-allotment transactions involve sales by an underwriter in
excess of the total offering size, which creates what is known as a
naked short position. A naked short position is more likely to be
created if the underwriters are concerned that there may be
downward pressure on the price of the offered notes in the open
market after pricing that could adversely affect investors who
purchase in the offering.
* Stabilizing transactions permit bids to purchase the notes so long
as the stabilizing bids do not exceed a specified maximum.
* Short covering transactions involve purchases of the notes in the
open market after the distribution has been completed in order to
cover naked short positions.
284
* Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the notes originally sold
by that syndicate member are purchased in a syndicate covering
transaction.
Similar to other purchase transactions, these transactions may have the
effect of raising or maintaining the market price of the notes or preventing or
retarding a decline in the market price of the notes. As a result, these
transactions may cause the prices of the notes to be higher than they would
otherwise be in the absence of those transactions. Neither the issuer nor any
of the underwriters represent that any underwriter will engage in any of these
transactions or that these transactions, once begun, will not be discontinued
without notice at any time.
The offered notes will be registered under the United States Securities Act
of 1933, as amended. The underwriters of the offered notes have agreed that
they will sell the offered notes within the United States through their US
registered broker dealers.
The offered notes will not be offered or sold via the internet, e-mail or
through similar electronic channels except that certain underwriters may
deliver copies of this prospectus via e-mail to persons who have given, and not
withdrawn, their prior consent to receive copies of this prospectus in that
format.
UNITED KINGDOM
Each underwriter will represent and agree that:
* it has not offered or sold, and will not offer or sell any notes to
persons in the United Kingdom prior to admission of the notes to
listing in accordance with Part VI of the Financial Services and
Markets Act 2000 (the "FSMA"), except to persons whose ordinary
activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for purposes of
their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 (as amended) or the FSMA;
* it has only communicated or caused to be communicated and will only
communicate or cause to be communicated any invitation or
inducement to engage in investment activity (within the meaning of
section 21 of the FSMA) received by it in connection with the issue
or sale of any notes in circumstances in which section 21(1) of the
FSMA does not apply to the issuer; and
* it has complied and will comply with all applicable provisions of
the FSMA with respect to anything done by it in relation to the
notes in, from or otherwise involving the United Kingdom.
NETHERLANDS
Each underwriter will represent and agree that it has not, directly or
indirectly, offered or sold and will not, directly or indirectly, offer or sell
any offered notes in the Netherlands.
ITALY
Each underwriter will represent and agree that the offering of the notes has
not been cleared by CONSOB (the Italian Securities Exchange Commission)
pursuant to Italian securities legislation and, accordingly, no notes may be
offered, sold or delivered, nor may copies of this prospectus or of any other
document relating to the notes be distributed in the Republic of Italy, except:
(i) to professional investors (operatori qualificati), as defined in
Article 31, second paragraph, of CONSOB Regulation No. 11522 of
July 1, 1998, as amended; or
285
(ii) in circumstances which are exempted from the rules on solicitation
of investments pursuant to Article 100 of Legislative Decree No. 58
of February 24, 1998 (the "FINANCIAL SERVICES ACT") and Article 33,
first paragraph, of CONSOB Regulation No. 11971 of May 14, 1999, as
amended; or
(iii) to an Italian resident who submits an unsolicited offer to purchase
the notes.
In addition, each underwriter will represent and agree that any offer, sale
or delivery of the notes or distribution of copies of this prospectus or any
other document relating to the notes in the Republic of Italy under (I) or (ii)
above must be:
(a) made by an investment firm, bank or financial intermediary
permitted to conduct such activities in the Republic of Italy in
accordance with the Financial Services Act and Legislative Decree
No. 385 of September 1, 1993 (the "BANKING ACT"); and
(b) in compliance with Article 129 of the Banking Act and the
implementing guidelines of the Bank of Italy, as amended from time
to time, pursuant to which the issue or the offer of securities in
the Republic of Italy may need to be preceded and followed by an
appropriate notice to be filed with the Bank of Italy depending,
inter alia, on the aggregate value of the securities issued or
offered in the Republic of Italy and their characteristics.
SPAIN
Each manager will acknowledge that the notes may not be offered or sold in
Spain by means of a public offer as defined and construed by Spanish law unless
such public offer is made in compliance with the requirements of Law 24/1988 of
July 28 (as amended by Law 37/1998, of November 16), on the Spanish Securities
Market and the Royal Decree 291/1992, of March 27 (as amended by Royal Decree
2590/1998, of December 7 and Royal Decree 705/2002, of July 19), on issues and
public offers for the sale of securities.
GENERAL
The underwriters have represented and agreed that they have complied and
will comply with all applicable laws and regulations in force in any
jurisdiction in which they purchase, offer, sell or deliver offered notes or
possess them or distribute the prospectus and will obtain any consent, approval
or permission required by them for the purchase, offer, sale or delivery by
them of offered notes under the laws and regulations in force in any
jurisdiction to which they are subject or in which they make such purchases,
offers, sales or deliveries and the issuer shall have no responsibility for
them. Furthermore, they will not directly or indirectly offer, sell or deliver
any offered notes or distribute or publish any prospectus, form of application,
offering circular, advertisement or other offering material except under
circumstances that will, to the best of its knowledge and belief, result in
compliance with any applicable laws and regulations, and all offers, sales and
deliveries of offered notes by it will be made on the same terms.
Neither the issuer nor the underwriters represent that offered notes may at
any time lawfully be sold in compliance with any application, registration or
other requirements in any jurisdiction, or pursuant to any exemption available
thereunder, or assume any responsibility for facilitating such sale.
The underwriters will, unless prohibited by applicable law, furnish to each
person to whom they offer or sell offered notes a copy of the prospectus as
then amended or supplemented or, unless delivery of the prospectus is required
by applicable law, inform each such person that a copy will be made available
upon request. The underwriters are not authorized to give any information or to
make any representation not contained in the prospectus in connection with the
offer and sale of offered notes to which the prospectus relates.
286
This prospectus may be used by J.P. Morgan Securities Inc. and Lehman
Brothers Inc. for offers and sales related to market-making transactions in the
offered notes. J.P. Morgan Securities Inc. and Lehman Brothers Inc. may act as
principal or agent in these transactions. These sales will be made at prices
relating to prevailing market prices at the time of sale. Neither J.P. Morgan
Securities Inc. nor Lehman Brothers Inc. has any obligation to make a market in
the offered notes, and any market-making may be discontinued at any time
without notice. J.P. Morgan Securities Inc. and Lehman Brothers Inc. are among
the underwriters participating in the initial distribution of the offered
notes.
Citibank, N.A., which is acting as the euro currency swap provider, is an
affiliate of Citigroup Global Markets Inc., one of the underwriters for the
series 1 class A notes.
287
REPORTS TO NOTEHOLDERS
The administrator will prepare quarterly and annual reports that will
contain information about the notes. The financial information contained in the
reports will not be prepared in accordance with generally accepted accounting
principles of any jurisdiction. The reports will be sent to Cede & Co. and
Citivic, as applicable, as the holder of the notes, unless and until individual
note certificates are issued. Reports will not be sent to investors by the
administrator.
WHERE INVESTORS CAN FIND MORE INFORMATION
The issuer has filed a registration statement with the SEC for the offered
notes. This prospectus is one portion of the registration statement, which also
includes additional information.
The administrator will file with the SEC all required periodic and special
SEC reports and other information about the offered notes.
Investors may read and copy any reports, statements or other information
filed at the SEC's public reference room in Washington, D.C. and may receive
copies of these documents upon writing to the SEC and paying a duplicating fee.
Investors can call the SEC at 1 800 732 0330 for further information on the
operation of the public reference room. The SEC filings are also available to
the public on the SEC's Internet site at http://www.sec.gov.
288
LISTING AND GENERAL INFORMATION
AUTHORIZATION
The issue of the notes will be authorized by resolution of the board of
directors of the issuer passed on or about September 19, 2003.
LISTING OF NOTES
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the Financial
Services and Markets Act 2000 for the notes to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for each class of the notes to be admitted to trading
by the London Stock Exchange plc. It is expected that listing of the notes on
the official list of the UK Listing Authority and the admission to trading of
the notes by the London Stock Exchange plc will be granted on or around
September 24, 2003, subject only to the issue of the notes in global form and
assignment of the expected ratings of the notes by the rating agencies.
This prospectus comprises listing particulars prepared in compliance with
the listing rules made under Section 74 of the Financial Services and Markets
Act 2000 by the UK Listing Authority. Copies have been delivered to the
Registrar of Companies in England and Wales for registration in accordance with
Section 83 of that Act.
The issuer and the directors of the issuer, whose names appear on page 67 of
this prospectus, accept responsibility for the information contained in this
prospectus. To the best of the knowledge and belief of the issuer and the
directors of the issuer (who have taken all reasonable care to ensure that such
is the case), the information contained in this prospectus is in accordance
with the facts and does not omit anything likely to affect the import of such
information. The issuer and the directors of the issuer accept responsibility
accordingly.
CLEARING AND SETTLEMENT
Transactions will normally be effected for settlement in US dollars (in
respect of the series 1 notes), euro (in respect of the series 2 notes) and
sterling (in respect of the series 3 notes) and for delivery on the third
working day after the date of the transaction. Prior to listing, however,
dealings will be permitted by the London Stock Exchange plc in accordance with
its rules.
The series 1 notes have been accepted for clearance through DTC,
Clearstream, Luxembourg and Euroclear under the following CUSIP numbers, common
codes and ISINs:
COMMON
CLASS OF NOTES CUSIP ISIN CODE
- ----------------- ----- ---- ------
series 1 class A1 38741UAA5 US38741UAA51 017696513
series 1 class A2 38741UAB3 US38741UAB35 017696564
series 1 class A3 38741UAC1 US38741UAC18 017696777
series 1 class B 38741UAD9 US38741UAD90 017696831
series 1 class M 38741UAE7 US38741UAE73 017696882
series 1 class C 38741UAF4 US38741UAF49 017696939
LITIGATION
None of the issuer, Funding, the previous issuers (together with the issuer
and Funding, the "FUNDING GROUP"), Holdings, the post-enforcement call option
holder or the mortgages trustee is or has been involved since its incorporation
in any legal or arbitration proceedings which may have, or have had since its
incorporation, a significant effect upon the financial position of the issuer,
the Funding Group, Holdings, the post-enforcement call option holder or the
mortgages trustee (as the case may be) nor, so far as the issuer, the
289
Funding Group, Holdings, the post-enforcement call option holder or the
mortgages trustee (respectively) is aware, are any such legal or arbitration
proceedings pending or threatened.
ACCOUNTS
No statutory or non-statutory accounts within the meaning of Section 240(5)
of the Companies Act 1985 in respect of any financial year of the issuer have
been prepared. So long as the notes are listed on the official list of the UK
Listing Authority and are trading by the London Stock Exchange plc the most
recently published audited annual accounts of the issuer from time to time
shall be available at the specified office of the UK principal paying agent in
London. The issuer does not publish interim accounts.
Since the date of its incorporation, the issuer has not entered into any
contracts or arrangements not being in the ordinary course of business other
than the underwriting agreement and the subscription agreement.
CONSENTS
PricewaterhouseCoopers LLP, chartered accountants, whose address is 89
Sandyford Road, Newcastle upon Tyne NE99 1PL, have given and have not withdrawn
their consent to the inclusion in this prospectus of their reports on the
issuer and Funding and the references to their name in the form and context in
which they appear, and have authorized the contents of that part of the listing
particulars containing their report for the purposes of Article 6(1)(e) of the
UK Financial Services and Markets Act 2000 (Official Listing of Securities)
Regulations 2001.
SIGNIFICANT OR MATERIAL CHANGE
Other than as described in this prospectus, since the date of incorporation
of the issuer (July 7, 2003), the date of incorporation of each previous issuer,
the date of the most current financial reports of Funding (December 31, 2002),
the date of incorporation of Holdings (December 14, 2000), the date of
incorporation of the mortgages trustee (February 14, 2001), and the date of
incorporation of the post-enforcement call option holder (December 15, 2000),
there has been:
* no material adverse change in the financial position or prospects
of the issuer, Funding Group, Holdings, the post-enforcement call
option holder or the mortgages trustee; and
* no significant change in the financial or trading position of the
issuer, Funding Group, Holdings, the post-enforcement call option
holder or the mortgages trustee.
DOCUMENTS AVAILABLE
Copies of the following documents may be inspected at the offices of Sidley
Austin Brown & Wood, 1 Threadneedle Street, London EC2R 8AW during usual
business hours, on any weekday (public holidays excepted) for 14 days from the
date of this prospectus:
(A) the Memorandum and Articles of Association of each of the issuer,
Funding, Holdings, the mortgages trustee and the post-enforcement
call option holder;
(B) the balance sheet of the issuer as at August 31, 2003 and the
independent accountants' report thereon;
(C) the financial statements of Funding for the year ended December 31,
2002 and for the period from February 14, 2001 to December 31, 2001
and the independent accountants' reports thereon;
(D) prior to the closing date, drafts (subject to minor amendment), and
after the closing date, copies, of the following documents:
* the underwriting agreement;
290
* the subscription agreement;
* the intercompany loan agreement;
* the mortgages trust deed;
* the mortgage sale agreement;
* the issuer deed of charge;
* the Funding deed of charge;
* the deed(s) of accession to the Funding deed of charge;
* the basis rate swap agreement;
* the dollar currency swap agreements;
* the euro currency swap agreements;
* the trust deed;
* the paying agent and agent bank agreement;
* the administration agreement;
* the cash management agreement;
* the issuer cash management agreement;
* the Funding guaranteed investment contract;
* the Funding (Granite 03-3) guaranteed investment contract;
* the mortgages trustee guaranteed investment contract;
* the post-enforcement call option agreement;
* the bank account agreement;
* the Funding (Granite 03-3) bank account agreement;
* the issuer bank account agreement;
* the collection bank agreement;
* the master definitions schedule;
* the start-up loan agreement;
* the corporate services agreement;
* any other deeds of accession or supplemental deeds relating to
any such documents;
* documents relating to the issuance of the previous notes to the
previous issuers; and
(E) independent accountant's consent letter.
291
GLOSSARY
All of the defined terms that are used in this prospectus are defined in the
following glossary. These terms are defined as follows:
"$", "US$", "USD", "US DOLLARS" and "DOLLARS"
The lawful currency for the time being of the United States
of America
"[E]" or "EURO" The currency of the member states of the
European Union that adopt the single currency in accordance
with the Treaty of Rome of March 25, 1957, establishing the
European Community, as amended from time to time
"[GBP]", "STERLING" or "POUNDS STERLING"
The lawful currency for the time being of the United Kingdom
of Great Britain and Northern Ireland
"ACCOUNT BANK"
In respect of the issuer, Citibank, N.A.; in respect of
Funding, Lloyds TSB Bank plc; and in respect of the mortgages
trustee, Lloyds TSB Bank plc Jersey International Branch
"ACCRUED INTEREST"
In respect of a mortgage loan as at any date (the "RELEVANT
DATE"), the aggregate of all interest accrued but not yet due
and payable on that mortgage loan from (and including) the
monthly payment date immediately preceding the relevant date
until (but excluding) the relevant date
"ADDITIONAL ASSIGNED MORTGAGE LOAN"
Any mortgage loan which is assigned by the seller to the
mortgages trustee on August 18, 2003 under the terms of the
mortgage sale agreement and referenced by its mortgage loan
identifier number and comprising the aggregate of all
principal sums, interest, costs, charges, expenses and other
monies (including all further advances) due or owing with
respect to that mortgage loan under the relevant mortgage
conditions by a borrower on the security of a mortgage from
time to time outstanding or, as the context may require, the
borrower's obligations in respect of the same
"ADDITIONAL ASSIGNED MORTGAGE PORTFOLIO"
The portfolio of additional mortgage loans, their related
security, accrued interest and other amounts derived from such
additional mortgage loans that the seller assigned to the
mortgages trustee on August 18, 2003
"ADDITIONAL MORTGAGE LOAN"
Any mortgage loan which the seller anticipated assigning to
the mortgages trustee on August 18, 2003 under the terms of
the mortgage sale agreement and referenced by its mortgage
loan identifier number and comprising the aggregate of all
principal sums, interest, costs, charges, expenses and other
monies (including all further advances) due or owing with
respect to that mortgage loan under the relevant mortgage
conditions by a borrower on the security of a mortgage from
time to time outstanding or, as the context may require, the
borrower's obligations in respect of the same
"ADDITIONAL MORTGAGE PORTFOLIO"
The portfolio of additional mortgage loans, their related
security, accrued interest and other amounts derived from such
additional mortgage loans that the seller, as of the cut-off
date, anticipated assigning to the mortgages trustee on August
18, 2003
292
"ADDITIONAL ASSIGNED TRUST PROPERTY"
The additional assigned mortgage portfolio assigned to the
mortgages trustee by the seller on August 18, 2003, including
the additional assigned mortgage loans and their related
security, the rights under the MIG policies and the other
seller arranged insurance policies
"ADMINISTRATION AGREEMENT"
The agreement dated March 26, 2001, as amended from time to
time, among the administrator, the mortgages trustee, the
security trustee, Funding and the seller under which the
administrator has agreed to administer the mortgage loans and
their related security comprised in the mortgage portfolio, as
described further under "THE ADMINISTRATION AGREEMENT"
"ADMINISTRATION FEE"
The fee payable by the mortgages trustee to the administrator
on each distribution date in payment for the administering of
the mortgage loans by the administrator. The administration
fee equals 0.12% per annum (inclusive of VAT) on the amount
of the Funding share of the trust property as determined on
that distribution date in respect of the then current trust
calculation period, but is payable on each distribution date
only to the extent that the mortgages trustee has sufficient
funds available to pay that amount in accordance with the
mortgages trust allocation of revenue receipts
"ADMINISTRATION
PROCEDURES''
The administration, arrears and enforcement policies and
procedures forming part of the seller's policy from time to
time or, at any time when the administrator is not also the
seller, the policies and procedures from time to time which
would be adopted by a reasonable, prudent mortgage lender
"ADMINISTRATOR"
Northern Rock or such other person as may from time to time
be appointed as administrator of the mortgage portfolio under
the administration agreement
"ADMINISTRATOR TERMINATION
EVENT"
The meaning given to it on page 131
"AGENT BANK"
Citibank, N.A, acting through its London branch at 5 Carmelite
Street, London EC4Y 0PA, or such other person for the time
being acting as agent bank under the paying agent and agent
bank agreement
"ALTERNATIVE INSURANCE
REQUIREMENTS"
Requirements which vary the insurance provisions of the
mortgage conditions
"ARREARS OF INTEREST"
As at any date and for any mortgage loan, interest (other
than capitalized interest or accrued interest) on that
mortgage loan which is currently due and payable on that date
"ASSET TRIGGER EVENT"
The meaning given to it on page 155
"ASSIGNMENT DATE"
The date of assignment of any new mortgage portfolio to the
mortgages trustee
"AUTHORIZED INVESTMENTS" (a) sterling gilt-edged securities; and
(b) sterling demand or time deposits, certificates of deposit and
short-term debt obligations (including commercial paper) (which may
include deposits into any account which earns a rate of interest
related to LIBOR) provided that in all cases these investments have
a maturity date of 90 days or less and mature on or before the next
following payment date or, in relation to any mortgages trustee
bank account, the next following
293
distribution date and the short-term unsecured, unguaranteed and
unsubordinated debt obligations of the issuing or guaranteeing
entity or the entity with which the demand or time deposits are made
(being an authorized institution under the FSMA) are rated at least
equal to "A-1+" by Standard & Poor's, "P-1" by Moody's and "F1+" by
Fitch or which are otherwise acceptable to the rating agencies (if
they are notified in advance) to maintain the then current rating of
the notes
"AUTHORIZED
UNDERPAYMENT"
The meaning given to it on page 96
"AXA"
The AXA Group of Companies
"BANK ACCOUNT AGREEMENT"
The agreement dated March 26, 2001, as amended from time to time,
among the account bank, the mortgages trustee, Funding and the
security trustee which governs the operation of the mortgages
trustee bank accounts and the Funding bank accounts (other than the
Funding (Issuer) GIC accounts)
"BANKING ACT"
The meaning given to it on page 286
"BANK OF ENGLAND BASE
RATE"
The Bank of England's official dealing rate (the repo rate) as set
by the UK Monetary Policy Committee, and in the event that this rate
ceases to exist or becomes inappropriate as an index for the base
rate pledge, such alternative rate or index, which is not controlled
by the seller, that the seller considers to be the most appropriate
in the circumstances
"BARCLAYS"
Barclays Bank plc, acting through its office at City Group Office,
Percy Street, Newcastle upon Tyne NE99 1JP
"BARCLAYS COLLECTION
ACCOUNT"
The account of the administrator held at Barclays as may be utilized
from time to time for the purpose of collecting amounts which are
paid to the seller on the mortgage loans and/or the related security
"BASE RATE PLEDGE"
The meaning given to it on page 93
"BASEL COMMITTEE"
The meaning given to it on page 63
"BASIC TERMS MODIFICATIONS"
The meaning given to it on page 257
"BASIS RATE SWAP"
The swap documented under the basis rate swap agreement, as
described further under "THE SWAP AGREEMENTS -- THE BASIS RATE SWAP"
"BASIS RATE SWAP
AGREEMENT"
The ISDA master agreement, the schedule thereto and the confirmation
thereunder to be entered into on or before the closing date, and any
credit support annex entered into at any time, as amended from time
to time, among the issuer, the basis rate swap provider and the note
trustee, which includes any additional and/or replacement basis rate
swap agreement entered into by the issuer from time to time in
connection with the notes
"BASIS RATE SWAP PROVIDER"
Northern Rock and/or, as applicable, any other basis rate swap
provider appointed from time to time in accordance with the
transaction documents
294
"BASIS RATE SWAP PROVIDER
DEFAULT"
The occurrence of an event of default or a downgrade termination
event (as defined in the relevant basis rate swap agreement) where
the basis rate swap provider is the defaulting party or the affected
party (each as defined in the relevant basis rate swap agreement)
"BENEFICIARIES"
Funding and the seller together as beneficiaries of the mortgages
trust
"BENEFIT PLAN INVESTORS"
An investor in a pension, profit-sharing or other employee benefit
plan, as well as individual retirement accounts and certain types of
Keogh Plans, as described further in "ERISA CONSIDERATIONS"
"BORROWER"
For each mortgage loan, the person or persons who is or are named
and defined as such in the relevant mortgage deed, or the other
person or persons (other than a guarantor) who shall become legally
obligated to comply with the borrower's obligations under the
related mortgage
"BUSINESS DAY"
A day that is a London business day, a New York business day and a
TARGET business day
"CALCULATION PERIOD ISSUER AMOUNT"
The meaning given to it on page 209
"CALCULATION PERIOD SWAP
PROVIDER AMOUNT"
The meaning given to it on page 209
"CALENDAR YEAR"
A year from the beginning of January 1 to the end of December 31
"CALL REPORTS"
The meaning given to it on page 79
"CAPITAL BALANCE"
For any mortgage loan at any date, the principal balance of that
mortgage loan to which the seller applies the relevant interest rate
at which interest on that mortgage loan accrues
"CAPITAL PAYMENT"
The meaning given to it on page 91
"CAPITALIZED"
In respect of a fee, an interest amount or any other amount, means
that amount which is added to the capital balance of a mortgage loan
"CAPITALIZED ARREARS"
For any mortgage loan at any date, interest or other amounts which
are overdue in respect of that mortgage loan and which as at that
date have been added to the capital balance of that mortgage loan
either in accordance with the mortgage conditions or otherwise by
arrangement with the relevant borrower
"CAPITALIZED INTEREST"
For any mortgage loan at any date, interest which is overdue in
respect of that mortgage loan and which as at that date has been
added to the capital balance of that mortgage loan in accordance
with the mortgage conditions or otherwise by arrangement with the
relevant borrower (excluding for the avoidance of doubt any arrears
of interest which have not been so capitalized on that date)
"CAPPED RATE MORTGAGE
LOANS"
Mortgage loans that are subject to a maximum rate of interest and
charge interest at the lesser of the seller's standard variable rate
or the specified capped rate
295
"CASH MANAGEMENT
AGREEMENT"
The cash management agreement dated March 26, 2001, as amended from
time to time, among the cash manager, the mortgages trustee, Funding
and the security trustee, as described further under "CASH
MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING"
"CASH MANAGER"
Northern Rock or such other person or persons for the time being
acting, under the cash management agreement, as agent for the
mortgages trustee, Funding and (following enforcement of the Funding
security) the security trustee for the purposes of, inter alia,
managing all cash transactions and maintaining certain ledgers on
behalf of the mortgages trustee, Funding and (following enforcement
of the Funding security) the security trustee
"CASH RE-DRAW"
The meaning given to it on page 96
"CASHBACK"
An amount agreed by the seller to be paid to the relevant borrower
on the completion of the relevant mortgage loan
"CASHBACK MORTGAGE LOAN"
A type of mortgage loan, the primary characteristics of which are
described on page 89
"CAT STANDARD MORTGAGE LOAN"
A type of flexible mortgage loan, the primary characteristics of
which are described on page 89
"CCA"
The Consumer Credit Act 1974
"CITIBANK"
Citibank, N.A., acting through its London branch at Citigroup
Centre, Canada Square, Canary Wharf, London E14 5LB
"CITIBANK, N.A."
Citibank, N.A., acting through its London branch at 5 Carmelite
Street, London EC4Y 0PA
"CITIGROUP"
Citigroup Inc.
"CLASS"
Any of the series 1 class A1 notes, the series 1 class A2 notes, the
series 1 class A3 notes, the series 1 class B notes, the series 1
class M notes, the series 1 class C notes, the series 2 class A
notes, the series 2 class B notes, the series 2 class M notes, the
series 2 class C notes, the series 3 class A notes, the series 3
class B notes, the series 3 class M notes and the series 3 class C
notes
"CLASS A NOTE ENFORCEMENT
NOTICE"
The meaning given to it on page 252
"CLASS A NOTE EVENT OF DEFAULT"
The meaning given to it on page 252
"CLASS A NOTES"
The series 1 class A1 notes, the series 1 class A2 notes, the series
1 class A3 notes, the series 2 class A notes and the series 3 class
A notes and, in relation to any previous issuer or any new issuer,
such previous notes or new notes as may be identified as such for
that issuer
"CLASS A NOTEHOLDERS"
The holders of the class A notes
"CLASS A PRINCIPAL
DEFICIENCY SUBLEDGER"
For any issuer, the subledger of the issuer principal deficiency
ledger of that issuer corresponding to the class A notes issued by
that issuer
"CLASS B NOTE ENFORCEMENT
NOTICE"
The meaning given to it on page 253
"CLASS B NOTE EVENT OF
DEFAULT"
The meaning given to it on page 253
296
"CLASS B NOTES"
The series 1 class B notes, the series 2 class B notes and the
series 3 class B notes and, in relation to the previous issuers or
any new issuer, such previous notes or new notes as may be
identified as such for that issuer
"CLASS B NOTEHOLDERS"
The holders of the class B notes
"CLASS B PRINCIPAL
DEFICIENCY SUBLEDGER"
For any issuer, the subledger of the issuer principal deficiency
ledger of that issuer corresponding to the class B notes issued by
that issuer
"CLASS C NOTE ENFORCEMENT
NOTICE"
The meaning given to it on page 254
"CLASS C NOTE EVENT OF
DEFAULT"
The meaning given to it on page 254
"CLASS C NOTES"
The series 1 class C notes, the series 2 class C notes and the
series 3 class C notes and, in relation to the previous issuers or
any new issuer, such previous notes or new notes as may be
identified as such for that issuer
"CLASS C NOTEHOLDERS"
The holders of the class C notes
"CLASS C PRINCIPAL
DEFICIENCY SUBLEDGER"
For any issuer, the subledger of the issuer principal deficiency
ledger of that issuer corresponding to the class C notes issued by
that issuer
"CLASS M NOTE ENFORCEMENT
NOTICE"
The meaning given to it on page 254
"CLASS M NOTE EVENT OF
DEFAULT"
The meaning given to it on page 254
"CLASS M NOTES"
The series 1 class M notes, the series 2 class M notes and the
series 3 class M notes and, in relation to the previous issuers or
any new issuer, such previous notes or new notes as may be
identified as such for that issuer
"CLASS M NOTEHOLDERS"
The holders of the class M notes
"CLASS M PRINCIPAL
DEFICIENCY SUBLEDGER"
For any issuer, the subledger of the issuer principal deficiency
ledger of that issuer corresponding to the class M notes issued by
that issuer
"CLEARING AGENCY"
An agency registered under the provisions of section 17A of the
Exchange Act
"CLEARING CORPORATION"
A corporation within the meaning of the New York Uniform
Commercial Code
"CLEARSTREAM,
LUXEMBOURG"
Clearstream Banking, societe anonyme
"CLOSING DATE"
On or about September 24, 2003
"CML"
The Council of Mortgage Lenders of which the seller is a member
"CML CODE"
The meaning given to it on page 58
"CODE"
United States Internal Revenue Code of 1986, as amended
297
"COLLECTION ACCOUNT"
The Barclays collection account, the Lloyds TSB collection account
and each other account in the name of the administrator which is
from time to time used for the purpose of collecting, directly or
indirectly, monies due in respect of mortgage loans and/or the
related security
"COLLECTION BANKS"
Barclays Bank plc acting through its branch at Percy Street,
Newcastle upon Tyne NE99 1JP and Lloyds TSB Bank plc acting through
its branch at City Office, Bailey Drive, Gillingham Business Park,
Kent ME8 0LS and each other bank as may be appointed as such under
and in accordance with the transaction documents
"COLLECTION BANK
AGREEMENT"
The agreement dated March 26, 2001, as amended from time to time,
among the mortgages trustee, Funding, the seller, the administrator,
the security trustee and the collection banks
"COMBINATION MORTGAGE
LOAN"
A mortgage loan that combines the features of a repayment mortgage
loan and an interest-only loan in that only part of the principal of
the mortgage loan will be repaid by way of monthly payments
"COMBINED CREDIT BALANCE"
The meaning given to it on page 88
"COMBINED DEBIT BALANCE"
The meaning given to it on page 88
"COMPTROLLER"
The United States Office of the Comptroller of the Currency
"CONNECTIONS BENEFIT"
The meaning given to it on page 89
"CONNECTIONS COMBINED
CREDIT BALANCE"
The meaning given to it on page 89
"CONNECTIONS DEBIT
BALANCE"
The meaning given to it on page 89
"CONNECTIONS INTEREST"
The meaning given to it on page 89
"CONNECTIONS MORTGAGE
LOAN"
A type of flexible mortgage loan, the primary characteristics of
which are described on page 88
"CONTRIBUTION"
The consideration in the form of cash provided to the mortgages
trustee by any beneficiary in respect of the share of that
beneficiary in the trust property under the mortgages trust deed,
being any of an initial contribution, a further contribution or a
deferred contribution
"CONTROLLED AMORTIZATION
AMOUNT"
On any payment date before the occurrence of a trigger event or the
enforcement of the issuer security in respect of any issuer:
(a) for any note or class of notes issued by an issuer which is a
controlled amortization note or class of such notes, the
maximum aggregate principal amount which may be repaid by such
issuer to the relevant noteholder or noteholders of such class
on that payment date in accordance with the relevant note; or
(b) for an intercompany loan, the maximum aggregate principal
amount which may be repaid by Funding to an issuer in respect
of the related intercompany loan on that payment date (which
will be equal to the aggregate of the controlled amortization
amounts due on that payment date under the notes issued by
such issuer)
298
"CONTROLLED AMORTIZATION
NOTE"
Any note where, before the occurrence of a trigger event or the
enforcement of the issuer security, the conditions of that note
impose a limit on the amount of principal which may be repaid by the
issuer of such note to the relevant noteholder for that note on any
payment date. All of the notes issued by the issuer and the previous
issuers are controlled amortization notes
"CORE TERMS"
The main subject matter of the contract
"CORPORATE SERVICES
AGREEMENT"
With respect to any issuer, the corporate services agreement, as
amended from time to time, entered into on or before the closing
date of the issue of the relevant notes among, inter alios, the
corporate services provider, Holdings, the post enforcement call
option holder and such issuer, for the provision by the corporate
services provider of certain corporate services, and with respect to
Funding and the mortgages trustee, the corporate services agreement
entered into on March 26, 2001, as amended from time to time, among,
inter alios, the corporate services provider, Funding and the
mortgages trustee for the provision by the corporate services
provider of certain corporate services
"CORPORATE SERVICES
PROVIDER"
With respect to the issuer, Law Debenture Corporate Services
Limited, and with respect to Funding, Mourant & Co. Capital (SPV)
Limited, and with respect to the mortgages trustee, Mourant & Co.
Limited, or any other person or persons for the time being acting as
corporate services provider under the corporate services agreement
"CPR" or "CONSTANT
PAYMENT RATE"
Unless otherwise defined in this prospectus, represents a constant
rate of scheduled and unscheduled repayments on the mortgage loans
in the mortgage portfolio each month relative to the aggregate
principal amount outstanding of those mortgage loans
"CRYSTALLIZE"
When a floating charge becomes a fixed charge
"CURRENCY RATE SWAP
PROVIDER"
Either of the dollar currency swap provider and/or the euro currency
swap provider
"CURRENCY SWAP
AGREEMENTS"
The dollar currency swap agreements and the euro currency swap
agreements
"CURRENCY SWAP PROVIDER
DEFAULT"
The occurrence of an event of default (as defined in the relevant
currency swap agreement) where the related currency rate swap
provider is the defaulting party (or the affected party (each as
defined in the relevant currency swap agreement)
"CURRENCY SWAPS"
The dollar currency swaps and the euro currency swaps
"CURRENT BALANCE"
For any mortgage loan as at any given date, the aggregate (but
avoiding double counting) of:
(1) the original principal amount advanced to the relevant
borrower and any further amount advanced on or before the
given date to the relevant borrower secured or intended to be
secured by the related mortgage; and
(2) the amount of any re-draw under any flexible mortgage loan
secured or intended to be secured by the related mortgage; and
299
(3) any interest, disbursement, legal expense, fee, charge, rent,
service charge, premium or payment which has been properly
capitalized in accordance with the relevant mortgage
conditions or with the relevant borrower's consent and added
to the amounts secured or intended to be secured by that
mortgage loan (including interest capitalized on any re-draw
under a flexible mortgage loan); and
(4) any other amount (other than unpaid interest) which is due or
accrued (whether or not due) and which has not been paid by
the relevant borrower and has not been capitalized in
accordance with the relevant mortgage conditions or with the
relevant borrower's consent but which is secured or intended
to be secured by that mortgage loan
as at the end of the London business day immediately preceding
that given date less any repayment or payment of any of the
foregoing made on or before the end of the London business day
immediately preceding that given date and excluding any
retentions made but not released and any further advances
committed to be made but not made by the end of the London
business day immediately preceding that given date
"CURRENT FUNDING SHARE"
The amount of trust property beneficially owned by Funding from time
to time, as described further in "THE MORTGAGES TRUST"
"CURRENT FUNDING SHARE
PERCENTAGE"
The percentage share of Funding's interest in the trust property
from time to time, as described further in "THE MORTGAGES TRUST"
"CURRENT SELLER SHARE"
The amount of trust property beneficially owned by the seller from
time to time, as described further in "THE MORTGAGES TRUST"
"CURRENT SELLER SHARE
PERCENTAGE"
The percentage share of the seller's interest in the trust property
from time to time, as described further in "THE MORTGAGES TRUST"
"CUT-OFF DATE"
July 31, 2003
"CUT-OFF DATE MORTGAGE
PORTFOLIO"
As of the cut off date, the initial mortgage portfolio and the
further mortgage portfolios (taking account of, among other things,
amortization of mortgage loans in that portfolio and the addition
and/or removal of any mortgage loans to or from that portfolio since
March 26, 2001) combined with the additional mortgage portfolio
"DEFERRED CONTRIBUTION"
The consideration in the form of cash payable by Funding to the
mortgages trustee from time to time in respect of the Funding share
of the trust property pursuant to and in accordance with the
mortgages trust deed and/or the Funding deed of charge, which
contribution will fund the payment by the mortgages trustee to the
seller of the deferred purchase price payable by the mortgages
trustee to the seller from time to time pursuant to and in
accordance with the mortgage sale agreement
300
"DEFERRED PURCHASE PRICE"
That portion of the purchase price for the initial mortgage
portfolio and of the purchase price (if any) of any other mortgage
portfolio assigned to the mortgages trustee which was not paid to
the seller on the initial closing date or (in the case of any other
mortgage portfolio) the relevant assignment date and which is to be
paid by the mortgages trustee from time to time to the seller from
deferred contributions received by the mortgages trustee from
Funding and otherwise in accordance with the mortgage sale agreement
"DIRECT DEBIT"
A payment made directly by a borrower from its bank account to a
collection account
"DIRECTIVE"
The meaning given to it on page 60
"DISCOUNT RATE MORTGAGE
LOAN"
A type of mortgage loan, the primary characteristics of which are
described on page 89
"DISTRIBUTION DATE"
The date on which the mortgages trust terminates and the London
business day determined by the cash manager falling no later than 6
business days after each trust determination date
"DOLLAR CURRENCY SWAP
AGREEMENTS"
The ISDA master agreements, schedules thereto and confirmations
thereunder relating to the dollar currency swaps to be entered into
on or about the closing date, and any credit support annexes or
other credit support documents entered into at any time, as amended
from time to time, among the issuer, the dollar currency swap
provider and the note trustee and/or any credit support provider and
includes any additional and/or replacement dollar currency swap
agreement entered into by the issuer from time to time in connection
with the notes
"DOLLAR CURRENCY SWAP
PROVIDER"
Swiss Re Financial Products Corporation and/or, as applicable,
any other dollar currency swap provider appointed from time to
time in accordance with the transaction documents
"DOLLAR CURRENCY SWAP
PROVIDER DEFAULT"
The occurrence of an event of default or a downgrade termination
event (as defined in the relevant dollar currency swap agreement)
where the dollar currency swap provider is the defaulting party or
the affected party (each as defined in the relevant dollar currency
swap agreement)
"DOLLAR CURRENCY SWAP
RATE"
The rate at which dollars are converted to sterling or, as the case
may be, sterling is converted to dollars under the relevant dollar
currency swap
"DOLLAR CURRENCY SWAPS"
The sterling-dollar currency swaps which enable the issuer to
receive and pay amounts under the intercompany loan in sterling and
to receive and pay amounts under the series 1 notes in dollars, as
described further under "THE SWAP AGREEMENTS -- THE DOLLAR CURRENCY
SWAPS"
"DTC"
The Depository Trust Company
"DTI"
The UK Department of Trade and Industry
"EARLY REPAYMENT CHARGE"
Any charge or fee for which the mortgage conditions applicable to a
mortgage loan require the relevant borrower to pay in the event that
all or part of that mortgage loan is repaid before a certain date,
including repayment of any cashback
"ENCUMBRANCE"
The same meaning as "SECURITY INTEREST"
301
"ENFORCEMENT PROCEDURES"
The procedures for the enforcement of mortgages undertaken by the
administrator from time to time in accordance with the
administration procedures
"ENTERPRISE ACT"
The UK Enterprise Act 2002
"ERISA"
The United States Employee Retirement Income Security Act of 1974,
as amended. See further "ERISA CONSIDERATIONS"
"ESIS"
The meaning given to it on page 58
"EURIBOR"
EURIBOR will be determined by the agent bank on the following basis:
(1) on the applicable interest determination date the agent bank
will determine the offered quotation to leading banks for
deposits in euro for a period equal to the relevant interest
period.
This will be determined by reference to the display as quoted
on the Dow Jones/Telerate Screen No. 248. If the Dow
Jones/Telerate Screen No. 248 stops providing these
quotations, the replacement service for the purposes of
displaying this information will be used. If the replacement
service stops displaying the information, another page as
determined by the issuer with the approval of the note trustee
will be used.
In each of these cases, the determination will be made as at
or about 11:00 a.m., Brussels time, on that date. This is
called the screen rate for the series 2 notes;
(2) if, on any of these interest determination dates, the screen
rate is unavailable, the agent bank will:
request the principal London office of each of the reference
banks to provide the agent bank with its offered quotation to
prime banks for euro deposits of the equivalent amount, and
for a time equal to the relevant interest period, in the
Eurozone inter-bank market as at or about 11:00 a.m. (Brussels
time); and
calculate the arithmetic mean, rounded upwards to five decimal
places, of those quotations;
(3) if on any of these interest determination dates the screen
rate is unavailable and only two or three of the reference
banks provide offered quotations, the relevant rate for that
interest period will be the arithmetic mean of the quotations
as calculated in (2);
and
(4) if fewer than two reference banks provide quotations, the
agent bank will consult with the note trustee and the issuer
for the purpose of agreeing a total of two banks to provide
these quotations and the relevant rate for that interest
period will be the arithmetic mean of the quotations as
calculated in (2). If none of these banks agree, then the
relevant rate for that interest period will be the rate in
effect for the last preceding interest period for which (1) or
(2) was applicable
302
"EURO CURRENCY SWAP
AGREEMENTS"
The ISDA master agreements, schedules thereto and confirmations
thereunder relating to the euro currency swaps to be entered into on
or about the closing date, and any credit support annexes or other
credit support documents entered into at any time, as amended from
time to time, between the issuer, the euro currency swap provider
and the note trustee and/or any credit support provider and includes
any additional and/or replacement euro currency swap agreement
entered into by the issuer from time to time in connection with the
notes
"EURO CURRENCY SWAP
PROVIDER"
Citibank, N.A., acting through its London Branch at Citigroup
Centre, Canada Square, Canary Wharf, London E14 5LB and/or, as
applicable, any other euro currency swap provider appointed from
time to time in accordance with the transaction documents
"EURO CURRENCY SWAP
PROVIDER DEFAULT"
The occurrence of an event of default or a downgrade termination
event (as defined in the relevant euro currency swap agreement)
where the euro currency swap provider is the defaulting party or the
affected party (each as defined in the relevant euro currency swap
agreement)
"EURO CURRENCY SWAP RATE"
The rate at which euro are converted to sterling or, as the case may
be, sterling is converted to euro, under the relevant euro currency
swap
"EURO CURRENCY SWAPS"
The sterling-euro currency swaps which enable the issuer to receive
and pay amounts under the intercompany loan in sterling and to
receive and pay amounts under the series 2 notes in euro, as
described further in "THE SWAP AGREEMENTS -- THE EURO CURRENCY
SWAPS"
"EUROCLEAR"
The Euroclear system
"EUROCLEAR OPERATOR"
Euroclear Bank S.A./N.V., as operator of the Euroclear system
"EUROZONE"
The region comprised of the member states of the European Union that
adopt the single currency in accordance with the Treaty of Rome of
March 25, 1957, establishing the European Community, as amended from
time to time
"EVENT OF DEFAULT"
as the context requires, any of the following:
(a) for any notes, an event of default under the terms and
condition of those notes; or
(b) for an intercompany loan agreement, the occurrence of an event
of default under the terms and conditions of that intercompany
loan
"EXCHANGE ACT"
The United States Securities Exchange Act of 1934, as amended
"EXISTING BORROWERS' REFIX
RATE"
At any date, the fixed rate then being offered to those of the
seller's existing borrowers who at that date are seeking to fix the
rate of interest payable under their existing fixed rate mortgage
loans
"FIFTH ISSUER"
Granite Mortgages 03-1 plc
"FIFTH ISSUER NOTES"
The notes issued by the fifth issuer on January 27, 2003
"FIFTH ISSUER INTERCOMPANY
LOAN"
The intercompany loan entered into on January 27, 2003 between the
fifth issuer and Funding
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"FILED PLAN"
With respect to the identification of a property, a plan retained at
H.M. Land Registry indicating the location of the related land
"FINAL DEFERRED
CONTRIBUTION"
An amount equal to the aggregate amount standing to the credit of
the Funding bank accounts (including any account established by
Funding for the purpose of any issuer reserve fund and/or any issuer
liquidity reserve fund of any issuer) after making any payments
ranking in priority, subject to and in accordance with the relevant
Funding priority of payments
"FINAL MATURITY DATE"
For the series 1 class A1 notes, means the payment date falling in
January 2019;
For the series 1 class A2 notes, means the payment date falling in
January 2024;
For the series 1 class A3 notes, means the payment date falling in
January 2044;
For the series 1 class B notes, means the payment date falling in
January 2044;
For the series 1 class M notes, means the payment date falling in
January 2044;
For the series 1 class C notes, means the payment date falling in
January 2044;
For the series 2 class A notes, means the payment date falling in
January 2044;
For the series 2 class B notes, means the payment date falling in
January 2044;
For the series 2 class M notes, means the payment date falling in
January 2044;
For the series 2 class C notes, means the payment date falling in
January 2044;
For the series 3 class A notes, means the payment date falling in
January 2044;
For the series 3 class B notes, means the payment date falling in
January 2044;
For the series 3 class M notes, means the payment date falling in
January 2044; and
For the series 3 class C notes, means the payment date falling in
January 2044;
and, in relation to any series and class of notes of a previous
issuer or a new issuer, such final maturity date as may be
identified as such for that series and class of notes of that issuer
"FINAL REPAYMENT DATE"
For the intercompany loan, the payment date falling in January 2044,
for the intercompany loan made by the first issuer, the payment date
falling in January 2041; for the intercompany loan made by the
second issuer, the payment date falling in October 2041; for the
intercompany loans made by the third issuer and the fourth issuer,
the payment date falling in April 2042; for the intercompany loan
made by the fifth issuer, the payment date falling in January 2043;
and for the intercompany loan made by the sixth issuer, the payment
date falling in July 2043
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"FINANCIAL SERVICES ACT"
The Legislative Decree No.58 of February 24, 1998 of the Republic of
Italy
"FIRST ISSUER"
Granite Mortgages 01-1 plc
"FIRST ISSUER NOTES"
The notes issued by the first issuer on March 26, 2001
"FIRST ISSUER INTERCOMPANY
LOAN"
The intercompany loan entered into on March 26, 2001 between the
first issuer and Funding
"FITCH"
Fitch Ratings Ltd., including any successor to its ratings business
"FIXED RATE MORTGAGE LOAN"
A mortgage loan which is subject to a fixed rate of interest set by
reference to a predetermined rate or series of rates for a fixed
period or periods
"FIXED RATE PERIOD"
For any fixed rate mortgage loan or other mortgage loan offered with
a fixed rate, the period agreed between the borrower and the seller
as set out under the mortgage conditions, during which the interest
rate applicable to that mortgage loan will remain fixed and after
which the borrower may be entitled to apply for a new fixed rate of
interest
"FIXED SECURITY"
A form of security which means that the chargor is not allowed to
deal with the assets subject to the charge without the consent of
the chargee
"FLEXIBLE CAPPED RATE
MORTGAGE LOANS"
Flexible mortgage loans with the same basic features as a Together
mortgage loan (other than allowing the borrower to obtain an
unsecured loan) which are subject to a maximum rate of interest for
a specified period of time, and at the expiration of that period are
generally subject to the seller's standard variable rate
"FLEXIBLE FIXED RATE
MORTGAGE LOAN"
Flexible mortgage loans with the same basic features as a Together
mortgage loan (other than allowing the borrower to obtain an
unsecured loan) which are subject to a fixed rate of interest for a
specified period of time, and at the expiration of that period are
generally subject to the seller's standard variable rate
"FLEXIBLE MORTGAGE LOAN"
A type of mortgage loan product that typically incorporates features
that give the borrower options (which may be subject to certain
conditions) to, among other things, make further drawings on the
mortgage loan account, and/or to overpay or underpay interest and
principal in a given month and/or to take a payment holiday. The
types of flexible mortgage loan products currently offered by the
seller are described under "THE MORTGAGE LOANS -- CHARACTERISTICS OF
THE MORTGAGE LOANS -- FLEXIBLE MORTGAGE LOANS"
"FLEXIBLE TRACKER RATE
MORTGAGE LOANS"
A type of flexible mortgage loan, the primary characteristics of
which are described on page 89
"FLOATING SECURITY"
A form of security which is not attached to specific assets but
which "FLOATS" over a class of them and which allows the chargor to
deal with those assets in the every day course of its business, up
until the point that the floating security is enforced if other
specified events occur (most often a default), at which point it
crystallizes into a fixed security
"FOURTH ISSUER"
Granite Mortgages 02-2 plc
"FOURTH ISSUER NOTES"
The notes issued by the fourth issuer on September 23, 2002
305
"FOURTH ISSUER INTERCOMPANY LOAN"
The intercompany loan entered into on September 23, 2002 between the
fourth issuer and Funding
"FSA"
The UK Financial Services Authority
"FSMA"
The UK Financial Services and Markets Act 2000
"FUNDING"
Granite Finance Funding Limited
"FUNDING AVAILABLE
PRINCIPAL RECEIPTS"
The meaning given to it on page 178
"FUNDING AVAILABLE REVENUE RECEIPTS"
The meaning given to it on page 168
"FUNDING BANK ACCOUNTS"
The Funding GIC account, the Funding (Granite 03-3) GIC account, the
Funding (Granite 03-2) GIC account, the Funding (Granite 03-1) GIC
account, the Funding (Granite 02-2) GIC account, the Funding
(Granite 02-1) GIC account, the Funding (Granite 01-2) GIC account,
the Funding (Granite 01-1) GIC account and the Funding transaction
account, each as further described under "FUNDING'S BANK ACCOUNTS"
and each other bank account (if any) opened in the name of Funding
"FUNDING CHARGED
PROPERTY"
The property, assets and undertaking of Funding which from time to
time are or are expressed to be mortgaged, charged, assigned,
pledged or otherwise encumbered to, or in favor of the security
trustee for itself and for the Funding secured creditors under the
Funding deed of charge
"FUNDING CONTRIBUTION
DATE"
Any date (including, in connection with the issuance of the notes,
the closing date) on which Funding makes a further contribution to
the mortgages trustee in connection with Funding's purchase of an
increased beneficial interest in the trust property, on which date
the mortgages trustee will also pay to the seller an initial
consideration equal to the amount of such further contribution
"FUNDING DEED OF CHARGE"
The deed of charge entered into on March 26, 2001, as amended from
time to time, among Funding, the security trustee, and the Funding
secured creditors as at the closing date including any deeds of
accession or supplements thereto
"FUNDING GIC ACCOUNT"
The account in the name of Funding held at the account bank and
maintained subject to the terms of the Funding guaranteed investment
contract, the bank account agreement and the Funding deed of charge,
or any additional or replacement account as may for the time being
be in place with the prior consent of the security trustee
"FUNDING GIC PROVIDER"
Lloyds TSB Bank plc acting through its office at Treasury Division,
25 Monument Street, London EC3R 8BQ or any other person or persons
as are for the time being the Funding GIC provider under the Funding
guaranteed investment contract and any Funding (Issuer) guaranteed
investment contract
"FUNDING (GRANITE 01-1)
BANK ACCOUNT AGREEMENT"
The agreement entered into on March 26, 2001, as amended from time
to time, among the account bank, Funding and others which governs
the operation of the Funding (Granite 01-1) GIC account
"FUNDING (GRANITE 01-1)
GIC ACCOUNT"
The account in the name of Funding into which is deposited amounts
in respect of the related issuer reserve fund and the issuer
liquidity reserve fund, if any, established for the benefit
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of the first issuer, which account is held at the account bank
and maintained subject to the terms of the related Funding (Granite
01-1) guaranteed investment contract, the related Funding (Granite
01-1) bank account agreement and the Funding deed of charge, or
any additional or replacement account as may for the time being
be in place with the prior consent of the security trustee
"FUNDING (GRANITE 01-1)
GUARANTEED INVESTMENT
CONTRACT"
The guaranteed investment contract entered into with respect to the
first issuer among Funding, the Funding GIC provider and others, as
amended from time to time, under which the Funding GIC provider
agrees to pay Funding a guaranteed rate of interest on the balance
from time to time of the Funding (Granite 01-1) GIC account
"FUNDING (GRANITE 01-2)
BANK ACCOUNT AGREEMENT"
The agreement entered into on September 28, 2001, as amended from
time to time, among the account bank, Funding and others which
governs the operation of the Funding (Granite 01-2) GIC account
"FUNDING (GRANITE 01-2)
GIC ACCOUNT"
The account in the name of Funding into which will be deposited
amounts in respect of the related issuer reserve fund and the issuer
liquidity reserve fund, if any, established for the benefit of the
second issuer, which account is held at the account bank and
maintained subject to the terms of the related Funding (Granite
01-2) guaranteed investment contract, the related Funding (Granite
01-2) bank account agreement and the Funding deed of charge, or any
additional or replacement account as may for the time being be in
place with the prior consent of the security trustee
"FUNDING (GRANITE 01-2)
GUARANTEED INVESTMENT
CONTRACT"
The guaranteed investment contract entered into with respect to the
second issuer among Funding, the Funding GIC provider and others, as
amended from time to time, under which the Funding GIC provider
agrees to pay Funding a guaranteed rate of interest on the balance
from time to time of the Funding (Granite 01-2) GIC account
"FUNDING (GRANITE 02-1)
BANK ACCOUNT AGREEMENT"
The agreement entered into on March 20, 2002, as amended from time
to time, among the account bank, Funding and others which governs
the operation of the Funding (Granite 02-1) GIC account
"FUNDING (GRANITE 02-1)
GIC ACCOUNT"
The account in the name of Funding into which is deposited amounts
in respect of the related issuer reserve fund and the issuer
liquidity reserve fund, if any, established for the benefit of the
third issuer, which account is held at the account bank and
maintained subject to the terms of the related Funding (Granite
02-1) guaranteed investment contract, the related Funding (Granite
02-1) bank account agreement and the Funding deed of charge, or any
additional or replacement account as may for the time being be in
place with the prior consent of the security trustee
"FUNDING (GRANITE 02-1)
GUARANTEED INVESTMENT
CONTRACT"
The guaranteed investment contract entered into with respect to the
third issuer among Funding, the Funding GIC provider and others
under which the Funding GIC provider agrees to pay Funding a
guaranteed rate of interest on the balance from time to time of the
Funding (Granite 02-1) GIC account
307
"FUNDING (GRANITE 02-2)
BANK ACCOUNT AGREEMENT"
The agreement entered into on September 23, 2002, as amended from
time to time, among the account bank, Funding and others which
governs the operation of the Funding (Granite 02-2) GIC account
"FUNDING (GRANITE 02-2)
GIC ACCOUNT"
The account in the name of Funding into which is deposited amounts
in respect of the related issuer reserve fund and the issuer
liquidity reserve fund, if any, established for the benefit of the
fourth issuer, which account is held at the account bank and
maintained subject to the terms of the related Funding (Granite
02-2) guaranteed investment contract, the related Funding (Granite
02-2) bank account agreement and the Funding deed of charge, or any
additional or replacement account as may for the time being be in
place with the prior consent of the security trustee
"FUNDING (GRANITE 02-2)
GUARANTEED INVESTMENT
CONTRACT"
The guaranteed investment contract entered into with respect to the
fourth issuer among Funding, the Funding GIC provider and others, as
amended from time to time, under which the Funding GIC provider
agrees to pay Funding a guaranteed rate of interest on the balance
from time to time of the Funding (Granite 02-2) GIC account
"FUNDING (GRANITE 03-1)
BANK ACCOUNT AGREEMENT"
The agreement entered into on January 27, 2003, as amended from time
to time, among the account bank, Funding and others which governs
the operation of the Funding (Granite 03-1) GIC account
"FUNDING (GRANITE 03-1)
GIC ACCOUNT"
The account in the name of Funding into which is deposited amounts
in respect of the related issuer reserve fund and the fifth issuer
liquidity reserve fund, if any, established for the benefit of the
fifth issuer, which account is held at the account bank and
maintained subject to the terms of the related Funding (Granite
03-1) guaranteed investment contract, the related Funding (Granite
03-1) bank account agreement and the Funding deed of charge, or any
additional or replacement account as may for the time being be in
place with the prior consent of the security trustee
"FUNDING (GRANITE 03-1)
GUARANTEED INVESTMENT
CONTRACT"
The guaranteed investment contract entered into with respect to the
fifth issuer among Funding, the Funding GIC provider and others, as
amended from time to time, under which the Funding GIC provider
agrees to pay Funding a guaranteed rate of interest on the balance
from time to time of the Funding (Granite 03-1) GIC account
"FUNDING (GRANITE 03-2)
BANK ACCOUNT AGREEMENT"
The agreement to be entered into on or about the closing date, as
amended from time to time, among the account bank, Funding and
others which governs the operation of the Funding (Granite 03-3) GIC
account
"FUNDING (GRANITE 03-2)
GIC ACCOUNT"
The account in the name of Funding into which is deposited amounts
in respect of the related issuer reserve fund and the sixth issuer
liquidity reserve fund, if any, established for the benefit of the
sixth issuer, which account is held at the account bank and
maintained subject to the terms of the related Funding (Granite
03-2) guaranteed investment contract, the related Funding (Granite
03-2) bank account agreement and
308
the Funding deed of charge, or any additional or replacement
account as may for the time being be in place with the prior
consent of the security trustee
"FUNDING (GRANITE 03-2)
GUARANTEED INVESTMENT
CONTRACT"
The guaranteed investment contract to be entered into on or about
the closing date with respect to the sixth issuer among Funding, the
Funding GIC provider and others, as amended from time to time,
under which the Funding GIC provider agrees to pay Funding a
guaranteed rate of interest on the balance from time to time of
the Funding (Granite 03-2) GIC account
"FUNDING (GRANITE 03-3)
BANK ACCOUNT AGREEMENT"
The agreement to be entered into on or about the closing date, as
amended from time to time, among the account bank, Funding and
others which governs the operation of the Funding (Granite 03-3) GIC
account
"FUNDING (GRANITE 03-3)
GIC ACCOUNT"
The account in the name of Funding into which is deposited amounts
in respect of the related issuer reserve fund and the issuer
liquidity reserve fund, if any, established for the benefit of the
issuer, which account is held at the account bank and maintained
subject to the terms of the related Funding (Granite 03-3)
guaranteed investment contract, the related Funding (Granite 03-3)
bank account agreement and the Funding deed of charge, or any
additional or replacement account as may for the time being be in
place with the prior consent of the security trustee
"FUNDING (GRANITE 03-3)
GUARANTEED INVESTMENT
CONTRACT"
The guaranteed investment contract to be entered into on or about
the closing date with respect to the issuer among Funding, the
Funding GIC provider and others, as amended from time to time, under
which the Funding GIC provider agrees to pay Funding a guaranteed
rate of interest on the balance from time to time of the Funding
(Granite 03-3) GIC account
"FUNDING GUARANTEED
INVESTMENT CONTRACT"
The guaranteed investment contract entered into on March 26, 2001,
as amended from time to time, among Funding, the Funding GIC
provider and others under which the Funding GIC provider agrees to
pay Funding a guaranteed rate of interest on the balance from time
to time of the Funding GIC account
"FUNDING (ISSUER) BANK
ACCOUNT AGREEMENT"
In respect of any issuer, the agreement, as amended from time to
time, entered into among the account bank, Funding and others which
governs the operation of the Funding (Issuer) GIC account for that
issuer
"FUNDING (ISSUER) GIC
ACCOUNT"
In respect of any issuer, the account in the name of Funding and
identified by reference to the related issuer into which will be
deposited amounts in respect of the related issuer reserve fund and
the related issuer liquidity reserve fund, if any, which account is
held at the account bank and maintained subject to the terms of the
related Funding (Issuer) guaranteed investment contract, the related
Funding (Issuer) bank account agreement and the Funding deed of
charge, or any additional or replacement account as may for the time
being be in place with the prior consent of the security trustee
"FUNDING (ISSUER)
GUARANTEED INVESTMENT
CONTRACT"
In respect of any issuer, the guaranteed investment contract entered
into with respect to that issuer, each among Funding, the Funding
GIC provider and others under which the Funding
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GIC provider agrees to pay Funding a guaranteed rate of interest
on the balance from time to time of the Funding (Issuer) GIC
account for the related issuer
"FUNDING POST-
ENFORCEMENT PRIORITY OF
PAYMENTS"
The provisions and the order of priority set out in a schedule to
the Funding deed of charge in which Funding available revenue
receipts, Funding available principal receipts and all
other monies, income, receipts and recoveries of Funding or the
security trustee or any receiver of Funding and the proceeds of
enforcement of the Funding security are to be applied following
service of an intercompany loan enforcement notice or otherwise
following an enforcement of the Funding security, as described under
"CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS
AND FUNDING AVAILABLE REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE
FUNDING SECURITY"
"FUNDING PRE-ENFORCEMENT
PRINCIPAL PRIORITY OF
PAYMENTS"
The provisions and the order of priority of payments set out in a
schedule to the Funding deed of charge in which Funding available
principal receipts will be applied until enforcement of the Funding
security, which is as described under "CASHFLOWS -- DISTRIBUTION OF
FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE
FUNDING SECURITY"
"FUNDING PRE-ENFORCEMENT
REVENUE PRIORITY OF
PAYMENTS"
The provisions and the order of priority of payments set out in a
schedule to the Funding deed of charge in which Funding available
revenue receipts will be applied until enforcement of the Funding
security, which is as described under "CASHFLOWS -- DISTRIBUTION OF
FUNDING AVAILABLE REVENUE RECEIPTS"
"FUNDING PRINCIPAL LEDGER"
The ledger on which receipts and payments of Funding principal
receipts will be recorded by the cash manager
"FUNDING PRINCIPAL
RECEIPTS"
The mortgage trustee principal receipts paid by the mortgages
trustee to Funding on each distribution date
"FUNDING PRIORITY OF
PAYMENTS"
As the context requires, any of the Funding pre-enforcement revenue
priority of payments, the Funding pre-enforcement principal priority
of payments and/or the Funding post- enforcement priority of
payments
"FUNDING RESERVE FUND"
The reserve fund established in the name of Funding on March 26,
2001 up to an amount not exceeding the Funding reserve required
amount as further described under "CREDIT STRUCTURE -- FUNDING
RESERVE FUND"
"FUNDING RESERVE LEDGER"
The ledger maintained by the cash manager in the name of Funding to
record the amount credited to the Funding reserve fund on the
initial closing date, and subsequent withdrawals from and deposits
into the Funding reserve fund
"FUNDING RESERVE REQUIRED
AMOUNT"
As of any date of determination an amount calculated in accordance
with the formula set out on page 200
"FUNDING REVENUE LEDGER"
The ledger on which the cash manager records all monies received and
paid out by Funding during an interest period other than the Funding
principal receipts
"FUNDING SECURED
CREDITORS"
The security trustee (and any receiver of Funding appointed under
the Funding deed of charge), the issuer, the previous issuers, the
corporate services provider in respect of Funding, the account bank,
the Funding GIC provider, the mortgages trustee, the start-up loan
provider, the cash manager and any
310
new Funding secured creditor who accedes to the Funding deed of
charge from time to time under a deed of accession or supplemental
deed
"FUNDING SECURITY"
The mortgages, charges, assignments, pledges and/or any other
security created by Funding under or pursuant to the Funding deed of
charge in favor of the security trustee for the benefit of the
Funding secured creditors
"FUNDING SHARE"
The current Funding share of the trust property calculated in
accordance with the formula set out on pages 146, 147 and 148
"FUNDING SHARE
PERCENTAGE"
The current Funding share percentage of the trust property
calculated in accordance with the formula set out on pages 146, 147
and 148
"FUNDING SHARE/SELLER
SHARE LEDGER"
The ledger maintained by the cash manager, on behalf of the
mortgages trustee and the beneficiaries, to record the current
Funding share, the current Funding share percentage, the current
seller share and the current seller share percentage of the trust
property
"FUNDING TRANSACTION
ACCOUNT"
The account in the name of Funding held with the account bank and
maintained subject to the terms of the bank account agreement and
the Funding deed of charge, or any additional or replacement account
as may, for the time being, be in place with the prior consent of
the security trustee
"FUNDING TRANSACTION
DOCUMENTS"
Each of the following documents:
(a) the mortgages trust deed;
(b) the mortgage sale agreement;
(c) the administration agreement;
(d) the Funding deed of charge;
(e) the corporate services agreement;
(f) the bank account agreement;
(g) each Funding (Issuer) bank account agreement;
(h) Funding (Issuer) guaranteed investment contracts;
(i) the Funding guaranteed investment contract;
(j) the cash management agreement;
(k) the start-up loan agreements;
(l) the collection bank agreement;
(m) the intercompany loan agreement;
(n) each previous intercompany loan agreement;
(o) each new intercompany loan agreement to be entered into by
Funding; and
(p) each other deed, document, agreement, instrument or certificate
entered into or to be entered into by Funding under or in connection
with any of the documents set out in paragraphs (a) through (o)
above or the transactions contemplated in them
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"FURTHER ADVANCE"
For any mortgage loan, any advance of further money to the relevant
borrower following the making of the initial advance of monies under
the mortgage and which is secured by the same mortgage, excluding
the amount of any retention in respect of the initial advance and
excluding any re-draw in respect of any flexible mortgage loan
"FURTHER CONTRIBUTION"
The consideration in the form of cash payable by any beneficiary to
the mortgages trustee to increase the Funding share or, as the case
may be, the seller share of the trust property pursuant to and in
accordance with the terms of the mortgages trust deed, but excluding
any initial contribution or deferred contribution paid by Funding
"FURTHER MORTGAGE LOAN"
Any mortgage loan which was assigned by the seller to the mortgages
trustee after March 26, 2001 and before August 18, 2003 under the
terms of the mortgage sale agreement and referenced by its mortgage
loan identifier number and comprising the aggregate of all principal
sums, interest, costs, charges, expenses and other monies (including
all further advances) due or owing with respect to that mortgage
loan under the relevant mortgage conditions by a borrower on the
security of a mortgage from time to time outstanding or, as the
context may require, the borrower's obligations in respect of the
same
"FURTHER MORTGAGE
PORTFOLIOS"
The portfolios of further mortgage loans, their related security,
accrued interest and other amounts derived from such further
mortgage loans that the seller assigned to the mortgages trustee
after March 26, 2001 and before August 18, 2003
"GLOBAL NOTE CERTIFICATES"
The note certificates representing the notes in global form
"GROUP"
The seller and its subsidiaries
"HOLDINGS"
Granite Finance Holdings Limited
"HOUSING INDICES"
The UK Nationwide House Price Index and Halifax Price Index
"ICTA"
The Income and Corporation Tax Act 1988
"IN ARREARS"
For a mortgage account, occurs when one or more monthly payments on
that mortgage account have become due and unpaid by a borrower
"INDIVIDUAL NOTE
CERTIFICATES"
The note certificates representing the notes in definitive form
"INITIAL CLOSING DATE"
March 26, 2001
"INITIAL CONSIDERATION"
A payment made by the mortgages trustee to the seller from principal
receipts held by the mortgages trustee for the purpose of increasing
Funding's beneficial interest in the trust property as of the
closing date in respect of any further contribution paid by Funding
to the mortgages trustee, which payment may be made on any date,
including any payment date, as further described under "THE
MORTGAGES TRUST -- INCREASING THE FUNDING SHARE OF THE TRUST
PROPERTY"
"INITIAL CONTRIBUTION"
The consideration in the form of cash paid by Funding to the
mortgages trustee in respect of the Funding share of the trust
property pursuant to and in accordance with the mortgages trust
deed, which contribution is to fund the payment to the seller by the
mortgages trustee of (and is equal to) the initial
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purchase price in respect of the initial mortgage portfolio or,
as the case may be, the further mortgage portfolio, the additional
assigned mortgage portfolio or (if any is payable) any new mortgage
portfolio assigned to the mortgages trustee and is to be
funded from the proceeds of the intercompany loan, each previous
intercompany loan or any new intercompany loan, as the case may be
"INITIAL MORTGAGE LOANS"
The portfolio of residential first mortgage loans and their related
security assigned by the seller to the mortgages trustee on March
26, 2001 under the mortgage sale agreement
"INITIAL MORTGAGE PORTFOLIO"
The portfolio of mortgage loans, their related security, accrued
interest and other amounts, proceeds, powers, rights, benefits and
interests derived from such mortgage loans that the seller assigned
to the mortgages trustee on March 26, 2001
"INITIAL PURCHASE PRICE"
That portion of the purchase price paid by the mortgages trustee to
the seller on the initial closing date in consideration for the
assignment to the mortgages trustee of the initial mortgage
portfolio or that portion of the purchase price (if any) payable by
the mortgages trustee to the seller on the relevant assignment date
in consideration for the assignment to the mortgages trustee of the
further mortgage portfolios or any new mortgage portfolio, in each
case in accordance with the provisions of the mortgage sale
agreement
"INITIAL TRUST PROPERTY"
The sum of [GBP]100 that the corporate services provider settled on
trust and held on trust absolutely as to both capital and income by
the mortgages trustee for the benefit of the beneficiaries
"INSOLVENCY EVENT"
For the seller, the administrator, the cash manager or the issuer
cash manager (each, for the purposes of this definition, a "RELEVANT
ENTITY"):
(a) an order is made or an effective resolution passed for the
winding up of the relevant entity (except, in any such case, a
winding-up or dissolution for the purpose of a reconstruction
or amalgamation the terms of which have been previously
approved by the security trustee);
(b) the relevant entity ceases or threatens to cease to carry on
its business or stops payment or threatens to stop payment of
its debts or is deemed unable to pay its debts within the
meaning of section 123(a), (b), (c) or (d) of the Insolvency
Act 1986 (as amended, modified or re-enacted) or becomes
unable to pay its debts as they fall due or the value of its
assets falls to less than the amounts of its liabilities
(taking into account, for both these purposes, contingent and
prospective liabilities) or otherwise becomes insolvent;
(c) (i) proceedings are initiated against the relevant
entity under any applicable liquidation, administration,
reorganization (other than a reorganization where the
relevant entity is solvent) or other similar laws,
except where these proceedings are being contested in
good faith; or
313
(ii) an administrative or other receiver, administrator or
other similar official is appointed in relation to the
whole or any substantial part of the undertaking or
assets of the relevant entity; or
(iii) a distress, execution or diligence or other process is
enforced upon the whole or any substantial part of the
undertaking or assets of the relevant entity and in any
of the foregoing cases it is not discharged within 30
London business days; or
(iv) if the relevant entity initiates or consents to judicial
proceedings relating to itself under any applicable
liquidation, administration, insolvency, reorganization
or other similar laws or makes a conveyance or
assignment for the benefit of its creditors generally;
and
in respect of Funding or the issuer (each, for the
purposes of this definition, a "RELEVANT ENTITY") means:
(a) except for the purposes of an amalgamation or
restructuring as described under the point immediately
following, the relevant entity ceases or threatens to
cease to carry on all or a substantial part of its
business or the relevant entity is deemed unable to pay
its debts within the meaning of section 123(1)(a), (b),
(c) or (d) of the Insolvency Act 1986 (as that section
may be amended, modified or re-enacted) or becomes
unable to pay its debts within the meaning of section
123(2) of the Insolvency Act 1986 (as that section may
be amended, modified or re-enacted); or
(b) an order is made or an effective resolution is passed
for the winding up of the relevant entity (except for
the purposes of or pursuant to an amalgamation,
restructuring or merger previously approved by the note
trustee or the security trustee, as the case may be, or
as approved in writing by an extraordinary resolution
(as defined in the trust deed) of the class A
noteholders); or
(c) (i) proceedings are otherwise initiated against the
relevant entity under any applicable liquidation,
insolvency, composition, reorganization or other
similar laws (including, but not limited to,
presentation of a petition for an administration
order) and (except in the case of presentation of a
petition for an administration order) such
proceedings are not, in the opinion of the note
trustee or the security trustee (as the case may
be), being disputed in good faith with a reasonable
prospect of success; or
(ii) an administration order being granted or an
administrative receiver or other receiver,
liquidator or other similar official being appointed
in relation to the relevant entity or in relation to
the whole or any substantial part of the undertaking
or assets of the relevant entity; or
314
(iii) an encumbrancer taking possession of the whole or
any substantial part of the undertaking or assets of
the relevant entity, or a distress, execution,
diligence or other process being levied or
enforced upon or sued out against the whole or
any substantial part of the undertaking or assets of
the relevant entity and such possession or process
(as the case may be) not being discharged or not
otherwise ceasing to apply within 30 days; or
(iv) the relevant entity initiating or consenting to
judicial proceedings relating to itself under
applicable liquidation, insolvency, composition,
reorganization or other similar laws or making a
conveyance or assignment for the benefit of its
creditors generally
"INTERCOMPANY LOAN"
The loan to be made by the issuer to Funding on the closing date
under the intercompany loan agreement (or, if the context requires,
a previous intercompany loan made by a previous issuer to Funding or
any new intercompany loan made by any new issuer under any new
intercompany loan agreement)
"INTERCOMPANY LOAN
AGREEMENT"
The intercompany loan agreement to be entered into on the closing
date, as amended from time to time, between, among others, Funding,
the issuer and the note trustee (or, if the context requires, the
first intercompany agreement entered into on March 26, 2001, as
amended from time to time, among Funding, the first issuer and the
note trustee, the second intercompany loan agreement entered into on
September 28, 2001 as amended from time to time, among Funding, the
second issuer and the note trustee, the third intercompany loan
agreement entered into on March 20, 2002 as amended from time to
time, among Funding, the third issuer and the note trustee, the
fourth intercompany loan agreement entered into on September 23,
2002 as amended from time to time, among Funding, the fourth issuer
and the note trustee, the fifth intercompany loan agreement entered
into on January 27, 2003 as amended from time to time, among
Funding, the fifth issuer and the note trustee, the sixth
intercompany loan agreement entered into on May 21, 2003, as amended
from time to time, among Funding, the sixth issuer and the note
trustee, and any new intercompany loan agreement entered into from
time to time, among Funding, a new issuer and the note trustee)
"INTERCOMPANY LOAN
AGREEMENTS"
The intercompany loan agreement, each previous intercompany loan
agreement and any new intercompany loan agreements
"INTERCOMPANY LOAN
ENFORCEMENT NOTICE"
An enforcement notice served by the security trustee on Funding for
the enforcement of the Funding security following the occurrence of
an intercompany loan event of default
"INTERCOMPANY LOAN EVENT
OF DEFAULT"
An event of default under the intercompany loan agreement and/or
under any previous intercompany loan agreement and/or under any new
intercompany loan agreement
315
"INTERCOMPANY LOAN
LEDGER"
A ledger maintained by the cash manager to record payments of
interest and fees and repayments of principal made under the
intercompany loan, each previous intercompany loan or any new
intercompany loan
"INTEREST DETERMINATION DATE"
(a) in respect of the series 1 notes and any interest
period for which the applicable rate of interest
shall apply, means the date which is two London
business days before the first day of such
interest period;
(b) in respect of the series 2 notes and any interest
period for which the applicable rate of interest
shall apply, means the date which is two TARGET
business days before the first day of such
interest period; and
(c) in respect of the series 3 notes and any interest
period for which the applicable rate of interest
shall apply, means in respect of the first
interest period, the closing date, and in respect
of each subsequent interest period, the first day
of such interest period
"INTEREST PERIOD"
In relation to each note, (i) with respect to the first payment
date, the period from and including the closing date to but
excluding January 20, 2004, and (ii) thereafter, with respect to
each payment date, the period from and including the preceding
payment date to but excluding such current payment date
"INTERIM CALCULATION
PERIOD"
The meaning given to it on page 146
"INVESTMENT PLAN"
For an interest-only loan, a repayment mechanism selected by the
borrower and intended to provide sufficient funds to redeem the full
principal of a mortgage loan at maturity
"IRS"
The US Internal Revenue Service
"ISA"
An individual savings account within the Individual Savings Account
Regulations 1998 (as amended) and which shelters investments in the
account from income Tax or capital gains tax
"ISSUER"
Granite Mortgages 03-3 plc and/or, if the context specifically
requires, any previous issuer and/or any new issuer
"ISSUER ACCOUNT BANK"
Citibank, N.A., acting through its London branch at 5 Carmelite
Street, London EC4Y 0PA or any other authorized entity as the
issuer may choose with the prior written approval of the note
trustee
"ISSUER ALLOCABLE PRINCIPAL
RECEIPTS"
The meaning given to it on page 178
"ISSUER ALLOCABLE REVENUE
RECEIPTS"
The meaning given to it on page 168
"ISSUER AVAILABLE PRINCIPAL
RECEIPTS"
The meaning given to it on page 193
"ISSUER ARREARS TEST"
The meaning given to it on page 184
"ISSUER AVAILABLE REVENUE
RECEIPTS"
The meaning given to it on page 172
316
"ISSUER BANK ACCOUNT
AGREEMENT"
The bank account agreement to be entered into on or about the
closing date, as amended from time to time, among the issuer, the
issuer cash manager, the issuer account bank and the note trustee
"ISSUER CASH MANAGEMENT
AGREEMENT"
The issuer cash management agreement to be entered into on or about
the closing date, as amended from time to time, among the issuer
cash manager, the issuer and the note trustee, as described further
in "CASH MANAGEMENT FOR THE ISSUER"
"ISSUER CASH MANAGER"
Northern Rock or such other person or persons for the time being
acting, under the issuer cash management agreement, as agent for the
issuer and (following enforcement of the issuer security) the note
trustee for the purposes of, inter alia, managing all cash
transactions and maintaining certain ledgers on behalf of the issuer
and (following enforcement of the issuer security) the note trustee
"ISSUER DEED OF CHARGE"
The deed of charge to be entered into on the closing date, as
amended from time to time, between, among others, the issuer and the
note trustee, under which the issuer charges the issuer security in
favor of the issuer secured creditors, as described further under
"SECURITY FOR THE ISSUER'S OBLIGATIONS"
"ISSUER LIQUIDITY RESERVE
FUND"
The liquidity reserve fund in Funding's name which Funding will be
required to establish if the long-term, unsecured, unsubordinated
and unguaranteed debt obligations of the seller cease to be rated at
least A3 by Moody's or A- by Fitch (unless Moody's or Fitch, as
applicable, confirms that the then current ratings of the notes will
not be adversely affected) and, if the context so requires, any
liquidity reserve fund required to be established by Funding with
respect to any other issuer. The issuer liquidity reserve fund, if
any, will be funded up to the issuer liquidity reserve required
amount
"ISSUER LIQUIDITY RESERVE
LEDGER"
A ledger maintained by the cash manager to record the balance from
time to time of the issuer liquidity reserve fund, if any and, if
the context so requires, any ledger maintained by Funding with
respect to the issuer liquidity reserve fund of any other issuer
"ISSUER LIQUIDITY RESERVE
REQUIRED AMOUNT"
The meaning given to it on page 201
"ISSUER POST-ENFORCEMENT
PRIORITY OF PAYMENTS"
The provisions and the order of priority set out in a schedule to
the issuer deed of charge in which all issuer available revenue
receipts, issuer available principal receipts and all other monies,
income, receipts and recoveries of the issuer or the note trustee or
any receiver of the issuer security are to be applied following
service of a note enforcement notice or otherwise following an
enforcement of the issuer security which on the closing date will be
as described under "CASHFLOWS -- DISTRIBUTION OF ISSUER AVAILABLE
PRINCIPAL RECEIPTS AND ISSUER AVAILABLE REVENUE RECEIPTS FOLLOWING
ENFORCEMENT OF THE ISSUER SECURITY"
"ISSUER PRE-ENFORCEMENT
PRINCIPAL PRIORITY OF
PAYMENTS"
The provisions and the order of priority of payments set out in a
schedule to the issuer cash management agreement in which the issuer
available principal receipts will be applied until enforcement of
the issuer security, which on the closing date
317
will be as described under "CASHFLOWS -- DISTRIBUTION OF ISSUER
AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY AND/OR OCCURRENCE OF A TRIGGER EVENT"
"ISSUER PRE-ENFORCEMENT
REVENUE PRIORITY OF
PAYMENTS"
The provisions and the order of priority of payments set out in a
schedule to the issuer cash management agreement in which the issuer
available revenue receipts will be applied until enforcement of the
issuer security, which on the closing date will be as described
under "CASHFLOWS -- DISTRIBUTION OF ISSUER AVAILABLE REVENUE
RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY"
"ISSUER PRINCIPAL
DEFICIENCY LEDGER"
The ledger maintained by the issuer cash manager in the name of the
issuer which will be established on the closing date and will be
sub-divided into subledgers corresponding to the classes of notes
issued by the issuer in order to record losses allocated to the
intercompany loan of the issuer which are to be applied to the notes
or the application of issuer available principal receipts of the
issuer in paying interest on the notes and certain amounts ranking
in priority thereto in accordance with the issuer pre-enforcement
revenue priority of payments or the application by Funding of issuer
allocable principal receipts of the issuer to fund or replenish any
issuer liquidity reserve fund (if any) of the issuer and, if the
context so requires, any such ledger maintained with respect to any
other issuer)
"ISSUER PRIORITY OF
PAYMENTS"
A relevant issuer pre-enforcement revenue priority of payments, the
issuer pre-enforcement principal priority of payments and the issuer
post-enforcement priority of payments
"ISSUER RESERVE FUND"
A reserve fund established in the name of Funding on the closing
date up to an amount not exceeding the issuer reserve required
amount, as further described under "CREDIT STRUCTURE-ISSUER RESERVE
FUND"
"ISSUER RESERVE LEDGER"
A ledger maintained by the cash manager in the name of Funding to
record the balance from time to time of the issuer reserve fund
"ISSUER RESERVE REQUIRED
AMOUNT"
An amount equal to [GBP][__] in respect of the issuer reserve fund,
[GBP]20,000,000 in respect of the issuer reserve fund of each of the
first issuer and the second issuer, [GBP]34,372,240 in respect of
the issuer reserve fund of the third issuer, [GBP]39,000,000 in
respect of the issuer reserve fund of the fourth issuer,
[GBP]45,000,000 in respect of the issuer reserve fund of the fifth
issuer, [GBP]35,000,000 in respect of the issuer reserve fund of the
sixth issuer and, in respect of any new issuer, such amount as may
be acceptable to the rating agencies at the relevant time
"ISSUER RESERVE
REQUIREMENT"
The meaning given to it on page 185
"ISSUER SECURED CREDITORS"
The note trustee (and any receiver appointed under the issuer deed
of charge), the swap providers, the corporate services provider in
respect of the issuer, the issuer account bank, the issuer cash
manager, the paying agents, the agent bank, the transfer agent, the
registrar and the noteholders
318
"ISSUER SECURITY"
The mortgages, charges, assignments, pledges and/or any other
security created by the issuer under the issuer deed of charge in
favor of the note trustee for the benefit of the issuer secured
creditors
"ISSUER SWAP DEFAULT"
The occurrence of an event of default (as defined in the relevant
swap agreement) where the issuer is the defaulting party (as defined
in the relevant swap agreement)
"ISSUER TRANSACTION
ACCOUNT"
The day to day bank accounts of the issuer, held with the issuer
account bank and comprising the issuer transaction dollar account,
the issuer transaction euro account and the issuer transaction
sterling account as at the closing date or that may be opened, with
the prior approval of the note trustee, after the closing date
"LEAD UNDERWRITERS"
J.P. Morgan Securities Inc. and Lehman Brothers Inc.
"LENDING CRITERIA"
The lending criteria of the seller, or that other criteria as would
be acceptable to a reasonable, prudent mortgage lender
"LIBOR"
The London Interbank Offered Rate for deposits in the relevant
currency, as determined by the agent bank on the following basis:
(1) on the applicable interest determination date the
agent bank will determine the offered quotation to
leading banks for deposits in the relevant
currency for a period equal to the relevant
period.
This will be determined by reference to the
display as quoted on the Dow Jones/Telerate Page
No. 3750. If the Dow Jones/Telerate Page No. 3750
stops providing these quotations, the replacement
page for the purposes of displaying this
information will be used. If the replacement page
stops displaying the information, another service
as determined by the issuer with the approval of
the note trustee will be used.
In each of these cases, the determination will be
made as at or about 11:00 a.m., London time, on
that date. This is called the screen rate.
(2) if on any of these interest determination dates
the screen rate is unavailable, the agent bank
will:
request the principal London office of each of the
reference banks to provide the agent bank with its
offered quotation to leading banks for deposits in
the relevant currency of the equivalent amount,
and for a time equal to the relevant period, in
the London inter-bank market as at or about 11:00
a.m. (London time); and
calculate the arithmetic mean, rounded upwards to
five decimal places, of those quotations;
(3) if on any of these interest determination dates
the screen rate is unavailable and only two or
three of the reference banks provide offered
quotations, the relevant rate for that period will
be the arithmetic mean of the quotations as
calculated in (2); and
319
(4) if fewer than two reference banks provide
quotations, the agent bank will consult with the
note trustee and the issuer for the purpose of
agreeing a total of two banks to provide these
quotations and the relevant rate for that period
will be the arithmetic mean of the quotations as
calculated in (2). If none of these banks agree,
then the relevant rate for that period will be
the rate in effect for the last preceding
interest period for which (1) or (2) was
applicable
"LLOYDS TSB"
Lloyds TSB Bank plc acting through its office at City Office, Bailey
Drive, Gillingham Business Park, Kent ME8 0LS, England
"LLOYDS TSB COLLECTION
ACCOUNT"
The account of the administrator held at Lloyds TSB as may be
utilized from time to time for the purpose of collecting amounts
which are paid to the seller on the mortgage loans and/or the
related security
"LONDON BUSINESS DAY"
A day (other than a Saturday, Sunday or public holiday) on which
banks are generally open for business in London
"LONDON STOCK EXCHANGE"
London Stock Exchange plc
"LOSSES"
The realized losses experienced on the mortgage loans in the
mortgage portfolio
"LOSSES LEDGER"
The ledger created and maintained by the cash manager under the cash
management agreement to record the losses on the mortgage portfolio
"LTV RATIO" or "LOAN TO
VALUE RATIO"
In respect of any mortgage loan assigned to the mortgages trust, the
ratio of the outstanding balance of such mortgage loan to the value
of the mortgaged property securing such mortgage loan; and in
respect of the seller's decision as to whether to make a mortgage
loan to a prospective borrower and for purposes of determining
whether a MIG policy is necessary in connection with a mortgage
loan, the ratio of the outstanding balance of such mortgage loan to
the lower of the purchase price or valuation of the mortgaged
property securing such mortgage loan as determined by the relevant
valuation by the seller
"LTV TESTS"
Two tests which assign a credit enhancement value (I) to each
mortgage loan in the mortgage portfolio based on its current LTV
ratio and the amount of mortgage indemnity cover on that mortgage
loan, and (ii) calculated to include any related unsecured portion
of a mortgage loan in respect of the Together product based on its
current LTV ratio and the amount of mortgage indemnity cover on that
mortgage loan. The weighted average credit enhancement value for the
mortgage portfolio is then determined
"MANAGERS"
J.P. Morgan Securities Ltd., Lehman Brothers International (Europe),
Barclays Bank PLC, Deutsche Bank AG London and ING Belgium SA/NV
"MANDATE HOLDERS"
The meaning given to it on page 100
320
"MASTER DEFINITIONS
SCHEDULE"
Together, the master definitions schedule dated March 26, 2001, as
amended from time to time, and the issuer master definitions
schedule to be dated the closing date, as amended from time to time,
which are schedules of definitions used in the transaction documents
"MIG POLICIES"
The mortgage indemnity guarantee policies on certain of the mortgage
loans which are intended to cover losses which may be incurred
following repossession and sale of a mortgaged property from a
borrower, and which were issued by NORMIC
"MINIMUM SELLER SHARE"
An amount included in the seller share which is calculated in
accordance with the mortgages trust deed and which, as at the
closing date, is approximately [GBP]387,200,000 as further
described under "THE MORTGAGES TRUST"
"MONEY MARKET NOTES"
For any issuer, any series and/or class of notes issued by such
issuer that are deemed to be "eligible securities" under Rule 2a-7
of the US Investment Company Act of 1940, as amended, and that are
designated as "MONEY MARKET NOTES"
"MONTHLY PAYMENT"
For any mortgage loan, the amount a borrower is required to pay on a
monthly payment date
"MONTHLY PAYMENT DATE"
For any mortgage loan, the date in each month on which the relevant
borrower is required to make a payment of interest and, if
applicable, principal, for that mortgage loan, as required by the
applicable mortgage conditions
"MOODY'S"
Moody's Investors Services Limited and any successor to its rating
business
"MORTGAGE"
For any mortgage loan in the mortgage portfolio, the charge by way
of legal mortgage which secures the repayment of that mortgage loan
including the mortgage conditions applicable to it
"MORTGAGE ACCOUNT"
As the context requires, either (1) all mortgage loans secured on
the same mortgaged property and thereby forming a single mortgage
account or (2) an account maintained by the administrator in respect
of a particular mortgage loan to record all amounts due in respect
of that mortgage loan (whether by way of principal, interest or
otherwise) and all amounts received in respect thereof
"MORTGAGE CONDITIONS"
For any mortgage loan, the terms and conditions applicable to that
mortgage loan and its related security as set out in the seller's
relevant "MORTGAGE CONDITIONS" booklet and the seller's relevant
general conditions, and in relation to each as from time to time
varied by the relevant mortgage loan agreement and the relevant
mortgage deed
"MORTGAGE DEED"
In respect of any mortgage, the deed creating that mortgage
including, unless the context otherwise requires, the mortgage
conditions applicable to that mortgage
"MORTGAGE LOAN"
Any mortgage loan and any permitted replacement mortgage loan which
is assigned by the seller to the mortgages trustee from time to time
under the terms of the mortgage sale agreement and referenced by its
mortgage loan identifier number and comprising the aggregate of all
principal sums, interest, costs, charges, expenses and other monies
(including all further advances) due or owing with respect to that
321
mortgage loan (or permitted replacement mortgage loan, as
applicable) under the relevant mortgage conditions by a borrower on
the security of a mortgage from time to time outstanding or, as the
context may require, the borrower's obligations in respect of the
same
"MORTGAGE LOAN FILES"
For each mortgage loan, the file or files (including files kept in
microfiche format or similar electronic data retrieval system)
containing correspondence between the borrower and the
seller and including the mortgage documentation applicable to that
mortgage loan, each letter of offer for that mortgage loan and other
relevant documents
"MORTGAGE PORTFOLIO"
The initial mortgage portfolio, the further mortgage portfolios and
the additional assigned mortgage portfolio as it is constituted as
of any date of determination since August 18, 2003, taking account
of, among other things, amortization of mortgage loans in that
portfolio and the addition and/or removal of any mortgage loans to
or from that portfolio since August 18, 2003
"MORTGAGE RELATED
SECURITIES"
As defined in the United States Secondary Mortgage Markets
Enhancement Act 1984, as amended
"MORTGAGE SALE
AGREEMENT"
The mortgage sale agreement entered into on March 26, 2001, as
amended from time to time, among the seller, the mortgages trustee,
Funding and the security trustee regarding the assignment of the
mortgage portfolio to the mortgages trustee including any documents
ancillary thereto, and as further described under "ASSIGNMENT OF THE
MORTGAGE LOANS AND THEIR RELATED SECURITY"
"MORTGAGED PROPERTY"
For any mortgage loan, the freehold or leasehold property in England
and Wales and all rights and security attached or appurtenant or
related thereto and all buildings and fixtures on the property which
are subject to the mortgage securing repayment of that mortgage loan
"MORTGAGEE"
For any mortgage loan, the person for the time being who is entitled
to exercise the rights of the mortgagee under the relevant mortgage
securing repayment of that mortgage loan
"MORTGAGES"
The mortgages contained in the mortgage portfolio
"MORTGAGES TRUST"
The bare trust of the trust property as to both capital and income,
held by the mortgages trustee on trust absolutely for Funding (as to
the Funding share) and the seller (as to the seller share) under the
mortgages trust deed so that each beneficiary has an undivided
beneficial interest in it
"MORTGAGES TRUST
ALLOCATION OF REVENUE
RECEIPTS"
The order of priority for applying mortgages trustee available
revenue receipts as set forth on page 153
"MORTGAGES TRUST DEED"
The mortgages trust deed entered into on March 26, 2001, as amended
from time to time, among the mortgages trustee, Funding, the seller
and the corporate services provider
"MORTGAGES TRUSTEE"
Granite Finance Trustees Limited
322
"MORTGAGES TRUSTEE
AVAILABLE REVENUE
RECEIPTS"
The meaning given to it on page 153
"MORTGAGES TRUSTEE BANK
ACCOUNTS"
The mortgages trustee GIC account and the mortgages trustee
transaction account
"MORTGAGES TRUSTEE GIC
ACCOUNT"
The account in the name of the mortgages trustee held at the account
bank and maintained subject to the terms of the mortgages trustee
guaranteed investment contract and the bank account agreement or any
additional or replacement account as may for the time being be in
place with the prior consent of the Funding, the seller and the
security trustee
"MORTGAGES TRUSTEE GIC
PROVIDER"
Lloyds TSB Bank plc Jersey International Branch acting through its
office at 25 New Street, St. Helier, Jersey JE4 8ZE or any other
person or persons as are for the time being the GIC provider under
the mortgages trustee guaranteed investment contract
"MORTGAGES TRUSTEE
GUARANTEED INVESTMENT
CONTRACT"
The guaranteed investment contract entered into on March 26, 2001,
as amended from time to time, among the mortgages trustee, the
mortgages trustee GIC provider and others under which the mortgages
trustee GIC provider has agreed to pay the mortgages trustee a
guaranteed rate of interest on the balance of the mortgages trustee
GIC account
"MORTGAGES TRUSTEE
PRINCIPAL PRIORITY OF
PAYMENTS"
The order in which the cash manager applies principal receipts on
the mortgage loans on each distribution date to each of Funding and
the seller, as set out in "THE MORTGAGES TRUST"
"MORTGAGES TRUSTEE
PRINCIPAL RECEIPTS"
On any distribution date, any mortgages trustee retained principal
receipt plus the principal receipts received by the mortgages
trustee in the immediately preceding trust calculation period which
may be distributed by the mortgages trustee
"MORTGAGES TRUSTEE
RETAINED PRINCIPAL
RECEIPTS"
The meaning given to it on page 157
"MORTGAGES TRUSTEE
REVENUE PRIORITY OF
PAYMENTS"
The order in which the cash manager applies the mortgages trustee
available revenue receipts on each distribution date, as set out in
"THE MORTGAGES TRUST"
"MORTGAGES TRUSTEE
TRANSACTION ACCOUNT"
The account in the name of the mortgages trustee held at the account
bank and maintained subject to the terms of the bank account
agreement or any additional or replacement bank account of the
mortgages trustee as may for the time being be in place with the
prior consent of the security trustee
"N3"
The meaning given to it on page 56
"NEW INTERCOMPANY LOAN
AGREEMENT"
A new intercompany loan agreement entered into between Funding and a
new issuer in relation to a new intercompany loan
"NEW INTERCOMPANY LOANS"
Intercompany loans made to Funding by new issuers under new
intercompany loan agreements
"NEW ISSUER"
A new wholly-owned subsidiary of Funding that is not established as
at the closing date and which, if established, will issue new notes
and make a new intercompany loan to Funding
323
"NEW MORTGAGE LOANS"
Mortgage loans, other than the mortgage loans assigned on or before
the closing date, which the seller may assign, from time to time, to
the mortgages trustee under the terms of the mortgage sale agreement
"NEW MORTGAGE PORTFOLIO"
Any portfolio of new mortgage loans, the mortgages and new related
security, any accrued interest and any other amounts, proceeds,
powers, rights, benefits and interests derived from the new mortgage
loans and/or the new related security, in each case which are to be
assigned by the seller to the mortgages trustee after the closing
date under the mortgage
sale agreement but excluding any mortgage loan and its related
security which has been redeemed in full on or before the relevant
assignment date
"NEW NOTES"
The notes issued by the new issuers to investors
"NEW RELATED SECURITY"
The security for the new mortgage loans (including the mortgages)
which the seller may assign to the mortgages trustee under the
mortgage sale agreement
"NEW TRUST PROPERTY"
As at any assignment date after the closing date, any and all new
mortgage portfolios assigned by the seller to the mortgages trustee
on an assignment date, or as at any distribution date, any and all
new mortgage portfolios assigned by the seller to the mortgages
trustee during the immediately preceding trust calculation period
"NEW YORK BUSINESS DAY"
A day (other than a Saturday, Sunday or public holiday) on which
banks are generally open for business in the city of New York
"NON-ASSET TRIGGER EVENT"
The meaning given to it on page 155
"NON-CASH RE-DRAW"
An authorized underpayment or a payment holiday under a flexible
mortgage loan included in the mortgages trust, which will result in
the seller being required to pay to the mortgages trustee an amount
equal to the unpaid interest associated with that authorized
underpayment or payment holiday
"NON PERFORMING MORTGAGE
LOAN"
A mortgage loan that is in arrears and for which the related
borrower has not made any payment within any of the three
consecutive calendar months prior to the date of determination
"NORMIC"
Northern Rock Mortgage Indemnity Company Limited
"NORTHERN ROCK"
Northern Rock plc
"NOTE CERTIFICATES"
The global note certificates and the individual note certificates
"NOTE ENFORCEMENT NOTICE"
An enforcement notice served by the note trustee for the enforcement
of the issuer security following a note event of default under the
notes
"NOTE EVENT OF DEFAULT"
An event of default under the provisions of the notes
"NOTE PRINCIPAL PAYMENT"
The amount of each principal payment payable on each note
"NOTE TRUSTEE"
The Bank of New York, acting through its office at 48th Floor, One
Canada Square, London E14 5AL, or such other person for the time
being acting as note trustee under the trust deed
324
"NOTEHOLDERS"
For the issuer, the holders of the class A notes, the class B notes,
the class M notes and/or the class C notes of any series or, for any
previous issuer or any new issuer, the holders for the time being of
the notes issued by such previous issuer or new issuer, as the case
may be
"NOTES"
Includes all of the class A notes, the class B notes, the class M
notes and the class C notes or, in relation to any previous issuer
or any new issuer, the notes issued by such previous issuer or new
issuer, as the case may be
"NOTICE"
In case of notice being given to the noteholders, a notice duly
given in accordance with the relevant conditions set forth in the
notes
"NRG"
Northern Rock (Guernsey) Limited
"OID"
Original issue discount
"OID REGULATIONS"
The US Treasury regulations relating to original issue discount
"OFFER CONDITIONS"
The terms and conditions applicable to a specific mortgage loan as
set out in the relevant offer letter to the borrower
"OFFERED GLOBAL NOTE
CERTIFICATES"
The series 1 global note certificates
"OFFERED NOTES"
The series 1 notes offered by this prospectus
"OFT"
Office of Fair Trading
"OMBUDSMAN"
The UK Financial Ombudsman Service
"OUTSTANDING AMOUNT"
Following enforcement of a mortgage loan, the amount outstanding on
the payment of that loan after deducting money received under the
applicable MIG policy
"OUTSTANDING PRINCIPAL
BALANCE"
For any note, the unpaid principal amount of that note, and for any
intercompany loan, the unpaid principal balance of that intercompany
loan
"OVERPAYMENTS LEDGER"
The ledger created and maintained by the cash manager to record
overpayments received by the mortgages trustee on the mortgage loans
"PAYING AGENT AND AGENT
BANK AGREEMENT"
The paying agent and agent bank agreement entered into on or about
the closing date, as amended from time to time, among the issuer,
the principal paying agent, the paying agents, the transfer agent,
the registrar and the agent bank
"PAYING AGENTS"
The principal paying agent and the US paying agent
"PAYMENT DATE"
The 20th day of January, April, July and October in each year,
beginning in January 2004 or, if such day is not a business day, the
next succeeding business day
"PAYMENT HOLIDAY"
The meaning given to it on page 96
"PERMITTED PRODUCT SWITCH"
The exchange by a borrower of its then current mortgage loan product
for a different mortgage loan product offered by the seller, which
may be made only if the new mortgage loan for which the prior
mortgage loan is to be exchanged is a permitted replacement mortgage
loan
"PERMITTED REPLACEMENT
MORTGAGE LOAN"
The meaning given to it on page 136
"PENSION PLAN"
A financial plan arranged by a borrower to provide for that
borrower's expenses during retirement
325
"PFIC"
A passive foreign investment company as more fully described under
"MATERIAL UNITED STATES TAX CONSEQUENCES"
"PLANS"
The meaning given to it on page 277
"POST ENFORCEMENT CALL
OPTION AGREEMENT"
The agreement entered into on or about the closing date, as amended
from time to time, under which the note trustee agrees on behalf of
the noteholders, that in specified circumstances, GPCH Limited may
call for the notes to be transferred to it
"POST-ENFORCEMENT CALL
OPTION HOLDER"
GPCH Limited
"PREVIOUS INTERCOMPANY
LOAN"
Each of the intercompany loans made by the previous issuers to
Funding on or subsequent to the initial closing date (but prior to
the closing date), as amended from time to time, under the
relevant previous intercompany loan agreement, as described under
"DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE
PREVIOUS INTERCOMPANY LOANS"
"PREVIOUS INTERCOMPANY
LOAN AGREEMENT"
Each of the intercompany loan agreements entered into on or
subsequent to the initial closing date (but prior to the closing
date), as amended from time to time, among others, Funding, the
applicable previous issuer and such previous issuer's note trustee
"PREVIOUS ISSUERS"
Each of the first issuer, the second issuer, the third issuer, the
fourth issuer, the fifth issuer and the sixth issuer, as described
under "DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND
THE PREVIOUS INTERCOMPANY LOANS"
"PREVIOUS NOTES"
The notes issued by the previous issuers, as described under
"DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE
PREVIOUS INTERCOMPANY LOANS"
"PREVIOUS START UP LOAN
AGREEMENTS"
Each of the start up loan agreements entered into on or subsequent
to the initial closing date (but prior to the closing date), as
amended from time to time, between Funding, the start up loan
provider and the security trustee
"PRINCIPAL AMOUNT
OUTSTANDING"
For each class of notes and as of any date of determination, the
initial principal amount of such class of notes less (in each case)
the aggregate amount of all principal payments in respect of such
notes that have been paid since the closing date and on or prior to
that determination date
"PRINCIPAL LEDGER"
The ledger maintained by the cash manager on behalf of the mortgages
trustee under the cash management agreement to record any mortgages
trustee retained principal receipts plus principal receipts on the
mortgage loans and payments of principal from the mortgages trustee
GIC account to Funding and the seller on each distribution date.
Together the principal ledger and the revenue ledger reflect the
aggregate of all amounts of cash standing to the credit of the
mortgages trustee in the mortgages trustee bank accounts
"PRINCIPAL PAYING AGENT"
Citibank, N.A., acting through its London Branch at 5 Carmelite
Street, London EC4Y 0PA, or such other person for the time being
acting as principal paying agent under the paying agent and
agent bank agreement
326
"PRINCIPAL RECEIPTS"
Any payment in respect of principal received in respect of any
mortgage loan, whether as all or part of a monthly payment, on
redemption (including partial redemption), on enforcement or on the
disposal of that mortgage loan or otherwise (including payments
pursuant to any insurance policy) and which may include the amount
of any overpayment in respect of any non-flexible mortgage loan, but
only to the extent permitted by the mortgages trust deed, and which
may also include the amount of any further contribution made by
Funding from time to time
"PRODUCT SWITCH"
Any variation in the mortgage conditions (other than a permitted
product switch) applicable to any mortgage loan which may be offered
by the seller or (in limited circumstances) the administrator from
time to time
"PROPERTIES IN POSSESSION
POLICY"
The insurance policy issued by AXA General Insurance Limited which
provides the seller with rebuilding insurance when the seller takes
possession of a property from a default borrower
"PROSPECTUS"
This prospectus dated September [19], 2003 relating to the issue of
the series 1 notes
"RATING"
Any rating assigned by the rating agencies to the notes or new notes
"RATING AGENCIES"
Moody's, Standard & Poor's and Fitch
"REAL PROPERTY"
Freehold or leasehold property in England and Wales, and any estate
or interest therein, and any reference to "REAL PROPERTY" includes a
reference to all rights and security from time to time attached,
appurtenant or related thereto and all buildings and fixtures from
time to time thereon
"REASONABLE, PRUDENT
MORTGAGE LENDER"
A reasonably prudent prime residential mortgage lender lending to
borrowers in England and Wales who generally satisfy the lending
criteria of traditional sources of residential mortgage capital
"RECEIVER"
A receiver appointed by the note trustee under the issuer deed of
charge and/or the security trustee under the Funding deed of charge
"RECOGNISED STOCK
EXCHANGE"
The meaning given to it on page 268
"RECORD DATE"
The fifteenth day before the due date for any payment on the notes
"RE-DRAW"
Either a cash re-draw or a non-cash re-draw
"RE-DRAWS LEDGER"
The ledger maintained by the cash manager in the name of the
mortgages trustee under the cash management agreement to record
re-draws on flexible mortgage loans from time to time and will be
sub-divided into two subledgers to record cash re-draws and non-cash
re-draws
"REFERENCE BANKS"
On the closing date, the London office of each of the following
banks: ABN Amro Bank NV, Barclays Bank plc, Citibank, N.A. and The
Royal Bank of Scotland plc
"RE-FIXED MORTGAGE LOAN"
As at any given date, a mortgage loan which on or before that date
had been a fixed rate mortgage loan but the fixed period had come to
an end, but as at or before that given date, the interest charged
under that mortgage loan was again fixed for
327
another fixed period by the seller or the administrator, as the
case may be (following an election by the borrower) in accordance
with the original terms of the fixed rate mortgage loan
"REGISTER"
The register of noteholders kept by the registrar and which records
the identity of each noteholder and the number of notes which each
noteholder owns
"REGISTERED LAND"
Land, title to which is registered at H.M. Land Registry
"REGISTRAR"
Citibank, N.A., acting through its London Branch at 5 Carmelite
Street, London EC4Y 0PA
"REGULATED MORTGAGE
CONTRACT"
The meaning given to it on page 57
"REGULATIONS"
The Insolvency Act 1986 (Amendment) (No. 3) Regulations 2002
"REINSTATEMENT"
For a mortgaged property that has been damaged, repairing or
rebuilding that mortgaged property to the condition that it was in
before the occurrence of the damage
"RELATED SECURITY"
The security for the repayment of a mortgage loan including the
relevant mortgage and all other matters applicable to the mortgage
loan, acquired as part of the mortgage portfolio assigned to the
mortgages trustee
"RELEVANT ISSUERS"
The issuer, the previous issuers and any new issuers, as the case
may be
"RELEVANT DISTRIBUTION DATE"
Each distribution date or the date on which the mortgage trust
terminates
"REPAYMENT MORTGAGE
LOAN"
A mortgage loan for which the borrower is under an obligation to the
mortgagee to make monthly payments of principal so that the whole
principal (in addition to interest) is repaid by the stated maturity
date for that mortgage loan
"REVENUE LEDGER"
The ledger created and maintained by the cash manager on behalf of
the mortgages trustee under the cash management agreement to record
revenue receipts on the mortgage loans and interest from the
mortgages trustee bank accounts and payments of revenue receipts
from the mortgages trustee GIC account to Funding and the seller on
each distribution date. Together the revenue ledger and the
principal ledger reflect the aggregate of all amounts of cash
standing to the credit of the mortgages trustee bank accounts
"REVENUE RECEIPTS"
Any payment received in respect of any mortgage loan, whether as all
or part of a monthly payment, on redemption (including partial
redemption), on enforcement or on the disposal of that mortgage loan
or otherwise (including payments pursuant to any insurance policy)
which in any such case is not a principal receipt
"REVENUE SHORTFALL"
The deficiency of Funding available revenue receipts on a payment
date over the amounts due by Funding under the Funding
pre-enforcement revenue priority of payments, and the deficiency of
issuer allocable revenue receipts on a payment date over the amounts
due by that issuer under the issuer pre-enforcement revenue priority
of payments, as the context requires
328
"SEC"
The United States Securities and Exchange Commission
"SECOND ISSUER"
Granite Mortgages 01-2 plc
"SECOND ISSUER INTER
COMPANY"
The intercompany loan entered into on September 28, 2001 between the
second issuer and Funding
"SECOND ISSUER NOTES"
The notes issued by the second issuer on September 28, 2001
"SECURITIES ACT"
The United States Securities Act of 1933, as amended
"SECURITY INTEREST" or
"ENCUMBRANCE"
Any mortgage or sub mortgage, standard security, charge or sub
charge (whether legal or equitable), encumbrance, pledge, lien,
hypothecation, assignment by way of security or other security
interest or title retention arrangement and any agreement, trust
or arrangement having substantially the same economic or
financial effect as any of the foregoing (other than a lien
arising in the ordinary course of business or by operation of law)
"SECURITY POWER OF
ATTORNEY FOR FUNDING"
The power of attorney granted by Funding in favor of the security
trustee on the closing date
"SECURITY TRUSTEE"
The Bank of New York, acting through its office at 48th Floor, One
Canada Square, London E14 5AL, or any other persons and all other
persons for the time being acting as the security trustee or
security trustees under the Funding deed of charge
"SELLER"
Northern Rock plc
"SELLER ARRANGED INSURER"
The meaning given to it on page 104
"SELLER SHARE"
The current seller share of the trust property calculated in
accordance with the formula set out on pages 150 and 151
"SELLER SHARE EVENT"
The meaning given to it on page 155
"SELLER SHARE EVENT
DISTRIBUTION DATE"
A distribution date on which a seller share event occurs.
"SELLER SHARE PERCENTAGE"
The current seller share percentage of the trust property calculated
in accordance with the formula set out on pages 150 and 151
"SELLER'S POLICY"
The originating, lending and underwriting, administration, arrears
and enforcement policies and procedures which are applied from time
to time by the seller to mortgage loans and the security for their
repayment which are beneficially owned solely by the seller and
which may be amended by the seller from time to time
"SELLER'S STANDARD VARIABLE
RATE"
The rate of interest set by the seller for variable rate mortgage
loans as more fully described on page 93
"SERIES 1 CLASS A NOTES"
The series 1 class A1 notes, the series 1 class A2 notes and the
series 1 class A3 notes
"SERIES 1 CLASS A1 DOLLAR
CURRENCY SWAP"
The dollar currency swap with respect to the series 1 class A1 notes
"SERIES 1 CLASS A1 DOLLAR
CURRENCY SWAP PROVIDER"
Swiss Re Financial Products Corporation and/or, as applicable, any
other entity appointed from time to time in accordance with the
transaction documents
"SERIES 1 CLASS A1 NOTES"
The $[750,000,000] series 1 class A1 floating rate notes due January
2019
"SERIES 1 CLASS A2 DOLLAR
CURRENCY SWAP"
The dollar currency swap with respect to the series 1 class A2 notes
329
"SERIES 1 CLASS A2 DOLLAR
CURRENCY SWAP PROVIDER"
Swiss Re Financial Products Corporation, and/or, as applicable, any
other entity appointed from time to time in accordance with the
transaction documents
"SERIES 1 CLASS A2 NOTES"
The $[750,000,000] series 1 class A2 floating rate notes due January
2024
"SERIES 1 CLASS A3 DOLLAR
CURRENCY SWAP"
The dollar currency swap with respect to the series 1 class A3 notes
"SERIES 1 CLASS A3 DOLLAR
CURRENCY SWAP PROVIDER"
Swiss Re Financial Products Corporation, and/or, as applicable, any
other entity appointed from time to time in accordance with the
transaction documents
"SERIES 1 CLASS A3 NOTES"
The $[500,000,000] series 1 class A3 floating rate notes due January
2044
"SERIES 1 CLASS B DOLLAR
CURRENCY SWAP"
The dollar currency swap with respect to the series 1 class B notes
"SERIES 1 CLASS B DOLLAR
CURRENCY SWAP PROVIDER"
Swiss Re Financial Products Corporation, and/or, as applicable, any
other entity appointed from time to time in accordance with the
transaction documents
"SERIES 1 CLASS B NOTES"
The $[72,000,000] series 1 class B floating rate notes due January
2044
"SERIES 1 CLASS M DOLLAR
CURRENCY SWAP"
The dollar currency swap with respect to the series 1 class M notes
"SERIES 1 CLASS M DOLLAR
CURRENCY SWAP PROVIDER"
Swiss Re Financial Products Corporation, and/or, as applicable, any
other entity appointed from time to time in accordance with the
transaction documents
"SERIES 1 CLASS M NOTES"
The $[27,000,000] series 1 class M floating rate notes due January
2044
"SERIES 1 CLASS C DOLLAR
CURRENCY SWAP"
The dollar currency swap with respect to the series 1 class C notes
"SERIES 1 CLASS C DOLLAR
CURRENCY SWAP PROVIDER"
Swiss Re Financial Products Corporation, and/or, as applicable, any
other entity appointed from time to time in accordance with the
transaction documents
"SERIES 1 CLASS C NOTES"
The $[62,100,000] series 1 class C floating rate notes due January
2044
"SERIES 1 GLOBAL NOTE
CERTIFICATES"
The global note certificates representing the series 1 notes
"SERIES 1 NOTES"
The series 1 class A1 notes, the series 1 class A2 notes, the series
1 class A3 notes, the series 1 class B notes, the series 1 class M
notes and the series 1 class C notes
"SERIES 2 CLASS A EURO
CURRENCY SWAP"
The euro currency swap with respect to the series 2 class A notes
"SERIES 2 CLASS A EURO
CURRENCY SWAP PROVIDER"
Citibank, N.A., acting through its London branch at Citigroup
Centre, Canada Square, Canary Wharf, London E14 5LB and/or, as
applicable, any other entity appointed from time to time in
accordance with the transaction documents
"SERIES 2 CLASS A NOTES"
The [e][500,000,000] series 2 class A floating rate notes due
January 2044
"SERIES 2 CLASS B EURO
CURRENCY SWAP"
The euro currency swap with respect to the series 2 class B notes
330
"SERIES 2 CLASS B EURO
CURRENCY SWAP PROVIDER"
Citibank, N.A., acting through its London branch at Citigroup
Centre, Canada Square, Canary Wharf, London E14 5LB, and/or, as
applicable, any other entity appointed from time to time in
accordance with the transaction documents
"SERIES 2 CLASS B NOTES"
The [e][25,200,000] series 2 class B floating rate notes due January
2044
"SERIES 2 CLASS C EURO CURRENCY SWAP"
The euro currency swap with respect to the series 2 class C notes
"SERIES 2 CLASS C EURO
CURRENCY SWAP PROVIDER"
Citibank, N.A., acting through its London branch at Citigroup
Centre, Canada Square, Canary Wharf, London E14 5LB, and/or, as
applicable, any other entity appointed from time to time in
accordance with the transaction documents
"SERIES 2 CLASS C NOTES"
The [e][21,700,000] series 2 class C floating rate notes due January
2044
"SERIES 2 CLASS M EURO
CURRENCY SWAP"
The euro currency swap with respect to the series 2 class M notes
"SERIES 2 CLASS M EURO
CURRENCY SWAP PROVIDER"
Citibank, N.A., acting through its London branch at Citigroup
Centre, Canada Square, Canary Wharf, London E14 5LB, and/or, as
applicable, any other entity appointed from time to time in
accordance with the transaction documents
"SERIES 2 CLASS M NOTES"
The [e][9,400,000] series 2 class M floating rate notes due January
2044
"SERIES 2 NOTES"
The series 2 class A notes, the series 2 class B notes, the series 2
class M notes and the series 2 class C notes
"SERIES 3 CLASS A NOTES"
The [GBP][250,000,000] series 3 class A floating rate notes due
January 2044
"SERIES 3 CLASS B NOTES"
The [GBP][18,900,000] series 3 class B floating rate notes due
January 2044
"SERIES 3 CLASS C NOTES"
The [GBP][16,300,000] series 3 class C floating rate notes
due January 2044
"SERIES 3 CLASS M NOTES"
The [GBP][7,100,000] series 3 class M floating rate notes due
January 2044
"SERIES 3 NOTES"
The series 3 class A notes, the series 3 class B notes, the series 3
class M notes and the series 3 class C notes
"S&P" and "STANDARD &
POOR'S"
Standard & Poor's Ratings Services, a division of The McGraw Hill
Companies, Inc., and any successor to its ratings business
"SHARED ISSUER PRINCIPAL
RECEIPTS"
The meaning given to it on page 180
"SHARED ISSUER REVENUE
RECEIPTS"
The meaning given to it on page 169
"SIGNIFICANT"
When we discuss ERISA considerations, a benefit plan investors'
equity participation in the issuer would not be significant if,
immediately after the most recent acquisition of any equity interest
in the issuer, less than 25% of the value of each class of equity
interests in the issuer -- excluding interests held by Funding -- is
held by benefit plan investors
"SIXTH ISSUER"
Granite Mortgages 03-2 plc
"SIXTH ISSUER NOTES"
The notes issued to the sixth issuer on May 21, 2003
331
"SIXTH ISSUER INTERCOMPANY
LOAN"
The intercompany loan entered into on May 21, 2003 between the sixth
issuer and Funding
"SPECIAL REPAYMENT NOTES"
In relation to the second issuer, the [GBP]10,000,000 series 2 class
D floating rate notes issued by the second issuer, in relation to
the third issuer, the [GBP]15,000,000 series 2 class D notes issued
by the third issuer and, in relation to any other issuer, any series
and/or class of notes issued by such issuer that are either:
(a) interest only notes; or
(b) notes, the outstanding principal balance of which
is to be repaid solely from issuer available
revenue receipts;
and that are designated as special repayment notes
"SPECIFIED MINIMUM RATE"
The rate specified in the offer conditions
"STANDARD VARIABLE RATE"
The Northern Rock standard variable rate and/or the standard
variable rate applicable to mortgage loans within the mortgages
trust, as applicable
"STANDARD VARIABLE RATE
MORTGAGE LOAN"
A mortgage loan which is subject to the standard variable rate
"START-UP LOAN" or "START-UP
LOANS"
Each loan made by the start-up loan provider to Funding under each
start-up loan agreement, and collectively, the "START-UP LOANS"
"START-UP LOAN AGREEMENT"
The agreement entered into on or about the closing date, as amended
from time to time, between Funding, the start-up loan provider and
the security trustee relating to the provision of the start-up loan
to Funding or, in relation to any other issuer, the start-up loan
agreement (if any) entered into by Funding, the relevant start-up
loan provider and the security trustee on or about the closing date
for such issuer's notes
"START-UP LOAN PROVIDER"
Northern Rock, in its capacity as provider of the start- up loans,
or such other person who provides a start-up loan to Funding
pursuant to a start-up loan agreement
"STEP-UP DATE"
The payment date in respect of an issuer on which the interest rate
on the notes issued by such issuer increases by a pre-determined
amount following the payment made by such issuer on such payment
date, which date in respect of (i) the issuer is the payment date
occurring in January 2009, (ii) the first issuer is the payment date
occurring in January 2008, (iii) the second issuer is the payment
date occurring in October 2006, (iv) the third issuer is the payment
date occurring in April 2007, (v) the fourth issuer is the payment
date occurring in September 2008 (vi) the fifth issuer is the
payment date occurring in April 2008 and (vii) the sixth issuer is
the payment date occurring in July 2010
"SUBORDINATED PRINCIPAL
TEST"
The meaning given to it on page 185
"SUBSCRIPTION AGREEMENT"
The subscription agreement relating to the sale of the series 2
notes and the series 3 notes expected to be dated on or about
September 19, 2003, among the issuer, Funding, the mortgages
trustee, J.P. Morgan Securities Ltd., Lehman Brothers International
(Europe), Barclays Bank PLC and the other managers
332
"SUBSIDIARY"
A subsidiary within the meaning of Section 736 of the United Kingdom
Companies Act 1985, and unless the context otherwise requires, a
subsidiary undertaking within the meaning of section 258 of the
United Kingdom Companies Act 1985
"SWAP AGREEMENTS"
The basis rate swap agreement, the dollar currency swap agreements
and the euro currency swap agreements
"SWAP COLLATERAL"
At any time, any asset (including, without limitation, cash and/or
securities) which is paid or transferred by a swap provider to the
issuer as collateral to secure the performance by such swap provider
of its obligations under the relevant swap agreement together with
any income or distributions received in respect of such asset and
any equivalent of or replacement of such asset into which such asset
is transformed
"SWAP COLLATERAL ACCOUNT"
An account opened in the name of the issuer for the purpose of
holding swap collateral and maintained in accordance with the issuer
cash management agreement
"SWAP COLLATERAL ANCILLARY
DOCUMENT"
Any document (including, without limitation, any custodial agreement
or bank account agreement but excluding the swap agreements, the
issuer cash management agreement and the issuer deed of charge) as
may be entered into by the issuer from time to time in connection
with the swap collateral
"SWAP COLLATERAL AVAILABLE
PRINCIPAL AMOUNT"
At any time, the amount of swap collateral which under the terms of
the relevant swap agreement may be applied at that time in
satisfaction of the relevant swap provider's obligations to the
issuer to the extent that such obligations relate to payments to be
made in connection with the issuer pre-enforcement principal
priority of payments or the issuer post-enforcement priority of
payments, as the case may be
"SWAP COLLATERAL AVAILABLE
REVENUE AMOUNT"
At any time, the amount of swap collateral which under the terms of
the relevant swap agreement may be applied at that time in
satisfaction of the relevant swap provider's obligations to the
issuer to the extent that such obligations relate to payments to be
made in connection with the issuer pre-enforcement revenue priority
of payments or the issuer post- enforcement priority of payments, as
the case may be
"SWAP COLLATERAL EXCLUDED
AMOUNT"
At any time, the amount of swap collateral which may not be applied
at that time in satisfaction of the relevant swap provider's
obligations to the issuer under the terms of the relevant swap
agreement
"SWAP EARLY TERMINATION
EVENT"
A circumstance in which a swap agreement can be terminated before
its scheduled termination date
"SWAP PROVIDER DEFAULT"
The occurrence of either a currency swap provider default or a basis
rate swap provider default
"SWAP PROVIDERS"
Each of the basis rate swap provider, the dollar currency swap
provider and the euro currency swap provider, or any one of them as
the context requires
"SWAP REPLACEMENT
PAYMENT"
An amount received by the issuer from a replacement swap provider
upon entry by the issuer into an agreement with such replacement
swap provider replacing a swap agreement which has terminated
following the occurrence of a downgrade termination event
333
"TARGET BUSINESS DAY"
A day on which the Trans-European Automated Real-time Gross
settlement Express Transfer (TARGET) System is open
"TELERATE PAGE NO. 3750"
or "TELERATE PAGE NO.
248" or "TELERATE PAGE
NO. 120"
The display designated as Page 3750 or 248 or 120, as applicable, on
the Dow Jones/Telerate Service (or any other page that may replace
the relevant Telerate Screen number on that service, or any other
service that may be nominated by the British Bankers' Association
(including the Reuters Screen) as the information vendor for the
purposes of displaying British Bankers' Association Interest
Settlement Rates for deposits in the currency concerned)
"THIRD ISSUER"
Granite Mortgages 02-1 plc
"THIRD ISSUER INTERCOMPANY
LOAN"
The intercompany loan entered into on March 20, 2002 between
the third issuer and Funding
"THIRD ISSUER NOTES"
The notes issued by the third issuer on March 20, 2002
"THIRD PARTY AMOUNTS"
The meaning given to it on page 153
"TITLE DEEDS"
For each mortgage loan and its related security and the
mortgaged property relating to it, all conveyancing deeds and
documents which make up the title to the mortgaged property
and the security for the mortgage loan and all searches and
inquiries undertaken in connection with the grant by the
borrower of the related mortgage
"TOGETHER CONNECTIONS
BENEFIT"
The meaning given to it on page 88
"TOGETHER CONNECTIONS
INTEREST"
The meaning given to it on page 88
"TOGETHER CONNECTIONS
MORTGAGE LOAN"
A type of flexible mortgage loan, the primary characteristics
of which are described on page 88
"TOGETHER MORTGAGE LOAN"
A type of flexible mortgage loan which allows the borrower to
obtain an additional unsecured loan and, in some cases, a
credit card, neither of which is secured by the mortgage
relating to the mortgage loan
"TOGETHER VARIABLE
MORTGAGE LOAN"
A type of together mortgage loan as more fully described on page 97
"TRACKER RATE MORTGAGE
LOAN"
A loan where interest is linked to a variable interest rate
other than the standard variable rate; for example, the rate
on a tracker rate mortgage loan may be set at a margin above
sterling LIBOR or above rates set by the Bank of England
"TRANSACTION DOCUMENTS"
The documents listed in "LISTING AND GENERAL INFORMATION" and
any swap collateral ancillary document, any new intercompany
loan agreements, new swap agreements and other documents
relating to new issues of notes by new issuers
"TRANSFER AGENT"
Citibank, N.A., acting through its London branch at 5
Carmelite Street, London EC4Y 0PA and/or any other person for
the time being acting as transfer agent under the paying agent
and agent bank agreement
"TRANSFER OF EQUITY"
A transfer of the equitable and legal title by co-owners to
one of the proprietors of a mortgaged property where the
transferee remains a party to the original mortgage or enters
into a new mortgage over the relevant mortgaged property in
favor of the seller
334
"TRIGGER EVENT"
An asset trigger event and/or a non-asset trigger event
"TRUST CALCULATION PERIOD"
The period from (and including) the first day of each
calendar month to (and including) the last day of the same
calendar month
"TRUST DEED"
The trust deed entered into on or about the closing date, as
amended from time to time, between the issuer and the note
trustee constituting the notes, as further described under
"DESCRIPTION OF THE TRUST DEED"
"TRUST DETERMINATION DATE"
The first day (or, if not a London business day, the next
succeeding London business day) of each calendar month
"TRUST PROPERTY"
The meaning given to it on page 143
"UK LISTING AUTHORITY"
The Financial Services Authority in its capacity as competent
authority under Part VI of the Financial Services and Markets
Act 2000
"UK TAX COUNSEL"
Sidley Austin Brown & Wood
"UNAUTHORIZED
UNDERPAYMENT"
In relation to any flexible mortgage loan has the meaning
given to it on page 96
"UNDERPAYMENT"
A situation where a borrower makes a monthly payment on its
mortgage loan which is less than the required monthly payment
for that month
"UNDERWRITERS"
J.P. Morgan Securities Inc., Lehman Brothers Inc., Citigroup
Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and UBS Securities LLC
"UNDERWRITING AGREEMENT"
The underwriting agreement relating to the sale of the series
1 notes, expected to be dated on or about September 19,
2003, among the issuer, Funding, the mortgages trustee, J.P.
Morgan Securities Inc., Lehman Brothers Inc. and the other
underwriters
"UNITED KINGDOM"
The United Kingdom of Great Britain and Northern Ireland
"US HOLDER"
A beneficial owner of series 1 notes who is a "UNITED STATES
PERSON" or that otherwise is subject to US federal income
taxation on a net income basis in respect of a series 1 note
"UNITED STATES PERSON"
The meaning given to it on page 272
"UNPAID INTEREST"
For any non-cash re-draw of any flexible mortgage loan, the
interest which would, but for that non-cash re-draw, have
been payable in respect of that mortgage loan on the relevant
monthly payment date for that mortgage loan
"UNREGISTERED LAND"
Land, title to which is not registered at H.M. Land Registry
"US PAYING AGENT"
Citibank, N.A., acting through its office at 14th Floor Zone
3, 111 Wall Street, New York, New York 10043
"US TAX COUNSEL"
Sidley Austin Brown & Wood LLP
"UTCCR"
The Unfair Terms in Consumer Contracts Regulations 1999
"VALUATION FEE"
A fee incurred by borrowers as a result of the seller or
administrator obtaining a valuation of the mortgaged property
"VARIABLE MORTGAGE RATE"
The rate of interest which determines the amount of interest
payable each month on a variable rate mortgage loan
"VARIABLE RATE MORTGAGE
LOAN"
A mortgage loan where the interest rate payable by the
borrower varies in accordance with a specified variable rate
335
"VAT"
Value added tax
"W-8BEN"
An IRS Form W-8BEN
"WAFF"
On any date, the weighted average foreclosure frequency for
the mortgage portfolio as calculated by the administrator on
that date in accordance with the calculations for the initial
mortgage portfolio or as agreed by the administrator and the
rating agencies from time to time
"WALS"
On any date, the weighted average loss severity for the
mortgage portfolio as calculated by the administrator on that
date in accordance with the calculations for the initial
mortgage portfolio or as agreed by the administrator and the
rating agencies from time to time
"WE" and "US"
The issuer
"WEIGHTED AVERAGE
FUNDING SHARE
PERCENTAGE"
The meanings given to it under "THE MORTGAGES TRUST --
WEIGHTED AVERAGE FUNDING SHARE PERCENTAGE"
"WEIGHTED AVERAGE SELLER
SHARE PERCENTAGE"
The meanings given to it under "THE MORTGAGES TRUST --
WEIGHTED AVERAGE SELLER SHARE PERCENTAGE"
"WITHHOLDING TAX"
A tax levied under UK law, as further described under
"MATERIAL UNITED KINGDOM TAX CONSEQUENCES"
336
ANNEX A
The following is an extract from the current reports on Form 6-K for the
period from July 1, 2003 through July 31, 2003 for Granite Mortgages 01-1 plc,
Granite Mortgages 01-2 plc, Granite Mortgages 02-1 plc, Granite Mortgages
02-2 plc, Granite Mortgages 03-1 plc, Granite Mortgages 03-2 plc, Granite
Finance Funding Limited and Granite Finance Trustees Limited, as filed with the
SEC on August 29, 2003. The following extract describes certain aspects of the
mortgage loans in the mortgages trust during the period from July 1, 2003
through July 31, 2003.
The monthly current reports which are filed with the SEC on behalf of
Granite Mortgages 03-3 plc, Granite Finance Funding Limited and Granite Finance
Trustees Limited may be accessed as set forth in the prospectus under "WHERE
INVESTORS CAN FIND MORE INFORMATION".
MORTGAGE LOANS
Number of Mortgage Loans in Pool 171,308
Current Balance [GBP]11,974,308,627
Last Month's Closing Trust Assets [GBP]12,065,260,413
Funding Share [GBP]11,702,472,622
Funding Share Percentage 97.73%
Seller Share [GBP]271,836,005
Seller Share Percentage 2.27%
Minimum Seller Share (Amount) [GBP]303,745,028
Minimum Seller Share (% of Total) 2.54%
ARREARS ANALYSIS OF NON REPOSSESSED MORTGAGE LOANS
BY
NUMBER PRINCIPAL ARREARS PRINCIPAL
([GBP]) ([GBP]) (%)
------- -------------- --------- ---------
[less_than][e] 1 Month 169,056 11,837,051,233 0 98.85
[greater_than_equal] 1 [less_than][e]3 Months 1,847 114,060,019 1,031,342 0.95
[greater_than_equal] 3 [less_than][e] 6 Months 320 18,778,132 459,779 0.16
[greater_than_equal] 6 [less_than][e] 9 Months 57 3,169,568 135,168 0.03
[greater_than_equal] 9 [less_than][e] 12 Months 21 940,573 54,475 0.01
[greater_than_equal] 12 Months 7 309,102 96,815 0.00
------- -------------- --------- ---------
Total 171,308 11,974,308,627 1,777,579 100.00
======= ============== ========= =========
337
PROPERTIES IN POSSESSION
PRINCIPAL ARREARS
NUMBER ([GBP]) ([GBP])
------ --------- ----------
Total (since inception) 38 1,966,533 79,221
Properties in Possession 13
Number Brought Forward 6
Repossessed (Current Month) 7
Sold (since inception) 25
Sale Price/Last Loan Valuation 1.07
Average Time from Possession to Sale (days) 120
Average Arrears at Sale [GBP]1,992
Average Principal Loss (Since inception)* [GBP]532
MIG Claims Submitted 4
MIG Claims Outstanding 1
Average Time from Claim to Payment 64
- ----------
*This figure is calculated taking the cumulative principal losses since
inception pre MIG claims divided by the number of properties sold since
inception.
Note: The arrears analysis and repossession information is at close of business
for the report month
SUBSTITUTION NUMBER PRINCIPAL ([GBP])
------- -------------------
Substituted this period 5,387 [GBP]499,998,942
Substituted to date (since March 26, 2001) 244,319 [GBP]17,495,301,495
CPR ANALYSIS
MONTHLY ANNUALISED
------- -----------
Current Month CPR Rate 5.03% 44.96%
Previous Month CPR Rate 5.34% 48.24%
Weighted Average Seasoning (by value) Months 24.72
Weighted Average Remaining Term (by value) Years 19.63
Average Loan Size [GBP]69,899
Weighted Average LTV (by value) 75.06%
PRODUCT BREAKDOWN
Fixed Rate (by balance) 42.81%
Flexible -- Together (by balance) 29.33%
Capped (by balance) 3.31%
Variable (by balance) 24.25%
Tracker (by balance) 0.30%
------
Total 100.0%
======
338
GEOGRAPHIC ANALYSIS
NUMBER % OF TOTAL VALUE ([GBP]) % OF TOTAL
------- ---------- -------------- ----------
East Anglia 4,049 2.36 281,396,253 2.35
East Midlands 14,360 8.38 881,309,115 7.36
Greater London 20,438 11.93 2,267,934,054 18.94
North 24,856 14.51 1,193,838,570 9.97
North West 25,705 15.01 1,445,299,051 12.07
South East 26,950 15.73 2,513,407,381 20.99
South West 12,491 7.29 938,785,796 7.84
Wales 8,390 4.90 463,405,744 3.87
West Midlands 12,951 7.56 834,609,311 6.97
Yorkshire 21,118 12.33 1,154,323,352 9.64
------- ---------- -------------- ----------
Total 171,308 100 11,974,308,627 100
======= ========== ============== ==========
LTV LEVELS BREAKDOWN
NUMBER VALUE ([GBP]) % OF TOTAL
------- -------------- ----------
0%5 [less_than]25% 5,111 197,576,092 1.65
[greater_than_equal] 25% [less_than]50% 19,333 1,284,843,316 10.73
[greater_than_equal] 50% [less_than]60% 12,617 1,007,039,356 8.41
[greater_than_equal] 60% [less_than]65% 7,230 607,097,447 5.07
[greater_than_equal] 65% [less_than]70% 8,640 734,025,119 6.13
[greater_than_equal] 70% [less_than]75% 14,859 1,138,756,750 9.51
[greater_than_equal] 75% [less_than]80% 11,057 933,996,073 7.80
[greater_than_equal] 80% [less_than]85% 12,310 930,403,780 7.77
[greater_than_equal] 85% [less_than]90% 31,971 2,123,044,920 17.73
[greater_than_equal] 90% [less_than]95% 36,855 2,381,689,986 19.89
[greater_than_equal] 95% [less_than]100% 11,231 631,046,065 5.27
[greater_than_equal] 100% 94 4,789,723 0.04
------- -------------- ----------
Total 171,308 11,974,308,627 100.0
======= ============== ==========
NR Current Existing Borrowers' SVR 5.69%
Effective Date of Change March 1, 2003
339
INDEX OF APPENDICES
The following appendices contain the text of the independent accountants'
reports on each of the issuer and Funding received by the directors of the
issuer and Funding, respectively, from the independent accountants to the
issuer and Funding being, in each case, PricewaterhouseCoopers LLP. These
appendices constitute an integral part of this prospectus. The balance sheets
attached as appendices B and F and the financial statements attached as
appendices E, G and H do not comprise the statutory accounts of either the
issuer or Funding. No statutory accounts have been prepared or delivered to the
Registrar of Companies on behalf of the issuer in England and Wales since its
incorporation. The first statutory accounts of the issuer will be drawn up to
December 31, 2003. The first statutory accounts of Funding were prepared and
drawn up from the date of incorporation to December 31, 2001 and filed with the
Registrar of Companies in England and Wales in July 2002. The second statutory
accounts of Funding were prepared and drawn up from December 31, 2001 to
December 31, 2002 and filed with the Registrar of Companies in England and
Wales in July 2003. The accounting reference date for each of the issuer and
Funding will be the last day of December and further statutory accounts will be
drawn up to December 31 and annually on the last day of December thereafter.
During the period from incorporation on July 7, 2003 until August 31, 2003,
the issuer had not traded, and did not have any receipts or payments apart from
the subscriptions referred to in "THE ISSUER". Consequently during this period,
the issuer has neither made a profit nor loss and no profit and loss account
nor cashflow statement has been prepared.
INDEX OF APPENDICES
Appendix A Report of Independent Accountants for Granite Mortgages 03-3 plc
Appendix B Balance Sheet as at August 31, 2003 of Granite Mortgages 03-3 plc
Appendix C Notes to the Balance Sheet of Granite Mortgages 03-3 plc as at
August 31, 2003
Appendix D Report of Independent Accountants for Granite Finance Funding
Limited with respect to the financial statements of Granite Finance Funding
Limited for the year ended December 31, 2002 and for the period from February
14, 2001 to December 31, 2001
Appendix E Consolidated Statements of Income for the year ended December 31,
2002 and for the period from February 14, 2001 to December 31, 2001 of Granite
Finance Funding Limited
Appendix F Consolidated Balance Sheets as at December 31, 2001 and
December 31, 2002 of Granite Finance Funding Limited
Appendix G Consolidated Statements of Changes in Shareholders' Equity for
the year ended December 31, 2002 and for the period from February 14, 2001 to
December 31, 2001 of Granite Finance Funding Limited
Appendix H Consolidated Statements of Cash Flows for the year ended December
31, 2002 and for the period from February 14, 2001 to December 31, 2001 of
Granite Finance Funding Limited
Appendix I Notes to the Financial Statements of Granite Finance Funding
Limited for the year ended December 31, 2002 and for the period from February
14, 2001 to December 31, 2001
340
APPENDIX A
REPORT OF INDEPENDENT ACCOUNTANTS
"To the Board of Directors and Shareholder of Granite Mortgages 03-3 plc
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Granite Mortgages 03-3 plc (the
"COMPANY") at August 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. The balance sheet is the
responsibility of the Company's management; our responsibility is to express an
opinion on the balance sheet based on our audit. We conducted our audit of the
balance sheet in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Newcastle upon Tyne, England
September 16, 2003"
341
APPENDIX B
GRANITE MORTGAGES 03-3 PLC
BALANCE SHEET AS AT AUGUST 31, 2003
AUGUST 31,
2003
NOTE [GBP]
ASSETS
Cash 12,500
----------
TOTAL ASSETS 12,500
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Common stock (authorized 50,000 shares, [gbp]1 par
value, issued and outstanding 50,000 shares
comprising 0 fully paid and 50,000 partly paid to
[gbp]0.25 each) 3 50,000
Less receivable from shareholders 3 (37,500)
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 12,500
==========
The notes on the following page form an integral part of this financial
statement.
342
APPENDIX C
GRANITE MORTGAGES 03-3 PLC
NOTES TO THE BALANCE SHEET AS AT AUGUST 31, 2003
1 ACCOUNTING POLICIES
The financial information for Granite Mortgages 03-3 plc (the "COMPANY") set
out in the balance sheet has been prepared under the historical cost convention
and in accordance with accounting principles generally accepted in the United
States of America and in pounds sterling ([GBP]), the Company's operating
currency. The financial statements are reported in accordance with generally
accepted accounting principles in the United States (US GAAP) due to the
Group's annual reporting requirements under the United States Securities
Exchange Act of 1934, as amended (Securities Exchange Act). The statutory
financial statements of the Company required under United Kingdom legislation
are prepared and maintained under generally accepted accounting principles in
the United Kingdom (UK GAAP).
2 NATURE OF OPERATIONS
The Company was incorporated as a public limited company registered in
England and Wales on July 7, 2003 under the name of Granite Mortgages 03-3 plc.
The principal purpose of the Company is to invest the proceeds of the
issuance and sale of asset-backed notes. The Company has, at the date of this
report, yet to commence trading.
3 SHARE CAPITAL
The Company was incorporated with authorized capital of [GBP]50,000
comprising 50,000 ordinary shares of [GBP]1 each.
On July 28, 2003, 50,000 ordinary shares were issued each of which was
partly paid to [GBP]0.25.
4 ULTIMATE HOLDING COMPANY
As at August 31, 2003, the ultimate holding company of the Company was The
Law Debenture Intermediary Corporation plc, a company registered in England and
Wales. The Law Debenture Intermediary Corporation plc holds all of the
beneficial interest in the issued shares of Granite Finance Holdings Limited, a
company registered in England and Wales (which holds all of the beneficial
interest in the issued shares of Granite Finance Funding Limited, and which, in
turn, holds all of the beneficial interest in the issued shares of the Company)
on a discretionary trust for charitable purposes.
343
APPENDIX D
REPORT OF INDEPENDENT ACCOUNTANTS
"To the Board of Directors and shareholder of Granite Finance Funding Limited
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, statements of changes in shareholder's
equity and statements of cashflows present fairly, in all material respects,
the financial position of Granite Finance Funding Limited and its subsidiaries
(the "GROUP") as at December 31, 2002 and as at December 31, 2001 and the
results of its operations and cashflows for the year ended December 31, 2002
and for the period from February 14, 2001 to December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Group's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free from material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Newcastle upon Tyne, England
May 16, 2003"
344
APPENDIX E
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED STATEMENTS OF INCOME
YEAR PERIOD
ENDED ENDED
DECEMBER 31 DECEMBER 31
NOTE 2002 2001
----------- -----------
[GBP]'000 [GBP]'000
OTHER REVENUE
Other income 3,536 854
Interest income 3 296,584 97,772
----------- -----------
TOTAL OTHER REVENUE -- CONTINUING OPERATIONS 300,120 98,626
=========== ===========
COSTS AND EXPENSES
Administration expenses (6,325) (1,850)
Interest expense 4 (272,154) (93,772)
Provision for bad and doubtful debts (5,380) ---
Unrealized loss on derivatives (344,466) (39,796)
Foreign currency translation gain 332,872 7,250
Deferred purchase consideration --- 20,000
----------- -----------
TOTAL COSTS AND EXPENSES -- CONTINUING
OPERATIONS (295,453) (108,168)
----------- -----------
INCOME/(LOSS) BEFORE TAX EXPENSE 5 4,667 (9,542)
Income taxes 6 (12) ---
----------- -----------
NET INCOME/(LOSS) 4,655 (9,542)
=========== ===========
EARNINGS PER SHARE FOR NET INCOME
Basic per ordinary share 104.6p (519.1)p
=========== ===========
Fully diluted per ordinary share 104.6p (519.1)p
=========== ===========
The notes on the following pages form an integral part of these consolidated
financial statements.
345
APPENDIX F
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER DECEMBER
31 31
NOTE 2002 2001
--------- ---------
[GBP]'000 [GBP]'000
ASSETS
CURRENT ASSETS
Restricted cash 484,829 185,562
Issue costs 7 14,338 7,027
Accounts receivable 8 40,328 16,501
--------- ---------
TOTAL CURRENT ASSETS 539,495 209,090
========= =========
INVESTMENTS AND OTHER ASSETS
Advance to Granite Finance Trustees Limited 9 7,116,008 2,765,673
--------- ---------
TOTAL INVESTMENTS AND OTHER ASSETS 7,116,008 2,765,673
========= =========
TOTAL ASSETS 7,655,503 2,974,763
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Other accounts payable and accrued expenses 10 101,419 45,209
Income tax payable 12 ---
Derivatives 384,262 39,796
--------- ---------
TOTAL CURRENT LIABILITIES 485,693 85,005
========= =========
LONG TERM DEBT
Asset-backed notes 7,113,331 2,885,645
Start up loan 61,304 13,618
--------- ---------
TOTAL LONG TERM DEBT 11 7,174,635 2,899,263
========= =========
COMMON STOCK (authorized 100,000 shares of [GBP]1
each (2001: 100,000), issued and outstanding,
62,500 (2001: 37,500)) 12 62 37
Retained earnings (4,887) (9,542)
--------- ---------
Total shareholders' equity (4,825) (9,505)
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 7,655,503 2,974,763
========= =========
The notes on the following pages form an integral part of these consolidated
financial statements.
346
APPENDIX G
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR PERIOD
ENDED ENDED
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
Net income/(loss) for the period 4,655 (9,542)
Retained deficit brought forward (9,542) ---
----------- -----------
RETAINED EARNINGS CARRIED FORWARD (4,887) (9,542)
=========== ===========
Common stock brought forward 37 ---
Shares issued in the period
(25,000 ordinary shares at [GBP]1 per
share: (2001: 37,500)) 25 37
----------- -----------
COMMON STOCK CARRIED FORWARD 62 37
=========== ===========
TOTAL SHAREHOLDERS' EQUITY (4,825) (9,505)
=========== ===========
The notes on the following pages form an integral part of these financial
statements.
347
APPENDIX H
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR PERIOD
ENDED ENDED
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
CASH FLOWS FROM OPERATING ACTIVITIES
Net retained income/(loss) for the period 4,655 (9,542)
Increase in accounts receivable (23,827) (16,501)
Increase in income tax payable 12 ---
Increase in accounts payable 56,210 45,209
Amortization of issue costs 3,238 1,192
Provision for bad and doubtful debts 5,380 ---
Gain on translation of foreign currency (332,872) (7,250)
Decrease in deferred consideration --- (20,000)
Unrealized loss on derivative 344,466 39,796
----------- -----------
NET CASH FROM OPERATING ACTIVITIES 57,262 32,904
=========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES
Payment of advance to Granite Finance
Trustees Limited (5,169,025) (2,980,000)
Proceeds from repayment of advance to
Granite Finance
Trustees Limited 813,310 234,327
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,355,715) (2,745,673)
=========== ===========
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of asset-backed notes 5,184,025 3,010,000
Repayment of asset-backed notes (623,467) (117,105)
Net proceeds from start-up loan 47,686 13,618
Payment of issue costs of asset-backed
notes (10,549) (8,219)
Proceeds from issue of share capital 25 37
----------- -----------
NET CASH FROM FINANCING ACTIVITIES 4,597,720 2,899,331
=========== ===========
NET INCREASE IN CASH AND CASH EQUIVALENTS 299,267 185,562
Cash and cash equivalents at beginning of
the period 185,562 ---
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF THE
PERIOD 484,829 185,562
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 188,055 52,562
----------- -----------
Income taxes paid --- ---
----------- -----------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Deferred consideration --- 20,000
----------- -----------
Reserve fund 15,000 10,000
----------- -----------
The notes on the following pages form an integral part of these consolidated
financial statements.
348
APPENDIX I
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
1. GENERAL INFORMATION
Granite Finance Funding Limited (the "COMPANY") was incorporated on February
14, 2001 as a company with limited liability and domiciled in Jersey for the
purposes of carrying on business. The company commenced business on March 26,
2001. Granite Finance Funding Limited and its subsidiaries, Granite Mortgages
01-1 plc, Granite Mortgages 01-2 plc, Granite Mortgages 02-1 plc, Granite
Mortgages 02-2 plc and Granite Mortgages 03-1 plc collectively comprise the
"GROUP".
The Company borrows indirectly from the Euro markets and from the domestic
US market via its subsidiaries, which are public limited companies organized
under the laws of England and Wales. The sole businesses of the subsidiaries
are the investment of the proceeds of the issuance and sale of asset-backed
notes by lending the proceeds thereof to the Company. Granite Mortgages 03-1
plc was incorporated on December 2, 2002 and has yet to commence trading at the
balance sheet date.
The Group's capital and debt issuance proceeds are invested in the purchase
of a beneficial interest in a pool of mortgage loans and related security which
provide the funds used by the Company to pay interest and repay principal to
the subsidiary companies under the intercompany loans. The pool of mortgage
loans is owned by beneficiaries of a trust administered by Granite Finance
Trustees Limited (the "TRUST"), a fellow subsidiary of Granite Finance Holdings
Limited.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP") and in Pounds Sterling ("[GBP]"), the currency of the United Kingdom,
which is the Group's operating currency. The financial statements are reported
in accordance with US GAAP due to the Group's annual reporting requirements
under the United States Securities Exchange Act of 1934, as amended (the
"SECURITIES EXCHANGE ACT"). The statutory accounting records of the Group are
prepared and maintained under generally accepted accounting principles in the
United Kingdom ("UK GAAP").
CONSOLIDATION
The consolidated financial statements include the accounts of Granite
Finance Funding Limited and its wholly owned subsidiaries Granite Mortgages 01-
1 plc, Granite Mortgages 01-2 plc, Granite Mortgages 02-1 plc, Granite
Mortgages 02-2 plc and Granite Mortgages 03-1 plc. All intercompany
transactions and balances have been eliminated on consolidation.
FOREIGN CURRENCY TRANSLATION
All foreign currency assets and liabilities are translated into Pounds
Sterling at the exchange rates prevailing at the end of the period. Interest
income and expense denominated in foreign currencies are translated into Pounds
Sterling at the exchange rates in force when the transaction arises. Foreign
currency translation effects are reflected on the face of the income statement.
Foreign currency investment and financing activities are economically hedged
into pounds sterling to offset exposures to fluctuating currency exchange
rates. Although these instruments offset exposures, they do not qualify for
hedge accounting under Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS NO.
133").
349
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
DERIVATIVES
Derivative instruments comprise interest rate swaps and currency swaps, and
are used by the Group to minimize interest rate exposures between fixed and
floating rate assets and liabilities and currency risk associated with its
financing activities. Although these instruments offset exposure, they do not
qualify for hedge accounting under SFAS No. 133 due to the differing and
unknown maturities of the underlying mortgage loan assets and the lack of
contemporaneous documentation requirements. All derivatives are recorded on the
balance sheet at fair value with changes in fair value reflected in the income
statement. All derivatives are transacted simultaneously with the purchase or
issuance of the underlying funding instrument. The derivatives are not held for
trading purposes.
INTEREST
Interest income and expense are recognized in the consolidated financial
statements on an accruals basis, except for income on loans taken into
possession which is taken to income when it is received.
FUNDING INSTRUMENTS
Asset-backed notes are stated at amortized cost on the balance sheet.
Premiums/discounts are amortized to the maturity date of each issue using the
straight-line method, which is not materially different from the interest
method.
DISTRIBUTION POLICY
Distributions to shareholders and holders of capital notes are accounted for
when approved by the Board of Directors.
RESTRICTED CASH
The Company holds deposits at banks which pay interest based on quoted 3-
month LIBOR. The use of this cash is restricted to a pre-defined priority of
payments set out in the prospectuses published when the debt securities were
issued. Cash balances can be utilised to meet third party expenses, and to pay
interest and principal to bondholders and swap counterparties with any excess
cash ultimately due as deferred consideration to Northern Rock plc in its
capacity as originator and seller of the loans. Included within restricted cash
are accumulated cash reserves of [GBP]25 million (the "reserve fund") where
bonds issued by Granite Mortgages 01-2 plc and Granite Mortgages 02-1 plc
exceeded the amount which the Company advanced to Granite Finance Trustees
Limited.
ADVANCE TO GRANITE FINANCE TRUSTEES LIMITED
The advance to the Trust is carried at cost, being cash plus initial
deferred consideration, of the Company's initial contributions to the Trust in
consideration for the purchase of the Company's beneficial interest in the
mortgages trust less capital repayments received and the Company's share of
other non-cash movements in the underlying mortgage loans comprising the
mortgages trust.
LOSS PROVISIONING
Specific provision for loss is made at such time as it is determined that an
impairment has occurred and it is anticipated that there will be a loss on
realisation. As of December 31, 2002 there was no specific provision for losses
on the advance because none of the underlying mortgage loans are considered to
be impaired, such that a loss is expected to be realized. A general provision
is maintained to cover inherent losses in the mortgage
350
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
portfolio related to loans that have not yet been specifically identified as
impaired. A statistically based model is used to calculate the appropriate
general provision for each completion year. The model considers appropriate
risk factors specific to the loan portfolio and historical default experience.
DEBT ISSUANCE COSTS
The portion of the direct costs associated with the issue of the notes by
Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc, Granite Mortgages 02-1
plc and Granite Mortgages 02-2 plc that are attributable to the Group are
capitalized and amortized over the expected life of the notes on an effective
yield basis.
DEFERRED PURCHASE CONSIDERATION
Deferred purchase consideration represents amounts owed to Northern Rock plc
under the Mortgage Sale Agreement dated March 26, 2001 (as amended) to be paid
out of realized income of the Group, together with an initial deferred
consideration amount of [GBP]20 million. The deferred consideration is payable
by Granite Finance Funding Limited out of future revenue cashflows to the Trust
who in turn will pay this to Northern Rock plc. Deferred consideration is
payable out of pre-tax profits and is only payable to the extent that adequate
cashflows are generated.
TAXATION
UK corporation tax is provided on the results for the year at amounts
expected to be paid or recovered using the tax rates and laws that have been
enacted or substantially enacted by the balance sheet dates.
Deferred taxation: provision for deferred tax under the liability method is
made in full for all temporary differences. Deferred tax assets are recognized
in full with valuation allowances provided where it is considered more likely
than not that some portion of the deferred tax asset will not be realized.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingencies at the balance sheet date and the
reported amount of revenues and expenses in the reporting period. Actual
results may differ from the estimates used in the financial statements.
3. INTEREST INCOME
YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
2002 2001
----------- ------------
[GBP]'000 [GBP]'000
Interest income on the advance to Granite
Finance Trustees Limited 279,918 92,618
Interest income on cash at bank 16,666 5,154
----------- ------------
Total 296,584 97,772
=========== ============
351
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
4. INTEREST EXPENSE
PERIOD
YEAR ENDED ENDED
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
Interest expense on the asset-backed notes 266,909 92,281
Amortization of issue costs 3,238 1,192
Interest expense on start-up loans 2,007 299
----------- -----------
Total 272,154 93,772
=========== ===========
5. NET INCOME/LOSS BEFORE TAXATION
Loss on ordinary activities before taxation is stated after charging:
PERIOD
YEAR ENDED ENDED
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
Audit fees 56 30
=========== ===========
The Group has no employees. No emoluments were paid to the Directors by the
Group during the period.
6. TAX ON INCOME/(LOSS)
PERIOD
YEAR ENDED ENDED
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
The tax charge for the year comprises:
Current tax on profits for the year --
UK corporation tax 12 ---
----------- -----------
Total current tax 12 ---
Increase/(decrease) in deferred
taxation --- ---
----------- -----------
Total tax charge for the period 12 ---
=========== ===========
All tax relates to continuing operations.
A reconciliation of tax on income/(loss) from continuing operations at the
standard UK corporation tax rate to the Group's effective tax rate for each of
the years ended December 31, 2002 and 2001 is shown as follows:
352
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
PERIOD
YEAR ENDED ENDED
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
Tax on income/(loss) from continuing operations at standard UK
corporation tax rate of 30% (2001: 30%) 1,400 (2,863)
Movement in deferred tax asset not recognized (1,388) 2,866
Other differences --- (3)
----------- -----------
Tax on income/(loss) from continuing operations 12 ---
=========== ===========
EFFECTIVE TAX RATE 0.3% 0%
The tax charge reconciliation uses the standard rate of corporation tax in
the UK of 30%, as this is the jurisdiction in which the Group pays income tax.
DEFERRED TAX
The principal components of the Group's net deferred tax asset/(liability)
calculated under SFAS No. 109, are as follows. Deferred tax has been calculated
using the standard rate of corporation tax in the UK of 30%, as this is the
jurisdiction in which the Group pays income taxes.
2002 2001
--------- ---------
[GBP]'000 [GBP]'000
DEFERRED TAX LIABILITIES:
Excess of book value of
financial instruments
over tax base cost 136 ---
--------- ---------
Total deferred tax
liabilities 136 ---
--------- ---------
DEFERRED TAX ASSETS:
General bad debt
provision 1,614 ---
Deficit of book value of
financial instruments
to tax base costs --- 2,866
--------- ---------
Total deferred tax asset
before valuation
allowance 1,614 2,866
Less: valuation allowance (1,478) (2,866)
--------- ---------
Deferred tax assets less
valuation allowance 136 ---
========= =========
Net deferred tax
liability/(asset) NIL NIL
========= =========
Valuation allowances have been made against the net potential deferred tax
asset at both December 31, 2001 and 2002 (i.e. all of the assets except to the
extent they can be offset against deferred tax liabilities) on the basis that
the directors consider it to be more likely than not that the benefit of the
deferred tax assets will not be realized.
353
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
7. ISSUE COSTS
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
Issue costs 14,338 7,027
=========== ===========
Issue costs include [GBP]10,156,000 (2001: [GBP]4,868,000) which will be
amortized after more than one year. These costs are paid by the Group in
connection with the issue of asset-backed notes by its subsidiaries.
8. ACCOUNTS RECEIVABLE
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
Accrued interest income 3,119 1,623
Other accounts
receivable 24 ---
Amounts due from
Granite Finance
Trustees Limited 37,185 14,878
----------- -----------
Total 40,328 16,501
=========== ===========
9. ADVANCE TO GRANITE FINANCE TRUSTEES LIMITED
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
Balance brought forward 2,765,673 ---
Advance to the Trust 5,169,025 2,980,000
Adjustment to initial
acquired value --- 20,000
Repayment of advance to
the Trust (813,310) (234,327)
Provision for bad and
doubtful debts (5,380) ---
----------- -----------
Total 7,116,008 2,765,673
=========== ===========
The advance is secured by a pool of mortgage loans that have been equitably
assigned by Northern Rock plc to the Trust, as mortgages trustee of the
mortgages trust. The Trust uses a portion of the interest and principal
payments that it receives on the mortgage loans held by it in trust to repay
interest and principal amounts on the loan from the Company.
During the year additional residential mortgage loans were assigned to the
Trust as follows: on March 20, 2002 [GBP]3,000 million, on July 28, 2002
[GBP]50 million and on September 23, 2002 [GBP]3,647 million. On March 20,
2002, the Company purchased an additional share of the beneficial interest in
the trust property from Northern Rock plc of [GBP]2,421 million. On September
23, 2002 the Company purchased a further share of the beneficial interest in
the trust property of [GBP]2,748 million.
354
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
The total securitized loans outstanding in the trust at December 31, 2002
was [GBP]7,311 million, comprising 114,539 loans with an average balance of
[GBP]63,800. Of these loans 31 were 6 or more months in arrears accounting for
a total principal balance of [GBP]1,455,000. There were 12 properties in
possession with a total principal balance of [GBP]701,000. The Company and
Northern Rock plc are beneficially entitled to all of the trust property in
accordance with their respective shares in the trust. Northern Rock plc
continues to service the mortgage assets under an administration agreement
entered into when the Trust was established.
The payment of interest and principal on the advance to the Trust is
dependent upon payment of interest and principal under the mortgage loans held
by the Trust, and is therefore subject to the risk of non-payment of the
mortgage loans. All of the underlying mortgage loans in the Trust were
originated by Northern Rock plc and the following factors mitigate the risks
associated with the failure of customers to settle financial obligations:
* the use of sophisticated credit scoring systems to differentiate
the credit risk associated with residential mortgage loans;
* emphasis on next time buyers and remortgage customers relative to
first time buyers as in Northern Rock's experience customers who
have proven repayment records represent lower risk;
* geographic spread -- distribution channels for new residential
mortgage lending are designed to avoid excessive reliance on any
single geographic region;
* size of loan relative to value of the property -- Northern Rock's
current policy is for at least 60% of new residential mortgage
lending to have loan to value ratios of 90% or lower.
All of the underlying mortgage assets are secured on properties in England
or Wales and hence the Company is dependent upon the state of the United
Kingdom economy and market interest rates. There can be no assurance that a
weakening in the United Kingdom economy will not have a material effect on the
Company's future performance.
10. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
Accrued interest expense 73,682 31,878
Accruals and other
accounts payable 27,737 13,331
----------- -----------
Total 101,419 45,209
=========== ===========
11. LONG TERM DEBT
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
Asset-backed notes 7,113,331 2,885,645
Start up loan 61,304 13,618
----------- -----------
Total 7,174,635 2,899,263
=========== ===========
355
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
Interest payable on the start-up loans is based on LIBOR which resets on
January 20, 2003. At December 31, 2002 LIBOR had previously fixed at 3.99563%
in relation to [GBP]37.4 million of the start-up loan and had previously fixed
at 3.975% in relation to the remaining start-up loan.
The payment of interest and principal on the asset-backed notes issued by
Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc, Granite Mortgages 02-1
plc and Granite Mortgages 02-2 plc is dependent upon each of those companies
receiving from the Company payment of interest and principal under the inter
company loans made to the Company. The Company's payment of interest and
principal under each intercompany loan is dependent upon the Company receiving
from the Trust payment of interest and principal under the advance. As both
repayment of the advance and repayment of the asset-backed notes are ultimately
dependent upon payment of interest and principal under the mortgage loans held
by the Trust, the advance and the asset-backed notes are subject to the risk of
prepayment of the mortgage loans.
(A) ASSET-BACKED NOTES -- GRANITE MORTGAGES 01-1 PLC
MARGIN OVER MARGIN OVER
LIBOR TO LIBOR AFTER DECEMBER DECEMBER
JANUARY JANUARY 31 31
2008 2008 2002 2001
----------- ----------- --------- ---------
[GBP]'000 [GBP]'000
Series 1 Class A1 Floating Rate Notes January 2011 0.12% pa 0.24% pa 186,150 410,516
Series 1 Class A2 Floating Rate Notes January 2026 0.21% pa 0.42% pa 456,069 507,106
Series 1 Class B Floating Rate Notes January 2041 0.40% pa 0.80% pa 31,025 34,497
Series 1 Class C Floating Rate Notes January 2041 1.40% pa 2.40% pa 41,884 46,572
Series 2 Class A Floating Rate Notes January 2041 0.24% pa 0.48% pa 350,000 350,000
Series 2 Class B Floating Rate Notes January 2041 0.40% pa 0.80% pa 10,000 10,000
Series 2 Class C Floating Rate Notes January 2041 1.40% pa 2.40% pa 15,000 15,000
--------- ---------
TOTAL 1,090,128 1,373,691
========= =========
The notes are repayable in more than 5 years, and are subject to variable
rates of interest. The Series 1 notes are denominated in US Dollars and the
Series 2 notes in Pounds Sterling. Interest is payable on the notes based on
USD 3-month LIBOR for the Series 1 notes and sterling 3-month LIBOR for the
Series 2 notes. At the balance sheet date the rates in force are 1.84% for the
USD 3-month LIBOR and 3.99563% for the sterling 3-month LIBOR.
Both USD and Sterling 3-month LIBOR re-price quarterly, and the next re-
price date after the balance sheet date is January 21, 2003.
356
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
(B) ASSET-BACKED NOTES -- GRANITE MORTGAGES 01-2 PLC
MARGIN OVER MARGIN OVER
LIBOR TO LIBOR AFTER DECEMBER DECEMBER
OCTOBER OCTOBER 31 31
2006 2006 2002 2001
----------- ----------- --------- ---------
[GBP]'000 [GBP]'000
Series 1 Class A1 Floating Rate Notes October 2021 0.23% pa 0.46% pa 603,748 896,924
Series 1 Class B Floating Rate Notes October 2041 0.40% pa 0.80% pa 26,992 30,012
Series 1 Class C Floating Rate Notes October 2041 1.38% pa 2.38% pa 35,989 40,018
Series 2 Class A Floating Rate Notes October 2041 0.25% pa 0.50% pa 500,000 500,000
Series 2 Class B Floating Rate Notes October 2041 0.42% pa 0.84% pa 15,000 15,000
Series 2 Class C Floating Rate Notes October 2041 1.40% pa 2.40% pa 20,000 20,000
Series 2 Class D Floating Rate Notes October 2041 4.60% pa 5.60% pa 10,000 10,000
--------- ---------
TOTAL 1,211,729 1,511,954
========= =========
The notes are repayable in more than 5 years, and are subject to variable
rates of interest. The Series 1 notes are denominated in US Dollars and the
Series 2 notes in Pounds Sterling. Interest is payable on the notes based on
USD 3-month LIBOR for the Series 1 notes and sterling 3-month LIBOR for the
Series 2 notes. At the balance sheet date the rates in force are 1.84% for the
USD 3-month LIBOR and 3.99563% for the sterling 3-month LIBOR.
USD and Sterling 3-month LIBOR re-price quarterly, and the next re-price
date after the balance sheet date is January 21, 2003.
(C) ASSET-BACKED NOTES -- GRANITE MORTGAGES 02-1 PLC
MARGIN OVER MARGIN OVER DECEMBER DECEMBER
LIBOR TO LIBOR AFTER 31 31
APRIL 2007 APRIL 2007 2002 2001
----------- ----------- --------- ---------
[GBP]'000 [GBP]'000
Series 1 Class A1 Floating Rate Notes October 2016 0.10% pa 0.20% pa 271,283 ---
Series 1 Class A2 Floating Rate Notes July 2019 0.16% pa 0.32% pa 790,767 ---
Series 1 Class B Floating Rate Notes April 2042 0.33% pa 0.66% pa 43,249 ---
Series 1 Class C Floating Rate Notes April 2042 1.30% pa 2.30% pa 59,878 ---
Series 2 Class A Floating Rate Notes April 2042 0.20% pa 0.40% pa 460,000 ---
Series 2 Class B Floating Rate Notes April 2042 0.35% pa 0.70% pa 16,200 ---
Series 2 Class C Floating Rate Notes April 2042 1.30% pa 2.30% pa 22,500 ---
Series 2 Class D Floating Rate Notes April 2042 4.50% pa 5.50% pa 15,000 ---
Series 3 Class A Fixed Rate Notes April 2042 N/A 0.42% pa 390,651 ---
Series 3 Class B Floating Rate Notes April 2042 0.35% pa 0.70% pa 13,738 ---
Series 3 Class C Floating Rate Notes April 2042 1.30% pa 2.30% pa 19,077 ---
--------- ---------
TOTAL 2,102,343 ---
========= =========
The notes are repayable in more than 5 years, and are subject to variable
rates of interest, except for the Series 3 Class A notes which pay 5.15%
annually until the payment date in April 2007 then 3-month Euribor plus the
margin shown above. The
357
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
Series 1 notes are denominated in US Dollars, the Series 2 notes in Pounds
Sterling and the Series 3 notes in Euros. Interest is payable on the notes
based on USD 3-month LIBOR for the Series 1 notes, sterling 3-month LIBOR for
the Series 2 notes and 3-month Euribor for the Series 3 Notes. At the balance
sheet date the rates in force are 1.84% for the USD 3-month LIBOR, 3.99563% for
the sterling 3-month LIBOR and 3.313% for 3-month Euribor.
USD and Sterling 3-month LIBOR and 3-month Euribor re-price quarterly, and
the next re-price date after the balance sheet date is January 21, 2003.
(D) ASSET-BACKED NOTES -- GRANITE MORTGAGES 02-2 PLC
MARGIN OVER MARGIN OVER
LIBOR TO LIBOR AFTER DECEMBER DECEMBER
JANUARY JANUARY 31 31
2008 2008 2002 2001
----------- ----------- --------- ---------
[GBP]'000 [GBP]'000
Series 1 Class A1 Floating Rate Notes January 2017 0.11% pa 0.22% pa 403,326 ---
Series 1 Class A2 Floating Rate Notes January 2043 0.18% pa 0.36% pa 713,577 ---
Series 1 Class B Floating Rate Notes January 2043 0.37% pa 0.74% pa 37,230 ---
Series 1 Class C Floating Rate Notes January 2043 1.25% pa 2.25% pa 54,604 ---
Series 2 Class A Floating Rate Notes January 2043 0.19% pa 0.38% pa 716,192 ---
Series 2 Class B Floating Rate Notes January 2043 0.37% pa 0.74% pa 26,694 ---
Series 2 Class C Floating Rate Notes January 2043 1.25% pa 2.25% pa 34,508 ---
Series 3 Class A Floating Rate Notes January 2043 0.19% pa 0.38% pa 665,000 ---
Series 3 Class B Floating Rate Notes January 2043 0.37% pa 0.74% pa 25,000 ---
Series 3 Class C Floating Rate Notes January 2043 1.25% pa 2.25% pa 33,000 ---
--------- ---------
TOTAL 2,709,131 ---
========= =========
The notes are repayable in more than 5 years, and are subject to variable
rates of interest. The Series 1 notes are denominated in US Dollars, the Series
2 notes in Euros and the Series 3 notes in Pounds Sterling. Interest is payable
on the notes based on USD 3-month LIBOR for the Series 1 notes, 3-month Euribor
for the Series 2 Notes and sterling 3-month LIBOR for the Series 3 notes. At
the balance sheet date the rates in force are 1.81884% for the USD 3-month
LIBOR, 3.97492% for the sterling 3-month LIBOR and 3.29765% for 3-month
Euribor.
USD and Sterling 3-month LIBOR and 3-month Euribor re-price quarterly, and
the next re-price date after the balance sheet date is January 21, 2003.
12. COMMON STOCK
DECEMBER 31 DECEMBER 31
2002 2001
----------- -----------
[GBP]'000 [GBP]'000
AUTHORISED:
100,000 Ordinary shares of [GBP]1 each 100 100
=========== ===========
CALLED UP, ALLOTTED AND FULLY PAID SHARE CAPITAL
62,500 Ordinary shares of [GBP]1 each (2001:
37,500) 62 37
=========== ===========
358
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
13. CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES
There were no outstanding capital commitments or contingent liabilities at
December 31, 2002 and 2001, respectively.
14. RELATED PARTY TRANSACTIONS
Statement of Financial Accounting Standards No. 57 "Related party
disclosures" defines related parties as follows: Affiliates of the enterprise;
entities for which investments are accounted for by the equity method by the
enterprise; trusts for the benefit of employees, such as pension and profit-
sharing trusts that are managed by or under the trusteeship of management;
principal owners of the enterprise; its management; members of the immediate
families of principal owners of the enterprise and its management; and other
parties with which the enterprise may deal if one party controls or can
significantly influence the management or operating policies of the other to an
extent that one of the transacting parties might be prevented from fully
pursuing its own separate interests. Another party also is a related party if
it can significantly influence the management or operating policies of the
transacting parties or if it has an ownership interest in one of the
transacting parties and can significantly influence the other to an extent that
one or more of the transacting parties might be prevented from fully pursuing
its own separate interests.
The Company, which is a special purpose company, is controlled by its board
of directors. The board of directors consists of three directors. Two of the
Company's three directors are provided by Mourant & Co. Capital (SPV) Limited,
the principal activity of which is providing directors and corporate management
services for special purpose companies. The third director of the Company is an
employee of Northern Rock plc. The Company pays a corporate services fee
pursuant to a corporate services agreement to Mourant & Co. Capital (SPV)
Limited in connection with its provision of corporate management services. The
fees payable to these directors for providing their services are immaterial in
the context of these consolidated financial statements and of the individual
directors.
The total amount paid to Northern Rock plc for administration and cash
management services during the year ended December 31, 2002 was [GBP]141,800
(period ended December 31, 2001 [GBP]72,000).
Northern Rock plc provides the interest rate swap in connection with the
notes issued by Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc, Granite
Mortgages 02-1 plc and Granite Mortgages 02-2 plc. Northern Rock plc is one of
a number of counterparties used by the Group in the normal course of its
business. Northern Rock plc does not hold any capital of the Group.
The Company receives all of its income from the Trust other than bank
interest and receipts under the interest rate and cross currency swaps. During
the period the Company received [GBP]261 million (period ended December 31,
2001: [GBP]80 million) of revenue from the Trust together with [GBP]813 million
of principal (period ended December 31, 2001: [GBP]234 million). The
outstanding loan balance due from the Trust at the period end was [GBP]7,116
million (period ended December 31, 2002: [GBP]2,766 million) with an additional
[GBP]37 million (period ended December 31, 2001: [GBP]15 million) due in
relation to payments collected by the Trust not yet paid over.
359
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
15. DERIVATIVES AND FINANCIAL INSTRUMENTS
The Group enters into derivative transactions, principally interest rate
swaps and currency swaps. The purpose of these transactions is to manage the
interest rate and currency risk arising from the Group's operations and its
sources of finance.
The net loss reflected is attributable to the recognition of losses on
derivatives entered into for hedging purposes. Such recognition is necessary
due to non-compliance with the requirement for contemporaneous hedge
documentation under SFAS No. 133. Because the hedge documentation requirements
were not met, the Group is required to record the changes in the fair value of
the derivatives in the income statement.
Interest rate risk -- interest is received on the advance made by the Group
at various underlying rates. These assets are financed by securities on which
interest is payable at different variable rates. The Group's policy is to match
this interest income and expense by use of interest rate swaps.
Currency risk -- all of the Group's assets and associated income are
denominated in Pounds Sterling, although some of the asset-backed notes issued
by Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc, Granite Mortgages
02-1 plc and Granite Mortgages 02-2 plc and associated interest expense are
denominated in US dollars or Euros. The Group's policy is to match this
currency income and expense by the use of currency swaps.
(A) MATURITY PROFILE OF FINANCIAL LIABILITIES
DECEMBER 31 DECEMBER 31 DECEMBER 31
2002 2002 2002
DEBT OTHER TOTAL
SECURITIES LIABILITIES LIABILITIES
----------- ----------- -----------
[GBP]'000 [GBP]'000 [GBP]'000
Within 1 year or less or on demand --- 485,693 485,693
More than 1 year but not more than
2 years --- --- ---
More than 2 years but not more
than 5 years --- --- ---
More than 5 years 7,113,331 61,304 7,174,635
----------- ----------- -----------
TOTAL 7,113,331 546,997 7,660,328
=========== =========== ===========
The maturity profiles reflect the legal maturity dates for the debt
securities. The actual lives of the debt securities cannot be predicted due
principally to the unknown rate at which mortgage loans will be repaid. Any
principal receipts from the Company's interest in the Trust, up to an
annualised constant prepayment rate of 15%, are utilised to repay the debt
securities. The Company also has options to redeem the loan notes on the
quarterly payment dates falling in October 2006 for the debt securities issued
by Granite Mortgage 01-2 plc, falling in April 2007 for the debt securities
issued by Granite Mortgage 02-1 plc and falling in January 2008 for the
remaining debt securities, or in each case on any quarterly payment date
thereafter.
360
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
DECEMBER 31 DECEMBER 31 DECEMBER 31
2001 2001 2001
DEBT OTHER TOTAL
SECURITIES LIABILITIES LIABILITIES
----------- ----------- -----------
[GBP]'000 [GBP]'000 [GBP]'000
Within 1 year or less or on demand --- 85,005 85,005
More than 1 year but not more than
2 years --- --- ---
More than 2 years but not more
than 5 years --- --- ---
More than 5 years 2,885,645 13,618 2,899,263
----------- ----------- -----------
TOTAL 2,885,645 98,623 2,984,268
=========== =========== ===========
There are no material undrawn committed borrowing facilities.
(B) INTEREST RATE PROFILE OF FINANCIAL ASSETS AND LIABILITIES
DECEMBER 31 DECEMBER 31 DECEMBER 31
2002 2002 2002
TOTAL FLOATING RATE NON-INTEREST BEARING
----------- ------------- --------------------
[GBP]'000 [GBP]'000 [GBP]'000
Assets 7,655,503 7,600,837 54,666
Liabilities shareholders' and equity 7,665,503 7,174,635 480,868
=========== ============= ====================
DECEMBER 31
DECEMBER 31 DECEMBER 31 2001
2001 2001 NON-INTEREST
TOTAL FLOATING RATE BEARING
----------- ------------- ------------
[GBP]'000 [GBP]'000 [GBP]'000
Assets 2,974,763 2,951,235 23,528
Liabilities shareholders and equity 2,974,763 2,899,263 75,500
=========== ============= ============
Benchmark rates for determining interest payments for the floating rate
assets and liabilities are given in the note to the accounts relevant to the
financial instrument type. All floating rate assets and liabilities reprice
within 3 months.
(C) CURRENCY PROFILE
All the Series 1 notes listed in Note 10 are denominated in US Dollars -- a
total of [GBP]4,132 million ($6,052.8 million). The Series 3 Notes for Granite
Mortgages 02-1 plc and the Series 2 Notes for Granite Mortgages 02-2 plc are
denominated in Euros -- a total of [GBP]1,164 million ([e]1,844.4 million). At
December 31, 2001 there were no Euro denominated debt securities in issue while
Dollar denominated issues totalled [GBP]1,966 million ($2,849 million). Foreign
currency investment and financing activities are economically hedged into
pounds sterling to offset exposures to fluctuating currency exchange rates.
361
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
Disclosures in the table below are in accordance with SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments".
Fair values have been estimated using quoted marked prices where available.
Where no ready markets exist and hence quoted market prices are not available,
appropriate techniques are used to estimate fair values which take account of
the characteristics of the instruments, including the expected future cash
flows, market interest rates and prices available for similar instruments.
DECEMBER 31 DECEMBER 31
2002 2002 DECEMBER 31
CARRYING FAIR 2002
AMOUNT VALUE DIFFERENCE
----------- ----------- -----------
[GBP]'000 [GBP]'000 [GBP]'000
NON-TRADING ASSETS
Cash and cash equivalents 484,829 484,829 ---
Advance to Granite Finance Trustees Limited 7,116,008 7,116,008 ---
NON-TRADING LIABILITIES
Asset-backed notes 7,113,331 7,469,077 355,746
Other liabilities 61,304 61,304 ---
Derivatives 384,262 384,262 ---
=========== =========== ===========
DECEMBER 31 DECEMBER 31
2001 2001 DECEMBER 31
CARRYING FAIR 2001
AMOUNT VALUE DIFFERENCE
----------- ----------- -----------
[GBP]'000 [GBP]'000 [GBP]'000
NON-TRADING ASSETS
Cash and cash
equivalents 185,562 185,562 ---
Advance to Granite
Finance Trustees
Limited 2,765,673 2,765,673 ---
NON-TRADING
LIABILITIES
Asset-backed notes 2,885,645 2,892,066 6,421
Other liabilities 13,618 13,618 ---
Derivatives 39,796 39,796 ---
=========== =========== ===========
The Group had no trading assets or liabilities at December 31, 2002 and
2001, respectively.
The advance to the Trust has been valued based on future cash flows. The
asset-backed notes have been valued based on third-party quotes for the trading
price thereof as at December 31, 2002 and 2001, respectively.
Northern Rock plc has entered written fixed rate swaps with external third
parties to mitigate the interest rate risks associated with the fixed rate
mortgage loans in the mortgages trust. A blended rate was then calculated for
the swaps weighted by value in respect of the different mortgage loan products
in the mortgages trust, as each of such products carried a different interest
rate relative to each other mortgage loan product. This rate was then applied
to the fixed rate mortgage loans in the mortgages trust for the swaps
362
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
between Northern Rock plc and Granite Mortgages 01-1 plc, Granite Mortgages 01-
2 plc, Granite Mortgages 02-1 plc and Granite Mortgages 02-2 plc. The external
swaps, which were retained by Northern Rock plc, were revalued at market value
on December 31, 2002 and the revaluations as then applied to the swaps between
Northern Rock plc and Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc,
Granite Mortgages 02-1 plc and Granite Mortgages 02-2 plc to revalue the
derivative.
Both the cross-currency swap agreements and the basis rate swap agreements
contain provisions whereby in the event of a ratings downgrade for the swap
counterparty, as a result of which the then-current ratings of the debt
securities in issue would be adversely affected, the counterparty will be
required to provide collateral for its obligations in order to maintain the
then-current ratings of the debt securities, or alternatively to arrange for
its obligations to be transferred to a suitably rated counterparty.
Where collateral is required to be posted, a separate weekly mark to market
valuation is undertaken for each swap and for any individual swap where the
valuation is in favour of the Company, the swap counterparty is required to
post collateral, in the form of cash or securities or both. The collateral is
held in a custodial account in the name of the Company.
17. MATERIAL SUBSEQUENT EVENTS
On January 27, 2003 the Company purchased a further beneficial interest in
the assets of the Trust for a cash consideration of [GBP]3,010 million financed
by the receipt of a loan from Granite Mortgages 03-1 plc, which commenced
trading on that date. On the same date the beneficial interest in a further
[GBP]4,060 million was assigned to the Trust by Northern Rock plc, the
originator of the loans.
On March 3, 2003 Granite Mortgages 03-2 plc was incorporated with a called
up share capital of 50,000 ordinary shares of [GBP]1 each partly paid to
[GBP]0.25. The entire share capital of Granite Mortgages 03-2 plc was acquired
by the Company funded by an increase in its issued share capital of
[GBP]12,500.
18. RECENT ACCOUNTING DEVELOPMENTS
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", ("FIN 45"). FIN 45 clarifies
the requirements of SFAS No. 5, "Accounting for Contingencies", relating to a
guarantor's accounting for, and disclosure of, the issuance of certain types of
guarantees. FIN 45 requires the Company to disclose information about
obligations under certain guarantee arrangements, defining a guarantee as a
contract that contingently requires the Company to pay a guaranteed party based
on (a) changes in an underlying asset, liability, or equity security of the
guaranteed party, or (b) a third party's failure to perform under a specified
agreement. FIN 45's provisions for initial recognition and measurement are to
be applied on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
guarantor's previous accounting for guarantees that were issued before the date
of FIN 45's initial application may not be revised or restated to reflect the
effect of the recognition and measurement provisions of FIN 45. The Company has
not entered into any guarantee arrangements and accordingly the adoption of the
recognition and initial measurement requirements of FIN 45 are not expected to
have a material effect on the Group's financial position or results of
operations.
363
APPENDIX I (CONTINUED)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND FOR
THE PERIOD FROM FEBRUARY 14, 2001 TO DECEMBER 31, 2001
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an interpretation of ARB 51" ("FIN 46"). The primary objectives of
FIN 46 are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights ("variable
interest entities" or "VIEs") and how to determine when and which business
enterprise should consolidate the VIE (the "primary beneficiary"). This
consolidation model applies to an entity in which either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without receiving additional subordinated financial support from other parties.
In addition, FIN 46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make additional
disclosures. The effective date relating to implementation and disclosure
requirements included in FIN 46 (although early adoption is permitted) are for
VIEs created before February 1, 2003, effective no later than the beginning of
the first interim or annual reporting period beginning after June 15, 2003, and
for VIEs created after January 31, 2003, effective immediately.
As the results of all the subsidiaries of the Company are already
consolidated FIN 46 will not have any material impact on the financial
statements. The Company has no exposure to loss as a result of its involvement
with its subsidiaries -- the principal activity of each of the subsidiaries is
the investment of the proceeds of the issue of asset backed loan notes.
364
REGISTERED OFFICE OF THE ISSUER
GRANITE MORTGAGES 03-3 PLC
Fifth Floor
100 Wood Street
London EC2V 7EX
ADMINISTRATOR
NORTHERN ROCK PLC
Northern Rock House
Gosforth
Newcastle upon Tyne
NE3 4PL
NOTE TRUSTEE AND SECURITY TRUSTEE PRINCIPAL PAYING AGENT, COMMON DEPOSITARY
AND REGISTRAR
THE BANK OF NEW YORK
48th Floor CITIBANK, N.A.
One Canada Square 5 Carmelite Street
London E14 5AL London EC4Y 0PA
US PAYING AGENT AGENT BANK
CITIBANK, N.A. CITIBANK, N.A.
14th Floor Zone 3 5 Carmelite Street
111 Wall Street London EC4Y 0PA
New York, New York 10043
LEGAL ADVISERS TO THE UNDERWRITERS, THE MANAGERS,
THE NOTE TRUSTEE AND THE SECURITY TRUSTEE
as to English and US law
ALLEN & OVERY
One New Change
London EC4M 9QQ
LEGAL ADVISERS TO THE ISSUER AND THE ADMINISTRATOR
as to English and US law
SIDLEY AUSTIN BROWN & WOOD
1 Threadneedle Street
London EC2R 8AW
LEGAL ADVISERS TO FUNDING AND THE MORTGAGES TRUSTEE
as to Jersey law
MOURANT DU FEU & JEUNE
4 Royal Mint Court
London EC3N 4HJ
AUTHORIZED ADVISOR
J.P. MORGAN SECURITIES LTD.
125 London Wall
London EC2Y 5AJ
THROUGH AND INCLUDING DECEMBER 18, 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.
GRANITE MORTGAGES 03-3 PLC
$[750,000,000] series 1 class A1 floating rate notes due January 2019
$[750,000,000] series 1 class A2 floating rate notes due January 2024
$[500,000,000] series 1 class A3 floating rate notes due January 2044
$[72,000,000] series 1 class B floating rate notes due January 2044
$[27,000,000] series 1 class M floating rate notes due January 2044
$[62,100,000] series 1 class C floating rate notes due January 2044
---------------
PROSPECTUS
---------------
JOINT UNDERWRITERS FOR THE SERIES 1 CLASS A NOTES
JPMORGAN LEHMAN BROTHERS
CITIGROUP MERRILL LYNCH & CO. UBS INVESTMENT BANK
JOINT UNDERWRITERS FOR THE SERIES 1 CLASS B NOTES, THE SERIES 1 CLASS M NOTES
AND THE SERIES 1 CLASS C NOTES
JPMORGAN LEHMAN BROTHERS
SEPTEMBER [19], 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=(GBP)0.6215), 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............................. $[174,832.99]
Expenses of qualification under state securities laws (including
legal fees)..................................................................... $0
Printing and engraving expenses ................................................ $145,000
Legal fees and expenses......................................................... $1,350,000
Accounting fees and expenses.................................................... $115,000
Trustee's fees and expenses..................................................... $7,500
Rating agency fees.............................................................. $515,000
Miscellaneous................................................................... $100,000
--------------------
Total........................................................................... $[2,407,332.99]
--------------------
* All amounts are estimates except for the SEC registration fee
Item 32. Sales to Special Parties
Not applicable.
Item 33. Recent Sales of Unregistered Securities
Not applicable.
Item 34. Indemnification of Directors and Officers
Granite Mortgages 03-3 plc (the "issuer")
Subject to the provisions of the Companies Act 1985, the laws which
govern the organization of the issuer provide for every director or other
officer or auditor of the issuer to be indemnified out of the assets of the
issuer against any liability incurred by him in defending any proceedings,
whether civil or criminal, in which judgment is given in his favor or in which
he is acquitted or in connection with any application in which relief is
granted to him by the court from liability for negligence, default, breach of
duty or breach of trust in relation to the affairs of the issuer.
Granite Finance Funding Limited ("Funding")
Subject to the provisions of the Companies (Jersey) Law 1991, the laws
which govern the organization of Funding permit every director or other
officer or auditor of Funding to be indemnified out of the assets of Funding
against any liability incurred by him in defending any proceedings, whether
civil or criminal, in which judgment is given in his favor or in which he is
II-1
acquitted or in connection with any application in which relief is granted to
him by the court from liability for negligence, default, breach of duty or
breach of trust in relation to the affairs of Funding.
Granite Finance Trustees Limited (the "mortgages trustee")
Subject to the provisions of the Companies (Jersey) Law 1991, the laws
which govern the organization of the mortgages trustee permit every director
or other officer or auditor of the mortgages trustee to be indemnified out of
the assets of the mortgages trust against any liability incurred by him in
defending any proceedings, whether civil or criminal, in which judgment is
given in his favor or in which he is acquitted or in connection with any
application in which relief is granted to him by the court from liability for
negligence, default, breach of trust in relation to the affairs of the
mortgages trustee.
Item 35. Treatment of Proceeds from Stock Being Registered
Not applicable.
Item 36. Financial Statements and Exhibits
(a) Financial Statements:
Financial statements for each of Granite Mortgages 03-3 plc as at August
31, 2003 and Granite Finance Funding Limited as at December 31, 2002 and
December 31, 2001 and for the period from February 21, 2001 to December 21, 2001
will be filed by amendment as part of this Registration Statement. There will be
no additional schedules to the financial statements.
(b) Exhibits:
Exhibit No. Description of Exhibit Sequential Page
Number
1.1 Form of Underwriting Agreement*
3.1.1 Memorandum and Articles of Association of Granite Mortgages 03-3 plc*
3.1.2 Memorandum and Articles of Association of Granite Finance Funding Limited*
3.1.3 Memorandum and Articles of Association of Granite Finance Trustees Limited*
4.1.1 Form of Second Amended and Restated Intercompany Loan Terms and Conditions*
4.1.2 Form of Issuer Intercompany Loan Confirmation*
4.2 Form of Seventh Amended and Restated Mortgages Trust Deed*
4.3 Form of Sixth Amended and Restated Mortgage Sale Agreement*
4.4 Form of Issuer Deed of Charge*
4.5.1 Form of Funding Deed of Charge*
4.5.2 Form of Deed of Accession to Funding Deed of Charge*
4.6 Form of Issuer Trust Deed*
II-2
4.7 Form of Issuer Paying Agent and Agent Bank Agreement*
4.8 Form of Third Amended and Restated Cash Management Agreement*
4.9 Form of Issuer Cash Management Agreement*
4.10 Form of Third Amended and Restated Administration Agreement*
4.11 Form of Issuer Post-Enforcement Call Option Agreement*
5.1 Opinion of Sidley Austin Brown & Wood as to legality*
8.1 Opinion of Sidley Austin Brown & Wood as to U.S. tax matters*
8.2 Opinion of Sidley Austin Brown & Wood as to U.K. tax matters*
8.3 Opinion of Mourant du Feu & Jeune as to Jersey tax matters*
10.1 Form of Issuer Basis Rate Swap Agreement*
10.2 Form of Issuer Dollar Currency Swap Agreement*
10.3 Form of Issuer Euro Currency Swap Agreement*
10.4 Form of Issuer Start-up Loan Agreement*
10.5.1 Form of Sixth Amended and Restated Master Definitions Schedule*
10.5.2 Form of Issuer Master Definitions Schedule*
10.6.1 Form of Issuer Corporate Services Agreement*
10.6.2 Form of Corporate Services Agreement (Mortgages Trustee)*
10.6.3 Form of Corporate Services Agreement (Funding)*
23.1 Consent of Sidley Austin Brown & Wood (included in Exhibits 5.1, 8.1 and
8.2)*
23.2 Consent of Mourant du Feu & Jeune (included in Exhibit 8.3)*
23.3 Consent of auditors*
25.1 Statement of Eligibility of Trustee (Form T-1)*
* To be filed 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 defense of any action, suit or proceeding)
is asserted against any of the registrants by such director, officer or
controlling person in connection with the securities being registered,
the relevant registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act of 1933 and
will be governed by the final adjudication of such issue.
II-3
B. Each of the undersigned registrants hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrants pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
registration statement or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized on September 17, 2003.
GRANITE MORTGAGES 03-3 PLC
By: L.D.C. Securitisation Director No. 1 Limited
By: /s/ Ian Bowden
Name: Ian Bowden
Title: Director
GRANITE FINANCE FUNDING LIMITED
By: /s/ Jonathan D. Rigby
Name: Jonathan D. Rigby
Title: Director
GRANITE FINANCE TRUSTEES LIMITED
By: /s/ Richard Gough
Name: Richard Gough
Title: Director
II-5
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment thereto has been signed by the following
persons in the capacities and on the dates indicated.
Granite Mortgages 03-3 plc
Signature Title Date
L.D.C. SECURITISATION DIRECTOR NO. 1 LIMITED Director September 17, 2003
By: /s/ Ian Bowden
Name: Ian Bowden
Title: Director
L.D.C. SECURITISATION DIRECTOR NO. 2 LIMITED Director September 17, 2003
By: /s/ Sharon Tyson
Name: Sharon Tyson
Title: Director
[Additional Signature Pages Follow]
II-6
Granite Finance Funding Limited
Signature Title Date
By: /s/ Jonathan D. Rigby Director September 17, 2003
Name: Jonathan D. Rigby
By: /s/ Nigel C. Bradley Director September 17, 2003
Name: Nigel C. Bradley
[Additional Signature Pages Follow]
II-7
Granite Finance Trustees Limited
Signature Title Date
By: /s/ Julia Chapman Director September 17, 2003
Name: Julia Chapman
By: /s/ Richard Gough Director September 17, 2003
Name: Richard Gough
By: /s/ Daniel Le Blancq Director September 17, 2003
Name: Daniel Le Blancq
[Additional Signature Page Follows]
II-8
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE MORTGAGES 03-3 plc
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Granite Mortgages 03-3
plc, has signed this registration statement or amendment thereto in New York,
New York on September 17, 2003.
By: /s/ Donald J.Puglisi
Name: Donald J. Puglisi
Office: Managing Director
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE FINANCE FUNDING LIMITED
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Granite Finance Funding
Limited, has signed this registration statement or amendment thereto in New
York, New York on September 17, 2003.
By: /s/ Donald J.Puglisi
Name: Donald J. Puglisi
Office: Managing Director
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE FINANCE TRUSTEES LIMITED
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Granite Finance
Trustees Limited, has signed the registration statement or amendment thereto
in New York, New York on September 17, 2003.
By: /s/ Donald J.Puglisi
Name: Donald J. Puglisi
Office: Managing Director
II-9
EXHIBIT INDEX
Exhibit No. Description of Exhibit Sequential Page
Number
1.1 Form of Underwriting Agreement*
3.1.1 Memorandum and Articles of Association of Granite Mortgages 03-3 plc*
3.1.2 Memorandum and Articles of Association of Granite Finance Funding Limited*
3.1.3 Memorandum and Articles of Association of Granite Finance Trustees Limited*
4.1.1 Form of Second Amended and Restated Intercompany Loan Terms and Conditions*
4.1.2 Form of Issuer Intercompany Loan Confirmation*
4.2 Form of Seventh Amended and Restated Mortgages Trust Deed*
4.3 Form of Sixth Amended and Restated Mortgage Sale Agreement*
4.4 Form of Issuer Deed of Charge*
4.5.1 Form of Funding Deed of Charge*
4.5.2 Form of Deed of Accession to Funding Deed of Charge*
4.6 Form of Issuer Trust Deed*
4.7 Form of Issuer Paying Agent and Agent Bank Agreement*
4.8 Form of Third Amended and Restated Cash Management Agreement*
4.9 Form of Issuer Cash Management Agreement*
4.10 Form of Third Amended and Restated Administration Agreement*
4.11 Form of Issuer Post-Enforcement Call Option Agreement*
5.1 Opinion of Sidley Austin Brown & Wood as to legality*
8.1 Opinion of Sidley Austin Brown & Wood as to U.S. tax matters*
8.2 Opinion of Sidley Austin Brown & Wood as to U.K. tax matters*
8.3 Opinion of Mourant du Feu & Jeune as to Jersey tax matters*
10.1 Form of Issuer Basis Rate Swap Agreement*
10.2 Form of Issuer Dollar Currency Swap Agreement*
10.3 Form of Issuer Euro Currency Swap Agreement*
10.4 Form of Issuer Start-up Loan Agreement*
10.5.1 Form of Sixth Amended and Restated Master Definitions Schedule*
10.5.2 Form of Issuer Master Definitions Schedule*
10.6.1 Form of Issuer Corporate Services Agreement*
10.6.2 Form of Corporate Services Agreement (Mortgages Trustee)*
10.6.3 Form of Corporate Services Agreement (Funding)*
23.1 Consent of Sidley Austin Brown & Wood (included in Exhibits 5.1, 8.1 and
8.2)*
23.2 Consent of Mourant du Feu & Jeune (included in Exhibit 8.3)*
23.3 Consent of auditors*
</table>
II-10
25.1 Statement of Eligibility of Trustee (Form T-1)*
* To be filed by amendment
II-11