NO. 333 - {circle}
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 2003
==============================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------
FORM S-11
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
--------------------------------
PERMANENT FINANCING (NO. 3) PLC
(Exact name of Registrant 1 as specified in its charter)
BLACKWELL HOUSE, GUILDHALL YARD, LONDON EC2V 5AE, UNITED KINGDOM,
(+44) 020 7556 0972
(Address and telephone number of Registrant 1's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-9600
(Name, address and phone number of Registrant 1's agent for service)
PERMANENT FUNDING (NO. 1) LIMITED
(Exact name of Registrant 2 as specified in its charter)
BLACKWELL HOUSE, GUILDHALL YARD, LONDON EC2V 5AE, UNITED KINGDOM,
(+44) 020 7556 0972
(Address and telephone number of Registrant 2's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-9600
(Name, address and phone number of Registrant 2's agent for service)
PERMANENT MORTGAGES TRUSTEE LIMITED
(Exact name of Registrant 3 as specified in its charter)
47 ESPLANADE, ST. HELIER, JERSEY JE1 0BD, (+44) 01534 510 924
(Address and telephone number of Registrant 3's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-9600
(Name, address and phone number of Registrant 3's agent for service)
Copies to:
------------------------------
David Balai Thomas Jones, Esq. Michael Durrer, Esq.
HBOS Treasury Services plc Allen & Overy Sidley Austin Brown & Wood
33 Old Broad Street One New Change 1 Threadneedle Street
London EC2N 1HZ, United Kingdom London EC4M 9QQ, United Kingdom London EC2R 8AW, 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. {square}
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. {square}
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. {square}
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. {square}
====================================
CALCULATION OF REGISTRATION FEE
TITLE OF SECURITIES BEING REGISTERED PROPOSED PROPOSED AMOUNT OF
MAXIMUM MAXIMUM REGISTRATION
AMOUNT BEING OFFERING PRICE AGGREGATE FEE (3)
REGISTERED PER UNIT (1) OFFERING PRICE (1)
$[1,250,000,000] series 1 class A floating rate notes due 2004 $[1,250,000,000] 100% $[1,250,000,000] $[101,125]
$[{circle}] series 1 class B floating rate notes due 2042 $[{circle}] 100% $[{circle}] $[{circle}]
$[{circle}] series 1 class C floating rate notes due 2042 $[{circle}] 100% $[{circle}] $[{circle}]
$[1,250,000,000] series 2 class A floating rate notes due 2008 $[1,250,000,000] 100% $[1,250,000,000] $[101,125]
$[{circle}] series 2 class B floating rate notes due 2042 $[{circle}] 100% $[{circle}] $[{circle}]
$[{circle}] series 2 class C floating rate notes due 2042 $[{circle}] 100% $[{circle}] $[{circle}]
$[750,000,000] series 3 class A floating rate notes due 2010 $[750,000,000] 100% $[750,000,000] $[60,675]
$[{circle}] series 3 class B floating rate notes due 2042 $[{circle}] 100% $[{circle}] $[{circle}]
$[{circle}] series 3 class C floating rate notes due 2042 $[{circle}] 100% $[{circle}] $[{circle}]
Series 1 term AAA advance (2)
Series 2 term AAA advance (2)
Series 3 term AAA advance (2)
Funding interest in the mortgages trust (2)
- ---------------
(1) Estimated solely for the purposes of computing the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act of
1933, as amended.
(2) These items are not being offered directly to investors. Permanent Mortgages
Trustee Limited is the registrant for the Funding interest in the mortgages
trust and is holding the Funding interest in the mortgages trust on behalf
of Permanent Funding (No. 1) Limited. The Funding interest in the mortgages
trust will be the primary source of payments on the term advances listed.
Permanent Funding (No. 1) Limited is the registrant for those term advances
and is issuing those term advances to Permanent Financing (No. 3) PLC. Those
term advances will be the primary source of payments on the series 1 notes,
the series 2 notes and the series 3 notes being registered hereby,
respectively. Permanent Financing (No. 3) PLC is the registrant for the
series 1 notes, the series 2 notes and the series 3 notes being registered
hereby.
(3) The total registration fee is $[262,925].
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.
This preliminary offering circular is subject to amendment and completion. This
preliminary offering circular does not constitute listing particulars nor has
it been approved by the London Stock Exchange plc or delivered to the Registrar
of Companies in England and Wales. The definitive terms of the transaction
described in this document will be described in the final version of the
offering circular. This preliminary offering circular may not be passed on in
the United Kingdom except to investment professionals or other persons in
circumstances where section 21(1) of the Financial Services and Markets Act
2000 does not apply to the issuer. This preliminary offering circular may not
be distributed to persons outside the United Kingdom other than persons to whom
it may be distributed lawfully and in accordance with all applicable securities
laws.
SUBJECT TO COMPLETION AND AMENDMENT
PERMANENT FINANCING (NO. 3) PLC
Issuer (incorporated in England and Wales with limited liability, registered
number 4907355)
HALIFAX PLC
SELLER, SERVICER AND CASH MANAGER
PRINCIPAL AMOUNT OF
PRICE TO PUBLIC ISSUER NOTES AND PROCEEDS TO ISSUER
PER ISSUER NOTE PER CLASS SCHEDULED
REDEMPTION
CLASS INTEREST RATE DATES
Series 1 class A __% margin above/ below 100% $[1,250,000,000] [September,
one-month USD-LIBOR 2004]
Series 1 class B __% margin above three-month USD-LIBOR 100% $__ ---
Series 1 class C __%margin above three-month USD-LIBOR 100% $__ ---
Series 2 class A __% margin above three-month USD-LIBOR 100% $[1,250,000,000] [December
2006]
Series 2 class B l%margin above three-month 100% $__ ---
USD-LIBOR
Series 2 class C __% margin above three-month USD-LIBOR 100% $__ ---
Series 3 class A __% margin above three-month USD-LIBOR 100% $[750,000,000] __ and __
Series 3 class B __% margin above three-month USD-LIBOR 100% $__ ---
Series 3 class C __% margin above three-month USD-LIBOR 100% $__ ---
FINAL MATURITY DATE
CLASS
Series 1 class A [September
2004]
Series 1 class B [June 2042]
Series 1 class C [June 2042]
Series 2 class A [December
2008]
Series 2 class B [June 2042]
Series 2 class C [June 2042]
Series 3 class A __
Series 3 class B [June 2042]
Series 3 class C [June 2042]
* The principal asset from which Permanent Financing (No. 3) PLC will
make payments on the issuer notes is an intercompany loan to an
affiliated company called Permanent Funding (No. 1) Limited.
* The principal asset from which Permanent Funding (No. 1) Limited
will make payments on the intercompany loan is its interest in a
master trust over a pool of residential mortgage loans held by
Permanent Mortgages Trustee Limited.
* The residential mortgage loans were originated by Halifax plc and
are secured over properties located in England and Wales. The
transaction documents are governed by English law (other than the
issuer underwriting agreement, which is governed by New York law
and the mortgages trustee corporate services agreement, which is
governed by Jersey law).
* Permanent Holdings Limited, the parent of Permanent Financing (No.
3) PLC and Permanent Funding (No. 1) Limited, is also the parent of
the previous issuers, Permanent Financing (No. 1) PLC and Permanent
Financing (No. 2) PLC, which have issued the previous notes as
referred to in this document. Among others, Permanent Financing
(No. 3) PLC, Permanent Financing (No. 2) PLC and Permanent
Financing (No. 1) PLC will share the security granted by Permanent
Funding (No. 1) Limited to secure its obligations to each of them
under their respective intercompany loans.
PLEASE CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE __ IN THIS
PROSPECTUS.
THE ISSUER NOTES OFFERED BY THIS PROSPECTUS WILL BE OBLIGATIONS OF THE
ISSUER ONLY. THE ISSUER NOTES WILL NOT BE OBLIGATIONS OF HALIFAX PLC OR ANY OF
ITS AFFILIATES OR ANY OF THE UNDERWRITERS.
Application has been made to the UK Listing Authority for each class of
issuer notes to be admitted to the official list maintained by the UK Listing
Authority and to the London Stock Exchange plc for each class of issuer notes
to be admitted to trading on the London Stock Exchange.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE NOTES OR DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENCE.
ARRANGER
CREDIT SUISSE FIRST BOSTON
JOINT LEAD UNDERWRITERS FOR THE CLASS A ISSUER NOTES
[CREDIT SUISSE FIRST BOSTON LLC]
[SALOMON SMITH BARNEY] [UBS SECURITIES LLC]
Preliminary Prospectus dated 26th September, 2003
Subject to conditions described further in this preliminary prospectus,
Permanent Holdings Limited may establish new issuers which will issue new notes
that are secured ultimately over the same property as the issuer notes and may
rank equally or ahead of the notes issued by the issuer.
A note is not a deposit and neither the issuer notes nor the underlying
receivables are insured or guaranteed by any United Kingdom or United States
governmental agency.
Currently, there is no public market for the issuer notes.
We expect that delivery of the issuer notes offered by this prospectus will
be made to investors in book-entry form through The Depository Trust Company on
or about __, 2003.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements including, but not
limited to, statements made under the captions "RISK FACTORS", "THE LOANS",
"THE SERVICER", "THE SERVICING AGREEMENT" and "MATURITY AND PREPAYMENT
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 issuer notes, Halifax 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; government, statutory, regulatory
or administrative initiatives affecting Halifax 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
DEFINED TERMS.............................................................. __
SUMMARY OF PROSPECTUS...................................................... __
RISK FACTORS............................................................... __
US DOLLAR PRESENTATION..................................................... __
THE ISSUER................................................................. __
USE OF PROCEEDS............................................................ __
HALIFAX PLC................................................................ __
FUNDING 1.................................................................. __
THE MORTGAGES TRUSTEE...................................................... __
HOLDINGS................................................................... __
PERMANENT PECOH LIMITED.................................................... __
THE ISSUER SWAP PROVIDERS.................................................. __
THE FUNDING 1 LIQUIDITY FACILITY PROVIDER.................................. __
DESCRIPTION OF THE PREVIOUS ISSUER, THE PREVIOUS NOTES..................... __
THE LOANS.................................................................. __
3
DEFINED TERMS
The principal and technical terms used in this prospectus have the meanings
set forth in the glossary, unless otherwise defined where they appear in the
text.
References in this document to "WE" or "US" mean the issuer and references
to "YOU" mean potential investors in the issuer notes.
References in this prospectus to "[GBP]", "POUNDS" or "STERLING" are to the
lawful currency for the time being of the United Kingdom of Great Britain and
Northern Ireland. References in this prospectus to "US$", "$", "US DOLLARS" or
"DOLLARS" are to the lawful currency of the United States of America.
References to "[GBP]", "EURO" or "EURO" are to the single currency
introduced at the third stage of European Economic and Monetary Union pursuant
to the Treaty establishing the European Communities, as amended from time to
time.
As this transaction is connected, by virtue of its structure, with previous
transactions and may be connected with future transactions, it is necessary in
this prospectus to refer to any or all of these transactions. In respect of
notes, term advances, intercompany loans or other terms derived from or related
to them we use the word "PREVIOUS" when referring to the previous transactions,
the word "ISSUER" when referring to the present transaction, the word "CURRENT"
when referring to the previous transactions and the present transaction, the
word "NEW" when referring to future transactions and "ANY" or "ALL" when
referring to any or all of the current transactions and future transactions.
For example, the "ISSUER NOTES" are the notes issued by Permanent Financing
(No. 3) PLC, the "PREVIOUS NOTES" are the notes issued by each of Permanent
Financing (No. 1) PLC and Permanent Financing (No. 2) PLC, the "CURRENT NOTES"
are the notes issued by Permanent Financing (No. 1) PLC, Permanent Financing
(No. 2) PLC and Permanent Financing (No. 3) PLC, the "NEW NOTES" are notes
which may be issued in future transactions and the "NOTES" are the previous
notes, the issuer notes and any new notes.
4
SUMMARY OF PROSPECTUS
The information on pages __ to __, inclusive, is a summary of the principal
features of the issuer notes, including the loans and the issuer transaction
documents that will generate the income for the issuer to make payments on the
issuer notes. This summary does not contain all of the information that you
should consider before investing in the issuer notes. You should read the
entire prospectus carefully, especially the risks of investing in the issuer
notes discussed under "RISK FACTORS".
OVERVIEW OF THE TRANSACTION
The following is a brief overview of the transaction and is further
illustrated by the "STRUCTURAL DIAGRAM OF THE SECURITISATION BY THE ISSUER"
(the numbers in the diagram refer to the numbered paragraphs in this section).
(1) On 14th June, 2002 and on several subsequent dates, the seller
assigned the loans in the portfolio and their related security to
the mortgages trustee pursuant to the mortgage sale agreement.
These assignments are further described in "ASSIGNMENT OF THE LOANS
AND THEIR RELATED SECURITY". The loans are residential mortgage
loans originated by Halifax plc and secured over residential
properties located in England and Wales.
(2) The mortgages trustee holds the trust property on trust for the
benefit of the seller and Funding 1 pursuant to a mortgages trust
deed initially entered into on 13th June, 2002. On the closing
date, the trust property will include the portfolio which will
consist of the loans, their related security, any accrued interest
on the loans and other amounts derived from the loans and their
related security. The seller and Funding 1 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. On the closing date, the
seller will assign part of its share of the trust property to
Funding 1 pursuant to the terms of the mortgages trust deed. This
assignment is further described in "THE MORTGAGES TRUST DEED".
(3) The mortgages trustee distributes interest on the loans to Funding
1 based on the share that Funding 1 has in the trust property
expressed as a percentage (or if less, the amount that Funding 1
needs to meet its obligations to pay interest on the intercompany
loans and other amounts on the date of distribution). The mortgages
trustee distributes the rest of the interest on the loans to the
seller. The mortgages trustee distributes losses on the loans to
the seller and Funding 1 in accordance with the share that each of
them has in the trust property, expressed as a percentage. These
percentages may fluctuate as described in "THE MORTGAGES TRUST".
The mortgages trustee distributes principal receipts on the loans
depending on whether Funding 1 is required to pay amounts on an
intercompany loan on the next Funding 1 interest payment date or
Funding 1 is accumulating cash to repay a bullet term advance or a
scheduled amortisation instalment. See further "THE MORTGAGES
TRUST".
(4) Funding 1 will use the proceeds of the issuer intercompany loan on
the closing date to pay the seller for an addition to the Funding 1
share of the trust property, thereby increasing Funding 1's share
and reducing the seller's share of the trust property. If Funding 1
has any excess income remaining after paying all amounts that it is
required to pay under the terms of the transaction, then, subject
to applicable rules, that extra income will be allocated and
distributed to the seller by the mortgages trustee.
(5) Funding 1 will use a portion of the amounts received from its share
in the trust property to meet its obligations to pay interest and
principal due to the issuer under the issuer intercompany loan.
Funding 1's obligations to the issuer under the issuer intercompany
loan will be secured under the Funding 1 deed of charge by, among
other things, Funding 1's share of the trust property.
(6) The issuer's obligations to pay principal and interest on the
issuer notes will be funded primarily from the payments of
principal and interest received by it from Funding 1 under the
issuer intercompany loan. The issuer's primary asset will be the
issuer intercompany
5
loan agreement. Neither the issuer nor the noteholders will have
any direct interest in the trust property, although the issuer
will have a shared security interest under the Funding 1 deed of
charge in Funding 1's share of the trust property.
(7) The issuer will sell the issuer notes to investors and then lend
the proceeds to Funding 1 under the issuer intercompany loan
agreement.
(8) These items and their function in the transaction structure are
described later in this prospectus. They are included in the first
diagram below so that investors can refer back to see where they
fit into the structure.
6
STRUCTURAL DIAGRAM OF THE SECURITISATION BY THE ISSUER
[ LOGO Structural diagram of the securitisation by the issuer ]
7
DIAGRAM OF OWNERSHIP STRUCTURE
[ LOGO Diagram of the ownership structure ]
This diagram illustrates the ownership structure of the principal parties to
the transaction, as follows:
* Each of Funding 1, Funding 2, the issuer, the previous issuers, and
the post-enforcement call option holder is a wholly-owned
subsidiary of Permanent Holdings Limited.
* The entire issued share capital of Holdings is held on trust by a
corporate services provider, not affiliated with the seller, under
the terms of a discretionary trust for the benefit of one or more
charities. Any profits received by Holdings, after payment of the
costs and expenses of Holdings, will be paid for the benefit of The
National Society for the Prevention of Cruelty to Children
(registered charity number 216401) in the United Kingdom and for
other charitable purposes selected at the discretion of the
corporate services provider. The payments on your issuer notes will
not be affected by this arrangement.
* The entire issued share capital of the mortgages trustee (not shown
in the diagram above) is held beneficially on trust by SFM Offshore
Limited, a corporate services provider, not affiliated with the
seller, under the terms of a discretionary trust for the benefit of
one or more charities. Any profits received by the mortgages
trustee, after payment of the costs and expenses of the mortgages
trustee, will be paid for the benefit of charities and charitable
purposes selected at the discretion of SFM Offshore Limited. The
payments on your issuer notes will not be affected by this
arrangement.
* Halifax plc has no ownership interest in any of the entities in the
diagrams above. This should ensure, among other things, that the
ownership structure and its impact on investors are not linked to
the credit of Halifax plc, and that Halifax plc has no obligation
to support the transaction financially, although Halifax plc may
still have a connection with the transaction for other reasons
(such as acting as servicer of the loans and as a beneficiary under
the mortgages trust).
* The previous issuers are Permanent Financing (No. 1) PLC and
Permanent Financing (No. 2) PLC, each of which is a wholly-owned
subsidiary of Holdings. The previous issuers issued the previous
notes to investors and loaned the proceeds to Funding 1 pursuant to
separate intercompany loan agreements dated 14th June, 2002 and 6th
March, 2003 respectively. See "-- THE PREVIOUS ISSUERS, NEW
ISSUERS, NEW INTERCOMPANY LOANS, NEW START-UP LOANS AND FUNDING 2".
The issuer notes offered pursuant to this prospectus rank behind,
equally or ahead of the previous notes, as further described under
"-- THE PREVIOUS ISSUERS, NEW ISSUERS, NEW INTERCOMPANY LOANS, NEW
START-UP LOANS AND FUNDING 2". The issuer and the previous issuers
will share in the security granted by Funding 1 for its respective
obligations to them under their respective intercompany loans.
8
* Holdings may establish new issuers that issue new notes that may
rank behind, equally or ahead of the issuer notes, depending on the
ratings of the new notes as described under "-- THE PREVIOUS
ISSUERS, NEW ISSUERS, NEW INTERCOMPANY LOANS, NEW START-UP LOANS
AND FUNDING 2". Any new issuer established after the closing date
will be a wholly-owned subsidiary of Holdings.
* Holdings has established an additional entity, Permanent Funding
(No. 2) PLC ("FUNDING 2"), which may in the future issue new notes
from time to time and use most of the proceeds to pay the seller
for a direct interest in the trust property rather than lending the
proceeds to Funding 1. Funding 2 is a wholly-owned subsidiary of
Holdings.
* In certain circumstances (including when new issuers are
established or Funding 2 becomes a beneficiary of the mortgages
trust), the security trustee will consent to modifications to be
made to some of the issuer transaction documents. Your consent will
not be obtained in relation to those modifications (see further
"RISK FACTORS -- THE SECURITY TRUSTEE MAY AGREE MODIFICATIONS TO
THE ISSUER TRANSACTION DOCUMENTS WITHOUT YOUR PRIOR CONSENT, WHICH
MAY ADVERSELY AFFECT YOUR INTERESTS").
SUMMARY OF THE ISSUER NOTES
In addition to the notes offered by this prospectus, the issuer will also
issue the series 4 class A issuer notes, series 4 class B issuer notes, series
4 class C issuer notes, series 5 class A issuer notes, series 5 class B issuer
notes and series 5 class C issuer notes. These additional issuer notes will be
secured over the same property as the notes offered by this prospectus. These
additional issuer notes have not been registered in the United States and are
not being offered by this prospectus. However, the term "ISSUER NOTES" when
used in this prospectus includes all of the series 1 issuer notes, series 2
issuer notes, series 3 issuer notes, series 4 issuer notes and series 5 issuer
notes, some features of which are summarised in this section.
Some series of issuer notes will be paid ahead of others, regardless of the
ranking of the issuer notes. In particular, some payments on some series of
class B issuer notes and class C issuer notes will be paid before some series
of class A issuer notes, as described in "-- THE ISSUER NOTES -- PAYMENT AND
RANKING OF THE ISSUER NOTES".
9
CLASS OF ISSUER NOTES
---------------------------------------------------------------
SERIES 1 SERIES 1
CLASS A CLASS B
------------------------------- ------------------------------
Principal amount $[1,250,000,000] $__
Credit enhancement: Subordination of the Subordination of the
class B issuer notes class C issuer notes
and the class C issuer and the reserve fund
notes and the reserve
fund
Interest rate: One-month USD-LIBOR [/+] margin Three-month USD-LIBOR + margin
Margin: __% p.a. __% p.a.
Until interest payment date falling in: N/A __
And thereafter: N/A __% p.a.
Scheduled redemption date (s): [September 2004] N/A
Interest accrual method: Actual/360 Actual/360
Interest payment dates: For the series 1 class A issuer notes, monthly in arrear on the
interest payment date falling in each consecutive month. For the other
series 1 issuer notes, quarterly in arrear on the interest payment dates
falling in September, December, March and June of each year. If a trigger
event occurs or the issuer security is enforced prior to the interest
payment date falling in [September 2004], interest and principal due and
payable on the series 1 class A issuer notes will be payable quarterly in
arrear on the interest payment dates falling in September, December, March
and June.
First interest payment date: __ __
Final maturity date: [September 2004] June 2042
Tax treatment: Debt for United States Debt for United States
federal income tax federal income tax
purposes, subject to purposes, subject to
the considerations the considerations
contained in "UNITED contained in "UNITED
STATES FEDERAL STATES FEDERAL
INCOME TAXATION" INCOME TAXATION"
ERISA eligible: Yes, subject to the Yes, subject to the
considerations in considerations in
"ERISA "ERISA
CONSIDERATIONS" CONSIDERATIONS"
Listing: UK Listing Authority UK Listing Authority
and London Stock and London Stock
Exchange Exchange
ISIN: __ __
Common code: N/A N/A
CUSIP number: __ __
Expected ratings (S&P/Moody's/Fitch): [A-1+/P-1 /F1+] [AA/Aa3/AA]
CLASS OF ISSUER NOTES
------------------------------
SERIES 1
CLASS C
------------------------------
Principal amount $__
Credit enhancement: The reserve fund
Interest rate: Three-month USD-LIBOR + margin
Margin: __% p.a.
Until interest payment date falling in: __
And thereafter: __% p.a.
Scheduled redemption date (s): N/A
Interest accrual method: Actual/360
Interest payment dates: For the series 1 class A issuer notes, monthly in
arrear on the interest payment date falling in each
consecutive month. For the other series 1 issuer notes,
quarterly in arrear on the interest payment dates falling in
September, December, March and June of each year. If a
trigger event occurs or the issuer security is enforced prior to the
interest payment date falling in [September 2004], interest and
principal due and payable on the series 1 class A issuer notes
will be payable quarterly in arrear on the interest payment
dates falling in September, December, March and June.
First interest payment date: __
Final maturity date: June 2042
Tax treatment: Debt for United States federal income tax
purposes, subject to the considerations
contained in "UNITED STATES FEDERAL INCOME TAXATION"
ERISA eligible: Yes, subject to the considerations in
"ERISA CONSIDERATIONS"
Listing: UK Listing Authority and London Stock Exchange
ISIN: __
Common code: N/A
CUSIP number: __
Expected ratings (S&P/Moody's/Fitch): [BBB/Baa2/BBB]
10
CLASS OF ISSUER NOTES
--------------------------------------------------------------
SERIES 2 SERIES 2
CLASS A CLASS B
------------------------------ ------------------------------
Principal amount $[1,250,000,000] $__
Credit enhancement: Subordination of the Subordination of the
class B issuer notes class C issuer notes
and the class C issuer and the reserve fund
notes and the reserve
fund
Interest rate: Three-month USD-LIBOR + margin Three-month USD-LIBOR + margin
Margin: __% p.a. __% p.a.
Until interest payment date falling in: N/A __
And thereafter: N/A __% p.a.
Scheduled redemption date (s): [December 2006] N/A
Interest accrual method: Actual/360 Actual/360
Interest payment dates: For the series 2 issuer notes, quarterly in arrear on the interest
payment dates falling in September, December, March and June of each year.
First interest payment date: __ __
Final maturity date: [December 2008] June 2042
Tax treatment: Debt for United States Debt for United States
federal income tax federal income tax
purposes, subject to purposes, subject to
the considerations the considerations
contained in "UNITED contained in "UNITED
STATES FEDERAL STATES FEDERAL
INCOME TAXATION" INCOME TAXATION"
ERISA eligible: Yes, subject to the Yes, subject to the
considerations in considerations in
"ERISA "ERISA
CONSIDERATIONS" CONSIDERATIONS"
Listing: UK Listing Authority UK Listing Authority
and London Stock and London Stock
Exchange Exchange
ISIN: __ __
Common code: N/A N/A
CUSIP number: __ __
Expected ratings (S&P/Moody's/Fitch): [AAA/Aaa/AAA] [AA/Aa3/AA]
CLASS OF ISSUER NOTES
------------------------------
SERIES 2
CLASS C
------------------------------
Principal amount $__
Credit enhancement: The reserve fund
Interest rate: Three-month USD-LIBOR + margin
Margin: __% p.a.
Until interest payment date falling in: __
And thereafter: __% p.a.
Scheduled redemption date (s): N/A
Interest accrual method: Actual/360
Interest payment dates:
First interest payment date: __
Final maturity date: June 2042
Tax treatment: Debt for United States
federal income tax
purposes, subject to
the considerations
contained in "UNITED
STATES FEDERAL
INCOME TAXATION"
ERISA eligible: Yes, subject to the
considerations in
"ERISA
CONSIDERATIONS"
Listing: UK Listing Authority
and London Stock
Exchange
ISIN: __
Common code: N/A
CUSIP number: __
Expected ratings (S&P/Moody's/Fitch): [BBB/Baa2/BBB]
11
CLASS OF ISSUER NOTES
--------------------------------------------------------------
SERIES 3 SERIES 3
CLASS A CLASS B
------------------------------ ------------------------------
Principal amount $[750,000,000] $__
Credit enhancement: Subordination of the Subordination of the
class B issuer notes class C issuer notes
and the class C issuer and the reserve fund
notes and the reserve
fund
Interest rate: Three-month USD-LIBOR + margin Three-month USD-LIBOR + margin
Margin: __% p.a. __% p.a.
Until interest payment date falling in: [N/A] __
And thereafter: N/A __% p.a.
Scheduled redemption date (s): [__ and __] N/A
Interest accrual method: Actual/360 Actual/360
Interest payment dates: For the series 3 issuer notes, quarterly in arrear on the
interest payment
dates falling in September, December, March and June of each
year.
First interest payment date: __ __
Final maturity date: __ June 2042
Tax treatment: Debt for United States Debt for United States
federal income tax federal income tax
purposes, subject to purposes, subject to
the considerations the considerations
contained in "UNITED contained in "UNITED
STATES FEDERAL STATES FEDERAL
INCOME TAXATION" INCOME TAXATION"
ERISA eligible: Yes, subject to the Yes, subject to the
considerations in considerations in
"ERISA "ERISA
CONSIDERATIONS" CONSIDERATIONS"
Listing: UK Listing Authority UK Listing Authority
and London Stock and London Stock
Exchange Exchange
ISIN: __ __
Common code: N/A N/A
CUSIP number: __ __
Expected ratings (S&P/Moody's/Fitch): [AAA/Aaa/AAA] [AA/Aa3/AA]
CLASS OF ISSUER NOTES
------------------------------
SERIES 3
CLASS C
------------------------------
Principal amount $__
Credit enhancement: The reserve fund
Interest rate: Three-month USD-LIBOR + margin
Margin: __% p.a.
Until interest payment date falling in: __
And thereafter: __% p.a.
Scheduled redemption date (s): N/A
Interest accrual method: Actual/360
Interest payment dates: For the series 3 issuer notes,
quarterly in arrear on the
interest payment
dates falling in September,
December, March and June of
each year.
First interest payment date: __
Final maturity date: June 2042
Tax treatment: Debt for United States
federal income tax
purposes, subject to
the considerations
contained in "UNITED
STATES FEDERAL
INCOME TAXATION"
ERISA eligible: Yes, subject to the
considerations in
"ERISA
CONSIDERATIONS"
Listing: UK Listing Authority
and London Stock
Exchange
ISIN: __
Common code: N/A
CUSIP number: __
Expected ratings (S&P/Moody's/Fitch): [BBB/Baa2/BBB]
12
CLASS OF ISSUER NOTES
----------------------------------------------------------------------
SERIES 4 SERIES 4 SERIES 4
CLASS A CLASS B CLASS C
---------------------- ---------------------- ----------------------
Principal amount [e] [1,000,000,000] [e][__] [e][__]
Credit enhancement: Subordination of the Subordination of the The reserve fund
class B issuer notes class C issuer notes
and the class C issuer and the reserve fund
notes and the reserve
fund
Interest rate: Three-month Three-month Three-month
EURIBOR + margin EURIBOR + margin EURIBOR + margin
Margin: __% p.a. __% p.a. __% p.a.
Until interest payment date falling in: __ __ __
And thereafter: __% p.a. __% p.a. __% p.a.
Scheduled redemption date (s): __ N/A N/A
Interest accrual method: Actual/360 Actual/360 Actual/360
Interest payment dates: For all the series 4 issuer notes, quarterly in arrear on the interest
payment dates falling in September, December, March and June of each year.
First interest payment date: __ __ __
Final maturity date: __ June 2042 June 2042
Tax treatment: N/A (These issuer N/A (These issuer N/A (These issuer
notes are not being notes are not being notes are not being
offered or sold in the offered or sold in the offered or sold in the
United States) United States) United States)
ERISA eligible: N/A (These issuer N/A (These issuer N/A (These issuer
notes are not being notes are not being notes are not being
offered or sold in the offered or sold in the offered or sold in the
United States) United States) United States)
Listing: UK Listing Authority UK Listing Authority UK Listing Authority
and London Stock and London Stock and London Stock
Exchange Exchange Exchange
ISIN: [e] __ __
Common code: __ __ __
CUSIP number: N/A N/A N/A
Expected ratings (S&P/Moody's/Fitch): [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
13
CLASS OF ISSUER NOTES
----------------------------------------------------------------------------------
SERIES 5 SERIES 5 SERIES 5
CLASS A CLASS B CLASS C
---------------------- ---------------------------- ----------------------------
Principal amount [GBP][500,000,000] [e] __ [e] __
Credit enhancement: Subordination of the Subordination of the The reserve fund
class B issuer notes class C issuer notes
and the class C issuer and the reserve fund
notes and the reserve
fund
Interest rate: __ % p.a. Three-month EURIBOR + margin Three-month EURIBOR + margin
Margin: N/A __% p.a. __% p.a.
Until interest payment date falling in: __ __ __
And thereafter: __% p.a. __% p.a. __% p.a.
Scheduled redemption date (s): __ N/A N/A
Interest accrual method: Actual/360 [until the Actual/360 Actual/360
interest payment date
falling in __ and then
__]
Interest payment dates: [For the series 5 issuer notes, quarterly in arrear on the interest payment
dates falling in September, December, March and June of each year.]
First interest payment date: __ __ __
Final maturity date: __ June 2042 June 2042
Tax treatment: N/A (These issuer N/A (These issuer N/A (These issuer
notes are not being notes are not being notes are not being
offered or sold in the offered or sold in the offered or sold in the
United States) United States) United States)
ERISA eligible: N/A (These issuer N/A (These issuer N/A (These issuer
notes are not being notes are not being notes are not being
offered or sold in the offered or sold in the offered or sold in the
United States) United States) United States)
Listing: UK Listing Authority UK Listing Authority UK Listing Authority
and London Stock and London Stock and London Stock
Exchange Exchange Exchange
ISIN: __ __ __
Common code: __ __ __
CUSIP number: N/A N/A N/A
Expected ratings (S&P/Moody's/Fitch): [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
THE ISSUER
Permanent Financing (No. 3) PLC is a public limited company incorporated in
England and Wales. Its registered office is Blackwell House, Guildhall Yard,
London EC2V 5AE. Its telephone number is (+44) (0)20 7556 0972.
The issuer is a newly created special purpose company. The purpose of the
issuer is to issue the issuer notes which represent its asset-backed
obligations and to lend the equivalent net issue proceeds to Funding 1. The
issuer will not engage in any activities that are unrelated to these purposes.
FUNDING 1
Permanent Funding (No. 1) Limited is a private limited company incorporated
in England and Wales. Its registered office is Blackwell House, Guildhall Yard,
London EC2V 5AE. Its telephone number is (+44) (0)20 7556 0972.
14
Funding 1 is a special purpose company. Funding 1 will borrow money from us
pursuant to the terms of the issuer intercompany loan agreement. Funding 1 will
use the money borrowed from us to pay the seller for the increased Funding 1
share of the trust property on the closing date. Together, Funding 1 and the
seller will be beneficially entitled to all of the trust property. Funding 2
may also acquire a share of the trust property in the future.
THE MORTGAGES TRUSTEE
Permanent Mortgages Trustee Limited is a private limited company
incorporated in Jersey, Channel Islands. Its registered office is 47 Esplanade,
St. Helier, Jersey, JE1 OBD, Channel Islands. Its telephone number is (+44) (0)
1534 510 924.
The mortgages trustee is a special purpose company. The purpose of the
mortgages trustee is to hold the trust property. The mortgages trustee holds
the trust property on trust for the seller and Funding 1 and, if applicable,
Funding 2, under the terms of the mortgages trust deed.
THE SELLER, THE SERVICER, THE CASH MANAGER AND THE ISSUER CASH MANAGER
The seller is a bank incorporated in England and Wales as a public limited
company. It is regulated by the Financial Services Authority. Its registered
office is Trinity Road, Halifax, West Yorkshire HX1 2RG. Its telephone number
is (+44) (0) 1422 333333.
The seller originated all of the loans in the portfolio according to the
lending criteria applicable at the time of origination and has assigned those
loans to the mortgages trustee under the mortgage sale agreement.
Although the loans have been assigned to the mortgages trustee, the seller
continues to perform administration and servicing functions in respect of the
loans on behalf of the mortgages trustee and the beneficiaries, including
collecting payments under the loans and taking steps to recover arrears. The
seller may not resign as servicer unless a successor servicer has been
appointed. In addition, the servicer may be replaced by a successor servicer if
it defaults in its obligations under the servicing agreement.
The seller has also been appointed as the cash manager for the mortgages
trustee and Funding 1 to manage their bank accounts, determine the amounts of
and arrange payments of monies to be made by them and keep certain records on
their behalf.
The seller will also be appointed as the issuer cash manager to manage our
bank accounts, determine the amounts of and arrange payments of monies to be
made by us and keep certain records on our behalf.
Although the seller has assigned the loans to the mortgages trustee, the
seller continues to have an interest in the loans as one of the beneficiaries
of the mortgages trust under the mortgages trust deed.
THE ACCOUNT BANK AND THE ISSUER ACCOUNT BANK
Bank of Scotland, acting through its offices at 116 Wellington Street, Leeds
LS1 4LT will be appointed as the issuer account bank to provide banking
services to us, and has been appointed as the account bank to Funding 1 and the
mortgages trustee.
THE ISSUER NOTES
CLASSES OF ISSUER NOTES
In this prospectus, we are offering the following series 1 issuer notes,
series 2 issuer notes and series 3 issuer notes:
* the $[1,250,000,000] floating rate series 1 class A issuer notes
due September 2004;
* the $__ floating rate series 1 class B issuer notes due June 2042;
* the $__ floating rate series 1 class C issuer notes due June 2042;
* the $[1,250,000,000] floating rate series 2 class A issuer notes
due December 2008;
* the $__ floating rate series 2 class B issuer notes due June 2042;
15
* the $__ floating rate series 2 class C issuer notes due June 2042;
* the $[750,000,000] floating rate series 3class A issuer notes due
__ ;
* the $__ floating rate series 3 class B issuer notes due June 2042;
and
* the $__ floating rate series 3 class C issuer notes due June 2042.
In addition, we are issuing the following issuer notes, which are not being
offered by this prospectus:
* the ([1,000,000,000] floating rate series 4 class A issuer notes
due __;
* the [e]__ floating rate series 4 class B issuer notes due June
2042;
* the [e]__ floating rate series 4 class C issuer notes due June
2042;
* the [GBP][500,000,000] [fixed-floating] rate series 5 class A
issuer notes due __;
* the [e]__ floating rate series 5 class B issuer notes due June
2042; and
* the [e]__ floating rate series 5 class C issuer notes due June
2042.
The series 1 class A issuer notes, the series 1 class B issuer notes and the
series 1 class C issuer notes are collectively referred to as the series 1
issuer notes and references to the series 2 issuer notes, the series 3 issuer
notes, the series 4 issuer notes and the series 5 issuer notes are to be
construed in an analogous manner. The series 1 class A issuer notes, the series
2 class A issuer notes, the series 3 class A issuer notes, the series 4 class A
issuer notes and the series 5 class A issuer notes are also collectively
referred to as the class A issuer notes and references to the class B issuer
notes and the class C issuer notes are to be construed in an analogous manner.
The series 4 issuer notes and the series 5 issuer notes are not being
offered to the public in the United States by this prospectus. Instead, they
will be offered to institutional investors outside the United States in
transactions exempt from the registration requirements of the US Securities Act
of 1933, as amended.
The series 1 issuer notes, the series 2 issuer notes, the series 3 issuer
notes, the series 4 issuer notes and the series 5 issuer notes together
represent our asset-backed obligations.
RELATIONSHIP BETWEEN THE ISSUER NOTES AND THE ISSUER INTERCOMPANY LOAN
On the closing date we will make an issuer intercompany loan to Funding 1
from the net proceeds of the issue of the issuer notes (after making
appropriate currency exchanges under the issuer swaps). The issuer intercompany
loan will consist of separate issuer term advances. There will be a total of 15
issuer term advances -- an issuer series 1 term AAA advance, an issuer series 1
term AA advance, an issuer series 1 term BBB advance, an issuer series 2 term
AAA advance, an issuer series 2 term AA advance, an issuer series 2 term BBB
advance, an issuer series 3 term AAA advance, an issuer series 3 term AA
advance, an issuer series 3 term BBB advance, an issuer series 4 term AAA
advance, an issuer series 4 term AA advance, an issuer series 4 term BBB
advance, an issuer series 5 term AAA advance, an issuer series 5 term AA
advance and an issuer series 5 term BBB advance. The proceeds of the different
series of class A issuer notes will be used to make the corresponding issuer
term AAA advances to Funding 1, the proceeds of the different series of class B
issuer notes will be used to make the corresponding issuer term AA advances to
Funding 1 and the proceeds of the different series of class C issuer notes will
be used to make the corresponding issuer term BBB advances to Funding 1. For
more information on the issuer intercompany loan, see "-- THE ISSUER
INTERCOMPANY LOAN".
We will repay the class A issuer notes from payments made by Funding 1 under
the corresponding issuer term AAA advances, the class B issuer notes from
payments made by Funding 1 under the corresponding issuer term AA advances and
the class C issuer notes from payments made by Funding 1 under the
corresponding issuer term BBB advances (in each case where the relevant class
of issuer notes is denominated in US dollars or euro after making appropriate
currency exchanges under the issuer swaps). The ability of Funding 1 to make
payments on the issuer intercompany loan will depend to a large extent on (a)
Funding 1 receiving its share of collections on the trust property, which will
in turn depend principally on the collections
16
the mortgages trustee receives on the loans and the related security and (b)
the allocation of monies between the previous intercompany loans, the issuer
intercompany loan and any new intercompany loans. See "-- THE ISSUER
INTERCOMPANY LOAN".
OPERATIVE DOCUMENTS CONCERNING THE ISSUER NOTES
We will issue the issuer notes under the issuer trust deed. The issuer notes
will also be subject to the issuer paying agent and agent bank agreement. The
security for the issuer notes will be created under the issuer deed of charge
between ourselves, the security trustee and our other secured creditors.
Operative legal provisions relating to the issuer notes will be included in the
issuer trust deed, the issuer paying agent and agent bank agreement, the issuer
deed of charge, the issuer cash management agreement and the issuer notes
themselves, each of which will be governed by English law.
PAYMENT AND RANKING OF THE ISSUER NOTES
Payments of interest and principal on the class A issuer notes of each
series will rank ahead of payments of interest and principal on the class B
issuer notes of any series and the class C issuer notes of any series and
payments of interest and principal on the class B issuer notes of each series
will rank ahead of payments of interest and principal on the class C issuer
notes of any series. For more information on the priority of payments to you,
see "CASHFLOWS" and see also "RISK FACTORS -- SUBORDINATION OF OTHER NOTE
CLASSES MAY NOT PROTECT YOU FROM ALL RISK OF LOSS".
Payments of interest and principal on the class A issuer notes of each
series rank equally (but subject to the scheduled redemption dates or permitted
redemption dates of each series of class A issuer notes). Payments of interest
and principal on the class B issuer notes of each series rank equally (but
subject to the permitted redemption dates of each series of class B issuer
notes). Payments of interest and principal on the class C issuer notes of each
series rank equally (but subject to the permitted redemption dates of each
series of class C issuer notes).
Unless an asset trigger event or a non-asset trigger event (each as
described in "THE MORTGAGES TRUST") has occurred or the issuer security or the
Funding 1 security has been enforced (see "-- SECURITY GRANTED BY FUNDING 1 AND
THE ISSUER"):
* the series 1 class A issuer notes will be redeemed in full on the
interest payment date falling in [September 2004] (their final
maturity date);
* the series 1 class B issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 1 class A issuer notes have
been redeemed in full;
* the series 1 class C issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 1 class B issuer notes have
been redeemed in full;
* the series 2 class A issuer notes will be redeemed in full or in
part on each interest payment date starting with the interest
payment date falling in [December, 2006] (as described in "--
SCHEDULED REDEMPTION") ;
* the series 2 class B issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 2 class A issuer notes have
been redeemed in full;
* the series 2 class C issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 2 class B issuer notes have
been redeemed in full;
* the series 3 class A issuer notes will be redeemed according to the
series 3 class A redemption schedule starting on or after the
interest payment date falling in __ (as described in "-- SCHEDULED
REDEMPTION") ;
* the series 3 class B issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 3 class A issuer notes have
been redeemed in full;
17
* the series 3 class C issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 3 class B issuer notes have
been redeemed in full;
* the series 4 class A issuer notes will be redeemed according to the
series 4 class A redemption schedule starting on or after the
interest payment date falling in __;
* the series 4 class B issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 4 class A issuer notes have
been redeemed in full;
* the series 4 class C issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 4 class B issuer notes have
been redeemed in full;
* the series 5 class A issuer notes will be redeemed in full or in
part on each interest payment date starting with the interest
payment date falling in __;
* the series 5 class B issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 5 class A issuer notes have
been redeemed in full; and
* the series 5 class C issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 5 class B issuer notes have
been redeemed in full.
Investors should note that the principal repayment schedule outlined here
could result in lower ranking issuer notes being repaid before higher ranking
issuer notes. For example, the series 1 class B issuer notes and the series 1
class C issuer notes could be repaid in full prior to principal payments being
made on the series 2 class A issuer notes. If on any interest payment date,
however, amounts are due and payable on a series of the class A issuer notes
and amounts are also due and payable on any series of the class B issuer notes
and/or the class C issuer notes, then payments of principal on the class A
issuer notes will rank ahead of payments of principal on the class B issuer
notes and the class C issuer notes and payments of principal on the class B
issuer notes will rank ahead of payments of principal on the class C issuer
notes.
SCHEDULED REDEMPTION
If not redeemed earlier, the issuer notes will be redeemed by us on the
final maturity date of each issuer note. Funding 1 will seek to accumulate
funds relating to principal payments on each of the issuer series 1 term AAA
advance and the issuer series 2 term AAA advance over their respective cash
accumulation periods in order to repay those issuer term advances (each such
issuer term advance being an issuer bullet term advance) as lump sum payments
to us so that we can redeem the series 1 class A issuer notes in full on the
interest payment date falling in [September 2004] and the series 2 class A
issuer notes in full on the interest payment date falling in [December 2006]. A
cash accumulation period in respect of a bullet term advance is the period of
time estimated to be the number of months prior to the relevant scheduled
redemption date necessary for Funding 1 to accumulate enough payments of
principal on the loans to repay that issuer bullet term advance to us so that
we will be able to redeem the corresponding series 1 class A issuer notes and
the series 2 class A issuer notes in full on the relevant interest payment
dates. The cash accumulation period will be determined according to a formula
described under "THE MORTGAGES TRUST -- CASH MANAGEMENT OF TRUST PROPERTY --
PRINCIPAL RECEIPTS". The interest payment date falling in [September 2004] is
the final maturity date of the series 1 class A issuer notes. To the extent
that there are insufficient funds to redeem the series 2 class A issuer notes
on the relevant interest payment date, the shortfall will be redeemed on
subsequent interest payment dates to the extent of principal receipts available
to the issuer, until the series 2 class A issuer notes are fully redeemed.
As set out in the schedule following this paragraph, we will seek to repay
each of the series 3 class A issuer notes and the series 4 class A issuer notes
in [two] [equal] instalments (each a scheduled amortisation instalment) on the
interest payment dates falling in __ and __ in respect of the series 3 class A
issuer notes and, __ and __ in respect of the series 4 class A issuer notes.
18
The transaction has been structured in the expectation that Funding 1 will
receive sufficient funds under the mortgages trust on each scheduled repayment
date of the issuer series 3 term AAA advance and the issuer series 4 AAA
advance in order to repay that issuer term advance to us, so that we can redeem
the corresponding series 3 class A issuer notes and the corresponding series 4
class A issuer notes on their respective scheduled redemption dates. Funding 1
will seek to accumulate funds relating to each scheduled amortisation
instalment over its cash accumulation period in order to repay each scheduled
amortisation instalment on its scheduled repayment date. The cash accumulation
period in respect of each scheduled amortisation instalment is three months,
but may be extended in the circumstances described under "THE MORTGAGES TRUST".
If there are either insufficient funds on the first relevant scheduled
redemption date to repay the relevant scheduled amortisation instalment on that
date (and to make a corresponding payment on the series 3 class A issuer notes
and/or the series 4 class A issuer notes), then the shortfall shall be due and
payable on the subsequent interest payment dates.
SCHEDULED
REDEMPTION DATES AMOUNT
- --------------------------------------------------- ---------------- ------
series 3 class A issuer notes...................... __ $__
__ $__
series 4 class A issuer notes...................... __ $__
__ $__
NO ASSURANCE CAN BE GIVEN THAT FUNDING 1 WILL ACCUMULATE SUFFICIENT FUNDS
DURING THE CASH ACCUMULATION PERIOD RELATING TO ANY ISSUER BULLET TERM ADVANCE
OR, AS APPLICABLE, ANY SCHEDULED AMORTISATION INSTALMENT TO ENABLE IT TO REPAY
THE RELEVANT TERM ADVANCE TO US SO THAT THE SERIES 1 CLASS A ISSUER NOTES OR
THE SERIES 2 CLASS A ISSUER NOTES WILL BE REDEEMED IN THEIR ENTIRETY OR, IN THE
CASE OF THE SERIES 3 CLASS A ISSUER NOTES AND THE SERIES 4 CLASS A ISSUER
NOTES, IN THE AMOUNTS SPECIFIED IN THE SCHEDULE ABOVE, ON THEIR RESPECTIVE
SCHEDULED REDEMPTION DATES. SEE "RISK FACTORS -- THE YIELD TO MATURITY OF THE
ISSUER NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENTS OR REDEMPTIONS ON THE
LOANS" and "RISK FACTORS -- OUR ABILITY TO REDEEM THE SERIES 1 CLASS A ISSUER
NOTES AND/OR THE SERIES 2 CLASS A ISSUER NOTES AND/OR THE SERIES 3 CLASS A
ISSUER NOTES ON THEIR SCHEDULED REDEMPTION DATES IS AFFECTED BY THE RATE OF
PREPAYMENT ON THE LOANS".
For more information on the redemption of the issuer notes, including a
description of asset trigger events and non-asset trigger events, see "THE
MORTGAGES TRUST -- CASH MANAGEMENT OF TRUST PROPERTY -- PRINCIPAL RECEIPTS" and
"CASHFLOWS".
OPTIONAL REDEMPTION OF THE ISSUER NOTES FOR TAX AND OTHER REASONS
We may redeem (unless otherwise provided) all, but not a portion, of the
issuer notes at our option if we give not more than 60 nor less than 30 days
notice to noteholders and the note trustee in accordance with the terms and
conditions of the issuer notes and if (a) on the interest payment date on which
such notice expires, no issuer note acceleration notice has been served in
respect of the issuer notes, and (b) we have, prior to giving such notice,
certified to the note trustee and produced evidence acceptable to the note
trustee (as specified in the issuer trust deed) that we will have the necessary
funds to pay principal and interest due in respect of the issuer notes on the
relevant interest payment date.
If we exercise this option, then we may redeem the issuer notes at their
principal amount outstanding on the following dates:
* in the case of all the issuer notes, on any interest payment date
in the event of particular tax changes affecting us or the issuer
notes or the issuer intercompany loan; or
* in the case of all of the issuer notes (other than the [series 1
class A issuer notes] and [the series 2 class A issuer notes]), if
the new Basel Capital Accord of 1988 (as described in the
consultative document "The New Basel Capital Accord" published in
January 2001 by the Basel Committee on Banking Supervision) has
been implemented in
19
the United Kingdom, whether by rule of law, recommendation of best
practice or by any other regulation, provided that an issuer note
acceleration notice has not been served and in any event not
earlier th an the interest payment date falling in [December
2007]; or
* in the case of all of the issuer notes (other than the [series 1
class A issuer notes] and the [series 2 class A issuer notes]), on
any interest payment date falling on or after the interest payment
date in __.
In addition, we may redeem in the same manner the issuer notes outstanding,
on any interest payment date on which the aggregate principal amount of the
issuer notes then outstanding is less than 10 per cent. of the aggregate
principal amount outstanding of the issuer notes on the closing date.
Any issuer notes that we redeem under these circumstances will be redeemed
at their principal amount outstanding together with accrued but unpaid interest
on that principal amount. If we exercise our option to redeem the issuer notes
as described above, this will not cause the seller to repurchase any loans and
their related security in the mortgages trust at that time.
WITHHOLDING TAX
Payments of interest and principal with respect to the issuer notes will be
subject to any applicable withholding taxes and we will not be obliged to pay
additional amounts in relation thereto. The applicability of any UK withholding
tax is discussed under "UNITED KINGDOM TAXATION".
THE CLOSING DATE
The issuer notes will be issued on or about __, 2003.
THE NOTE TRUSTEE
The Bank of New York will be appointed as the note trustee on the closing
date. Its address is One Canada Square, London E14 5AL. The note trustee will
act as trustee for the noteholders under the issuer trust deed.
THE PAYING AGENTS, AGENT BANK, REGISTRAR AND TRANSFER AGENT
[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 issuer notes to noteholders.
[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 issuer
notes.
[Citibank, N.A.] is the registrar and the transfer agent. Its address is [5
Carmelite Street, London EC4Y 0PA]. The registrar will maintain a register in
respect of the issuer notes.
THE LOANS
The loans in the portfolio as at the closing date will comprise:
* loans which are subject to variable rates of interest set by the
seller from time to time;
* loans which track a variable rate of interest other than a variable
rate set by the seller (for example, a rate set at a margin above
rates set by the Bank of England) ; and
* 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.
Additional features of the loans in the portfolio are described in "THE
LOANS -- CHARACTERISTICS OF THE LOANS".
In addition to the loans in the portfolio as at the closing date, the trust
property may also include new loans assigned by the seller to the mortgages
trustee after the closing date. The new loans may include new types of loan
products including loans known as flexible loans. Generally, a flexible loan
allows the borrower, among other things, to make larger repayments than are due
on a
20
given payment date (which may reduce the life of the loan) or draw further
amounts under the loan under some circumstances. Any drawings under flexible
loans will be funded solely by the seller. This means that the drawings under
flexible loans will be added to the trust property and will be included in the
seller's share of the trust property for purposes of allocating interest and
principal.
New loans assigned to the mortgages trustee will be required to comply with
specified criteria (see "ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY --
ASSIGNMENT OF NEW LOANS AND THEIR RELATED SECURITY TO THE MORTGAGES TRUSTEE").
Any new loans assigned to the mortgages trustee will increase the total size of
the trust property, and will increase the Funding 1 share of the trust property
to the extent only that Funding 1 has paid for an increased interest in the
trust property. To the extent that Funding 1 does not pay for an increased
interest, the seller share of the trust property will increase by a
corresponding amount.
All the loans in the portfolio as at the closing date and any new loans or
drawings under flexible loans, if any, added to the trust property thereafter
will be secured by first legal charges over freehold or leasehold properties
located in England or Wales.
The loans have been or will be originated according to the seller's lending
criteria for mortgage loans applicable at the time of origination. The seller's
current lending criteria are described further in "THE LOANS -- LENDING
CRITERIA". The seller has given or, as applicable, will give warranties to the
mortgages trustee in the mortgage sale agreement that, among other things, the
loans have been originated in accordance with the seller's policy in effect at
the time of origination. If a loan or its related security does not comply with
these warranties, then the seller will have 20 London business days in which to
cure the default. If the default cannot be or is not cured within 20 London
business days, then the seller will be required to repurchase the loan or loans
under the relevant mortgage account and their related security from the
mortgages trustee. If the seller does not repurchase those loans and their
related security, then the trust property will be deemed to be reduced by an
amount equal to the amount outstanding under those loans. The size of the
seller's share of the trust property will reduce by that amount but the size of
Funding 1's share of the trust property will not alter, and the respective
percentage shares of the seller and Funding 1 in the trust property will alter
accordingly.
ASSIGNMENT OF THE LOANS
On 14th June, 2002, the seller assigned the initial loans and on subsequent
dates has assigned further loans, together with their related security, to the
mortgages trustee, subject to the terms of the mortgage sale agreement. After
the closing date, the seller may assign new loans and their related security to
the mortgages trustee in order to increase or maintain the size of the trust
property. The seller may increase the size of the trust property from time to
time in relation to an issue of new notes by a new issuer, the proceeds of
which are applied ultimately to fund the assignment of the new loans and their
related security to the mortgages trustee, or to comply with its obligations
under the mortgage sale agreement as described under "ASSIGNMENT OF THE LOANS
AND THEIR RELATED SECURITY -- ASSIGNMENT OF NEW LOANS AND THEIR RELATED
SECURITY TO THE MORTGAGES TRUSTEE".
The seller may, from time to time, change its lending criteria and any other
terms applicable to the new loans or their related security assigned to the
mortgages trustee after the closing date so that all new loans originated after
the date of that change will be subject to the new lending criteria.
Notwithstanding any change to the lending criteria or other terms applicable to
new loans, those new loans and their related security may only be assigned to
the mortgages trustee if those new loans comply with the warranties set out in
the mortgage sale agreement.
When new loans are assigned to the mortgages trustee, the amount of the
trust property will increase. Depending on the circumstances, the increase in
the trust property may result in an increase in either the seller's share of
the trust property or Funding 1's share of the trust property. For a
description of how adjustments are made to the seller's share and Funding 1's
share of the trust property, see "THE MORTGAGES TRUST".
21
Some fees payable by the mortgage borrowers, such as early repayment fees,
will be given back to the seller and not allocated in the same manner as the
other receipts arising from the portfolio comprised in the trust property. For
more information on the mortgage sale agreement, see "ASSIGNMENT OF THE LOANS
AND THEIR RELATED SECURITY".
THE MORTGAGES TRUST
The mortgages trustee holds the trust property for both Funding 1 and the
seller. Funding 1 and the seller each has a joint and undivided beneficial
interest in the trust property. However, payments of interest and principal
arising from the loans in the trust property are allocated to Funding 1 and the
seller according to Funding 1's share of the trust property and the seller's
share of the trust property, calculated periodically as described later in this
section. As at the date of this prospectus, the beneficiaries of the trust are
Funding 1 and the seller only.
On the closing date, the trust property will include the loans in the
portfolio as at that date and their related security and any income generated
by the loans or their related security. The trust property will also include
any money in 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.
Payments by borrowers and any recoveries made in respect of the loans in the
portfolio will be paid initially into the collection account in the name of the
servicer and swept into the mortgages trustee GIC account on a regular basis
but in any event in the case of direct debits no later than the next London
business day after they are deposited in the collection account.
In addition, drawings under flexible loans, if any, and any new loans and
their related security that the seller assigns to the mortgages trustee after
the closing date, will be part of the trust property, unless they are
repurchased by the seller. The seller will be solely responsible for funding
drawings under any flexible loans. The composition of the trust property will
fluctuate as drawings under any flexible loans and new loans are added and as
the loans that are already part of the trust property are repaid or mature or
default or are repurchased by the seller.
At the closing date:
* Funding 1's share of the trust property will be approximately
[GBP]__, representing approximately __ per cent. of the trust
property; and
* the seller's share of the trust property will be approximately
[GBP]__, representing approximately __ per cent. of the trust
property.
The actual amounts of Funding 1's share and the seller's share of the trust
property as at the closing date will not be determined until the day before the
closing date which will be after the date of this prospectus.
Income from the trust property is distributed at least monthly to Funding 1
and the seller on each distribution date. A distribution date is the date which
is two London business days after each calculation date (being the first day of
each month after the initial closing date or, if not a London business day, the
next succeeding London business day) or any other day during a month that
Funding 1 acquires a further interest in the trust property. On each
calculation date, Funding 1's share and the seller's share of the trust
property, and the percentage of the total to which each relates, are
recalculated to take effect from the next distribution date to take into
account:
* principal payments on the loans distributed to Funding 1 and/or the
seller since the last distribution date (in general, a principal
payment made to a beneficiary reduces that beneficiary's share of
the trust property);
* losses sustained on the loans since the last distribution date;
* any drawings under flexible loans (if any) since the last
distribution date (in general, these will be funded by the seller
and the seller's share of the trust property will increase
accordingly);
22
* any acquisition of trust property by Funding 1 since the last
distribution date (which happens when Funding 1 receives additional
funds under a new intercompany loan from a new issuer and which, in
general, increases Funding 1's share of the trust property);
* any acquisition of trust property by the seller since the last
distribution date (which happens when the seller makes a payment to
Funding 1 in relation to Funding 1's share of any increase in the
balance of a loan due to borrowers taking payment holidays or
making underpayments under flexible loans or Funding 1 receives a
payment from the seller of the amount outstanding under an
intercompany loan); and
* the assignment of any new loans to the mortgages trustee which
increases the total size of the trust property (and the Funding 1
share and/or seller share of the trust property will increase
depending on whether Funding 1 has provided consideration for all
or a portion of that assignment).
Adjustments to the trust property may also occur if borrowers make
overpayments, underpayments or take payment holidays or if borrowers do not pay
premiums due on their insurance policies.
On each distribution date, income (but not principal) from the trust
property is allocated to Funding 1 (after paying amounts due to the mortgages
trustee or third parties) in an amount equal to the lesser of (a) what Funding
1 needs on that distribution date in order to pay interest due on the issuer
term advances and to meet its other obligations as described in the Funding 1
pre-enforcement revenue priority of payments (or, as applicable, the Funding 1
post-enforcement priority of payments), and (b) Funding 1's percentage share of
the revenue receipts. Any remaining revenue receipts are allocated to the
seller.
Losses on the loans are allocated to Funding 1 and the seller based on their
respective percentage shares in the trust property.
Whether the mortgages trustee allocates principal received on the loans to
Funding 1 depends on a number of factors. In general, Funding 1 receives
payment of principal in the following circumstances:
* when, in relation to any term advance, Funding 1 is either
accumulating principal during a cash accumulation period or is
scheduled to make principal repayments on those term advances (in
which case principal receipts will be paid to Funding 1 based on
its cash accumulation requirements or repayment requirements in
relation to those term advances);
* when a non-asset trigger event has occurred (in which case all
principal receipts on the loans will be paid to Funding 1); or
* when an asset trigger event has occurred or the security granted by
Funding 1 to the security trustee is being enforced (in which case
principal receipts on the loans will be paid to Funding 1 in
proportion to its share of the trust property).
For more information on the mortgages trust, the cash accumulation period
relating to a bullet term advance or a scheduled amortisation instalment and
the distribution of principal receipts on the loans, including a description of
when a non-asset trigger event or an asset trigger event will occur, see "THE
MORTGAGES TRUST".
THE ISSUER INTERCOMPANY LOAN
On the closing date, we will lend the equivalent net issue proceeds of the
issue of the issuer notes to Funding 1. Funding 1 will pay the proceeds of this
issuer intercompany loan to the seller as consideration in part for the seller
assigning part of its share of the trust property to Funding 1.
As described in "-- THE ISSUER NOTES -- RELATIONSHIP BETWEEN THE ISSUER
NOTES AND THE ISSUER INTERCOMPANY LOAN", the issuer intercompany loan will be
split into separate term advances to match the underlying series and classes of
issuer notes: the issuer term AAA advances, matching the issue of the class A
issuer notes of each series; the issuer term AA advances,
23
matching the issue of the class B issuer notes of each series; and the issuer
term BBB advances, matching the issue of the class C issuer notes of each
series. Together these advances are referred to in this prospectus as the
issuer term advances.
The issuer term AAA advances reflect the rating expected to be assigned to
the class A issuer notes by the rating agencies on the closing date (being, in
the case of the series 1 class A issuer notes, A-1+ by Standard & Poor's, P-1
by Moody's and F1+ by Fitch and, in the case of the other class A issuer notes,
AAA by Standard & Poor's, Aaa by Moody's and AAA by Fitch). The issuer term AA
advances reflect the rating expected to be assigned to the class B issuer notes
by the rating agencies on the closing date (being AA by Standard & Poor's, Aa3
by Moody's and AA by Fitch). The issuer term BBB advances reflect the rating
expected to be assigned to the class C issuer notes by the rating agencies on
the closing date (being BBB by Standard & Poor's, Baa2 by Moody's and BBB by
Fitch).
Funding 1 will repay the issuer intercompany loan primarily from payments
received from Funding 1's share of the trust property. We will make payments of
interest and principal on the issuer notes from payments of interest and
principal made by Funding 1 under the issuer intercompany loan. As further
described in "CASHFLOWS -- DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL
RECEIPTS -- DUE AND PAYABLE DATES OF ISSUER TERM ADVANCES", under the terms of
the issuer intercompany loan agreement, Funding 1 is required, prior to the
occurrence of a trigger event or enforcement of the security granted by Funding
1 or the issuer, to:
* repay the issuer series 1 term AAA advance in full on the interest
payment date falling in [September 2004];
* repay the issuer series 1 term AA advance to the extent of
principal receipts available to Funding 1 for that purpose on each
Funding 1 interest payment date on or after the Funding 1 interest
payment date on which the issuer series 1 term AAA advance has been
fully repaid;
* repay the issuer series 1 term BBB advance to the extent of
principal receipts available to Funding 1 for that purpose on each
Funding 1 interest payment date on or after the Funding 1 interest
payment date on which the issuer series 1 term AA advance has been
fully repaid;
* repay the issuer series 2 term AAA advance on the Funding 1
interest payment date falling in [December 2006], but to the extent
there are insufficient funds to repay the issuer series 2 term AAA
advance on that Funding 1 interest payment date, the shortfall
shall be repaid on subsequent Funding 1 interest payment dates to
the extent of principal receipts available to Funding 1 for that
purpose, until the issuer series 2 term AAA advance is fully
repaid;
* repay the issuer series 2 term AA advance to the extent of
principal receipts available to Funding 1 for that purpose on each
Funding 1 interest payment date on or after the Funding 1 interest
payment date on which the issuer series 2 term AAA advance has been
fully repaid;
* repay the issuer series 2 term BBB advance to the extent of
principal receipts available to Funding 1 for that purpose on each
Funding 1 interest payment date on or after the Funding 1 interest
payment date on which the issuer series 2 term AA advance has been
fully repaid;
* repay the issuer series 3 term AAA advance in an amount equal to
the scheduled amortisation instalment due on the Funding 1 interest
payment date falling in __ and in an amount equal to the scheduled
amortisation instalment due on the Funding 1 interest payment date
falling in __, but to the extent there are insufficient funds to
repay a scheduled amortisation instalment according to the
repayment schedule on the relevant Funding 1 interest payment date,
the shortfall shall be repaid on subsequent Funding 1 interest
payment dates to the extent of principal receipts available to
Funding 1 for that purpose, until the issuer series 3 term AAA
advance is fully repaid;
24
* repay the issuer series 3 term AA advance to the extent of
principal receipts available to Funding 1 for that purpose on each
Funding 1 interest payment date on or after the Funding 1 interest
payment date on which the issuer series 3 term AAA advance has been
fully repaid;
* repay the issuer series 3 term BBB advance to the extent of
principal receipts available to Funding 1 for that purpose on each
Funding 1 interest payment date on or after the Funding 1 interest
payment date on which the issuer series 3 term AA advance has been
fully repaid;
* repay the issuer series 4 term AAA advance in an amount equal to
the scheduled amortisation instalment due on the Funding 1 interest
payment date falling in __ and in an amount equal to the scheduled
amortisation instalment due on the Funding 1 interest payment date
falling in __, but to the extent there are insufficient funds to
repay a scheduled amortisation instalment according to the
repayment schedule on the relevant Funding 1 interest payment date,
the shortfall shall be repaid on subsequent Funding 1 interest
payment dates to the extent of principal receipts available to
Funding 1 for that purpose, until the issuer series 4 term AAA
advance is fully repaid;
* repay the issuer series 4 term AA advance to the extent of
principal receipts available to Funding 1 for that purpose on each
Funding 1 interest payment date on or after the Funding 1 interest
payment date on which the issuer series 4 term AAA advance has been
fully repaid;
* repay the issuer series 4 term BBB advance to the extent of
principal receipts available to Funding 1 for that purpose on each
Funding 1 interest payment date on or after the Funding 1 interest
payment date on which the issuer series 4 term AA advance has been
fully repaid.
* repay the issuer series 5 term AAA advance to the extent of
principal receipts available to Funding 1 for that purpose on each
Funding 1 interest payment date on or after the Funding 1 interest
payment date falling in __;
* repay the issuer series 5 term AA advance to the extent of
principal receipts available to Funding 1 for that purpose on each
Funding 1 interest payment date on or after the Funding 1 interest
payment date on which the issuer series 5 term AAA advance has been
fully repaid; and
* repay the issuer series 5 term BBB advance to the extent of
principal receipts available to Funding 1 for that purpose on each
Funding 1 interest payment date on or after the Funding 1 interest
payment date on which the issuer series 5 term AA advance has been
fully repaid.
The repayment schedule for the issuer term AAA advances (other than the
issuer series 5 term AAA advance) is as follows:
SCHEDULED
ISSUER TERM ADVANCE REPAYMENT DATES AMOUNT
- --------------------------------------------------- --------------- -------
Issuer series 1 term AAA advance................... __ [GBP]__
Issuer series 2 term AAA advance................... __ [GBP]__
Issuer series 3 term AAA advance................... __ and [GBP]__
__ [GBP]__
__ [GBP]__
Issuer series 4 term AAA advance................... __ and [GBP]__
__ [GBP]__
During the cash accumulation period for any bullet term advance or scheduled
amortisation instalment, Funding 1 will continue to make principal repayments
on any other term advances that are then due and payable, subject to having
sufficient moneys therefor after meeting its obligations with a higher priority
(see "CASHFLOWS -- DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL RECEIPTS --
25
Repayment of term advances of each series prior to the occurrence of a trigger
event and prior to the service on Funding 1 of an intercompany loan
acceleration notice or the service on each issuer of a note acceleration
notice").
Whether Funding 1 will have sufficient funds to repay the issuer term
advances, on the dates described in this section, will depend on a number of
factors (see "RISK FACTORS -- THE YIELD TO MATURITY OF THE ISSUER NOTES MAY BE
ADVERSELY AFFECTED BY PREPAYMENTS OR REDEMPTIONS ON THE LOANS" and "RISK
FACTORS -- OUR ABILITY TO REDEEM THE SERIES 1 CLASS A ISSUER NOTES AND/OR
SERIES 2 CLASS A ISSUER NOTES AND/OR THE SERIES 3 CLASS A ISSUER NOTES AND/OR
THE SERIES 4 CLASS A ISSUER NOTES ON THEIR SCHEDULED REDEMPTION DATES IS
AFFECTED BY THE RATE OF PREPAYMENT ON THE LOANS").
In certain circumstances, payment on the scheduled amortisation term
advances will be deferred. This will occur if, on a Funding 1 interest payment
date, one or more bullet term advances are within a cash accumulation period at
that time (irrespective of whether any scheduled amortisation instalments are
then in a cash accumulation period) and either;
* the quarterly CPR is less than 10 per cent; or
* both:
(i) the quarterly CPR is equal to or greater than 10 per cent,
but less than 15 per cent, and
(ii) the annualised CPR is less than 10 per cent.
In these circumstances, the scheduled amortisation term advances will be
entitled to receive principal repayments only to the extent permitted under the
scheduled amortisation repayment restrictions (see "CASHFLOWS -- DISTRIBUTION
OF FUNDING 1 AVAILABLE PRINCIPAL RECEIPTS -- REPAYMENT OF TERM ADVANCES OF EACH
SERIES PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO THE SERVICE ON
FUNDING 1 OF AN INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH
ISSUER OF A NOTE ACCELERATION NOTICE").
The circumstances under which we can take action against Funding 1 if it
does not make a repayment under an intercompany loan are limited. In
particular, it will not be an event of default in respect of an intercompany
loan if Funding 1 does not repay amounts due in respect of the intercompany
loan where Funding 1 does not have the money to make the relevant repayment.
For more information on the issuer intercompany loan, see "THE ISSUER
INTERCOMPANY LOAN AGREEMENT".
Prior to the occurrence of a trigger event or the service of an intercompany
loan acceleration notice on Funding 1 or the service of a note acceleration
notice on each and every issuer, Funding 1 is generally required to repay
principal on the term advances (after repaying amounts owed to the Funding 1
liquidity facility provider and after replenishing the reserve fund) based on
their respective term advance ratings. This means that the term AAA advances
are repaid before the term AA advances, which in turn are repaid before the
term BBB advances. There are a number of exceptions to this priority of
payments. Some of these exceptions are summarised below, but for further
information you should read the "CASHFLOWS" section of this prospectus.
In certain circumstances, payment on the term BBB advances and the term AA
advances is deferred. Those circumstances are that as at the relevant Funding 1
interest payment date:
(i) there is a debit balance on the BBB principal deficiency sub-ledger
or the AA principal deficiency sub-ledger after application of the
Funding 1 available revenue receipts on the relevant Funding 1
interest payment date; or
(ii) the adjusted reserve fund level is less than the reserve fund
threshold; or
26
(iii) the aggregate outstanding principal balance of loans in the
mortgages trust, in respect of which the aggregate amount in
arrears is more than three times the monthly payment then due, is
more than 5 per cent. of the aggregate outstanding principal
balance of loans in the mortgages trust, and,
as at that date, there are any term AAA advances outstanding or, in
respect of the term BBB advances, any term AA advances are outstanding (whether
or not such term advances are then due and payable). Any deferral of the
principal amounts due on the term BBB advances or the term AA advances will
result in deferral of principal amounts due on the corresponding classes of
notes.
Furthermore, if, on a Funding 1 interest payment date:
* one or more bullet term advances and/or scheduled amortisation
instalments are then in a cash accumulation period; and
* the quarterly CPR is less than 15 per cent; and
* there is a cash accumulation shortfall at that time,
then, on or before their step-up dates, the issuer series 5 term AAA advances
the issuer term AA advances and the issuer term BBB advances will be entitled
to principal repayments only to the extent permitted under the pass-through
repayment restrictions (see -- "CASHFLOWS -- DISTRIBUTION OF FUNDING 1
AVAILABLE PRINCIPAL RECEIPTS -- REPAYMENT OF TERM ADVANCES OF EACH SERIES PRIOR
TO THE OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO THE SERVICE ON FUNDING 1 OF
AN INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF A
NOTE ACCELERATION NOTICE").
If the issuer intercompany loan is not repaid on the step-up date, then the
amount of principal receipts that Funding 1 can allocate to repay the
outstanding issuer term advances (other than issuer bullet term advances or
issuer scheduled amortisation instalments) on a Funding 1 interest payment date
may not exceed the proportion that the issuer intercompany loan bears to the
aggregate outstanding principal balance of all of the intercompany loans.
If a note acceleration notice is served on us (but not on every other
issuer), then the issuer term advances will be immediately due and payable, but
the Funding 1 security will not be automatically enforced unless Funding 1 is
also in default under the issuer intercompany loan agreement, and Funding 1
will allocate its principal receipts to repay the outstanding issuer term
advances based on the proportion that the issuer intercompany loans bear to the
aggregate outstanding principal balance of all of the intercompany loans.
If a note acceleration notice is served on us (and a note acceleration
notice is or has been served on every other issuer as well), then the issuer
term advances will be immediately due and payable, but the Funding 1 security
will not be automatically enforced unless Funding 1 is also in default under
one or other of the relevant intercompany loan agreements, and Funding 1 will
allocate its principal receipts to repay the various term advances based on
their respective term advance ratings (the highest rated term advances being
paid in priority to the lower rated term advances).
If a trigger event occurs or an intercompany loan acceleration notice is
served on Funding 1, then principal receipts will be allocated as described in
the "CASHFLOWS" section of this prospectus.
THE SECURITY TRUSTEE
The Bank of New York was appointed security trustee in respect of the
security created under the Funding 1 deed of charge pursuant to a deed of
appointment dated 25th July, 2003. Its address is One Canada Square, London E14
5AL.The Bank of New York will also be appointed to act as the security trustee
for the issuer secured creditors under the issuer deed of charge on the closing
date. See "SECURITY FOR THE ISSUER'S OBLIGATIONS".
27
SECURITY GRANTED BY FUNDING 1 AND THE ISSUER
On 14th June, 2002, Funding 1 entered into a deed of charge to secure its
obligations to its then existing secured creditors. On 6th March, 2003, Funding
1 entered into a first deed of accession to the deed of charge pursuant to which
Permanent Financing (No. 2) PLC, among others, acceded to the Funding 1 deed of
charge as a Funding 1 secured creditor. To secure its obligations to us under
the issuer intercompany loan and to the start-up loan provider under the third
start-up loan agreement, Funding 1 will on the closing date enter into a second
deed of accession to the deed of charge with us and with Funding 1's other
secured creditors. Together, the deed of charge, the first deed of accession and
the second deed of accession are referred to as the Funding 1 deed of charge.
Besides ourselves, Funding 1's secured creditors on the closing date will be
the previous issuers (in relation to the previous intercompany loans), the
Funding 1 swap provider, the Funding 1 GIC provider, the cash manager, the
Funding 1 liquidity facility provider, the account bank, the corporate services
provider, the security trustee, the start-up loan provider (in respect of the
start-up loans) and the seller.
Pursuant to the terms of the Funding 1 deed of charge, Funding 1 has granted
security over all of its assets in favour of the security trustee. On the
closing date, the security trustee will continue to hold that security for the
benefit of the secured creditors of Funding 1 (which from the closing date will
include us). This means that Funding 1's obligations to us under the issuer
intercompany loan and to the other secured creditors will be secured over the
same assets. Except in very limited circumstances, only the security trustee
will be entitled to enforce the security granted by Funding 1. For more
information on the security granted by Funding 1, see "SECURITY FOR FUNDING 1'S
OBLIGATIONS". For details of post-enforcement priority of payments, see
"CASHFLOWS".
To secure our obligations to the noteholders and to our other secured
creditors, we will grant security over all of our assets in favour of the
security trustee. Our secured creditors will be the noteholders, the security
trustee, the note trustee, the agent bank, the issuer cash manager, the issuer
account bank, the paying agents, the issuer swap providers and the corporate
services provider. The security trustee will hold that security for the benefit
of our secured creditors, including the note trustee. This means that our
obligations to our other secured creditors will be secured over the same assets
that secure our obligations under the issuer notes. Except in very limited
circumstances, only the security trustee will be entitled to enforce the
security granted by us. For more information on the security granted by us, see
"SECURITY FOR THE ISSUER'S OBLIGATIONS". For details of post-enforcement
priority of payments, see "CASHFLOWS".
SWAP PROVIDERS
The Funding 1 swap provider is Halifax plc, and its registered office is at
Trinity Road, Halifax, West Yorkshire HX1 2RG. For more information about the
Funding 1 swap provider, see "HALIFAX PLC". The issuer swap provider for the
series 1 issuer notes is __ and its registered office is at __. The issuer swap
provider for the series 2 issuer notes is __ and its registered office is at
__. The issuer swap provider for the series 3 issuer notes is __ and its
registered office is at __. The issuer swap provider for the series 4 issuer
notes is __ and its registered address is __. The issuer swap provider for the
series 5 issuer notes (other than the series 5 class A issuer notes) is __ and
its registered address is __. For more information about the issuer swap
providers, see "THE ISSUER SWAP PROVIDERS".
The Funding 1 swap provider has entered into the Funding 1 swap agreement
with Funding 1 and the security trustee. [The Funding 1 swap agreement will be
amended and restated on the closing date.] The Funding 1 swap agreement is an
ISDA master agreement (including a schedule and a confirmation) under which the
Funding 1 swap has been documented with Funding 1 and the security trustee. The
issuer dollar currency swap providers will enter into the issuer dollar
currency swap agreements, which are ISDA master agreements (each including a
schedule and a confirmation), with us and the security trustee. The issuer euro
currency swap provider[s] will enter into the issuer euro currency swap
agreements, which are ISDA master agreements (each including a schedule and a
confirmation), with us and the security trustee.
28
SWAP AGREEMENTS
Borrowers will make payments under the loans in pounds sterling. Some of the
loans in the portfolio carry variable rates of interest, some of the loans pay
interest at a fixed rate or rates of interest and some of the loans pay
interest which tracks an interest rate other than one of the two variable base
rates set by Halifax or the mortgages trustee (the tracker rate is currently
set at a margin above or below a rate set by the Bank of England). These
interest rates do not necessarily match the floating rate of interest payable
on the issuer intercompany loan. Funding 1 will enter into a swap documented
under the Funding 1 swap agreement to hedge against these potential interest
rate mismatches.
In relation to the previous issue by Permanent Financing (No. 1) PLC,
Funding 1 entered into the Funding 1 swap under the Funding 1 swap agreement.
On 6th March, 2003 the swap agreement was amended and restated in relation to
the previous issue by Permanent Financing (No. 2) PLC.
In relation to this issue, in order to provide a hedge against the possible
variance between:
(1) the mortgages trustee variable base rate payable on the variable
rate loans, the rates of interest payable on the tracker rate loans
and the fixed rates of interest payable on the fixed rate loans;
and
(2) a LIBOR based rate for three-month sterling deposits,
the Funding 1 swap agreement will be amended and restated on the closing date
so that the Funding 1 swap will:
* have a notional amount that is sized to hedge against the potential
interest rate mismatches in relation to the previous issues and
this issue; and
* provide for the notional amount to be increased to hedge against
similar potential interest rate mismatches in relation to new
issues.
When the Funding 1 swap agreement is amended and restated, all of the rights
and obligations of Funding 1 and the Funding 1 swap provider under the existing
Funding 1 swap will cease to exist and will be replaced by the rights and
obligations arising under the Funding 1 swap agreement as amended and restated.
Payments made by the mortgages trustee to Funding 1 under the mortgages
trust deed and payments made by Funding 1 to us under the issuer intercompany
loan will be made in pounds sterling.
To enable us to make payments on the interest payment dates in respect of
each of the series 1 issuer notes, the series 2 issuer notes and the series 3
issuer notes in US dollars, we will enter into the issuer dollar currency swap
agreements with the issuer dollar currency swap providers and the security
trustee. Under the issuer dollar currency swaps, we will pay to the issuer
dollar currency swap providers the sterling amounts received on the issuer term
advances corresponding to each of the classes of the series 1 issuer notes, the
series 2 issuer notes and the series 3 issuer notes and the issuer dollar
currency swap providers will pay to us amounts in US dollars that are equal to
the amounts to be paid on the classes of series 1 issuer notes, series 2 issuer
notes and the series 3 issuer notes.
Similarly, to enable us to make payments on the interest payment dates in
respect of each of the series 4 issuer notes, the series 5 class B issuer notes
and the series 5 class C issuer notes in euro we will enter into the issuer
euro currency swap agreements with the issuer euro currency swap provider[s]
and the security trustee. Under the issuer euro currency swaps, we will pay to
the issuer euro currency swap providers the sterling amounts received on the
issuer term advances corresponding to each of the classes of the series 4
issuer notes, the series 5 class B issuer notes and the series 5 class C issuer
notes and the issuer euro currency swap providers will pay to us amounts in
euro that are equal to the amounts to be paid on the series 4 issuer notes, the
series 5 class B issuer notes and the series 5 class C issuer notes. The terms
of the swaps are described in greater detail below in "THE SWAP AGREEMENTS".
29
ISSUER POST-ENFORCEMENT CALL OPTION AGREEMENT
The issuer post-enforcement call option agreement will be entered into
between the note trustee, as trustee for and on behalf of the class B
noteholders and the class C noteholders, the security trustee, the issuer and a
subsidiary of Holdings called Permanent PECOH Limited. The terms of the option
will require, upon exercise of the option by Permanent PECOH Limited following
the enforcement of the security granted by us pursuant to the issuer deed of
charge, the transfer to Permanent PECOH Limited of all of the class B issuer
notes and/or all of the class C issuer notes, as the case may be. The class B
noteholders and the class C noteholders will be bound by the terms of the class
B issuer notes and the class C issuer notes, respectively, to transfer the
issuer notes to Permanent PECOH Limited in these circumstances. The class B
noteholders and the class C noteholders will be paid a nominal amount only for
that transfer.
However, as the post-enforcement call option can be exercised only after the
security trustee has enforced the security granted by us under the issuer deed
of charge and has determined that there are no further assets available to pay
amounts due and owing to the class B noteholders and/or the class C
noteholders, as the case may be, the exercise of the post-enforcement call
option will not further disadvantage the economic position of those
noteholders. In addition, exercise of the post-enforcement call option and
delivery by the class B noteholders and/or the class C noteholders of the class
B issuer notes and/or the class C issuer notes to Permanent PECOH Limited will
not extinguish any other rights or claims other than the rights to payment of
interest and repayment of principal under the class B issuer notes and/or the
class C issuer notes that such class B noteholders and/or class C noteholders,
as the case may be, may have against us.
RATING OF THE ISSUER NOTES
The series 1 class A issuer notes are expected to be assigned an A-1+ rating
by Standard & Poor's, a P-1 rating by Moody's and an F1+ rating by Fitch on the
closing date. The series 2 class A issuer notes, the series 3 class A issuer
notes, the series 4 class A issuer notes and the series 5 class A issuer notes
are expected to be assigned an AAA rating by Standard & Poor's, an Aaa rating
by Moody's and an AAA rating by Fitch on the closing date. The class B issuer
notes are expected to be assigned an AA rating by Standard & Poor's, an Aa3
rating by Moody's and an AA rating by Fitch on the closing date. The class C
issuer 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 on the closing date.
A credit rating is not a recommendation to buy, sell or hold securities and
may be subject to revision, suspension or withdrawal at any time by the
assigning rating organisation if, in its judgment, circumstances in the future
so warrant.
Together Standard & Poor's, Moody's and Fitch comprise the rating agencies,
which is to be understood to include any further or replacement rating agency
appointed by us with the approval of the note trustee to give a credit rating
to the issuer notes or any class of the issuer notes.
LISTING
Application has been made to the UK Listing Authority for each class of the
issuer notes to be admitted to the official list maintained by the UK Listing
Authority. Application has also been made to the London Stock Exchange plc for
each class of the issuer notes to be admitted to trading on the London Stock
Exchange.
THE PREVIOUS ISSUERS, NEW ISSUERS, NEW INTERCOMPANY LOANS, NEW START-UP LOANS
AND FUNDING 2
The previous issuers each of which is a wholly owned subsidiary of Holdings,
issued the previous notes and used the equivalent net issue proceeds to make
the previous intercompany loans to Funding 1 as follows:
* Permanent Financing (No. 1) PLC, on 14th June, 2002; and
* Permanent Financing (No. 2) PLC, on 6th March, 2003.
30
Funding 1's obligations under the previous intercompany loans are secured by
the same security that secures the issuer intercompany loan. In addition, it is
expected that in the future, subject to satisfaction of certain conditions,
Holdings will establish additional wholly owned subsidiary companies to issue
new notes to investors. One of these conditions is that the ratings of your
issuer notes will not be downgraded by the rating agencies as a result of a new
issuer issuing new notes. Any new issuers will loan the proceeds of any issue
of new notes to Funding 1 pursuant to the terms of a new intercompany loan
agreement. Funding 1 will use the proceeds of a new intercompany loan to do one
or more of the following:
* pay the seller for new loans and their related security to be
assigned to the mortgages trustee, which will result in an increase
in Funding 1's share of the trust property;
* pay the seller for a portion of the seller share of the trust
property to be assigned to Funding 1, which will result in an
increase in Funding 1's share of the trust property;
* refinance an intercompany loan or intercompany loans outstanding at
that time, which will not result in a change in the size of Funding
1's share of the trust property. In these circumstances, Funding 1
will use the proceeds of the new intercompany loan to repay an
intercompany loan outstanding at that time, which the relevant
issuer will use to repay the relevant noteholders. If our issuer
intercompany loan to Funding 1 is refinanced in these
circumstances, you could be repaid early; and/or
* to use a portion of the proceeds to make a deposit in the reserve
fund.
Regardless of which of these uses of proceeds is selected, all notes issued
(including your issuer notes) will be secured ultimately over Funding 1's share
of the trust property and will be subject to the ranking described in the
following paragraphs.
Funding 1 will apply amounts it receives from the trust property to pay
amounts it owes under the term advances (including the issuer term advances)
without distinguishing when the interest in the trust property was acquired or
when the relevant term advance was made. Funding 1's obligations to pay
interest and principal to us on the issuer term advances and to the previous
issuers or new issuers on their respective term advances will rank either equal
with, ahead of or after each other, primarily depending on the relative term
advance rating of each such term advance. The rating of an issuer term advance,
previous term advance or new term advance will be the rating assigned by the
rating agencies to the issuer notes, previous notes or the new notes, which are
used to fund the relevant term advance, on their date of issue. Funding 1 will
pay interest and (subject to their respective scheduled repayment dates and the
rules for application of principal receipts described in "CASHFLOWS --
DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL RECEIPTS -- REPAYMENT OF TERM
ADVANCES OF EACH SERIES PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO
THE SERVICE ON FUNDING 1 OF AN INTERCOMPANY LOAN ACCELERATION NOTICE OR THE
SERVICE ON EACH ISSUER OF A NOTE ACCELERATION NOTICE") principal first on the
issuer term advances, the previous term advances and the new term advances with
the highest term advance rating, and thereafter on the issuer term advances,
the previous term advances and the new term advances with the next highest term
advance rating, and so on down to the issuer term advances the previous term
advances, and the new term advances with the lowest term advance rating.
Accordingly, any term advance in relation to previous notes or new notes that
has an AAA rating will rank equally with Funding 1's payments of interest and
(subject to their respective scheduled repayment dates and the rules referred
to in this paragraph) principal on the issuer term AAA advances and will rank
ahead of Funding 1's payments of interest and principal on the issuer term AA
advances and the issuer term BBB advances.
It should be noted however, that although an issuer term advance, a previous
term advance and any new term advance may rank equally, principal payments may
be made earlier on the previous term advances or the new term advances or the
issuer term advances, as the case may be, depending on their scheduled
repayment dates and final maturity dates.
31
You should also note that during a cash accumulation period for any bullet
term advance or scheduled amortisation instalment under an intercompany loan
(for example, the issuer intercompany loan), Funding 1 will continue to make
principal repayments in respect of amounts due and payable in respect of pass-
through term advances under any intercompany loan, including the issuer
intercompany loan, provided that the quarterly CPR is greater than 15 per cent.
[If Funding 1 enters into a new intercompany loan agreement, it will also,
if required, enter into a new Funding 1 swap, in each case with either the
Funding 1 swap provider or a new Funding 1 swap provider and the security
trustee] in order to address the potential mismatch between the variable loan
rates, tracker loan rates and fixed loan rates paid by borrowers on the loans
and the LIBOR-based rate of interest paid by Funding 1 on the new intercompany
loan. Each new Funding 1 swap and the Funding 1 swap will rank without any
order of priority between themselves, but in proportion to the amounts due and,
in each case, ahead of payments on the term AAA advances, as described further
in "THE SWAP AGREEMENTS". The various margins on the fixed, floating and
tracker elements of the Funding 1 swap may be varied from time to time by
agreement between Funding 1 and the Funding 1 swap provider (subject to the
prior written consent of the security trustee).
As Funding 1 enters into new intercompany loan agreements, it will, if
required, simultaneously enter into new start-up loan agreements with a new
start-up loan provider which will provide for the costs and expenses of the
issue of the new notes and, if required by the rating agencies, for extra
amounts to be credited to the reserve fund.
Pursuant to its obligations under the Listing Rules of the UK Listing
Authority, if a new issuer is established to issue new notes, then we will
notify or procure that notice is given of that new issue.
Holdings has established anentity, Funding 2, which may, in the future,
issue new notes from time to time and use the proceeds to pay the seller for a
direct interest in the trust property rather than lending the proceeds to
Funding 1. Funding 2 is a wholly-owned subsidiary of Holdings. Funding 2 will
become a beneficiary of the mortgages trust subject to satisfaction of certain
conditions, including that the ratings of your notes will not be downgraded by
the rating agencies at the time Funding 2 becomes such a beneficiary (see "RISK
FACTORS -- HOLDINGS HAS ESTABLISHED ANOTHER COMPANY, FUNDING 2, WHICH MAY
BECOME AN ADDITIONAL BENEFICIARY UNDER THE MORTGAGES TRUST").
UNITED KINGDOM TAX STATUS
Subject to important qualifications and conditions set out under "UNITED
KINGDOM TAXATION", including as to final documentation and assumptions, Allen &
Overy, our UK tax advisers, are of the opinion that:
* if and for so long as the issuer notes are listed on the London
Stock Exchange, no UK withholding tax will be required on interest
payments to any noteholder. If the issuer notes cease to be so
listed at the time of the relevant interest payment, UK withholding
tax at the then applicable rate (currently 20 per cent.) will be
imposed on interest payments;
* US persons who are not and have never been either resident or
ordinarily resident in the UK and who are not carrying on a trade,
profession or vocation in the UK through a branch or agency or
permanent establishment in the UK will not be subject to UK
taxation in respect of payment of principal and interest on the
issuer notes, except to the extent that any withholding or
deduction from interest payments made to such persons 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 issuer 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 or permanent
establishment in connection with which interest is received or to
which the issuer notes are attributable;
32
* no UK stamp duty or stamp duty reserve tax is payable on the issue
or transfer of the global issuer notes or on the issue or transfer
of an issuer note in definitive form;
* Funding 1 and the issuer will generally be subject to UK
corporation tax, currently at a rate of 30 per cent., on the pre-
tax 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 1, the
profit in the profit and loss account will not exceed [0.01] per
cent of the Funding 1 available revenue receipts. In respect of the
issuer, the profit in the profit and loss account will not exceed
0.01 per cent of the interest on the issuer term advances under the
issuer intercompany loan. We refer you to "Risk factors -- Tax
payable by Funding 1 or the issuer may adversely affect our ability
to make payments on the issuer notes"; and
* the mortgages trustee will have no liability to UK tax in respect
of any income, profit or gain arising under these arrangements.
Accordingly, the mortgages trustee will have no liability to UK tax
in relation to amounts which it receives on behalf of Funding 1 or
the seller under the mortgages trust.
UNITED STATES TAX STATUS
In the opinion of Allen & Overy, our US tax advisers, the series 1 issuer
notes, the series 2 issuer notes and the series 3 issuer notes will be treated
as debt for US federal income tax purposes. 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 1 and the issuer will not be subject to US federal
income tax. See "UNITED STATES FEDERAL INCOME TAXATION" for the relevant
limitations relating to the foregoing and a complete discussion of the
characterisation of (and the consequences of owning) the issuer notes for US
federal income tax purposes and the tax status of the mortgages trustee,
Funding 1 and the issuer as just described.
JERSEY (CHANNEL ISLANDS) TAX STATUS
It is the opinion of Mourant du Feu & Jeune, our 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 per cent.
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. See "MATERIAL JERSEY
(CHANNEL ISLANDS) TAX CONSIDERATIONS".
ERISA CONSIDERATIONS FOR INVESTORS
The series 1 issuer notes, the series 2 issuer notes, and the series 3
issuer notes are eligible for purchase by employee benefit and other plans
subject to Section 406 of ERISA or Section 4975 of the Code and by governmental
plans that are subject to any state, local or other federal law of the United
States that is substantially similar to Section 406 of ERISA or Section 4975 of
the Code, subject to consideration of the issues described herein under "ERISA
CONSIDERATIONS". Each purchaser of any such issuer notes (and all subsequent
transferees thereof) will be deemed to have represented and warranted that its
purchase, holding and disposition of such issuer notes will not result in a
non-exempt prohibited transaction under ERISA or the Code (or in the case of
any governmental plan, any substantially similar state, local or other federal
law of the United States). In addition, any fiduciary of a plan subject to the
fiduciary responsibility provisions of ERISA or similar provisions of state,
local or other federal laws of the United States should consult with their
counsel to determine whether an investment in the issuer notes satisfies the
prudence, investment diversification and other applicable requirements of those
provisions and to determine the impact
33
that an investment in the issuer notes would have if the issuer notes were to
be deemed an "EQUITY INTEREST" under the United States Department of Labor plan
asset regulations described in the "ERISA CONSIDERATIONS" section below.
FEES
The following table sets out the on-going fees to be paid by the issuer, the
previous issuers, Funding 1 and the mortgages trustee to transaction parties.
TYPE OF FEE AMOUNT OF FEE PRIORITY IN CASHFLOW FREQUENCY
- ---------------------------- ----------------------- ------------------------ ---------------------------
Servicing fee 0.05 per cent. per Ahead of all revenue Each distribution
year of the amounts payable to date
aggregate Funding 1 by the
outstanding principal mortgages trustee
amount of the trust
property
Mortgages trustee fee [GBP]1,000 each year Ahead of all revenue On each anniversary
amounts payable to of the initial closing
Funding 1 by the date
mortgages trustee
Funding 1 cash management 0.025 per cent. per Ahead of all issuer Each Funding 1
fee year of principal term advances interest payment
amount outstanding date
of the notes
Permanent Financing (No. 1) Estimated 0.025 per Ahead of all Each interest
PLC cash management fee cent. per year of the outstanding previous payment date
principal amount notes of Permanent
outstanding of the Financing (No. 1)
applicable previous PLC
intercompany loan
Corporate expenses of Estimated [GBP]5,200 Ahead of all Each interest
Permanent Financing (No. 1) each year outstanding previous payment date
PLC notes of Permanent
Financing (No. 1)
PLC
Permanent Financing (No. 2) Estimated 0.025 per Ahead of all Each interest
PLC cash management fee cent. per year of the outstanding previous payment date
principal amount notes of Permanent
outstanding of the Financing (No. 2)
applicable previous PLC
intercompany loan
Corporate expenses of Estimated [GBP][5,200] Ahead of all Each interest
Permanent Financing (No. 2) each year outstanding previous payment date
PLC notes of Permanent
Financing (No. 2)
PLC
Issuer cash management fee Estimated 0.025 per Ahead of all Each interest
cent. per year of the outstanding issuer payment date
principal amount notes
outstanding of the
issuer intercompany
loan
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TYPE OF FEE AMOUNT OF FEE PRIORITY IN CASHFLOW FREQUENCY
- ---------------------------- ----------------------- ----------------------- ---------------------------
Corporate expenses of Estimated [GBP]1,750 Ahead of all revenue Each distribution
mortgages trustee each year amounts payable to date
Funding 1 by the
mortgages trustee
Corporate expenses of Estimated [GBP]1,200 Ahead of all issuer Each Funding 1
Funding 1 each year term advances interest payment
date
Corporate expenses of issuer Estimated [GBP]5,200 Ahead of all Each interest
each year outstanding issuer payment date
notes
Commitment fee under Funding [0.08] per cent. of Ahead of all issuer Each Funding 1
1 liquidity facility undrawn amount term advances interest payment
under Funding 1 date
liquidity facility from
time to time
Fee payable by Funding 1 to [GBP]2,500 each year Ahead of all issuer Each Funding 1
security trustee (including term advances interest payment
paying agents) date
35
RISK FACTORS
This section describes the principal risk factors associated with an
investment in the issuer notes. If you are considering purchasing our issuer
notes, you should carefully read and think about all the information contained
in this document, including the risk factors set out here, prior to making any
investment decision.
YOU CANNOT RELY ON ANY PERSON OTHER THAN US TO MAKE PAYMENTS ON THE ISSUER
NOTES
The issuer notes will not represent an obligation or be the responsibility
of Halifax plc or any of its affiliates, [Credit Suisse First Boston LLC],
[Salomon Smith Barney], [UBS Securities LLC], the other managers, the mortgages
trustee, the note trustee or any other party to the transaction other than us.
WE HAVE A LIMITED SET OF RESOURCES AVAILABLE TO US TO MAKE PAYMENTS ON THE
ISSUER NOTES
Our ability to make payments of principal and interest on the issuer notes
and to pay our operating and administrative expenses will depend primarily on
the funds being received under the issuer intercompany loan. In addition, we
will rely on the issuer dollar currency swaps and the issuer euro currency
swaps to provide payments on the issuer notes denominated in US dollars and
euro, respectively. [You should note that there is no liquidity facility
directly available to the issuer, although Funding 1 has the benefit of a
liquidity facility to pay interest on the issuer term advances corresponding to
the issuer notes and to pay principal on issuer term advances corresponding to
the series 1 class A issuer notes, [the series 2 class A issuer notes and the
series 3 class A issuer notes]. [The ability of Funding 1 to draw on the
Funding 1 liquidity facility is subject to satisfying conditions precedent
which are described in "CREDIT STRUCTURE -- FUNDING 1 LIQUIDITY FACILITY --
CONDITIONS PRECEDENT TO A FUNDING 1 LIQUIDITY DRAWING". [The Funding 1
liquidity facility will be available to repay principal due on the issuer term
advance corresponding to the series 3 class A issuer notes on their final
maturity date only.]
[In addition to us, all relevant issuers (including each previous issuer
and, as they are established, each new issuer) have or will have an indirect
interest in the Funding 1 liquidity facility (the Funding 1 liquidity facility
will be available to meet interest and principal obligations of Funding 1 to
the previous issuers and new issuers, subject to certain conditions precedent).
If a drawing is made under the Funding 1 liquidity facility to enable Funding 1
to meet its obligations to a previous issuer or to a new issuer, then that may
affect the amount of funds available to Funding 1 to meet its obligations to
us.]
We will not have any other significant sources of funds available to meet
our obligations under the issuer notes and/or any other payments ranking in
priority to the issuer notes.
FUNDING 1 IS NOT OBLIGED TO MAKE PAYMENTS ON THE ISSUER TERM ADVANCES IF IT
DOES NOT HAVE ENOUGH MONEY TO DO SO, WHICH COULD ADVERSELY AFFECT PAYMENTS ON
THE ISSUER NOTES
Funding 1's ability to pay amounts due on the issuer term advances will
depend upon:
* Funding 1 receiving enough funds from its entitlement to the trust
property on or before each Funding 1 interest payment date;
* Funding 1 receiving the required funds from the Funding 1 swap
provider;
* the amount of funds credited to the reserve fund (as described in
"CREDIT STRUCTURE -- RESERVE FUND");
* [Funding 1 making drawings as permitted under the Funding 1
liquidity facility (as described in "CREDIT STRUCTURE -- FUNDING 1
LIQUIDITY FACILITY")]; and
* the allocation of funds between the issuer term advances, the
previous term advances and any new term advances (as described in
"CASHFLOWS").
36
According to the terms of the mortgages trust deed, the mortgages trustee is
obliged to pay to Funding 1 the Funding 1 share percentage of revenue receipts
on the loans by crediting those amounts to the Funding 1 GIC account on each
distribution date. The mortgages trustee is obliged to pay to Funding 1
principal receipts on the loans by crediting those amounts to the Funding 1 GIC
account as and when required pursuant to the terms of the mortgages trust deed.
Funding 1 will be obliged to pay revenue receipts due to us under the issuer
intercompany loan only to the extent that it has revenue receipts left over
after making payments ranking in priority to us, such as payments of certain
fees and expenses of Funding 1 and payments on certain higher ranking term
advances under any intercompany loan agreements.
Funding 1 will be obliged to pay principal receipts due to us under the
issuer intercompany loan only to the extent that it has principal receipts
available for that purpose after repaying amounts ranking in priority to us
(including repaying any higher ranking previous term advances or new term
advances), as described in "CASHFLOWS -- DISTRIBUTION OF FUNDING 1 AVAILABLE
PRINCIPAL RECEIPTS -- REPAYMENT OF TERM ADVANCES OF EACH SERIES PRIOR TO THE
OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO THE SERVICE ON FUNDING 1 OF AN
INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF A NOTE
ACCELERATION NOTICE".
If there is a shortfall between the amounts payable by Funding 1 to us under
the issuer intercompany loan agreement and the amounts payable by us on the
issuer notes, you may, depending on what other sources of funds are available
to us and to Funding 1, not receive the full amount of interest and/or
principal which would otherwise be due and payable on the issuer notes.
FAILURE BY FUNDING 1 TO MEET ITS OBLIGATIONS UNDER THE ISSUER INTERCOMPANY LOAN
AGREEMENT WOULD ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
If Funding 1 does not make payments due and payable on the issuer
intercompany loan, then we may not have enough money to make payments on the
issuer notes, and in addition we will have only limited recourse to the assets
of Funding 1. If Funding 1 does not pay amounts under the issuer intercompany
loan because it does not have enough money available, those amounts will be
deemed not to be due and payable, so there will not be an event of default
under the issuer intercompany loan, and we will not have recourse to the assets
of Funding 1 in that instance.
ON THE FINAL REPAYMENT DATE OF THE ISSUER INTERCOMPANY LOAN ANY OUTSTANDING
AMOUNTS IN RESPECT OF THE ISSUER TERM AA ADVANCES AND THE ISSUER TERM BBB
ADVANCES WILL BE EXTINGUISHED, WHICH WOULD CAUSE A LOSS ON ANY CLASS B ISSUER
NOTES AND ANY CLASS C ISSUER NOTES STILL OUTSTANDING
The transaction has been structured in the expectation that on the final
repayment date of the issuer intercompany loan in June 2042, the interest and
principal due and payable on the issuer term AA advances and the issuer term
BBB advances will be in an amount equal to the sum available to pay all
outstanding interest and/or principal (including interest and/or principal
deferred and unpaid) on the issuer term AA advances and the issuer term BBB
advances (after paying amounts of a higher order of priority as required by the
Funding 1 priority of payments).
If there is a shortfall between the amount available to pay such interest
and/or principal and the amount required to pay all outstanding interest and/or
principal on the issuer term AA advances and the issuer term BBB advances, then
the shortfall will be deemed to be not due and payable under the issuer
intercompany loan agreement and we will not have any claim against Funding 1
for the shortfall.
If there is such a shortfall in interest and/or principal payments under the
issuer intercompany loan agreement, you may not receive the full amount of
interest and/or principal which would otherwise be due and payable on the class
B issuer notes or the class C issuer notes outstanding.
37
ENFORCEMENT OF THE ISSUER SECURITY IS THE ONLY REMEDY FOR A DEFAULT IN THE
ISSUER'S OBLIGATIONS, AND THE PROCEEDS OF THAT ENFORCEMENT MAY NOT BE ENOUGH TO
MAKE PAYMENTS ON THE ISSUER NOTES
The only remedy for recovering amounts on the issuer notes is through the
enforcement of the issuer security. We have no recourse to the assets of
Funding 1 unless Funding 1 has also defaulted on its obligations under the
issuer intercompany loan and the Funding 1 security has been enforced.
If the security created as required by the issuer deed of charge is
enforced, the proceeds of enforcement may be insufficient to pay all principal
and interest due on the issuer notes.
THE TRANSACTION HAS BEEN STRUCTURED IN THE EXPECTATION THAT THE SERIES 1 ISSUER
NOTES WILL BE REDEEMED BEFORE THE SERIES 2 ISSUER NOTES AND SO ON
The transaction has been structured in the expectation that:
* the series 1 issuer notes will be redeemed in full prior to the
redemption of the series 2 issuer notes, the series 3 issuer notes,
the series 4 issuer notes and the series 5 issuer notes;
* the series 2 issuer notes will be redeemed in full prior to the
redemption of the series 3 issuer notes, the series 4 issuer notes
and the series 5 issuer notes;
* the series 3 issuer notes will be redeemed in full prior to the
redemption of the series 4 issuer notes and the series 5 issuer
notes; and
* the series 4 issuer notes will be redeemed in full prior to the
redemption of the series 5 issuer notes.
This means, among other things, that the series 1 class B issuer notes and
the series 1 class C issuer notes are expected to be redeemed before the series
2 class A issuer notes, the series 3 class A issuer notes, the series 4 class A
issuer notes and the series 5 class A issuer notes, even though the series 2
class A issuer notes, the series 3 class A issuer notes, the series 4 class A
issuer notes and the series 5 class A issuer notes have a higher rating than
the series 1 class B issuer notes and the series 1 class C issuer notes.
Similarly, the series 2 class B issuer notes and the series 2 class C issuer
notes are expected to be redeemed before the series 3 class A issuer notes, the
series 4 class A issuer notes and the series 5 class A issuer notes, and so on
for each series of issuer notes.
However, there is no assurance that the series 1 issuer notes will be
redeemed in full before the series 2 issuer notes, the series 3 issuer notes,
the series 4 issuer notes and the series 5 issuer notes or that the series 2
issuer notes will be redeemed in full before the series 3 issuer notes, the
series 4 issuer notes and the series 5 issuer notes or that the series 3 issuer
notes will be redeemed in full before the series 4 issuer notes and the series
5 issuer notes or that the series 4 issuer notes will be redeemed in full
before the series 5 issuer notes. In each case, redemption of the issuer notes
is ultimately dependent on, among other things, repayment and redemptions on
the loans and on the term advance rating of the issuer term advances. Further,
if on any interest payment date, amounts are due and payable in respect of the
class A issuer notes of any series and amounts are due and payable in respect
of the class B issuer notes of any series and/or the class C issuer notes of
any series, then payments of principal will be made on the class A issuer notes
in priority to payments of principal on the class B issuer notes and the class
C issuer notes. Similarly, if on any interest payment date, amounts are payable
in respect of the class B issuer notes of any series and the class C issuer
notes of any series, then payments of principal will be made on the class B
issuer notes in priority to payments of principal on the class C issuer notes.
See "-- SUBORDINATION OF OTHER NOTE CLASSES MAY NOT PROTECT YOU FROM ALL RISK
OF LOSS" and "MATURITY AND PREPAYMENT CONSIDERATIONS".
THERE MAY BE CONFLICTS BETWEEN YOUR INTERESTS AND THE INTERESTS OF ANY OF OUR
OTHER SECURED CREDITORS, AND THE INTERESTS OF THOSE SECURED CREDITORS MAY
PREVAIL OVER YOUR INTERESTS
The issuer deed of charge requires the security trustee to consider the
interests of each of the issuer secured creditors in the exercise of all of its
powers, trusts, authorities, duties and discretions, but requires the security
trustee, in the event of a conflict between your interests and
38
the interests of any of the other issuer secured creditors, to consider only
your interests. In certain circumstances, the security trustee can make
amendments to the documents without your prior consent, as described in the
next risk factor.
THE SECURITY TRUSTEE MAY AGREE MODIFICATIONS TO THE ISSUER TRANSACTION
DOCUMENTS WITHOUT YOUR PRIOR CONSENT, WHICH MAY ADVERSELY AFFECT YOUR INTERESTS
Pursuant to the terms of the Funding 1 deed of charge and the issuer deed of
charge, the security trustee may, without the consent or sanction of Funding
1's secured creditors or the issuer's secured creditors, concur with any person
in making or sanctioning any modifications to the transaction documents:
* which in the opinion of the security trustee it may be expedient to
make, provided that the security trustee is of the opinion that
such modification will not be materially prejudicial to the
interests of the secured creditors or, if it is not of that opinion
in relation to any secured creditor, such secured creditor has
given its written consent to such modification; or
* which in the opinion of the security trustee is made to correct a
manifest error or is of a formal, minor or technical nature.
The security trustee will be entitled to assume that the exercise of its
discretions will not be materially prejudicial to your interests if each of the
rating agencies has confirmed that the then current rating by it of the notes
would not be adversely affected by such exercise.
In addition, the security trustee will give its consent to any modifications
to the mortgage sale agreement, the servicing agreement, the cash management
agreement, the Funding 1 deed of charge, [the Funding 1 liquidity facility
agreement], the Funding 1 swap agreement, the terms and conditions of the
intercompany loans, the bank account agreement and the master definitions and
construction schedule, that are requested by Funding 1 or the cash manager,
provided that Funding 1 or the cash manager certifies to the security trustee
in writing that such modifications are required in order to accommodate:
(i) the entry by Funding 1 into new intercompany loan agreements, and/
or the issue of new types of notes by new issuers, and/or the
addition of other relevant creditors to the transaction;
(ii) the inclusion of Funding 2 as a beneficiary of the mortgages trust;
(iii) the issue of notes by Funding 2;
(iv) the assignment of new types of loans to the mortgages trustee;
(v) changes to be made to the reserve fund required amount and/or the
manner in which the reserve fund is funded;
(vi) changes to be made to the definitions of asset trigger event and
non-asset trigger event; and
(vii) the inclusion of an additional Funding 1 liquidity facility in the
circumstances described in "CREDIT STRUCTURE -- ADDITIONAL FUNDING
1 LIQUIDITY FACILITY",
and provided further that:
* in respect of the matters listed in paragraphs (i) to (iv), the
relevant conditions precedent to, as applicable, the addition
of new issuers, the inclusion of Funding 2 as a beneficiary of
the mortgages trust or the assignment of new loans to the
mortgages trustee, have been satisfied; and
* in respect of the matters listed in paragraphs (i) to (vii),
the security trustee has received written confirmation from
each of the rating agencies that the relevant modifications
will not adversely affect the then current ratings of the
notes.
The modifications required to give effect to the matters listed in
paragraphs (i) to (vii) above may include, amongst other matters, amendments to
the provisions of the Funding 1 deed of charge relating to the application of
monies. Accordingly, there can be no assurance that the effect
39
of the modifications to the transaction documents will not ultimately adversely
affect your interests. Any modifications to the documents described above will
require the actual consent of the Funding 1 liquidity facility provider, the
Funding 1 swap provider and each of the issuer swap providers, as applicable,
such consent not to be unreasonably withheld and to be deemed given if no
response (affirmative or negative) is given within 10 business days after the
request for consent is sent to each such party.
THERE MAY BE A CONFLICT BETWEEN THE INTERESTS OF THE HOLDERS OF CLASS A ISSUER
NOTES, THE HOLDERS OF CLASS B ISSUER NOTES AND THE HOLDERS OF CLASS C ISSUER
NOTES, AND THE INTERESTS OF OTHER CLASSES OF NOTEHOLDERS MAY PREVAIL OVER YOUR
INTERESTS
The issuer trust deed and the terms of the issuer notes will provide that
the note trustee is to have regard to the interests of the holders of all the
classes of issuer notes. There may be circumstances, however, where the
interests of one class of the noteholders conflicts with the interests of
another class or classes of the noteholders. The issuer trust deed and the
terms of the issuer notes will provide that where, in the sole opinion of the
note trustee there is such a conflict, then:
* the note trustee is to have regard only to the interests of the
class A noteholders in the event of a conflict between the
interests of the class A noteholders on the one hand and the class
B noteholders and/or the class C noteholders on the other hand; and
* the note trustee is to have regard only to the interests of the
class B noteholders in the event of a conflict between the
interests of the class B noteholders on the one hand and the class
C noteholders on the other hand.
THERE MAY BE A CONFLICT BETWEEN THE INTERESTS OF THE HOLDERS OF EACH SERIES OF
THE CLASS A ISSUER NOTES, THE HOLDERS OF EACH SERIES OF THE CLASS B ISSUER
NOTES AND THE HOLDERS OF EACH SERIES OF THE CLASS C ISSUER NOTES, AND THE
INTERESTS OF OTHER SERIES OF NOTEHOLDERS MAY PREVAIL OVER YOUR INTERESTS
There may also be circumstances where the interests of the class A
noteholders of one series of the issuer notes conflicts with the interests of
the class A noteholders of another series of the issuer notes. Similarly, there
may be circumstances where the interests of the class B noteholders of one
series of the issuer notes conflicts with the interests of the class B
noteholders of another series of the issuer notes or the interests of the class
C noteholders of one series of the issuer notes conflicts with the interests of
the class C noteholders of another series of the issuer notes.
The issuer trust deed and the terms of the issuer notes will provide that
where, in the sole opinion of the note trustee there is such a conflict, then a
resolution directing the note trustee to take any action must be passed at
separate meetings of the holders of each series of the class A issuer notes,
or, as applicable, each series of the class B issuer notes or each series of
the class C issuer notes. A resolution may only be passed at a single meeting
of the noteholders of each series of the relevant class if the note trustee is,
in its absolute discretion, satisfied that there is no conflict between them.
Similar provisions will apply in relation to requests in writing from
holders of a specified percentage of the principal amount outstanding of the
issuer notes of each class within each series (the principal amount outstanding
being converted into sterling for the purposes of making the calculation). You
should note that as a result of repayments of principal first to the series 1
issuer notes, then to the series 2 issuer notes, then to the series 3 issuer
notes, then to the series 4 issuer notes and then to the series 5 issuer notes,
the principal amount outstanding of each series of the issuer notes will change
after the closing date.
HOLDINGS HAS ESTABLISHED ANOTHER COMPANY, FUNDING 2, WHICH MAY BECOME AN
ADDITIONAL BENEFICIARY UNDER THE MORTGAGES TRUST
Holdings has established a separate entity, Funding 2, which may issue notes
from time to time and use the proceeds to pay for a direct interest in the
trust property rather than lending the proceeds to Funding 1. Simultaneously
with the acquisition by Funding 2 of an interest in the trust
40
property, the seller and Funding 1, as existing beneficiaries of the mortgages
trust, would be required to agree to a decrease in their beneficial interests
in the trust property (which would require a partial release of security by
Funding 1 over its share in the trust property).
The seller, Funding 1 and Funding 2 would each have a joint and undivided
interest in the trust property but their entitlement to the proceeds from the
trust property would be in proportion to their respective shares of the trust
property. On each distribution date the mortgages trustee would distribute
interest and principal receipts to one, two or all three beneficiaries,
depending on the terms of the mortgages trust.
It is anticipated that Funding 2 will issue notes directly to investors from
time to time backed by its share of the trust property. You would not have a
direct or indirect interest in Funding 2's share of the trust property.
Amendments would be made to a number of the issuer transaction documents as
a result of the inclusion of Funding 2 as a beneficiary of the mortgages trust.
In particular (but without limitation), amendments would be made to:
* the mortgage sale agreement to enable the purchase by Funding 2 of
interests in the trust property;
* the mortgages trust deed (i) to establish Funding 2 as a
beneficiary of the trust, (ii) to enable the acquisition by Funding
2 of an interest in the trust property from time to time (and vice
versa) and (iii) to regulate the distribution of interest and
principal receipts in the trust property to Funding 2 and the other
beneficiaries; and
* the cash management agreement to regulate the application of monies
to Funding 2.
There may be conflicts of interest between Funding 1 and Funding 2, in which
case it is expected that the mortgages trustee will follow the directions given
by the relevant beneficiary (excluding the seller) that has the largest share
of the trust property at that time. The interests of Funding 1 may not prevail,
which may adversely affect your interests.
Your prior consent to the inclusion of Funding 2 as a beneficiary of the
mortgages trust and the subsequent amendments to the documents and/or release
of security by Funding 1 will not be obtained (see "THE SECURITY TRUSTEE MAY
AGREE MODIFICATIONS TO THE ISSUER TRANSACTION DOCUMENTS WITHOUT YOUR PRIOR
CONSENT, WHICH MAY ADVERSELY AFFECT YOUR INTERESTS" above). Before becoming a
beneficiary of the mortgages trust, however, Funding 2 will be required to
satisfy a number of conditions, including:
* obtaining a written confirmation from each of the rating agencies
that the then current ratings of the notes outstanding at that time
will not be adversely affected as a result of Funding 2 becoming a
beneficiary of the mortgages trust;
* providing written certification to the security trustee that no
event of default under any of Funding 1's intercompany loan
agreements outstanding at that time has occurred which has not been
remedied or waived and no event of default will occur as a result
of Funding 2 becoming a beneficiary of the mortgages trust; and
* providing written certification to the security trustee that no
principal deficiency is recorded on the principal deficiency ledger
in relation to Funding 1's term advances that are outstanding at
that time.
There can be no assurance that the inclusion of Funding 2 as a beneficiary
of the mortgages trust would not affect cashflows available to pay amounts due
on your issuer notes and therefore adversely affect your interests.
IF FUNDING 1 ENTERS INTO NEW INTERCOMPANY LOAN AGREEMENTS, THEN THE NEW TERM
ADVANCES MAY RANK AHEAD OF ISSUER TERM ADVANCES AS TO PAYMENT, AND ACCORDINGLY
NEW NOTES MAY RANK AHEAD OF ISSUER NOTES AS TO PAYMENT
It is likely that Holdings will establish new issuers to issue new notes to
investors. The proceeds of each new issue will be used by the new issuer to
make a new intercompany loan to Funding 1. Funding 1 will use the proceeds of
the new intercompany loan to:
41
* pay the seller for new loans and their related security to be
assigned to the mortgages trustee;
* pay the seller for a portion of the existing seller share of the
trust property to be assigned to Funding 1;
* refinance an intercompany loan or intercompany loans outstanding at
that time (and if our issuer intercompany loan to Funding 1 is
refinanced, you could be repaid early); and/or
* deposit some of those proceeds in the reserve fund.
The current payment and security priorities of the issuer notes relative to
each other as set out in the issuer deed of charge and the issuer cash
management agreement will not be affected as a result of an issue of new notes
by a new issuer, because the new issue will be separately documented. However,
Funding 1 may be required to pay to a new issuer amounts owing under a new term
advance ahead of or in the same order of priority as amounts owing to us on the
issuer term advances, depending on the term advance rating, the scheduled
repayment date of that new term advance and other rules regarding the payment
of interest and the repayment of principal by Funding 1, as described in
"SUMMARY OF PROSPECTUS -- THE PREVIOUS ISSUERS, NEW ISSUERS, NEW INTERCOMPANY
LOANS, NEW START-UP LOANS AND FUNDING 2". If this is the case, then the
relevant new noteholders will be paid before you.
If Holdings establishes new issuers to make new intercompany loans to
Funding 1, 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 1 transaction documents
(including the mortgage sale agreement, the mortgages trust deed, the Funding 1
deed of charge, the definitions of the trigger events, the criteria for the
assignment of new loans to the mortgages trustee and the amount available to be
drawn under the Funding 1 liquidity facility) may be amended to reflect the new
issue. Your consent to these changes will not be required. There can be no
assurance that these changes will not affect the cashflows available to pay
amounts due on your notes. See "-- THE SECURITY TRUSTEE MAY AGREE MODIFICATIONS
TO THE ISSUER TRANSACTION DOCUMENTS WITHOUT YOUR PRIOR CONSENT, WHICH MAY
ADVERSELY AFFECT YOUR INTERESTS" above.
However, before issuing new notes, a new issuer will be required to satisfy
a number of conditions, including:
* obtaining a written confirmation from each of the rating agencies
that the then current ratings of the notes outstanding at that time
will not be adversely affected because of the new issue;
* providing written certification to the security trustee that no
event of default under any of the intercompany loan agreements
outstanding at that time has occurred which has not been remedied
or waived and no event of default will occur as a result of the
issue of the new notes; and
* providing written certification to the security trustee that no
principal deficiency is recorded on the principal deficiency ledger
in relation to the term advances outstanding at that time.
FUNDING 1 HAS ENTERED INTO THE PREVIOUS INTERCOMPANY LOAN AGREEMENTS WITH THE
PREVIOUS ISSUERS, AND SOME OF THE PREVIOUS TERM ADVANCES IN THE PREVIOUS
INTERCOMPANY LOANS RANK AHEAD OF SOME OF THE ISSUER TERM ADVANCES IN THE ISSUER
INTERCOMPANY LOAN AS TO PAYMENT, AND ACCORDINGLY SOME OF THE NOTES ISSUED BY
THE PREVIOUS ISSUERS RANK AHEAD OF SOME OF THE ISSUER NOTES AS TO PAYMENT
The previous issuers issued the previous notes to investors, the equivalent
net issue proceeds of which were used by the previous issuers to make the
previous intercompany loans to Funding 1. Funding 1 used most of the proceeds
of the previous intercompany loan from Permanent Financing (No. 1) PLC to pay
the seller for the initial loans (together with their related security)
assigned to the mortgages trustee on 14th June, 2002 which comprised Funding
1's original share of the trust
42
property. Funding 1 used the proceeds of the previous intercompany loan from
Permanent Financing (No. 2) PLC to pay the seller for loans (together with
their related security) assigned to the mortgages trustee on 6th March, 2003.
The current payment and security priorities of the issuer notes relative to
each other as set out in the issuer deed of charge and the issuer cash
management agreement are not affected as a result of the issue of the previous
notes by the previous issuers, because the previous issue was separately
documented. However, Funding 1 may be required to pay to the previous issuers
amounts which are owing under one or more previous term advances ahead of or in
the same order of priority as amounts owing to us on the issuer term advances,
depending on the term advance rating, the scheduled repayment date of that
previous term advance and other rules regarding the payment of interest and the
repayment of principal by Funding 1, as described in "SUMMARY OF PROSPECTUS --
THE PREVIOUS ISSUERS, NEW ISSUERS, NEW INTERCOMPANY LOANS, NEW START-UP LOANS
AND FUNDING 2". If this is the case, then the relevant previous noteholders
will be paid before you.
OTHER CREDITORS WILL SHARE IN THE SAME SECURITY GRANTED BY FUNDING 1 TO THE
ISSUER, AND THIS MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
If Funding 1 enters into a new intercompany loan agreement, then if required
it will also enter into a new start-up loan agreement with a new start-up loan
provider and the security trustee.
If required by the rating agencies, Funding 1 will use part of the proceeds
of the new start-up loan to fund further the existing reserve fund. Similarly,
if necessary, Funding 1 will also enter into a new Funding 1 swap with either
the Funding 1 swap provider or a new Funding 1 swap provider and the security
trustee.
The new issuer, any new start-up loan provider and any new Funding 1 swap
provider will become party to the Funding 1 deed of charge and will be entitled
to share in the security granted by Funding 1 for our benefit (and the benefit
of the other Funding 1 secured creditors) under the Funding 1 deed of charge.
In addition, the liabilities owed to the Funding 1 liquidity facility provider
and the Funding 1 swap provider which are secured by the Funding 1 deed of
charge may increase each time that Funding 1 enters into a new intercompany
loan agreement. These factors could ultimately cause a reduction in the
payments you receive on your issuer notes. Your consent to the requisite
changes to the transaction documents will not be obtained (see "-- THE SECURITY
TRUSTEE MAY AGREE MODIFICATIONS TO THE ISSUER TRANSACTION DOCUMENTS WITHOUT
YOUR CONSENT, WHICH MAY ADVERSELY AFFECT YOUR INTERESTS" above). There may be
conflicts between us and any new issuers, and our interests may not prevail,
which may adversely affect payments on the issuer notes.
The security trustee will exercise its rights under the Funding 1 deed of
charge only in accordance with directions given by the issuers (which could be
us, any previous issuer or, if Funding 1 enters into new intercompany loans,
any new issuer) that have the highest-ranking outstanding term advances at that
time, provided that the security trustee is indemnified and/or secured to its
satisfaction.
If the security trustee receives conflicting directions, it will follow the
directions given by the relevant issuers representing the largest principal
amount outstanding of relevant term advances. If we are not in the group
representing that largest principal amount, then our interests may not prevail.
This could ultimately cause a reduction in the payments you receive on your
issuer notes.
AS NEW LOANS ARE ASSIGNED TO THE MORTGAGES TRUSTEE, THE CHARACTERISTICS OF THE
TRUST PROPERTY MAY CHANGE FROM THOSE EXISTING AT THE CLOSING DATE, AND THOSE
CHANGES MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
There is no guarantee that any new loans assigned to the mortgages trustee
will have the same characteristics as the loans in the portfolio as at the
closing date. In particular, new loans may have different payment
characteristics than the loans in the portfolio as at the closing date.
43
The ultimate effect of this could be to delay or reduce the payments you
receive on the issuer notes. However, any new loans will be required to meet
the conditions described in "ASSIGNMENT OF THE LOANS AND THEIR RELATED
SECURITY".
THE YIELD TO MATURITY OF THE ISSUER NOTES MAY BE ADVERSELY AFFECTED BY
PREPAYMENTS OR REDEMPTIONS ON THE LOANS
The yield to maturity of the issuer notes of each class will depend mostly
on (a) the amount and timing of payment of principal on the loans and (b) the
price paid by the noteholders of each class of issuer notes.
The yield to maturity of the issuer notes of each class may be adversely
affected by a higher or lower than anticipated rate of prepayments on the
loans. The factors affecting the rate of prepayment on the loans are described
in "-- OUR ABILITY TO REDEEM THE SERIES 1 CLASS A ISSUER NOTES AND/OR THE
SERIES 2 CLASS A ISSUER NOTES AND/OR THE SERIES 3 CLASS A ISSUER NOTES AND /OR
THE SERIES 4 CLASS A ISSUER NOTES ON THEIR SCHEDULED REDEMPTION DATES IS
AFFECTED BY THE RATE OF PREPAYMENT ON THE LOANS" and "-- THE OCCURRENCE OF
TRIGGER EVENTS AND ENFORCEMENT OF THE ISSUER SECURITY MAY ADVERSELY AFFECT THE
SCHEDULED REDEMPTION DATES OF THE SERIES 1 CLASS A ISSUER NOTES, SERIES 2 CLASS
A ISSUER NOTES, SERIES 3 CLASS A ISSUER NOTES AND/OR SERIES 4 CLASS A ISSUER
NOTES".
No assurance can be given that Funding 1 will accumulate sufficient funds
during the cash accumulation period relating to the issuer series 1 term AAA
advance, the issuer series 2 term AAA advance, each scheduled amortisation
instalment under the issuer series 3 term AAA advance or each scheduled
amortisation instalment under the issuer series 4 term AAA advance to enable it
to repay these issuer term advances to us so that the corresponding classes of
issuer notes will be redeemed in accordance with their scheduled redemption
dates. During the cash accumulation period for the issuer bullet term advances
and scheduled amortisation instalments, repayments of principal will only be
made on the issuer series 5 term AAA advance, the issuer term AA advances or
the issuer term BBB advances that are due and payable if the quarterly CPR of
the loans in the trust property is greater than 15 per cent. and other
conditions are met as described in "-- PRINCIPAL PAYMENTS ON THE ORIGINAL PASS-
THROUGH NOTES WILL BE DEFERRED IN CERTAIN CIRCUMSTANCES" below. This means that
there may be no corresponding repayments of principal on the series 5 class A
issuer notes, the class B issuer notes or the class C issuer notes.
The extent to which sufficient funds are saved by Funding 1 during a cash
accumulation period or received by it from its share in the mortgages trust for
application on a scheduled repayment date will depend on whether the actual
principal prepayment rate of the loans is the same as the assumed principal
prepayment rate. If Funding 1 is not able to save enough money during a cash
accumulation period or does not receive enough money from its share in the
mortgages trust for application on a scheduled repayment date to repay the
relevant issuer term AAA advance (and, if in respect of the issuer bullet term
advances or, where applicable, scheduled amortisation instalments) it is unable
to make a drawing on the Funding 1 liquidity facility or the reserve fund to
make good the shortfall) so that we can redeem the class A issuer notes of the
corresponding series on their respective scheduled redemption date(s), then
Funding 1 will be required to pay to us on those scheduled redemption dates
only the amount that it has actually saved or received. Any shortfall will be
deferred and paid on subsequent Funding 1 interest payment dates when Funding 1
has money available to make the payment. In these circumstances, unless Funding
1 is able to make a drawing on the Funding 1 liquidity facility, there will be
a variation in the yield to maturity of the relevant class of issuer notes.
OUR ABILITY TO REDEEM THE SERIES 1 CLASS A ISSUER NOTES AND/OR THE SERIES 2
CLASS A ISSUER NOTES AND/OR THE SERIES 3 CLASS A ISSUER NOTES AND/OR THE SERIES
4 CLASS A ISSUER NOTES ON THEIR SCHEDULED REDEMPTION DATES IS AFFECTED BY THE
RATE OF PREPAYMENT ON THE LOANS
The rate of prepayment of loans is influenced by a wide variety of economic,
social and other factors, including prevailing mortgage market interest rates,
the availability of alternative financing programs, local and regional economic
conditions and homeowner mobility. For instance, prepayments on the loans may
be due to borrowers refinancing their loans and sales of properties
44
by borrowers (either voluntarily or as a result of enforcement action taken).
In addition, if the seller is required to repurchase a loan or loans under a
mortgage account and their related security because, for example, one of the
loans does not comply with the loan warranties in the mortgage sale agreement,
then the payment received by the mortgages trustee will have the same effect as
a prepayment of all of the loans under the mortgage account. Because these
factors are not within our control or the control of Funding 1 or the mortgages
trustee, we cannot give any assurances as to the level of prepayments that the
portfolio may experience.
Variation in the rate of prepayments of principal on the loans may affect
each class of issuer notes differently depending upon amounts already repaid by
Funding 1 to us under the issuer intercompany loan and whether a trigger event
has occurred, or a loan is subject to a product switch or a further advance or
the security granted by us under the issuer deed of charge has been enforced.
If prepayments on the loans occur less frequently than anticipated, then there
may not be sufficient funds available to redeem the series 1 class A issuer
notes and/or the series 2 class A issuer notes and/or the series 3 class A
issuer notes and/or the series 4 class A issuer notes in full on their
respective scheduled redemption dates.
THE SELLER MAY CHANGE THE LENDING CRITERIA RELATING TO LOANS THAT ARE
SUBSEQUENTLY ASSIGNED TO THE MORTGAGES TRUSTEE, WHICH COULD AFFECT THE
CHARACTERISTICS OF THE TRUST PROPERTY AND WHICH MAY ADVERSELY AFFECT PAYMENTS
ON THE ISSUER NOTES
Each of the loans was originated in accordance with the seller's lending
criteria at the time of origination. The current lending criteria are set out
in the section "THE LOANS -- CHARACTERISTICS OF THE LOANS -- LENDING CRITERIA".
These lending criteria consider a variety of factors such as a potential
borrower's credit history, employment history and status and repayment ability,
as well as the value of the property to be mortgaged. In the event of the
assignment of any new loans and new related security to the mortgages trustee,
the seller will warrant that those new loans and new related security were
originated in accordance with the seller's lending criteria at the time of
their origination. However, the seller retains the right to revise its lending
criteria as determined from time to time, and so the lending criteria
applicable to any loan at the time of its origination may not be or have been
the same as those set out in the section "THE LOANS -- CHARACTERISTICS OF THE
LOANS -- LENDING CRITERIA".
If new loans that have been originated under revised lending criteria are
assigned to the mortgages trustee, the characteristics of the trust property
could change. This could lead to a delay or a reduction in the payments
received on the issuer notes.
THE SELLER HAS ADOPTED PROCEDURES RELATING TO INVESTIGATIONS AND SEARCHES FOR
REMORTGAGES WHICH COULD AFFECT THE CHARACTERISTICS OF THE TRUST PROPERTY AND
WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
The seller does not require a solicitor or licensed conveyancer to conduct a
full investigation of the title to a property in all cases. Where the borrower
is remortgaging there will be a limited investigation to carry out some but not
all of the searches and investigations which would normally be carried out in
England and Wales by a solicitor conducting a full investigation of the title
to a property. Properties which have undergone such a limited investigation may
be subject to matters which would have been revealed by a full investigation of
title and which may have been remedied or, if incapable of remedy, may have
resulted in the properties not being accepted as security for a loan had such
matters been revealed, though to mitigate against this risk search indemnity
insurance is obtained in respect of such properties. The introduction of loans
secured by such properties into the trust property could result in a change of
the characteristics of the trust property. This could lead to a delay or a
reduction in the payments received on the issuer notes.
THE TIMING AND AMOUNT OF PAYMENTS ON THE LOANS COULD BE AFFECTED BY VARIOUS
FACTORS WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
The loans are affected by credit, liquidity and interest rate risks. Various
factors influence mortgage delinquency rates, prepayment rates, repossession
frequency and the ultimate payment of interest and principal, such as changes
in the national or international economic climate, regional
45
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' individual,
personal or financial circumstances may affect the ability of borrowers to
repay loans. Loss of earnings, illness, divorce and other similar factors may
lead to an increase in delinquencies by and bankruptcies of borrowers, and
could ultimately have an adverse impact on the ability of borrowers to repay
loans.
In addition, the ability of a borrower to sell a property given as security
for a loan at a price sufficient to repay the amounts outstanding under the
loan will depend upon a number of factors, including the availability of buyers
for that property, the value of that property and property values in general at
the time.
Further, the mortgage loan industry in the United Kingdom is highly
competitive. This competitive environment may affect the rate at which the
seller originates new loans and may also affect the level of attrition of the
seller's existing borrowers.
The principal source of income for repayment of the issuer notes by us is
the issuer intercompany loan. The principal source of income for repayment by
Funding 1 of the issuer intercompany loan is its interest in the loans held on
trust by the mortgages trustee for Funding 1 and the seller. If the timing and
payment of the loans is adversely affected by any of the risks described in
this section, then the payments on the issuer notes could be reduced or
delayed.
THE OCCURRENCE OF TRIGGER EVENTS AND ENFORCEMENT OF THE ISSUER SECURITY MAY
ADVERSELY AFFECT THE SCHEDULED REDEMPTION DATES OF THE SERIES 1 CLASS A ISSUER
NOTES, SERIES 2 CLASS A ISSUER NOTES, SERIES 3 CLASS A ISSUER NOTES AND/OR
SERIES 4 CLASS A ISSUER NOTES
If no trigger event has occurred and the issuer security has not been
enforced in accordance with the terms of the issuer deed of charge, then
payments of principal will not occur on the series 1 class A issuer notes,
series 2 class A issuer notes, series 3 class A issuer notes and/or series 4
class A issuer notes before their respective scheduled redemption dates.
If a trigger event occurs or the issuer security is enforced in accordance
with the issuer deed of charge prior to the scheduled redemption dates for the
series 1 class A issuer notes, series 2 class A issuer notes, series 3 class A
issuer notes and/or series 4 class A issuer notes, then the relevant classes of
issuer notes outstanding will not be repaid on their scheduled redemption dates
but will be repaid on each interest payment date from monies received from
Funding 1 on the issuer term AAA advances of the corresponding series as
described in the following three risk factors.
IF AN ASSET TRIGGER EVENT OCCURS, ANY SERIES 1 CLASS A ISSUER NOTES, SERIES 2
CLASS A ISSUER NOTES, SERIES 3 CLASS A ISSUER NOTES AND/OR SERIES 4 CLASS A
ISSUER NOTES THEN OUTSTANDING WILL NOT BE REPAID ON THEIR SCHEDULED REDEMPTION
DATES
When an asset trigger event has occurred, the mortgages trustee will
distribute principal receipts on the loans to Funding 1 and the seller
proportionally and equally based on their percentage shares of the trust
property (that is, the Funding 1 share percentage and the seller share
percentage). When an asset trigger event has occurred, Funding 1 will repay
(after making requisite payments to the Funding 1 liquidity facility provider
and to replenish the reserve fund):
first, the term AAA advances in respect of the issuer intercompany loan,
the previous intercompany loans and any new intercompany loans, until
each of those term AAA advances is fully repaid;
then, the term AA advances in respect of the issuer intercompany loan,
the previous intercompany loans and any new intercompany loans, until
each of those term AA advances is fully repaid; and
then, the term BBB advances in respect of the issuer intercompany loan,
the previous intercompany loans and any new intercompany loans, until
each of those term BBB advances is fully repaid.
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If an asset trigger event occurs, any series 1 class A issuer notes and/or
series 2 class A issuer notes and/or series 3 class A issuer notes and/or
series 4 class A issuer notes then outstanding will not be repaid on their
scheduled redemption dates, and there is also a risk that they will not be
repaid by their final maturity dates.
IF A NON-ASSET TRIGGER EVENT OCCURS, ANY SERIES 1 CLASS A ISSUER NOTES, SERIES
2 CLASS A ISSUER NOTES, SERIES 3 CLASS A ISSUER NOTES AND/OR SERIES 4 CLASS A
ISSUER NOTES THEN OUTSTANDING WILL NOT BE REPAID ON THEIR SCHEDULED REDEMPTION
DATES
If a non-asset trigger event has occurred but an asset trigger event has not
occurred, the mortgages trustee will distribute all principal receipts to
Funding 1 until the Funding 1 share percentage of the trust property is zero.
When a non-asset trigger event has occurred, Funding 1 will repay (after making
requisite payments to the Funding 1 liquidity facility provider and to
replenish the reserve fund):
first, the term AAA advance with the earliest final repayment date, then
to repay the term AAA advance with the next earliest final repayment
date, and so on until the term AAA advances in respect of the issuer
intercompany loan, the previous intercompany loans and any new
intercompany loans are fully repaid;
then, the term AA advances in respect of the issuer intercompany loan,
the previous issuer intercompany loans and any new intercompany loans,
until each of those term AA advances is fully repaid; and
finally, the term BBB advances in respect of the issuer intercompany
loan, the previous issuer intercompany loans and any new intercompany
loans, until each of those term BBB advances is fully repaid.
If a non-asset trigger event occurs, any series 1 class A issuer notes,
series 2 class A issuer notes, series 3 class A issuer notes and/or series 4
class A issuer notes then outstanding will not be repaid on their scheduled
redemption dates.
IF THE ISSUER SECURITY IS ENFORCED, ANY SERIES 1 CLASS A ISSUER NOTES, SERIES 2
CLASS A ISSUER NOTES, SERIES 3 CLASS A ISSUER NOTES AND/OR SERIES 4 CLASS A
ISSUER NOTES THEN OUTSTANDING WILL NOT BE REPAID ON THEIR SCHEDULED REDEMPTION
DATES
If the issuer security is enforced, then the mortgages trustee will
distribute funds in the manner described in "CASHFLOWS". In these
circumstances, any series 1 class A issuer notes, series 2 class A issuer
notes, series 3 class A issuer notes and/or series 4 class A issuer notes then
outstanding will not be repaid on their scheduled redemption dates and there is
also a risk that those class A issuer notes may not be repaid by their final
maturity dates.
LOANS SUBJECT TO FURTHER ADVANCES WILL BE REPURCHASED BY THE SELLER FROM THE
MORTGAGES TRUSTEE, WHICH WILL AFFECT THE PREPAYMENT RATE OF THE LOANS, AND THIS
MAY AFFECT THE YIELD TO MATURITY OF THE ISSUER NOTES
If the servicer at its discretion decides to grant a borrower a further
advance under a loan which has been assigned to the mortgages trustee, then the
seller will be required to repurchase that loan under the relevant mortgage
account and its related security from the mortgages trustee save for any loan
in arrears at a price equal to the outstanding principal balance of those loans
together with any accrued and unpaid interest and expenses to the date of
purchase. The yield to maturity of the issuer notes may be affected by the
repurchase of loans subject to further advances.
IN LIMITED CIRCUMSTANCES, LOANS SUBJECT TO PRODUCT SWITCHES WILL BE REPURCHASED
BY THE SELLER FROM THE MORTGAGES TRUSTEE, WHICH WILL AFFECT THE PREPAYMENT RATE
OF THE LOANS, AND THIS MAY AFFECT THE YIELD TO MATURITY OF THE ISSUER NOTES
Loans subject to product switches will not be repurchased unless on any
distribution date, the seller is in breach of the conditions precedent to the
sale of new loans to the mortgages trustee as described in "ASSIGNMENT OF LOANS
AND THEIR RELATED SECURITY -- ASSIGNMENT OF NEW LOANS AND
47
THEIR RELATED SECURITY TO THE MORTGAGES TRUSTEE" in paragraphs (A) to (P). From
and including that date to but excluding the date when those conditions
precedent have been satisfied, the seller will be required to repurchase any
loans and their related security that are subject to product switches. The
seller will be required to repurchase the relevant loan or loans under the
relevant mortgage account and their related security from the mortgages trustee
at a price equal to the outstanding principal balance of those loans together
with accrued and unpaid interest and expenses to the date of purchase.
A loan will be subject to a product switch if the borrower and the seller
agree on or the servicer offers a variation in the financial terms and
conditions applicable to the relevant borrower's loan, other than:
* any variation agreed with a borrower to control or manage arrears
on the loan;
* any variation to the interest rate as a result of a borrower being
linked to HVR 2;
* any variation in the maturity date of the loan unless, while the
issuer intercompany loan is outstanding, it is extended beyond June
2040;
* any variation imposed by statute;
* any variation of the rate of interest payable in respect of the
loan where that rate is offered to the borrowers of more than 10
per cent. by outstanding principal amount of loans in the trust
property in any interest period; or
* any variation in the frequency with which the interest payable in
respect of the loan is charged.
The yield to maturity of the issuer notes may be affected by the repurchase
of loans subject to product switches.
RATINGS ASSIGNED TO THE ISSUER NOTES MAY BE LOWERED OR WITHDRAWN AFTER YOU
PURCHASE THE ISSUER NOTES, WHICH MAY LOWER THE MARKET VALUE OF THE ISSUER NOTES
The ratings assigned to each class of issuer notes address the likelihood of
full and timely payment to you of all payments of interest on each interest
payment date under those classes of issuer notes. The ratings also address the
likelihood of "ULTIMATE" payment of principal on the final maturity date of
each class of issuer notes. The expected ratings of each class of issuer notes
on the closing date are set out in "RATINGS OF THE ISSUER NOTES". Any rating
agency may lower its rating or withdraw its rating if, in the sole judgment of
the rating agency, the credit quality of the issuer notes has declined or is in
question. If any rating assigned to the issuer notes is lowered or withdrawn,
the market value of the issuer notes may be reduced and, in the case of the
series 1 class A issuer notes, such issuer notes may no longer be eligible for
investment by money market funds. See "-- CERTAIN EVENTS MAY AFFECT THE
ELIGIBILITY OF THE SERIES 1 CLASS A ISSUER NOTES FOR INVESTMENT BY MONEY MARKET
FUNDS".
A change to the ratings assigned to each class of issuer notes will not
affect the term advance ratings assigned to each issuer term advance in the
intercompany loans.
SUBORDINATION OF OTHER NOTE CLASSES MAY NOT PROTECT YOU FROM ALL RISK OF LOSS
The class B issuer notes and the class C issuer notes are subordinated in
right of payment of interest to the class A issuer notes. The class C issuer
notes are subordinated in right of payment of interest to the class B issuer
notes. However, as described in "-- THE TRANSACTION HAS BEEN STRUCTURED IN THE
EXPECTATION THAT THE SERIES 1 ISSUER NOTES WILL BE REDEEMED BEFORE THE SERIES 2
ISSUER NOTES AND SO ON" above, the transaction has been structured in the
expectation that the series 1 issuer notes will be repaid in full prior to the
redemption of the series 2 class A issuer notes, the series 3 class A issuer
notes, the series 4 class A issuer notes and the series 5 class A issuer notes.
Accordingly, there is no assurance that these subordination rules will
protect the holders of class A issuer notes or the holders of class B issuer
notes from all risk of loss.
48
PRINCIPAL PAYMENTS ON THE ORIGINAL PASS-THROUGH NOTES WILL BE DEFERRED IN SOME
CIRCUMSTANCES
Principal repayments on the issuer term AA advances and/or the issuer term
BBB advances will be deferred in the following circumstances:
If on a Funding 1 interest payment date:
* there is a debt balance on the BBB principal deficiency sub-ledger
or the AA principal deficiency sub-ledger, after application of the
Funding 1 available revenue receipts on that Funding 1 interest
payment date; or
* the adjusted reserve fund level is less than the reserve fund
threshold; or
* the aggregate outstanding principal balance of loans in the
mortgages trust, in respect to which the aggregate amount in
arrears is more than three times the monthly payment then due, is
more than 5 per cent of the aggregate outstanding principal balance
of loans in the mortgages trust;
then to the extent that any term AAA advance remains outstanding (whether
or not such term AAA advance is then due and payable) after the
allocation of principal on that Funding 1 interest payment date to those
term advances, the issuer term AA advances and issuer term BBB advances
will not be entitled to principal repayments until the relevant
circumstance as described above has been remedied or otherwise ceases to
exist. In addition, if any term AA advance remains outstanding (whether
or not such term AA advance is then due and payable) after the allocation
of principal on that Funding 1 interest payment date to those term
advances, the issuer term BBB advances will not be entitled to principal
repayments until the relevant circumstances as described above have been
remedied or otherwise cease to exist. This means that payments of
principal on the class C issuer notes of all series and, as applicable,
the class B issuer notes of all series will be deferred until the earlier
of the time when the relevant circumstance described in this risk factor
has been remedied (if ever) and the final maturity date of the relevant
issuer notes.
Furthermore, if, on a Funding 1 interest payment date prior to the issuer
step-up date:
* one or more bullet term advances and/or scheduled amortisation
instalments are then in a cash accumulation period; and
* the quarterly CPR is less than 15 per cent; and
* there is a cash accumulation shortfall at that time;
then, on or before their step-up dates, the issuer term advances which
are original pass-through term advances will be entitled to principal
repayments only to the extent permitted under the pass-through repayment
restrictions see "CASHFLOWS -- DISTRIBUTION OF FUNDING 1 AVAILABLE
PRINCIPAL RECEIPTS -- REPAYMENT OF TERM ADVANCES OF EACH SERIES PRIOR TO
THE OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO THE SERVICE ON FUNDING 1
OF AN INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER
OF A NOTE ACCELERATION NOTICE".
SERIES 2 ISSUER NOTES, SERIES 3 ISSUER NOTES, SERIES 4 ISSUER NOTES AND SERIES
5 ISSUER NOTES MAY BE SUBJECT TO RISK IF THE TRUST PROPERTY DETERIORATES AFTER
REPAYMENT OF PREVIOUS SERIES OF THE ISSUER NOTES
If the loans comprising the trust property do not perform as expected at any
time after the repayment in full of the series 1 issuer notes, then the series
2 issuer notes and/or the series 3 issuer notes and/or the series 4 issuer
notes and/or the series 5 issuer notes may not be repaid in full. This risk
will not affect the series 1 noteholders.
YOU MAY NOT BE ABLE TO SELL THE ISSUER NOTES
There currently is no secondary market for the issuer notes. The relevant
underwriters expect, but are not obliged, to make a market in the issuer notes.
If no secondary market develops, you may not be able to sell the issuer notes
prior to maturity. We cannot offer any assurance that a secondary market will
develop or, if one does develop, that it will continue.
49
YOU MAY BE SUBJECT TO EXCHANGE RATE RISKS ON THE SERIES 1 ISSUER NOTES, THE
SERIES 2 ISSUER NOTES, THE SERIES 3 ISSUER NOTES, THE SERIES 4 ISSUER NOTES,
THE SERIES 5 CLASS B ISSUER NOTES AND THE SERIES 5 CLASS C ISSUER NOTES
Investors will pay for the series 1 issuer notes, the series 2 issuer notes
and the series 3 issuer notes in US dollars and the series 4 issuer notes,
series 5 class B issuer notes and series 5 class C issuer notes in euro, but
the issuer term advances to be made by us to Funding 1 and repayments of
principal and payments of interest by Funding 1 to us under the issuer
intercompany loan will be in sterling.
To hedge:
* our currency exchange rate exposure, including the interest rate
exposure connected with that currency exposure; and
* the difference in periodicity between quarterly Funding 1 interest
payment dates, and the monthly interest payment dates in relation
to the series 1 class A issuer notes,
we will enter into the issuer dollar currency swaps for the series 1 issuer
notes, the series 2 issuer notes and the series 3 issuer notes with the issuer
dollar currency swap providers and the issuer euro currency swaps for the
series 4 issuer notes, the series 5 class B issuer notes and the series 5 class
C issuer notes with the issuer euro currency swap providers (see "THE SWAP
AGREEMENTS -- THE ISSUER DOLLAR CURRENCY SWAPS AND THE ISSUER EURO CURRENCY
SWAPS").
If we fail to make timely payments of amounts due under an issuer swap, then
we will have defaulted under that issuer swap. Each issuer swap provider is
obliged only to make payments under an issuer swap as long as we make payments
under the same. If an issuer swap provider is not obliged to make payments, or
if it defaults in its obligations to make payments of amounts in US dollars or
euro, as applicable, equal to the full amount to be paid by it on the payment
dates under the relevant issuer swap (which are the same dates as the interest
payment dates in respect of the issuer notes), we will be exposed to changes in
US dollar/sterling or euro/sterling currency exchange rates and in the
associated interest rates on these currencies. Unless a replacement issuer swap
is entered into, we may have insufficient funds to make payments due on the
issuer notes of any class and any series that are then outstanding.
THERE MAY BE A DELAY IN PAYMENT OF INTEREST ON SERIES 1 CLASS A ISSUER NOTES ON
THE OCCURRENCE OF A TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER SECURITY
After the occurrence of a trigger event or enforcement of the issuer
security, the interest payments on the series 1 class A issuer notes will no
longer be payable monthly, but will be payable quarterly. In these
circumstances a noteholder will not receive interest under the series 1 class A
issuer notes on the expected payment dates.
THE MORTGAGES TRUSTEE GIC PROVIDER OR THE FUNDING 1 GIC PROVIDER MAY CEASE TO
SATISFY CERTAIN CRITERIA TO PROVIDE THE MORTGAGES TRUSTEE GIC ACCOUNT OR THE
FUNDING 1 GIC ACCOUNT
The mortgages trustee GIC provider and the Funding 1 GIC provider are
required to satisfy certain criteria (including certain criteria and/or
permissions set or required by the FSA from time to time) in order to continue
to receive deposits in the mortgages trustee GIC account and the Funding 1 GIC
account respectively. If either the mortgages trustee GIC provider or the
Funding 1 GIC provider ceases to satisfy that criteria the relevant account
would need to be transferred to another entity which does satisfy that
criteria. In these circumstances the new GIC provider may not offer a GIC on
terms as favourable as those provided by the mortgages trustee GIC provider or
the Funding 1 GIC provider.
TERMINATION PAYMENTS ON THE ISSUER SWAPS MAY ADVERSELY AFFECT THE FUNDS
AVAILABLE TO MAKE PAYMENTS ON THE ISSUER NOTES
If any of the issuer swaps terminates, we may as a result be obliged to pay
a termination payment to the relevant issuer swap provider. The amount of the
termination payment will be based on the cost of entering into a replacement
issuer swap. Under the issuer intercompany loan
50
agreement, Funding 1 will be required to pay us an amount equal to any
termination payment due by us to the relevant issuer swap provider. Funding 1
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 1 will have the funds
available to make that payment or that we will have sufficient funds available
to make any termination payment under any of our issuer swaps or to make
subsequent payments to you in respect of the relevant series and class of
issuer notes. Nor can we give you any assurance that we will be able to enter
into a replacement issuer swap or, if one is entered into, that the credit
rating of the replacement issuer swap provider will be sufficiently high to
prevent a downgrading of the then current ratings of the issuer notes by the
rating agencies.
Except where the relevant issuer swap provider has caused the relevant
issuer swap to terminate by its own default, any termination payment due by us
will rank equally not only with payments due to the holders of the series and
class of issuer notes to which the relevant issuer swap relates but also with
payments due to the holders of any other series and class of issuer notes which
rank equally with the series and class of issuer notes to which the relevant
issuer swap relates. Any additional amounts required to be paid by us following
termination of the relevant issuer swap (including any extra costs incurred
(for example, from entering into "SPOT" currency transactions or interest rate
swaps) if we cannot immediately enter into a replacement issuer swap) will also
rank equally not only with payments due to the holders of the series and class
of issuer notes to which the relevant issuer swap relates but also with
payments due to the holder of any other series and class of issuer notes which
rank equally with the series and class of issuer notes to which the relevant
issuer swap relates. Furthermore, any termination payment or additional payment
or additional amounts required to be paid by us following termination of an
issuer swap will rank ahead of payments due to the holders of any series and
class of issuer notes which ranks below the series and class of issuer notes to
which the relevant issuer swap relates. Therefore, if we are obliged to make a
termination payment to the relevant issuer swap provider or to pay any other
additional amount as a result of the termination of the relevant issuer swap,
this may affect the funds which we have available to make payments on the
issuer notes of any class and any series.
RISKS ASSOCIATED WITH THE FUNDING 1 SWAP
To provide a hedge against (a) the mortgages trustee variable base rate
payable on the variable rate loans, the rates of interest payable on the
tracker rate loans and the fixed rates of interest payable on the fixed rate
loans; and (b) the rate of interest payable by Funding 1 on the intercompany
loans, Funding 1 has entered into the Funding 1 swap agreement. If Funding 1
fails to make timely payments under the Funding 1 swap, it will have defaulted
under the Funding 1 swap. The Funding 1 swap provider is obliged only to make
payments under the Funding 1 swap as long as Funding 1 makes payments under the
same. If the Funding 1 swap provider is not obliged to make payments, or
defaults in its obligation to make payments under the Funding 1 swap, Funding 1
will be exposed to the variance between the rates of interest payable on the
loans and the rate of interest payable by it under the intercompany loans
unless a replacement Funding 1 swap is entered into. If the Funding 1 swap
terminates, Funding 1 may as a result be obliged to pay a termination payment
to the Funding 1 swap provider. Any variance between the rates of interest
payable on the loans and the rate of interest payable by Funding 1 under the
intercompany loans and any termination payment payable by it to the Funding 1
swap provider may adversely affect the ability of Funding 1 to meet its
obligations under the issuer intercompany loan agreement (see also "-- FAILURE
BY FUNDING 1 TO MEET ITS OBLIGATIONS UNDER THE ISSUER INTERCOMPANY LOAN
AGREEMENT WOULD ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES" above).
Funding 1 will receive interest on the variable rate loans, which is based
on HVR 1 or HVR 2. The payment obligations of Funding 1 under the Funding 1
swap will, among other things, be based on 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, HSBC Bank plc, Lloyds TSB plc,
Nationwide Building Society, Northern Rock plc, National Westminster Bank Plc,
and Woolwich plc (and where
51
those banks have more than one standard variable rate, the highest of those
rates). While it is anticipated that such average rate will broadly track both
HVR 1 and HVR 2, the variance between such average rate and HVR 1 and HVR 2
respectively, may affect the ability of Funding 1 to meet its payment
obligations under the Funding 1 swap agreement.
WE RELY ON THIRD PARTIES TO PERFORM SERVICES IN RELATION TO THE ISSUER NOTES,
AND YOU MAY BE ADVERSELY AFFECTED IF THEY FAIL TO PERFORM THEIR OBLIGATIONS
We are a party to contracts with a number of other third parties that have
agreed to perform services in relation to the issuer notes. For example, the
issuer swap providers have agreed to provide their respective issuer swaps, the
corporate services provider has agreed to provide corporate services and the
paying agents and the agent bank have agreed to provide payment and calculation
services in connection with the issuer notes. In the event that any of these
parties were to fail to perform their obligations under the respective
agreements to which they are a party, you may be adversely affected.
WE MAY BE UNABLE TO PAY, IN FULL OR AT ALL, INTEREST DUE ON THE ISSUER NOTES IF
THERE IS AN INCOME OR PRINCIPAL DEFICIENCY
If, on any Funding 1 interest payment date, revenue receipts available to
Funding 1 (including the reserve fund) are insufficient to enable Funding 1 to
pay interest on issuer term advances, previous term advances and any new term
advances and other expenses of Funding 1 ranking higher in seniority to
interest due on these term advances, then Funding 1 may use principal receipts
on the loans received by it in the mortgages trust to make up the shortfall.
Funding 1 will use principal receipts that would have been applied to repay
the term advances with the lowest term advance rating to pay interest on those
other term advances and senior expenses described in the preceding paragraph
where there is a shortfall of monies to pay those amounts. At the closing date,
the relevant term advances with the lowest term advance rating include the
issuer term BBB advances. If Funding 1 uses principal to repay interest and
senior expenses in this manner, there will be less principal available to repay
the issuer term BBB advances.
Funding 1 will be obliged to keep a ledger that records any principal
applied to pay interest and senior expenses (as well as any losses on the loans
causing a principal deficiency). When the amount recorded on the ledger is
equal to the principal amount outstanding of the term BBB advances, then
Funding 1 will use principal receipts that would have been applied to repay the
term advance with the next lowest ranking term advance rating to pay interest
on the term advances and senior expenses where there is a shortfall of money to
pay those amounts. At the closing date, the term advances with the next lowest
term advance rating include the issuer term AA advances. When the amount
recorded on the principal deficiency ledger exceeds the principal amount
outstanding on the term AA advances, Funding 1 will use principal receipts that
would have been applied to repay the term AAA advances to pay those amounts.
During the term of the transaction, however, it is expected that any
principal deficiencies of this sort will be recouped from subsequent excess
revenue receipts and amounts standing to the credit of the reserve fund. The
revenue receipts will be applied first to cover any principal deficiency in
respect of the term advances with the highest term advance rating (at the
closing date, these include the issuer term AAA advances), and then the term
advances with the next highest-ranking term advance rating (at the closing
date, these include the issuer term AA advances), and so on down to the term
advances with the lowest term advance rating.
If there are insufficient funds available because of income or principal
deficiencies, then one or more of the following consequences may occur:
* the interest and other net income of Funding 1 may not be
sufficient, after making the payments to be made in priority, to
pay, in full or at all, interest due on the issuer term BBB
advances and the issuer term AA advances;
52
* there may be insufficient funds to repay the principal due and
payable on any of the issuer term BBB advances and the issuer term
AA advances prior to their final repayment dates unless the other
net income of Funding 1 is sufficient, after making other prior
ranking payments, to reduce any principal deficiency in respect of
the term BBB advances and term AA advances;
* if the amount of principal deficiencies exceeds the principal
amount outstanding of any of the term advances (and the principal
deficiencies cannot be covered by the other income of Funding 1),
then we may not receive the full principal amount of any or all of
the issuer term advances and, accordingly, you may not receive the
full face value of the class C issuer notes, the class B issuer
notes and the class A issuer notes, as the case may be; and/or
* we may be unable to pay, in full or at all, interest due on your
issuer notes.
For more information on income and principal deficiencies, see "CREDIT
STRUCTURE -- PRINCIPAL DEFICIENCY LEDGER".
THE SELLER SHARE OF THE TRUST PROPERTY DOES NOT PROVIDE CREDIT ENHANCEMENT FOR
THE ISSUER NOTES
Any losses from loans included in the trust property will be allocated to
Funding 1 and the seller proportionally on each distribution date in accordance
with the Funding 1 share percentage and the seller share percentage of the
trust property. The seller's share of the trust property therefore does not
provide credit enhancement for the Funding 1 share of the trust property or the
issuer notes. Losses on the loans in the trust property are allocated
proportionately between the seller and Funding 1 depending on their respective
shares in the trust property.
WE WILL ONLY HAVE RECOURSE TO THE SELLER IF THERE IS A BREACH OF WARRANTY BY
THE SELLER, BUT OTHERWISE THE SELLER'S ASSETS WILL NOT BE AVAILABLE TO US AS A
SOURCE OF FUNDS TO MAKE PAYMENTS ON THE ISSUER NOTES
After an intercompany loan acceleration notice under an intercompany loan is
given (as described in "SECURITY FOR FUNDING 1'S OBLIGATIONS"), the security
trustee may, but shall not be obliged, to sell the Funding 1 share of the trust
property. There is no assurance that a buyer would be found or that such a sale
would realise enough money to repay amounts due and payable under the issuer
intercompany loan agreement.
We will not, and Funding 1 and the mortgages trustee will not, have any
recourse to the seller of the loans, other than in respect of a breach of
warranty under the mortgage sale agreement.
We will not, and the mortgages trustee, Funding 1 and the security trustee
will not, undertake any investigations, searches or other actions on any loan
or its related security and we and each of them will rely instead on the
warranties given in the mortgage sale agreement by the seller.
If any of the warranties made by the seller (a) in the case of each loan in
the portfolio, was materially untrue on the date that loan was assigned to the
mortgages trustee or (b) in the case of each new loan, is materially untrue on
the date that new loan is assigned to the mortgages trustee, then the seller
will be required to remedy the breach within 20 London business 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 20 London business days,
then the seller will be required to repurchase the loan or loans under the
relevant mortgage account and their related security at their outstanding
principal balance as of the date of repurchase together with any arrears of
interest and accrued and unpaid interest and expenses. There can be no
assurance that the seller will have the financial resources to repurchase the
loan or loans under the relevant mortgage account and their related security.
However, if the seller does not repurchase those loans and their related
security when required, then the seller's share of the trust property will be
deemed to be reduced by an amount equal to the principal amount outstanding of
those loans together with any arrears of interest and accrued and unpaid
interest and expenses.
Other than as described here, neither you nor we will have any recourse to
the assets of the seller.
53
THERE CAN BE NO ASSURANCE THAT A BORROWER WILL REPAY PRINCIPAL AT THE END OF
THE TERM ON AN INTEREST-ONLY LOAN, WHICH MAY ADVERSELY AFFECT REPAYMENTS ON THE
ISSUER NOTES
Each loan in the portfolio is repayable either on a principal repayment
basis or an interest-only basis. Of the loans in the portfolio as at __, 2003,
approximately __ per cent. are interest-only loans. For interest-only loans,
because the principal is repaid in a lump sum at the maturity of the loan, the
borrower is required to have some repayment mechanism such as an investment
plan in place to ensure that funds will be available to repay the principal at
the end of the term. However, the seller does not ensure that a repayment
mechanism is in place in all cases and does not take security over these
repayment mechanisms. The borrower is also recommended to take out a life
insurance policy in relation to the loan but, as with repayment mechanisms, the
seller does not take security over these life insurance policies.
The ability of a borrower to repay the principal on an interest-only loan at
maturity depends on the borrower's responsibility to ensure that sufficient
funds are available from an investment plan or another source, such as ISAs,
pension policies, personal equity plans or endowment policies, as well as the
financial condition of the borrower, tax laws and general economic conditions
at the time.
There can be no assurance that the borrower will have the funds required to
repay the principal at the end of the term. If a borrower cannot repay the loan
and a loss occurs on the loan, then this may affect repayments of principal on
the issuer notes if that loss cannot be cured by amounts standing to the credit
of the reserve fund or the application of excess Funding 1 available revenue
receipts.
THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE MORTGAGES TRUSTEE HAS NO
LEGAL TITLE TO THE MORTGAGES WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER
NOTES
The sale by the seller to the mortgages trustee of the mortgages will take
effect, in equity only. This means that legal title to the loans in the trust
property remains with the seller, but the mortgages trustee has all the other
rights and benefits relating to ownership of each loan and its related security
(which rights and benefits are subject to the trust in favour of the
beneficiaries). The mortgages trustee has the right to demand that the seller
give it legal title to the loans and the related security in the circumstances
described in "ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY -- LEGAL
ASSIGNMENT OF THE LOANS TO THE MORTGAGES TRUSTEE" and until then the mortgages
trustee will not give notice of the assignment of the loans and related
security to any borrower or apply to H.M. Land Registry or the Central Land
Charges Registry to register or record its equitable interest in the mortgages.
Because the mortgages trustee has not obtained legal title to the loans or
their related security, there are risks, as follows:
* firstly, if the seller wrongly sold a loan to another person which
has already been assigned to the mortgages trustee, and that person
acted in good faith and did not have notice of the interests of the
mortgages trustee or the beneficiaries in the loan, then she or he
might obtain good title to the loan, free from the interests of the
mortgages trustee and the beneficiaries. If this occurred then the
mortgages trustee would not have good title to the affected loan
and its related security and it would not be entitled to payments
by a borrower in respect of that loan. This may affect the ability
of the issuer to repay the issuer notes; and
* secondly, the rights of the mortgages trustee and the beneficiaries
may be subject to the rights of the borrowers against the seller,
such as the rights of set-off (see in particular "-- SET-OFF RISKS
IN RELATION TO FLEXIBLE LOANS AND DELAYED CASHBACKS MAY ADVERSELY
AFFECT THE FUNDS AVAILABLE TO THE ISSUER TO REPAY THE ISSUER
NOTES") which occur in relation to transactions or deposits made
between some borrowers and the seller and the rights of borrowers
to redeem their mortgages by repaying the loan directly to the
seller. If these rights were exercised, the mortgages trustee may
receive less money than anticipated from the loans, which may
affect the ability of the issuer to repay the issuer notes.
54
However, if a borrower exercises any set-off rights, then an amount equal to
the amount set off will reduce the total amount of the seller share of the
trust property only, and the minimum seller share has been sized in an amount
expected to cover this risk, although there is no assurance that it will. If
the minimum seller share is exhausted, then the amount of any set-offs would be
applied to reduce the Funding 1 share of the trust property.
Once notice has been given to borrowers of the transfer of the loans and
their related security to the mortgages trustee, independent set-off rights
which a borrower has against the seller will crystallise and further rights of
independent set-off would cease to accrue from that date and no new rights of
independent set-off could be asserted following that notice. Set-off rights
arising under transaction set-off (which are set-off claims arising out of a
transaction connected with the loan) will not be affected by that notice.
SET-OFF RISKS IN RELATION TO FLEXIBLE LOANS AND DELAYED CASHBACKS MAY ADVERSELY
AFFECT THE FUNDS AVAILABLE TO THE ISSUER TO REPAY THE ISSUER NOTES
As described in "-- THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE
MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGES WHICH MAY ADVERSELY
AFFECT PAYMENTS ON THE ISSUER NOTES", the seller has made, and in the future
may make, an equitable assignment of the mortgages to the mortgages trustee,
with legal title being retained by the seller. Therefore, the rights of the
mortgages trustee may be subject to the direct rights of the borrowers against
the seller, including rights of set-off existing prior to notification to the
borrowers of the assignment of the mortgages. Although the seller does not
currently offer flexible loans or delayed cashbacks, it may offer products in
the future with those features, and those loans may be added to the mortgages
trust. Set-off rights may occur if the seller fails to advance to a borrower a
drawing under a flexible loan when the borrower is entitled to draw additional
amounts under a flexible loan or if the seller fails to pay to a borrower any
delayed cashback which the seller had agreed to pay to that borrower after
completion of the relevant loan.
If the seller fails to advance the drawing or pay the delayed cashback, then
the relevant borrower may set off any damages claim arising from the seller's
breach of contract against the seller's (and, as assignee of the mortgages, the
mortgages trustee's) claim for payment of principal and/or interest under the
loan as and when it becomes due. These set-off claims will constitute
transaction set-off as described in the immediately preceding risk factor.
The amount of the claim in respect of a drawing will, in many cases, be the
cost to the borrower of finding an alternative source of finance: the borrower
may obtain a loan elsewhere in which case the damages would be equal to any
difference in the borrowing costs together with any consequential losses,
namely the associated costs of obtaining alternative funds (for example, legal
fees and survey fees). If the borrower is unable to obtain an alternative loan,
he or she may have a claim in respect of other losses arising from the seller's
breach of contract where there are special circumstances communicated by the
borrower to the seller at the time the mortgage was taken out.
In respect of a delayed cashback, the claim is likely to be in an amount
equal to the amount due under the delayed cashback together with interest and
expenses and consequential losses (if any).
A borrower may also attempt to set-off against his or her mortgage payments
an amount greater than the amount of his or her damages claim. In that case,
the servicer will be entitled to take enforcement proceedings against the
borrower although the period of non-payment by the borrower is likely to
continue until a judgment is obtained.
The exercise of set-off rights by borrowers would reduce the incoming
cashflow to the mortgages trustee during the exercise. However, the amounts
set-off will be applied to reduce the seller share of the trust property only.
The minimum seller share has been sized in an amount expected to cover this
risk, although there is no assurance that it will. If the minimum seller share
is not sufficient in this respect then there is a risk that you may not receive
all amounts due on the issuer notes.
55
IF THE SERVICER IS REMOVED, THERE IS NO GUARANTEE THAT A SUBSTITUTE SERVICER
WOULD BE FOUND, WHICH COULD DELAY COLLECTION OF PAYMENTS ON THE LOANS AND
ULTIMATELY COULD ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
The seller has been appointed by the mortgages trustee and the beneficiaries
as servicer to service the loans. If the servicer breaches the terms of the
servicing agreement, then the mortgages trustee, Funding 1 and/or the security
trustee will be entitled to terminate the appointment of the servicer and
appoint a new servicer in its place.
There can be no assurance that a substitute servicer with sufficient
experience of administering mortgages of residential properties would be found
who would be willing and able to service the loans on the terms of the
servicing agreement. In addition, as described below, any substitute servicer
may be required to be authorised under FSMA (as defined below) once mortgage
lending becomes a regulated activity. The ability of a substitute servicer
fully to perform the required services would depend, among other things, on the
information, software and records available at the time of the appointment. Any
delay or inability to appoint a substitute servicer may affect payments on the
loans and hence our ability to make payments when due on the issuer notes.
You should note that the servicer has no obligation itself to advance
payments that borrowers fail to make in a timely fashion.
FUNDING 1 MAY NOT RECEIVE THE BENEFIT OF ANY CLAIMS MADE ON THE BUILDINGS
INSURANCE WHICH COULD ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
The practice of the seller in relation to buildings insurance is described
under "THE LOANS -- INSURANCE POLICIES". As described in that section, no
assurance can be given that Funding 1 will always receive the benefit of any
claims made under any applicable insurance contracts. This could reduce the
principal receipts received by Funding 1 according to the Funding 1 share
percentage and could adversely affect our ability to redeem the issuer notes.
You should note that buildings insurance is renewed annually.
Possible regulatory changes by the Office of Fair Trading, the Financial
Services Authority and any other regulatory authorities may have an impact on
the seller, the issuer, the servicer, and/or the loans and may adversely affect
our ability to make payments when due on the issuer notes
In the United Kingdom, the Office of Fair Trading (the "OFT") is responsible
for the issue of licences under, and the superintendence of the working and the
enforcement of, the Consumer Credit Act 1974 ("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.
The UK's Financial Services and Markets Act 2000 ("FSMA") represents a major
overhaul of financial services regulation in the UK and brings a wide range of
financial activities under a single regime of statutory-based regulation. FSMA
is being brought into effect in stages. The first stage (known as "N2") came
into effect on 1st December, 2001. Rules relating to the regulation of
mortgages will come into effect at a later stage (known as "N3"), currently
expected to be in October 2004.
FSMA applies to any "regulated activity". H.M. Treasury has made the
Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 as
amended, specifying that entering into and (in certain circumstances)
administering a "regulated mortgage contract" are regulated activities
(although the provisions specifying such will not come into force until N3).
H.M. Treasury has made the Financial Services and Markets Act 2000 (Regulated
Activities) (Amendment) No. 1 Order 2003, specifying that arranging and
advising on a regulated mortgage contract are also to be regulated activities.
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
56
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.
The main effect will be that each entity carrying on a regulated activity
will be required to hold authorisation and permission from the FSA to carry on
that activity. Generally, each financial promotion will have to be issued or
approved by a person holding authorisation and permission from the FSA. If
requirements as to authorisation of lenders or brokers or as to advertising are
not complied with, the regulated mortgage contract will be unenforceable
against the borrower except with the approval of a court.
The seller will be required to hold authorisation and permission to enter
into and to administer regulated mortgage contracts. Brokers will be required
to hold authorisation and permission from the FSA to arrange and, where
applicable, to advise on regulated mortgage contracts.
In August 2002, H.M. Treasury published feedback to its third consultation
on mortgage regulation. This feedback confirms H.M. Treasury's intention that
an entity (such as the issuer, the mortgages trustee or the security trustee)
will not carry on any regulated activity in relation to regulated mortgage
contracts that are administered pursuant to an administration agreement by an
entity having the required authorisation and permission. If such administration
agreement were to terminate, however, that entity (for example, the issuer, the
mortgages trustee or the security trustee) would have a period of not more than
one month in which to arrange for mortgage administration to be carried out by
a replacement administrator having the required authorisation and permission.
In August 2002, the FSA published feedback to its consultation on conduct of
business rules on entering into and administering regulated mortgage contracts.
This feedback annexes near-final draft rules on certain post-origination
matters, such as product disclosure on and after origination and, where
applicable, provision of an FSA information sheet on mortgage arrears.
In August 2002, the FSA also published its consultation on arranging and
advising on regulated mortgage contracts. This consultation annexes draft rules
on certain pre-origination matters, such as financial promotions, and draft
pre-application illustrations.
In March 2003, the FSA published its consultation on changes that the FSA
proposes to make to the FSA Handbook relating to prudential and authorisation-
related requirements for regulated mortgage activities. In May 2003, the FSA
published a further consultation on conduct of business rules. Rules and
guidance in respect of conduct of business requirements for such regulated
persons, including in relation to disclosure, fair treatment of consumers, the
extension of the complaints and compensation regime to cover regulated mortgage
contracts, and client money rules, are expected to be finalised by the FSA in
the fourth quarter of 2003.
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 1st May, 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 Department of Trade and Industry (the "DTI")
announced its intention that a credit agreement will be regulated where, for
credit agreements made after this change is implemented: (a) the borrower is or
includes an individual, save for partnerships of four or more partners, (b)
irrespective of the amount of credit, (although in July 2003, the DTI announced
its intention that the financial limit will remain for certain business-to-
business lending), and (c) the credit agreement is not an exempt agreement. If
this change is implemented (which is expected not later than 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.
57
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 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 on the issuer notes when
due.
Meanwhile, in the United Kingdom, self-regulation of mortgage business
exists under the Mortgage Code (the "CML CODE") issued by the Council of
Mortgage Lenders (the "CML"). Halifax currently subscribes to the CML Code.
Membership of the CML and compliance with the CML Code are voluntary. The CML
Code sets out minimum standards of good mortgage business practice, from
marketing to lending procedures and dealing with borrowers experiencing
financial difficulties. Since 30th April, 1998 lender-subscribers to the CML
Code may not accept mortgage business introduced by intermediaries who are not
registered with (before 1st November, 2000) the Mortgage Code Register of
Intermediaries or (on and after 1st November, 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 (the "EMF CODE"). On 26th July, 2001 the CML decided to
subscribe to the code collectively on behalf of its members. Lenders had until
30th September, 2002 to implement the EMF Code, an important element of which
is provision to consumers of a "European Standardised Information Sheet" (an
"ESIS") similar to the pre-application illustration proposed by the FSA.
Following postponement of regulation by the FSA of mortgage business. UK
lenders generally are not in a position to begin to provide an ESIS to
consumers until N3. The CML has discussed this with the European Commission and
the European Mortgage Federation. While compliance with the EMF Code is
voluntary, if the EMF 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 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 harmonisation 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 does not include a threshold
amount for regulated agreements (unlike the existing Directive 87/102/EEC, as
amended, which provides that (subject to certain exceptions) loans in excess of
ECU20,000 are not regulated by such Directive) and requires specified
requirements to be met in respect of certain mortgage loan products (including
new credit agreements for further drawings under certain flexible mortgages and
for further advances and amortisation tables for repayment mortgages). If the
proposal comes into force in its current form, mortgage loans which do not
comply with these requirements may be unenforceable. 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 procedure 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 into force. The DTI is
currently in consultation with consumer and industry organisations in relation
to this proposal.
No assurance can be given that the proposal will come into force in its
current form and it is unclear how the current proposal is intended to apply in
practice. If amendments are made (and, in particular, if the scope of the
proposal is extended to existing mortgage loans or mortgage loans without an
equity release component or if a directive on mortgage credit is adopted) or
certain provisions are interpreted to extend beyond their literal reading, the
implemented directive may have a material adverse impact 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 on the issuer notes
when due.
58
REGULATIONS IN THE UNITED KINGDOM COULD LEAD TO SOME TERMS OF THE LOANS BEING
UNENFORCEABLE, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
In the United Kingdom, the Unfair Terms in Consumer Contracts Regulations
1999 as amended (the "UTCCR"), which, together with (in so far as applicable)
the Unfair Terms in Consumer Contracts Regulations 1994, apply to agreements
made on or after 1st July, 1995 and affect all or almost all of the loans,
provide that:
* a consumer may challenge a term in an agreement on the basis that
it is "unfair" within the UTCCR and therefore not binding on the
consumer; and
* the OFT and any "qualifying body" within the UTCCR (such as the
FSA) may seek to injunct a business against relying on unfair
terms.
The UTCCR will not generally affect "core terms" which define the main
subject matter of the contract, such as the borrower's obligation to repay the
principal, but may affect terms that are not considered to be core terms, such
as the lender's power to vary the interest rate.
For example, if a term permitting the lender to vary the interest rate (as
the servicer is permitted to do) is found to be unfair, the borrower will not
be liable to pay the increased rate or, to the extent that the borrower has
paid it, will be able, as against the lender, or any assignee such as the
issuer or the mortgages trustee, to claim repayment of the extra interest
amounts paid or to set-off the amount of the claim against the amount owing by
the borrower under the loan. Any such non-recovery, claim or set-off may
adversely affect our ability to make payments on the issuer notes.
In February 2000, the OFT issued a guidance note on what the OFT considers
to be fair terms 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 each affected borrower in writing at least 30 days
before the rate change and (ii) permits the affected 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 loans or its business. The guidance note has been withdrawn from the OFT
website and is currently under review by the OFT and 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.
In August 2002, the Law Commission for England and Wales and the Scottish
Law Commission issued a joint consultation LCCP No. 166/SLCDP 119 on proposals
to rationalise the UK's Unfair Contract Terms Act 1977 and the UTCCR into a
single piece of legislation and a final report, together with a bill on unfair
terms is expected early in 2004. The Law Commissions have a duty under section
3 of the UK's Law Commissions Act 1965 to keep the law under review for a
number of purposes, including its simplification. The proposals are primarily
to simplify the legislation on unfair terms. It is not proposed that there
should be any significant increase in the extent of controls over terms in
consumer contracts. Some changes are proposed, however, such as that the
legislation should not affect core terms in so far as they are not
substantially different from what the borrower should reasonably expect and are
transparent. It is too early to tell how the proposals, if enacted, would
affect the loans.
59
TAX PAYABLE BY FUNDING 1 OR THE ISSUER MAY ADVERSELY AFFECT OUR ABILITY TO MAKE
PAYMENTS ON THE ISSUER NOTES
As explained in "UNITED KINGDOM TAX STATUS", Funding 1 and the issuer will
generally be subject to UK corporation tax, currently at a rate of 30 per
cent., on the profit reflected in their respective profit and loss accounts as
increased by the amount of any non-deductible expenses or losses. If the tax
payable by Funding 1 or the issuer is greater than expected because, for
example, non-deductible expenses or losses are greater than expected, the funds
available to make payments on your issuer notes will be reduced and this may
adversely affect our ability to make payments on the issuer notes.
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 issuer notes are subject to
withholding tax, we will not be obliged to pay additional amounts in relation
thereto. We may, in certain circumstances, redeem the issuer notes (as
described in paragraph 5(E) (Optional redemption for tax and other reasons) in
the section "TERMS AND CONDITIONS OF THE OFFERED ISSUER NOTES"). The
applicability of any UK withholding tax under current English law is discussed
under "UNITED KINGDOM TAXATION -- WITHHOLDING TAX".
YOUR INTERESTS MAY BE ADVERSELY AFFECTED IF THE UNITED KINGDOM JOINS THE
EUROPEAN MONETARY UNION
If the United Kingdom joins the European Monetary Union prior to the
maturity of the issuer notes, we cannot assure you that this would not
adversely affect payments on your issuer notes.
It is possible that prior to the maturity of the issuer notes the United
Kingdom may become a participating member state in the European economic and
monetary union and that the euro may become the lawful currency of the United
Kingdom. In that event, (a) all amounts payable in respect of any issuer notes
denominated in pounds sterling may become payable in euro; (b) applicable
provisions of law may allow or require us to re-denominate such issuer notes
into euro and take additional measures in respect of such issuer notes; and (c)
the introduction of the euro as the lawful currency of the United Kingdom may
result in the disappearance of published or displayed rates for deposits in
pounds sterling used to determine the rates of interest on such issuer notes or
changes in the way those rates are calculated, quoted and published or
displayed. The introduction of the euro could also be accompanied by a volatile
interest rate environment which could adversely affect 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 issuer notes.
CHANGES OF LAW MAY ADVERSELY AFFECT YOUR INTERESTS
The structure of the issue of the issuer notes and the ratings which are to
be assigned to them are based on English law 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.
INSOLVENCY ACT 2000
Significant changes to the English insolvency regime have recently been
enacted, including the Insolvency Act 2000. The Insolvency Act 2000 allows
certain "small" companies to seek protection from their creditors for a period
of 28 days, for the purposes of putting together a company voluntary
arrangement, with the option for creditors to extend the moratorium for a
further two months. A "small" company is defined as one which satisfies, in any
financial year, two or more of the following criteria: (i) its turnover is not
more than [GBP]2.8 million, (ii) its balance sheet total is not more than
[GBP]1.4 million and (iii) the number of employees is not more than 50. Whether
or not a company is a "small" company may change from period to period and
consequently no assurance
60
can be given that the issuer, the mortgages trustee or Funding 1 will not, 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
16th July, 2002 included a proposal to increase the limits for the definition
of a small company to the EU maximum ([GBP]4.8 million turnover, [GBP]2.4
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 noteholders.
Secondary legislation has now been enacted which excludes certain special
purpose companies in relation to capital markets transactions from the optional
moratorium provisions. Such exceptions include (amongst other matters) (i) a
company which is a party to an agreement which is or forms part of a capital
market arrangement (as defined in the secondary legislation) under which a
party has incurred a debt of at least [GBP]10 million and which involves the
issue of a capital market investment (also defined, but generally, a rated,
listed or traded bond) and (ii) a company which has incurred a liability
(including a present, future or contingent liability) of at least [GBP]10
million. While the issuer, the mortgages trustee and Funding 1 should fall
within the exceptions, there is no guidance as to how the legislation will be
interpreted and the Secretary of State for Trade and Industry may by regulation
modify the exceptions. No assurance may be given that any modification of the
eligibility requirements for "small" companies and/or the exceptions will not
be detrimental to the interests of Noteholders.
If the issuer and/or the mortgages trustee and/or Funding 1 is determined to
be a "small" company and determined not to fall within one of the exceptions
(by reason of modification of the exceptions or otherwise), then the
enforcement of the issuer security by the security trustee may, for a period,
be prohibited by the imposition of a moratorium.
ENTERPRISE ACT 2002
On 15th September 2003, the corporate insolvency provisions of the
Enterprise Act 2002 came into force, amending certain provisions of the
Insolvency Act 1986 (as amended, the "INSOLVENCY ACT"). These provisions
introduced significant reforms to both personal and corporate insolvency law.
In particular the reforms restrict the right of the holder of a floating charge
to appoint an administrative receiver (unless an exception applies) and instead
will give primacy to collective insolvency procedures (in particular,
administration). 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.
The Insolvency Act contains provisions which continue to allow the
appointment of an administrative receiver in relation to certain transactions
in the capital markets. The relevant exception provides that the right to
appoint an administrative receiver would be retained for certain types of
security (such as the issuer security) that form part of a capital markets
arrangement (as defined in the Insolvency Act) that involves indebtedness of at
least [GBP]50,000,000 (or, when the relevant security document was entered into
(being in respect of the transactions described in this prospectus, the issuer
deed of charge and the Funding 1 deed of charge), a party to the relevant
transaction (such as the issuer) was expected to incur a debt of at least
[GBP]50,000,000) and the issue of a capital markets investment (also defined
but generally a rated listed or traded bond). The Secretary of State for Trade
and Industry may, by secondary legislation, modify the capital market exception
and/or provide that the exception shall cease to have effect. No assurance can
be given that any such modification or provision in respect of the capital
market exception, or its ceasing to be applicable to the transactions described
in this document will not adversely affect payments on the issuer notes.
The Insolvency Act also contains a new out-of-court route into
administration for a qualifying floating charge holder, the directors or the
company itself. The relevant provisions provide for a notice period during
which the holder of the floating charge can either agree to the administrator
proposed by the directors of the company or appoint an alternative
administrator, although the moratorium will take effect immediately after
notice is given. If the qualifying floating charge holder
61
does not respond to the directors' notice of intention to appoint, the
directors', or as the case may be, the company's appointee will automatically
take office after the notice period has elapsed. Where the holder of a
qualifying floating charge within the context of a capital market transaction
retains the power to appoint an administrative receiver, such holder may
prevent the appointment of an administrator (either by the new out-of-court
route or by the court based procedure), by appointing an administrative
receiver prior to the appointment of the administrator being completed.
The new provisions of the Insolvency Act give primary emphasis to the rescue
of the company as a going concern. The purpose of realising property to make a
distribution to one or more secured creditors is subordinated to the primary
purposes of rescuing the company as a going concern or achieving a better
result for the creditors as a whole than would be likely if the company were
wound up.No assurance can be given that the primary purposes of the new
provisions will not conflict with the interests of noteholders were the issuer
ever subject to administration.
YOU WILL NOT RECEIVE ISSUER NOTES IN PHYSICAL FORM, WHICH MAY CAUSE DELAYS IN
DISTRIBUTIONS AND HAMPER YOUR ABILITY TO PLEDGE OR RESELL THE ISSUER NOTES
Unless the global issuer notes are exchanged for definitive issuer notes,
which will only occur under a limited set of circumstances, your beneficial
ownership of the issuer notes will only be recorded in book-entry form with
DTC, Euroclear or Clearstream, Luxembourg. The lack of issuer notes in physical
form could, among other things:
* result in payment delays on the issuer notes because the issuer
will be sending distributions on the issuer notes to DTC, Euroclear
or Clearstream, Luxembourg instead of directly to you;
* make it difficult for you to pledge the issuer notes if issuer
notes in physical form are required by the party demanding the
pledge; and
* hinder your ability to resell the issuer notes because some
investors may be unwilling to buy issuer notes that are not in
physical form.
IF YOU HAVE A CLAIM AGAINST US IT MAY BE NECESSARY FOR YOU TO BRING SUIT
AGAINST US IN ENGLAND TO ENFORCE YOUR RIGHTS
We have agreed to submit to the non-exclusive jurisdiction of the courts of
England, and it may be necessary for you to bring a suit in England to enforce
your rights against us.
PROPOSED CHANGES TO THE BASEL CAPITAL ACCORD AND THE RISK-WEIGHTED ASSET
FRAMEWORK MAY RESULT IN CHANGES TO THE RISK-WEIGHTING OF YOUR ISSUER NOTES
The Basel Committee on Banking Supervision has issued proposals for reform
of the 1988 Capital Accord and has proposed a framework that places enhanced
emphasis on market discipline. In parallel, the European Commission has issued
proposals for reform of the existing EU Capital Adequacy Directive which is
based on the 1988 Capital Accord and applies to banks and investment firms in
the European Union. While the European Commission has indicated that its
proposals are intended to implement the new Basel Capital Accord proposals, it
has noted that there will be appropriate modifications where it considers
necessary. At present, both sets of proposals are under consultation and are
not in final form; however, the proposals are expected to be finalised in the
fourth quarter of 2003, allowing for implementation at the end of 2006. The
consultation period on the initial proposals ended in March 2000 and the
Committee published its second consultation document, the "New Basel Capital
Accord", on 16th January, 2001. The consultation period on the further
proposals contained in the New Basel Capital Accord ended on 31st May, 2001.
Although the Basel Committee had announced previously that it would release a
revised proposal in early 2002, this has now been delayed pending the
completion of a review assessing the overall impact of the proposals on banks
and the banking system. It is anticipated that the revised proposals will be
issued for public comment in the second quarter of 2003, allowing for
implementation of the new framework in each country at the year end 2006. If
adopted in their current form, the proposals could affect the risk weighting of
the issuer notes in respect of some investors if those investors are regulated
in a manner which will be affected by the proposals.
62
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.
63
US DOLLAR PRESENTATION
Unless otherwise stated in this prospectus, any translations of pounds
sterling into US dollars have been made at the rate of [GBP]l = US$1.00, which
was the noon buying rate in the City of New York for cable transfers in
sterling per US$1.00 as certified for customs purposes by the Federal Reserve
Bank of New York on __, 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.
STERLING/US DOLLAR EXCHANGE RATE HISTORY
PERIOD
ENDED YEARS ENDED 31ST DECEMBER,
__, ----------------------------------------------
2003 2002 2001 2000 1999 1998
------ ------ ------ ------ ------ ------
Last(1)............. __ 1.6100 1.4546 1.4930 1.6182 1.6600
Average(2).......... __ 1.5038 1.4407 1.5160 1.6177 1.6575
High................ __ 1.6100 1.5038 1.6537 1.6746 1.7115
Low................. __ 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 periods indicated, years commencing from 1st January or the
next operating business day.
(2) Average is the average daily exchange rate during the period.
Source: Bloomberg
64
THE ISSUER
INTRODUCTION
The issuer was incorporated in England and Wales on 22nd September, 2003
(registered number 4907355) and is a public limited company under the Companies
Act 1985. The authorised share capital of the issuer comprises 50,000 ordinary
shares of [GBP]1 each. The issued share capital of the issuer comprises 50,000
ordinary shares of [GBP]1 each, 49,998 of which are partly paid to [GBP]0.25
each and 2 of which are fully paid and all of which are beneficially owned by
Holdings (see "HOLDINGS"). The registered office of the issuer is Blackwell
House, Guildhall Yard, London EC2V 5AE.
The issuer is organised as a special purpose company. The issuer has no
subsidiaries. The seller does not own directly or indirectly any of the share
capital of Holdings or the issuer.
The principal objects of the issuer are set out in its memorandum of
association and include:
* lending money and giving credit, with or without security;
* borrowing or raising money and obtaining credit or finance; and
* securing payment or repayment of money credit or finance by any
security over the issuer's property.
The issuer was established to issue the issuer notes and to make the issuer
term AAA advances, the issuer term AA advances and the issuer term BBB advances
to Funding 1.
The issuer has not engaged, since its incorporation, in any material
activities other than those incidental to its incorporation as a public company
under the Companies Act 1985, applying for a standard licence under the
Consumer Credit Act 1974, and to the proposed issue of the issuer notes and to
the authorisation of the other issuer transaction documents referred to in this
prospectus.
There is no intention to accumulate surplus cash in the issuer except in the
circumstances set out in "SECURITY FOR THE ISSUER'S OBLIGATIONS".
The accounting reference date of the issuer is the last day of December.
DIRECTORS AND SECRETARY
The following table sets out the directors of the issuer and their
respective business addresses and occupations.
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ----------------------------- --------------------------- -------------------
SFM Directors Limited Blackwell House Director of special
Guildhall Yard purpose companies
London EC2V 5AE
SFM Directors (No. 2) Limited Blackwell House Director of special
Guildhall Yard purpose companies
London EC2V 5AE
David Balai HBOS Treasury Services plc Head of Capital
33 Old Broad Street Markets and
London EC2N 1HZ Securitisations
David Balai is an employee of a company in the same group of companies as
the seller.
The directors of SFM Directors Limited and SFM Directors (No. 2) Limited are
set out under the section "HOLDINGS" in this prospectus.
65
The company secretary of the issuer is:
SFM Corporate Services Limited
Blackwell House
Guildhall Yard
London EC2V 5AE
The activities of the issuer will be restricted by the terms and conditions
of the issuer notes and will be limited to the issue of the issuer notes,
making the issuer term advances to Funding 1, the exercise of related rights
and powers, and other activities referred to in this prospectus or incidental
to those activities.
CAPITALISATION STATEMENT
The following table shows the capitalisation of the issuer as at __, 2003:
AS AT
__,
2003
[GBP]
---------
AUTHORISED SHARE CAPITAL
Ordinary shares of [GBP]1 each....................................... 50,000
---------
ISSUED SHARE CAPITAL
2 ordinary shares of [GBP]1 each fully paid.......................... 2.00
49,998 ordinary shares each [one quarter paid]....................... 12,499.50
---------
12,501.50
=========
The issuer has no loan capital, term loans, other borrowings or indebtedness
or contingent liabilities or guarantees as at __, 2003.
There has been no material change in the capitalisation, indebtedness,
guarantees or contingent liabilities of the issuer since __, 2003.
It is not intended that there be any further payment of the issued share
capital.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE ISSUER
SOURCES OF CAPITAL AND LIQUIDITY
The issuer's source of capital will be the net proceeds of the offering of
the issuer notes.
The issuer's primary source of liquidity will be payments of interest and
principal on the issuer intercompany loan.
RESULTS OF OPERATIONS
As of the date of this prospectus, the issuer does not have an operating
history. Therefore, this prospectus does not include any historical or pro
forma ratio of earnings to fixed charges. The earnings on the issuer
intercompany loan, the interest costs of the issuer notes and the related
operating expenses will determine the issuer's results of operations in the
future. Fees and expenses of the issuer in connection with the issuance of the
issuer notes will be borne by Funding 1. The income generated on the issuer
intercompany loan will be used to pay principal and interest on the issuer
notes.
66
USE OF PROCEEDS
The net proceeds of the issuance of the offered issuer notes will equal
approximately $__ and together with the net proceeds of the series 4 issuer
notes and series 5 issuer notes (in each case where the relevant class of
issuer notes is denominated in US dollars or euro after making appropriate
currency exchanges under the issuer swaps) will be applied in accordance with
the issuer intercompany loan, to make the issuer term advances to Funding 1.
The net proceeds of the issuance of the offered issuer notes will equal the
gross proceeds of the offered issuer notes as
(1) the management and underwriting fees and selling commissions otherwise
payable by the issuer will be paid to the underwriters on behalf of the issuer
by Funding 1 from part of the proceeds of the second start-up loan, and (2) the
additional offering expenses otherwise payable by the issuer in connection with
the issuance of the offered issuer notes will be partly paid by the
underwriters and partly paid by the seller on the issuer's behalf, see
"UNDERWRITING".
67
HALIFAX PLC
THE SELLER
Halifax Building Society was founded in 1853 as the Halifax Permanent
Benefit Building and Investment Society. In 1928, it merged with Halifax
Equitable Building Society to form Halifax Building Society. On 2nd June, 1997
Halifax Building Society, at that time the UK's largest building society,
transferred its business to the seller, which on that date became authorised
under the UK Banking Act 1987. The UK Banking Act 1987 was repealed when
section 19 of the FSMA was brought into force on 30th November, 2001. The
seller is now authorised as required under the FSMA. Upon completion of the
transfer, Halifax Building Society ceased to exist. The seller was incorporated
in England and Wales with registered number 02367076 on 31st March, 1989. On
4th December, 1996 the seller changed its name to Halifax plc and re-registered
as a public limited company. On 1st June, 1999, through a scheme of
arrangement, Halifax Group plc acquired and became the holding company of the
seller. On 1st July, 2002 Halifax plc became a directly held undertaking of
HBOS plc having formerly been a subsidiary undertaking of Halifax Group plc. On
10th September, 2001 Halifax Group plc and The Governor and Company of the Bank
of Scotland were acquired by a new holding company, HBOS plc ("HBOS"). HBOS is
the [fourth] largest banking group in the UK in terms of assets and is the UK's
largest savings banking group.
HBOS was incorporated in Scotland on 3rd May, 2001. HBOS had consolidated
total assets at 31st December, 2002 of [GBP]__ million. HBOS's consolidated
profit on ordinary activities before tax for the year ended __ was [GBP]__
million.
The seller had total consolidated assets at 31st December, 2002 of [GBP]__
million. In the year to [31st December, 2002], the seller's consolidated profit
on ordinary activities before tax was [GBP]__ million.
MORTGAGE BUSINESS
The total consolidated value of the seller's mortgage loans and advances
secured on residential properties as at 31st December, 2002 was approximately
[GBP]122.1 billion (for 2001 this figure was [GBP]110.1 billion).
HALIFAX GENERAL INSURANCE SERVICES LTD
Halifax General Insurance Services Ltd was incorporated in England and Wales
on 19th February, 1993 as a private limited company. Halifax General Insurance
Services Ltd is a wholly and indirectly owned subsidiary of Halifax Group plc
and its registered office is at Trinity Road, Halifax, West Yorkshire HX1 2RG.
The principal business activity of Halifax General Insurance Services Ltd is
that of general insurance.
HBOS INSURANCE (PCC) GUERNSEY LTD
HBOS Insurance (PCC) Guernsey Ltd was incorporated in Guernsey on 14th
December, 2001 as a protected cell company in accordance with the provisions of
the Guernsey Protected Cell Companies Ordinance 1997. HBOS Insurance (PCC)
Guernsey Limited is a wholly owned subsidiary of HBOS Guernsey Mortgage Limited
and its registered office is at Maison Trinity, Trinity Square, St. Peter Port,
Guernsey GY1 4AT. The principal business activity of HBOS Insurance (PCC)
Guernsey Ltd, an indirect subsidiary of HBOS, is insurance. The company
commenced insurance business on 19th December, 2001, when it acquired by
portfolio transfer the insurance businesses of Halifax Mortgage Re Limited and
Halifax Guarantee Insurance Company Limited. HBOS Insurance (PCC) Guernsey Ltd
is the current owner of the mortgage indemnity insurance policies contracted
between Halifax Mortgage Re Limited and Halifax plc.
68
HALIFAX INSURANCE IRELAND LIMITED
Halifax Insurance Ireland Limited was incorporated in Ireland on 29th March,
2000 and was registered as company number 323923. Halifax Insurance Ireland
Limited is a wholly owned subsidiary of Halifax Jersey Holdings Limited and its
registered office is at Dromore House, East Park, Shannon. The principal
business activity of Halifax Insurance Ireland Limited is that of general
insurance. On 2nd January, 2001 the company began providing underwriting for
mortgage repayment insurance offered by the seller to borrowers. In March 2001
the seller introduced the Total Mortgage Protection Policy, of which the
mortgage repayment cover element is underwritten by Halifax Insurance Ireland
Limited. In a few instances, the seller still offers mortgage repayment
insurance. In these instances, the insurance continues to be underwritten by
Halifax Insurance Ireland Limited.
69
FUNDING 1
INTRODUCTION
Funding 1 was incorporated in England and Wales on 9th August, 2001
(registered number 4267660) as a private limited company under the Companies
Act 1985. The authorised share capital of Funding 1 comprises 100 ordinary
shares of [GBP]1 each. The issued share capital of Funding 1 comprises one
ordinary share of [GBP]1, which is beneficially owned by Holdings (see
"HOLDINGS"). The registered office of Funding 1 is Blackwell House, Guildhall
Yard, London EC2V 5AE.
Funding 1 is organised as a special purpose company. Funding 1 has no
subsidiaries. The seller does not own directly or indirectly any of the share
capital of Holdings or Funding 1.
The principal objects of Funding 1 are set out in its memorandum of
association and are, among other things, to:
* carry on business as a property investment company and an
investment holding company;
* acquire trust property and enter into loan arrangements;
* invest, buy, sell and otherwise acquire and dispose of mortgage
loans, advances and other investments and all forms of security;
* carry on business as a money lender, financier and investor; and
* undertake and carry on all kinds of loan, financial and other
operations.
Since its incorporation, Funding 1 has not engaged in any material
activities, other than those relating to the issue of the previous notes by the
previous issuers and those incidental to the authorisation of the issuer
transaction documents referred to in this prospectus to which it is or will be
a party and other matters which are incidental to those activities. Funding 1
has no employees.
The accounting reference date of Funding 1 is the last day of December.
DIRECTORS AND SECRETARY
The following table sets out the directors of Funding 1 and their respective
business addresses and occupations.
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ----------------------------- -------------------------- -----------------------
SFM Directors Limited........ Blackwell House Director of special
Guildhall Yard purpose companies
London EC2V 5AE
SFM Directors (No. 2) Limited Blackwell House Director of special
Guildhall Yard purpose companies
London EC2V 5AE
David Balai................. HBOS Treasury Services plc Head of Capital Markets
33 Old Broad Street and Securitisation
London EC2N 1HZ
[David Balai is an employee of a company in the same group of companies as
the seller.]
The directors of SFM Directors Limited and SFM Directors (No. 2) Limited are
set out under the section "HOLDINGS" in this prospectus.
70
The company secretary of Funding 1 is:
SFM Corporate Services Limited
Blackwell House
Guildhall Yard
London EC2V 5AE
CAPITALISATION STATEMENT
The following table shows the capitalisation of Funding 1 as at 31st
December, 2003:
AS AT
31st DECEMBER,
2003
[GBP]
------------
AUTHORISED SHARE CAPITAL
Ordinary shares of [GBP]1 each.................................... 100
------------
ISSUED SHARE CAPITAL
Allotted and fully paid........................................... 1
Allotted and unpaid............................................... 0
Allotted and partly paid.......................................... 0
------------
Total issued share capital........................................ 1
============
71
The following table shows the indebtedness of Funding 1 as at [__], 2003,
all of which is secured and unguaranteed and relates to the previous issues:
Advances made by Permanent Financing (No. 1) PLC
series 1 term AAA advance due June 2003..................... [GBP]509,614,731
series 1 term AA advance due June 2042...................... [GBP]17,666,644
series 1 term BBB advance due June 2042..................... [GBP]17,666,644
series 2 term AAA advance due June 2007..................... [GBP]509,614,731
series 2 term AA advance due June 2042...................... [GBP]17,666,644
series 2 term BBB advance due June 2042..................... [GBP]17,666,644
series 3 term AAA advance due December 2007................. [GBP]748,299,320
series 3 term AA advance due June 2042...................... [GBP]26,190,476
series 3 term BBB advance due June 2042..................... [GBP]26,190,476
series 4A1 term AAA advance due June 2009................... [GBP]484,000,000
series 4A2 term AAA advance due June 2042................... [GBP]1,000,000,000
series 4 term AA advance due June 2042...................... [GBP]52,000,000
series 4 term BBB advance due June 2042..................... [GBP]52,000,000
first start-up loan......................................... [GBP]64,200,000
------------------
Advances made by Permanent Financing (No. 2) PLC
series 1 term AAA advance due March 2004.................... [GBP]633,312,000
series 1 term AA advance due June 2042...................... [GBP]21,533,000
series 1 term BBB advance due June 2042..................... [GBP]21,533,000
series 2 term AAA advance due September 2007................ [GBP]1,108,016,000
series 2 term AA advance due June 2042...................... [GBP]38,622,000
series 2 term BBB advance due June 2042..................... [GBP]38,622,000
series 3 term AAA advance due December 2032................. [GBP]854,375,000
series 3 term AA advance due June 2042...................... [GBP]29,732,000
series 3 term BBB advance due June 2042..................... [GBP]29,732,000
series 4 term AAA advance due December 2009................. [GBP]1,107,250,000
series 4 term AA advance due June 2042...................... [GBP]38,644,000
series 4 term BBB advance due June 2042..................... [GBP]38,644,000
series 5 term AAA advance due June 2042..................... [GBP]750,000,000
series 5 term AA advance due June 2042...................... [GBP]26,000,000
series 5 term BBB advance due June 2042..................... [GBP]26,000,000
second start up loan........................................ [GBP]__
------------------
Total........................................... [GBP]__
==================
Other than as set out in the preceding table, Funding 1 has no loan capital,
term loans, other borrowings or indebtedness or contingent liabilities or
guarantees as at __, 2003.
There has been no material change in the capitalisation, indebtedness or
contingent liabilities or guarantees of Funding 1 since __, 2003.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF FUNDING 1
SOURCES OF CAPITAL AND LIQUIDITY
Funding 1's source of capital is the previous term advances made to it by
the previous issuer pursuant to the previous intercompany loan agreement and
this will be increased by the issuer term advances made to it by the issuer
pursuant to the issuer intercompany loan agreement.
Funding 1's principal source of liquidity is earnings on its interest in the
trust property, the reserve fund and the Funding 1 liquidity facility.
72
RESULTS OF OPERATIONS
This prospectus does not include any historical or pro forma ratio of
Funding 1's earnings to fixed charges. The earnings on its interest in the
trust property, the interest costs of the issuer term advances it pays to the
issuer pursuant to the issuer intercompany loan agreement, the interest costs
of the previous term advances it pays to the previous issuers pursuant to the
previous intercompany loan agreements and the related operating expenses are
the principal components of Funding 1's results of operations. The income
generated on its interest in the trust property will be used to pay principal
and interest on the issuer intercompany loan to the issuer and on the previous
intercompany loans to the previous issuers.
73
THE MORTGAGES TRUSTEE
INTRODUCTION
The mortgages trustee was incorporated in Jersey, Channel Islands on 13th
May, 2002 (registered number 83116) as a private company with limited liability
under the Companies (Jersey) Law 1991, for a period of unlimited duration. The
authorised share capital of the mortgages trustee is [GBP]2 divided into two
ordinary shares of [GBP]1 each. Two ordinary shares have been issued and fully
paid and are held in trust for charitable purposes by SFM Offshore Limited
pursuant to an instrument of trust dated 7th May, 2002. The registered office
of the mortgages trustee is at 47 Esplanade, St. Helier, Jersey JE1 0BD,
Channel Islands.
The mortgages trustee is organised as a special purpose company. The
mortgages trustee has no subsidiaries. The seller does not own directly or
indirectly any of the share capital of Holdings or the mortgages trustee.
The principal activities of the mortgages trustee are, among other things,
to:
* invest and deal in mortgage loans secured on residential or other
properties within England and Wales;
* invest in, buy, sell and otherwise acquire and dispose of mortgage
loans, advances, other similar investments and all forms of
security;
* carry on business as a money lender, financier and investor;
* undertake and carry on all kinds of loan, financial and other
operations; and
* act as trustee in respect of carrying on any of these activities.
The mortgages trustee has not engaged, since its incorporation, in any
material activities other than those incidental to its incorporation, the
settlement of the trust property on the mortgages trustee, acting as trustee of
the mortgages trust since the initial closing date, the issue of the previous
notes by the previous issuers, the authorisation of the issuer transaction
documents referred to in this prospectus to which it is or will be a party,
obtaining a standard licence under the Consumer Credit Act 1974, filing a
notification under the Data Protection Act 1998 and other matters which are
incidental or ancillary to the foregoing. The mortgages trustee has no
employees.
The accounting reference date of the mortgages trustee is the last day of
December.
DIRECTORS AND SECRETARY
The following table sets out the directors of the mortgages trustee and
their respective business addresses and occupations.
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- --------------------- -------------------------- -----------------------
Michael George Best 47 Esplanade, St Helier, Trust Company Director
Jersey JE1 0BD
Peter John Richardson 47 Esplanade, St Helier, Trust Company Director
Jersey JE1 0BD
David Balai HBOS Treasury Services plc Head of Capital Markets
33 Old Broad Street and Securitisation
London EC2N 1HZ
David Balai is an employee of a company in the same group of companies as
the seller.
74
The directors of SFM Offshore Limited and their respective occupations are:
Jonathan Eden Keighley........................ Company Director
James Garner Smith Macdonald.................. Company Director
Michael George Best........................... Trust Company Director
Peter John Richardson......................... Trust Company Director
Anthony John Olsen............................ Jersey Advocate & Notary Public
The company secretary of the mortgages trustee is:
SFM Offshore Limited
47 Esplanade
St Helier
Jersey
JE1 0BD
75
HOLDINGS
INTRODUCTION
Holdings was incorporated in England and Wales on 9th August, 2001
(registered number 4267664) as a private limited company under the Companies
Act 1985. The registered office of Holdings is Blackwell House, Guildhall Yard,
London EC2V 5AE.
Holdings has an authorised share capital of [GBP]100 divided into 100
ordinary shares of [GBP]1 each, of which two shares have been issued, one share
at par value and one share at a premium, and are beneficially owned by SFM
Corporate Services Limited on a discretionary trust for the benefit of The
National Society for the Prevention of Cruelty to Children (registered charity
number 216401) in the United Kingdom and for charitable purposes.
Holdings is organised as a special purpose company.
The principal objects of Holdings are set out in its memorandum of
association and are, among other things, to:
* acquire and hold, by way of investments or otherwise; and
* deal in or exploit in such manner as may from time to time be
considered expedient,
all or any part of any securities or other interests of or in any company
(including the previous issuers, the issuer, the mortgages trustee, Funding 1,
and the post-enforcement call option holder).
Holdings has acquired all of the issued share capital of the issuer, the
previous issuers, Funding 1, Funding 2 and Permanent PECOH Limited and Holdings
has not engaged in any other activities since its incorporation other than
changing its name from Alnery No. 2224 Limited on 21st March, 2002 and those
incidental to the authorising of the previous transaction documents and the
issuer transaction documents and other matters which are incidental to those
activities. Holdings has no employees.
The accounting reference date of Holdings is the last day of December.
DIRECTORS AND SECRETARY
The following table sets out the directors of Holdings and their respective
business addresses and occupations.
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ----------------------------- -------------------------- -----------------------
SFM Directors Limited Blackwell House Director of special
Guildhall Yard purpose companies
London EC2V 5AE
SFM Directors (No. 2) Limited Blackwell House Director of special
Guildhall Yard purpose companies
London EC2V 5AE
David Balai HBOS Treasury Services plc Head of Capital Markets
33 Old Broad Street and Securitisation
London EC2N 1HZ
David Balai is an employee of a company in the same group of companies as
the seller.
76
The directors of SFM Directors Limited and their respective occupations are:
NAME BUSINESS OCCUPATION
- --------------------- ----------------------
Jonathan Keighley....................................... Company Director
James Macdonald......................................... Company Director
Robert Berry............................................ Company Director
Annika Aman-Goodwille................................... Company Secretary
Paivi Helena Whitaker................................... Company Secretary
Ryan O'Rourke........................................... Administration Manager
The business address of the directors of SFM Directors Limited is Blackwell
House, Guildhall Yard, London EC2V 5AE.
The directors of SFM Directors (No. 2) Limited and their respective
occupations are:
NAME BUSINESS OCCUPATION
- --------------------- ----------------------
Jonathan Keighley....................................... Company Director
James Macdonald......................................... Company Director
Robert Berry............................................ Company Director
Annika Aman-Goodwille................................... Company Secretary
Paivi Helena Whitaker................................... Company Secretary
Ryan O'Rourke........................................... Administration Manager
The business address of the directors of SFM Directors (No. 2) Limited is
Blackwell House, Guildhall Yard, London EC2V 5AE.
The company secretary of Holdings is:
SFM Corporate Services Limited
Blackwell House
Guildhall Yard
London EC2V 5AE
77
PERMANENT PECOH LIMITED
INTRODUCTION
The post-enforcement call option holder was incorporated in England and
Wales on 9th August, 2001 (registered number 4267666) as a private limited
company under the Companies Act 1985. The registered office of the post-
enforcement call option holder is Blackwell House, Guildhall Yard, London EC2V
5AE.
The authorised share capital of the post-enforcement call option holder
comprises 100 ordinary shares of [GBP]1 each. The issued share capital of the
post-enforcement call option holder comprises one ordinary share of [GBP]1,
which is beneficially owned by Holdings.
The post-enforcement call option holder is organised as a special purpose
company. The post-enforcement call option holder has no subsidiaries. The
seller does not own directly or indirectly any of the share capital of Holdings
or the post-enforcement call option holder.
The principal objects of the post-enforcement call option holder are as set
out in its memorandum of association and are, among others, to hold bonds,
notes, obligations and securities issued or guaranteed by any company and any
options or rights in respect of them. The post-enforcement call option holder
has not engaged since its incorporation in any material activities other than
changing its name from Alnery No. 2223 Limited on 21st March, 2002, those
activities relating to the issue of the previous notes by the previous issuers
and those incidental to the authorising of the issuer 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 accounting reference date of the post-enforcement call option holder is
the last day of December.
DIRECTORS AND SECRETARY
The following table sets out the directors of the post-enforcement call
option holder and their respective business addresses and occupations.
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ----------------------------- -------------------------- -----------------------
SFM Directors Limited Blackwell House Director of special
Guildhall Yard purpose companies
London EC2V 5AE
SFM Directors (No. 2) Limited Blackwell House Director of special
Guildhall Yard purpose companies
London EC2V 5AE
[David Balai HBOS Treasury Services plc Head of Capital Markets
33 Old Broad Street and Securitisation]
London EC2N 1HZ
[David Balai is an employee of a company in the same group of companies as
the seller.]
The directors of SFM Directors Limited and SFM Directors (No. 2) Limited are
set out under the section "HOLDINGS" in this prospectus.
The company secretary of the post-enforcement call option holder is:
SFM Corporate Services Limited
Blackwell House
Guildhall Yard
London EC2V 5AE
78
THE ISSUER SWAP PROVIDERS
[TO BE INSERTED]
The information contained in this prospectus with respect to each of the
issuer swap providers relates to and has been obtained from each such issuer
swap provider. The delivery of this prospectus shall not create any
implications that there has been no change in the affairs of any of the issuer
swap providers since the date of this prospectus, or that the information
contained or referred to in this prospectus is correct as of any time
subsequent to its date.
79
THE FUNDING 1 LIQUIDITY FACILITY PROVIDER
[TO BE INSERTED]
80
DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES
AND THE PREVIOUS INTERCOMPANY LOANS
The previous issuers, Permanent Financing (No. 1) PLC and Permanent
Financing (No. 2) PLC are each public limited companies incorporated in England
and Wales. The registered office of each previous issuer is Blackwell House,
Guildhall Yard London EC2V 5AE. The telephone number of each previous issuer is
(+44) 20 7556 0972. Each previous issuer is a special purpose company whose
purpose is to have issued the previous notes that represent their respective
asset-backed obligations and to have lent an amount equal to the proceeds of
their respective previous notes to Funding 1 under their respective previous
intercompany loans. Each previous issuer does not engage in any activities that
are unrelated to these purposes.
Each previous issuer has appointed the seller as its cash manager to manage
its bank accounts, to determine the amounts of and arrange payments of monies
to be made by it and keep certain records on its behalf. The seller has also
been appointed as an account bank for Permanent Financing (No. 1) PLC to
provide banking services to it. Permanent Financing (No. 2) PLC appointed the
Bank of Scotland as its account bank, to provide banking services to it.
The following tables summarise the principal features of the previous notes.
In each table, references to "PREVIOUS NOTES" are references to the notes
issued by the relevant previous issuer, the notes of which previous issuer are
described in that table. In the tables, the alternative interest periods
indicate the length of interest periods which apply to the relevant class of
previous issuer notes upon the earlier of the occurrence of a trigger event,
the enforcement of the previous issuer security and the relevant scheduled
redemption date relating to that class of previous issuer notes.
SERIES OF PREVIOUS NOTES ISSUED BY
PERMANENT
FINANCING (NO. 1) PLC
-------------------------------------------
SERIES 1 SERIES 1 SERIES 1
CLASS A CLASS B CLASS C
-------------- ----------- --------------
Initial principal amount:.................. [$750,000,000 $26,000,000 $26,000,000
Interest rate:............................. One-month Three-month Three-month
USD-LIBOR + USD-LIBOR + USD-LIBOR +
margin margin margin
Margin:.................................... --0.02% p.a. 0.27% p.a. 1.05% p.a.
Until interest payment date falling in:.... June 2003 June 2007 June 2007
And thereafter:............................ N/A 0.54% p.a. 2.05% p.a.
Initial interest periods:.................. Monthly Quarterly Quarterly
Alternative interest periods:.............. Quarterly N/A N/A
Issuance date:............................. June 2002 June 2002 June 2002
Scheduled redemption date(s):.............. June 2003 N/A N/A
Final maturity date:....................... June 2003 June 2042 June 2042
Ratings as at 14th June, 2003.............. [A-1+/P-1/F1+] [AA/Aa3/AA] [BBB/Baa2/BBB]
Ratings as at __, 2003 (S&P/Moody's/Fitch): [A-1+/P-1/F1+] [AA/Aa3/AA] [BBB/Baa2/BBB]
81
SERIES OF PREVIOUS NOTES ISSUED BY
PERMANENT
FINANCING (NO. 1) PLC
------------------------------------------
SERIES 2 SERIES 2 SERIES 2
CLASS A CLASS B CLASS C
------------- ----------- --------------
Initial principal amount:.................. $750,000,000 $26,000,000 $26,000,000
Interest rate:............................. 4.20% p.a. Three-month Three-month
USD-LIBOR + USD-LIBOR +
margin margin
Margin:.................................... N/A 0.28% p.a. 1.18% p.a.
Until interest payment date falling in:.... June 2005 June 2007 June 2007
And thereafter:............................ Three-month 0.56% p.a. 2.18% p.a.
USD-LIBOR +
0.16%
Initial interest periods:.................. Semi-annually Quarterly Quarterly
Alternative interest periods:.............. Quarterly N/A N/A
Issuance date:............................. June 2002 June 2002 June 2002
Scheduled redemption date(s):.............. June 2005 N/A N/A
Final maturity date:....................... June 2007 June 2042 June 2042
Ratings as at 14th June, 2003.............. [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
Ratings as at __, 2003 (S&P/Moody's/Fitch): [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
SERIES OF PREVIOUS NOTES ISSUED BY
PERMANENT
FINANCING (NO. 1) PLC
-------------------------------------------
SERIES 3 SERIES 3 SERIES 3
CLASS A CLASS B CLASS C
-------------- ----------- --------------
Initial principal amount:.................. $1,100,000,000 $38,500,000 $38,500,000
Interest rate:............................. Three-month Three-month Three-month
USD-LIBOR + USD-LIBOR + USD-LIBOR +
margin margin margin
Margin:.................................... 0.125% p.a. 0.30% p.a. 1.20% p.a.
Until interest payment date falling in:.... N/A June 2007 June 2007
And thereafter:............................ N/A 0.60% p.a. 2.20% p.a.
Initial interest periods:.................. Quarterly Quarterly Quarterly
Alternative interest periods:.............. N/A N/A N/A
Issuance date:............................. June 2002 June 2002 June 2002
Scheduled redemption date(s):.............. December 2005 N/A N/A
Final maturity date:....................... December 2007 June 2042 June 2042
Ratings as at 14th June, 2002.............. [AAA /Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
Ratings as at __, 2003 (S&P/Moody's/Fitch): [AAA /Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
82
SERIES OF PREVIOUS NOTES ISSUED BY PERMANENT FINANCING (NO. 1) PLC
-----------------------------------------------------------------------
SERIES 4 SERIES 4 SERIES 4 SERIES 4
CLASS A1 CLASS A2 CLASS B CLASS C
--------------- ------------------ ---------------- ----------------
Initial principal amount: [e]750,000,000 [GBP]1,000,000,000 [GBP]52,000,000 [GBP]52,000,000
5.10 p.a. until
the interest
payment date in
June 2007 and
then three- Three-month Three-month Three-month
month EURIBOR + sterling LIBOR + sterling LIBOR + sterling LIBOR +
Interest rate:........... margin margin margin margin
Margin:.................. N/A 0.18% p.a. 0.30% p.a. 1.20% p.a.
Until interest payment
date falling in:....... June 2007 June 2007 June 2007 June 2007
And thereafter:.......... 0.20% p.a. 0.36% p.a. 0.60% p.a. 2.20% p.a.
Initial interest periods: Annually Quarterly Quarterly Quarterly
Alternative interest
periods:............... Quarterly N/A N/A N/A
Issuance date:........... June 2002 June 2002 June 2002 June 2002
Scheduled redemption
date(s):............... June 2007 N/A N/A N/A
Final maturity date:..... June 2009 June 2042 June 2042 June 2042
Ratings as at 14th June,
2002................... [AAA/Aaa/AAA] [AAA /Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
Ratings as at __, 2003
(S&P/Moody's/Fitch):... [AAA/Aaa/AAA] [AAA /Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
SERIES OF PREVIOUS NOTES ISSUED BY PERMANENT
FINANCING (NO. 2) PLC
---------------------------------------------
SERIES 1 SERIES 1 SERIES 1
CLASS A CLASS B CLASS C
-------------- ------------- --------------
Initial principal amount:.............. $1,000,000,000 $34,000,000 $34,000,000
Interest rate:......................... One-month Three-month Three-month
USD-LIBOR -- USD-LIBOR + USD-LIBOR +
margin margin margin
Margin:................................ 0.04% 0.23% p.a. 1.25% p.a.
Until interest payment date falling in: N/A December 2008 December 2008
And thereafter:........................ N/A 0.46% p.a. 2.25% p.a.
Initial interest periods:.............. Monthly Quarterly Quarterly
Alternative interest periods:.......... Quarterly N/A N/A
Issuance date:......................... March 2003 March 2003 March 2003
Scheduled redemption date(s):.......... March 2004 N/A N/A
Final maturity date:................... March 2004 June 2042 June 2042
Ratings as at 6th March, 2003 [AAA/Aa3/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
Ratings as at __ (S&P/Moody's/Fitch):.. [AAA/Aa3/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
83
SERIES OF PREVIOUS NOTES ISSUED BY PERMANENT
FINANCING (NO. 2) PLC
---------------------------------------------
SERIES 2 SERIES 2 SERIES 2
CLASS A CLASS B CLASS C
-------------- ------------- --------------
Initial principal amount:.............. $1,750,000,000 $61,000,000 $61,000,000
Interest rate:......................... Three month Three-month Three-month
USD -- LIBOR + USD-LIBOR + USD-LIBOR +
margin margin margin
Margin:................................ 0.15% 0.33% p.a. 1.45% p.a.
Until interest payment date falling in: N/A December 2008 December 2008
And thereafter:........................ N/A 0.66% p.a. 2.45% p.a.
Initial interest periods:.............. Quarterly Quarterly Quarterly
Alternative interest periods:.......... Quarterly N/A N/A
Issuance date:......................... March 2003 March 2003 March 2003
Scheduled redemption date(s):.......... September 2005 N/A N/A
Final maturity date:................... September 2007 June 2042 June 2042
Ratings as at 6th March, 2003.......... [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
Ratings as at __ (S&P/Moody's/Fitch):.. [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
SERIES OF PREVIOUS NOTES ISSUED BY PERMANENT
FINANCING (NO. 2) PLC
-----------------------------------------------
SERIES 3 SERIES 3 SERIES 3
CLASS A CLASS B CLASS C
---------------- ------------- --------------
Initial principal amount:.............. [e]1,250,000,000 [e]43,500,000 [e]43,500,000
Interest rate:......................... Three-month Three-month Three-month
EURIBOR + EURIBOR + EURIBOR +
margin margin margin
Margin:................................ 0.23% p.a. 0.43% p.a. 1.45% p.a.
Until interest payment date falling in: December 2008 December 2008 December 2008
And thereafter:........................ 0.46% p.a. 0.86% p.a. 2.45% p,a,
Initial interest periods:.............. Quarterly Quarterly Quarterly
Alternative interest periods:.......... N/A N/A N/A
Issuance date:......................... March 2003 March 2003 March 2003
Scheduled redemption date(s):.......... March 2006 and N/A N/A
June 2006
Final maturity date:................... December 2032 June 2042 June 2042
Ratings as at 6th March, 2003.......... [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
Ratings as at __ (S&P/Moody's/Fitch):.. [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
84
SERIES OF PREVIOUS NOTES ISSUED BY PERMANENT
FINANCING (NO. 2) PLC
----------------------------------------------
SERIES 4 SERIES 4 SERIES 4
CLASS A CLASS B CLASS C
-------------- -------------- --------------
Initial principal amount:.............. $1,750,000,000 [e]56,500,000 [e]56,500,000
Interest rate:......................... Three-month Three-month Three-month
USD-LIBOR + EURIBOR EURIBOR
margin LIBOR + margin LIBOR + margin
Margin:................................ 0.22% p.a. 0.45% p.a. 1.45% p.a.
Until interest payment date falling in: N/A December 2008 December 2008
And thereafter:........................ N/A 0.90% p.a. 2.45% p.a.
Initial interest periods:.............. Quarterly Quarterly Quarterly
Alternative interest periods:.......... N/A N/A N/A
Issuance date:......................... March 2003 March 2003 March 2003
Scheduled redemption date(s):.......... December 2007 N/A N/A
Final maturity date:................... December 2009 June 2042 June 2042
Ratings as at 6th March, 2003.......... [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
Ratings as at __ (S&P/Moody's/Fitch):.. [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
SERIES OF PREVIOUS NOTES ISSUED BY PERMANENT
FINANCING (NO. 2) PLC
----------------------------------------------------
SERIES 5 SERIES 5 SERIES 5
CLASS A CLASS B CLASS C
---------------- ---------------- ----------------
Initial principal amount:.............. [GBP]750,000,000 [GBP]26,000,000 [GBP]26,000,000
Interest rate:......................... Three-month Three-month Three-month
sterling LIBOR + sterling LIBOR + sterling LIBOR +
margin margin margin
Margin:................................ 0.25% p.a. 0.45% p.a. 1.45% p.a.
Until interest payment date falling in: December 2008 December 2008 December 2008
And thereafter:........................ 0.50% p.a. 0.90% P.A. 2.45% p.a.
Initial interest periods:.............. Quarterly Quarterly Quarterly
Alternative interest periods:.......... N/A N/A N/A
Issuance date:......................... March 2003 March 2003 March 2003
Scheduled redemption date(s):.......... N/A N/A N/A
Final maturity date:................... June 2042 June 2042 June 2042
Ratings as at 6th March, 2003.......... [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
Ratings as at __ (S&P/Moody's/Fitch):.. [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
Each previous issuer issued its previous notes to the previous noteholders
and entered into a previous intercompany loan with Funding 1. Funding 1 used
the proceeds of the previous intercompany loan from Permanent Financing (No. 1)
PLC to pay the seller for the initial loans, (and their related security)
assigned by the seller to the mortgages trustee. Funding 1 used the proceeds of
the previous intercompany loan from Permanent Financing (No. 2) PLC to pay the
seller for the additional loans (and their related security) assigned by the
seller to the mortgages trustee. Each of the previous issuer's obligations to
pay principal and interest on its previous notes are funded primarily from the
payments of principal and interest received by it from Funding 1 under its
previous intercompany loan. Each previous issuer's primary asset is its
previous intercompany loan. Neither of the previous issuers nor the previous
noteholders have any direct interest in the trust property, although the
previous issuers share the security interest under the Funding 1 deed of charge
in Funding 1's share of the trust property.
85
Each of the previous intercompany loans is split into separate previous term
advances to match the underlying series and classes of the previous notes to
which it relates. The previous intercompany loan of Permanent Financing (No. 1)
PLC is split into the 13 separate previous term advances as described in
section (1) below. The previous intercompany loan of Permanent Financing (No.
2) PLC is split into the 15 separate previous term advances as described in
section (2) below. Together these advances are referred to in this prospectus
as the previous term advances:
(1)
INITIAL STEPPED-UP
DESIGNATED INTEREST RATE INTEREST RATE PRINCIPAL
TERM PER ANNUM PER ANNUM SCHEDULED FINAL AMOUNT
ADVANCE (LIBOR STEP-UP (LIBOR REPAYMENT REPAYMENT OUTSTANDING AS
SERIES NAME RATING PLUS/MINUS) DATE PLUS/MINUS) DATE DATE AS AT __
- ----------- ---------- ------------- --------- ------------- ------------- ------------- ------------------
Series 1... AAA --0.04030% N/A N/A June 2003 June 2003 nil
Series 1... AA +0.28760% June 2007 +0.81760% N/A June 2042 [GBP]17,666,644
Series 1... BBB +1.13060% June 2007 +2.39060% N/A June 2042 [GBP]17,666,644
Series 2... AAA +0.16834% N/A N/A June 2005 June 2007 [GBP]509,614,731
Series 2... AA +0.29420% June 2007 +0.83420% N/A June 2042 [GBP]17,666,644
Series 2... BBB +1.26850% June 2007 +2.52850% N/A June 2042 [GBP]17,666,644
Series 3... AAA +0.12810% N/A N/A December 2005 December 2007 [GBP]748,299,320
Series 3... AA +0.33100% June 2007 +0.89100% N/A June 2042 [GBP]26,190,476
Series 3... BBB +1.27940% June 2007 +2.53940% N/A June 2042 [GBP]26,190,476
Series 4A1. AAA +0.22000% N/A N/A June 2007 June 2009 [GBP]484,000,000
Series 4A2. AAA +0.18000% June 2007 +0.36000% N/A June 2042 [GBP]1,000,000,000
Series 4... AA +0.30000% June 2007 +0.60000% N/A June 2042 [GBP]52,000,000
Series 4... BBB +1.20000% June 2007 +2.20000% N/A June 2042 [GBP]52,000,000
------------------
TOTAL...... [GBP]3,478,576,310
==================
(2)
INITIAL STEPPED-UP
DESIGNATED INTEREST RATE INTEREST RATE PRINCIPAL
TERM PER ANNUM PER ANNUM SCHEDULED FINAL AMOUNT
ADVANCE (LIBOR STEP-UP (LIBOR REPAYMENT REPAYMENT OUTSTANDING AS
SERIES NAME RATING PLUS/MINUS) DATE PLUS/MINUS) DATE DATE AS AT __
- ----------- ---------- ------------- ------------- ------------- ------------------------ -------------- ------------------
Series 1... AAA --0.04930% N/A N/A March 2004 March 2004 [GBP]633,312,000
Series 1... AA +0.25050% December 2008 + 0.76100% N/A June 2042 [GBP]21,533,000
Series 1... BBB + 1.36080% December 2008 + 2.62080% N/A June 2042 [GBP]21,533,000
Series 2... AAA + 0.15830% N/A N/A September 2005 September 2007 [GBP]1,108,016,000
Series 2... AA + 0.35660% December 2008 +0.97320% N/A June 2042 [GBP]38,622,000
Series 2... BBB + 1.55060% December 2008 +2.81060% N/A June 2042 [GBP]38,622,000
Series 3... AAA + 0.23310% December 2008 + 0.72620% March 2006 and June 2006 December 2032 [GBP]854,375,000
Series 3... AA + 0.44595% December 2008 1.15190% N/A June 2042 [GBP]29,732,000
Series 3... BBB + 1.55880% December 2008 2.81880% N/A June 2042 [GBP]29,732,000
Series 4... AAA + 0.22360% N/A N/A December 2007 December 2009 1,107,250,000
Series 4... AA + 0.48380% December 2008 + 1.22760% N/A June 2042 [GBP]38,644,000
Series 4... BBB + 1.53690% December 2008 + 2.79690% N/A June 2042 [GBP]38,644,000
------------------
Series 5... AAA + 0.25% December 2008 + 0.50% N/A June 2042 [GBP]750,000,000
------------------
Series 5... AA + 0.45% December 2008 + 0.90% N/A June 2042 [GBP]26,000,000
------------------
Series 5... BBB + 1.45% December 2008 + 2.45% N/A June 2042 __
------------------
TOTAL...... [GBP]__
==================
The previous term AAA advances reflect the rating assigned by the rating
agencies to the class A previous notes at their time of issue (being, in the
case of the series 1 class A previous notes issued by Permanent Financing (No.
1) PLC and the series 1 class A previous notes issued by Permanent Financing
(No. 2) PLC, A-1+ by Standard and Poor's, P-1 by Moody's and F1 + by Fitch and
in the case of all other class A previous notes, AAA by Standard & Poor's, Aa3
by Moody's and AAA by Fitch). The previous term AA advances reflect the rating
assigned to the class B previous notes by the rating agencies (being AA by
Standard & Poor's, Aaa by Moody's
86
and AA by Fitch) and the previo us term BBB advances reflect the rating assigned
to the class C previous notes by the rating agencies (being BBB by Standard &
Poor's, Baa2 by Moody's and BBB by Fitch).
The interest rates applicable to the previous term advances from time to
time are determined by reference to LIBOR for three-month sterling deposits
plus, in each case, a margin which will differ for each separate advance (as
outlined in the tables above). LIBOR for an interest period is determined on
the relevant Funding 1 interest determination date. The table above sets out
details relating to the payment of interest on the previous term advances.
The initial interest rate indicated in relation to a previous term advance
in the above tables applies to that previous term advance for each interest
period relating to that previous term advance to and including the interest
period which ends on the relevant step-up date indicated in that table in
relation to that previous term advance.
The stepped-up interest rate indicated in relation to a previous term
advance in the above table applies to that previous term advance for each
interest period relating to that previous term advance from and including the
interest period which starts on the relevant step-up date indicated in that
table in relation to that previous term advance.
The previous term advances will be repaid on the dates and in the priorities
described in "CASHFLOWS -- DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL
RECEIPTS".
87
THE LOANS
INTRODUCTION
The UK housing market is primarily one of owner-occupied housing, with the
remainder in some form of public, private landlord or social ownership. The
mortgage market, whereby 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 31st December, 2002, mortgage loans outstanding in the UK amounted to
[GBP]671 billion. Outstanding mortgage debt grew at an annual average rate of 7
per cent. between 1992 and 2002. At [31st December, 2002], [70] per cent. of
outstanding mortgage debt was held with banks and 18 per cent. with building
societies. The statistics in this paragraph have been sourced from the
Department of Transport, Local Government and the Regions, The Council of
Mortgage Lenders and the Bank of England.
The following is a description of some of the characteristics of the loans
currently or previously offered by the seller including details of loan types,
the underwriting process, lending criteria and selected statistical
information.
On 14th June, 2002 the seller assigned the initial loans and, on subsequent
dates, the seller has assigned further loans, in each case together with their
related security to the mortgages trustee pursuant to the mortgage sale
agreement. On the closing date, the seller will assign a portion of its share
in the trust property to Funding 1 pursuant to the terms of the mortgagees
trust deed so that Funding 1's portion of the trust property is of sufficient
size for the purposes of this transaction. The loanscurrently making up the
trust property, together with their related security, accrued interest and
other amounts derived from the loans, will make up the trust property on the
closing date.
The portfolio as at __, for which statistics are presented later in this
section, and the portfolio as at the closing datemay differ due to, among other
things, amortisation of loans in the portfolio [and replenishment of the
portfolio by the addition of further new loans].
Unless otherwise indicated, the description that follows relates to types of
loans that have been or could be assigned to the mortgages trustee, either as
part of the portfolio as at the closing date or as a new loan assigned to the
mortgages trustee at a later date.
The portfolio as at __, 2003 comprised __ mortgage accounts having an
aggregate outstanding principal balance of [GBP]__ as at that date. The loans
in the portfolio at that date were originated by the seller between __ and __.
No loan in the portfolio was delinquent or non-performing at the time it was
assigned to the mortgages trustee.
After the closing date, the seller may assign new loans and their related
security to the mortgages trustee. The seller reserves the right to amend its
lending criteria and to assign to the mortgages trustee new loans which are
based upon mortgage terms (as defined in the glossary) different from those
upon which loans forming the portfolio as at __, 2003 are based. Those new
loans may include loans which are currently being offered to borrowers which
may or may not have some of the characteristics described here, but may also
include loans with other characteristics that are not currently being offered
to borrowers or that have not yet been developed. All new loans will be
required to comply with the warranties set out in the mortgage sale agreement
and all the material warranties in the mortgage sale agreement are described in
this prospectus. See "ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY".
CHARACTERISTICS OF THE LOANS
REPAYMENT TERMS
Loans are typically repayable on one of the following bases:
* "repayment": the borrower makes monthly payments of both interest
and principal so that, when the loan matures, the full amount of
the principal of the loan will have been repaid;
88
* "interest-only": the borrower makes monthly payments of interest
but not of principal; when the loan matures, the entire principal
amount of the loan is still outstanding and is payable in one lump
sum; and
* a combination of both these options.
In the case of either repayment loans or interest-only loans, the required
monthly payment may alter from month to month for various reasons, including
changes in interest rates.
As at __, 2003, approximately __ per cent. of the loans in the portfolio
were repayment loans and approximately __ per cent. were interest-only loans.
As at __, 2003, __ per cent. of the loans in the portfolio had their payment
linked to the Halifax Payment Plan, where the borrower pays the monthly
payments using an internal transfer from a Halifax current account or other
account the borrower may have with the seller, and __ per cent. had an active
direct debit instruction from another bank or building society account and the
remainder were paid using various other methods, such as by cheque.
For interest-only loans (other than products offered by the seller which are
known as Retirement Home Plan loans), because the principal is repaid in a lump
sum at the maturity of the loan, the borrower is recommended to have some
repayment mechanism (such as an investment plan) in place to ensure that funds
will be available to repay the principal at the end of the term.
Principal prepayments may be made in whole or in part at any time during the
term of a loan, subject to the payment of any repayment fees (as described in
"-- REPAYMENT FEES" below). A prepayment of the entire outstanding balance of
all loans under a mortgage account discharges the mortgage. Any prepayment in
full must be made together with all accrued interest, arrears of interest, any
unpaid expenses and any applicable repayment fee(s).
Each of the loans is governed by English law.
INTEREST PAYMENTS AND INTEREST RATE SETTING
The seller has responded to the competitive mortgage market by developing a
range of products with special features that are used to attract new borrowers
and retain existing customers. The seller currently offers the following
special rate loans and is able to combine these to suit the requirements of the
borrower:
* "discounted variable rate loans", which allow the borrower to pay
interest at a specified discount to the variable base rate;
* "fixed rate loans", which are subject to a fixed rate of interest;
* "capped rate loans", where the borrower pays interest equal to the
seller's variable base rate (or, as the case may be, the tracker
rate), but where the interest rate cannot exceed a predetermined
level, or cap; and
* "tracker rate loans", which are subject to a variable interest rate
other than the variable base rate; for example the rate may be set
at a fixed margin above or below rates set by the Bank of England.
Each of the above special rates is offered for a predetermined period,
usually between one and five years, at the commencement of the loan (the
"PRODUCT PERIOD"). At the end of the period the rate of interest charged will
either (a) move to some other interest rate type for a predetermined period or
(b) revert to, or remain at, a variable base rate of interest (the "VARIABLE
BASE RATE"), which is administered, at the discretion of the seller, by
reference to the general level of interest rates and competitive forces in the
UK mortgage market. In certain instances, early repayment fees are payable by
the customer if the loan is redeemed within the product period. See "--
REPAYMENT FEES" below.
No capped rate loans will be included in the portfolio as at the closing
date. In addition, the seller has in the past offered "added rate loans", where
the borrower pays interest at a margin above the variable base rate. Although
these products are not currently offered by the seller, some added rate loans
may be included in the portfolio as at the closing date.
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Loans may combine one or more of the features listed in this section. Other
customer incentives may be offered with the product including cashback, free
valuations and payment of legal fees. Some product types require the borrower
to deposit a cash amount into a deposit account held with Halifax and to charge
that deposit account in favour of Halifax. Additional features such as payment
holidays (temporary suspension of monthly payments) and the ability to make
overpayments or underpayments are also available to most borrowers. See "--
OVERPAYMENTS AND UNDERPAYMENTS" and "-- PAYMENT HOLIDAYS" below. In respect of
the tracker rate loans where the tracker rate feature lasts for a specified
period of time, after the expiration of that period the interest on the tracker
rate loan will be charged at the variable base rate that applies to the
mortgage account unless the seller agrees to continue the tracker rate mortgage
or to allow the borrower to switch to a different product. In November 2002, a
new feature to vary the margin payable on the tracker rate was introduced in
respect of new tracker rate loans and new transfers to tracker rate loans only.
This feature allows Halifax to vary the tracker rate margin at any time where
such variation would be to the borrower's advantage. Halifax may vary the
margin payable on the tracker rate to the borrower's disadvantage only if the
tracker base rate (as calculated by reference to the Bank of England repo rate)
is below three per cent. All relevant borrowers are given written advance
notification of any such variation. A borrower with a tracker rate loan which
is subject to a repayment fee may, within three months of a variation which is
disadvantageous, repay that loan without having to pay an early repayment fee.
The features that apply to a particular loan are specified in the mortgage
conditions (as varied from time to time) and loan agreement.
As at __, 2003, approximately __ per cent. of the loans in the portfolio
were fixed rate loans. The remaining approximately __ per cent. of the loans in
the portfolio were tracker rate loans or discounted variable rate loans. These
figures are calculated on the basis of the percentage of product holdings of
the loans in the pool, not the number of loans in the pool. Each loan may have
more than one active product.
From 1st March, 2001 until 31st January, 2002, all new mortgage loans sold
under the Halifax brand were subject to a second variable base rate (HVR 2)
instead of the existing variable base rate (HVR 1) at the end of the
predetermined product period. Existing Halifax borrowers were in some
circumstances able to transfer to HVR 2, subject to the terms and conditions of
their existing loan and to the borrower entering a deed of variation to vary
the terms of the existing loan.
As noted elsewhere in this prospectus, no capped rate loans will be included
in the portfolio as at the closing date, although such loans may be assigned to
the mortgages trustee in the future provided that each of the rating agencies
has confirmed that the then current ratings of the notes would not be adversely
affected.
In addition, from 1st March, 2001, all new Halifax branded mortgages have
featured interest calculated on a daily basis rather than on an annual basis.
Any payment by the borrower will reduce the borrower's balance on which
interest will be calculated the following day. Prior to this date, most but not
all Halifax branded mortgage products had carried interest calculated on an
annual basis. Borrowers with existing loans on which interest is calculated on
an annual basis are in some circumstances able to change and have their
interest calculated on a daily basis, subject to the terms and conditions of
their existing loan and to the borrower entering a deed of variation to vary
the terms of the existing loan.
The seller may change the interest rate, by giving the borrowers notice, on
any part of the loan, unless otherwise agreed in the loan agreement and subject
to certain restrictions set forth in the loan agreement. The seller may change
the interest rate by altering the base rate or, if permitted in the loan
agreement, charging an added rate. An added rate of not more than two per cent.
may be charged if the borrower has let the property, changed the use of the
property, or it has become more difficult for the seller to exercise its powers
over the property. The seller may also change the borrower's monthly payments,
the repayment period, and the accounting period by giving the borrowers notice.
In the case of special rate loans, the seller may cancel the special rate under
certain circumstances specified in the loan agreement.
Except in limited circumstances as set out in "THE SERVICING AGREEMENT --
UNDERTAKINGS BY THE SERVICER", the servicer is responsible for setting the
mortgages trustee variable base rate on the loans in the portfolio as well as
on any new loans that are assigned to the mortgages trustee.
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The mortgage conditions applicable to all of the variable rate loans provide
that the variable base rate may only be varied in accordance with a number of
reasons that are specified in the mortgage conditions. These reasons include:
* to reflect changes in the cost of funds used by the seller in its
mortgage lending business;
* to reflect a change in the general practice of mortgage lenders;
* to reflect changes in the way the seller administers its mortgage
accounts;
* to reflect any regulatory requirements or guidance or any change in
the law or decision or recommendation by a court or an ombudsman;
or
* to reflect changes to the way that the property over which the
mortgage is granted is used or occupied.
In respect of the variable rate loans with these mortgage conditions, the
servicer may also change the mortgages trustee variable base rate for any other
valid reason. In maintaining, determining or setting the mortgages trustee
variable base rate, the servicer will apply the factors set out here and,
except in limited circumstances as set out in "THE SERVICING AGREEMENT --
UNDERTAKINGS BY THE SERVICER", has undertaken to maintain, determine or set the
mortgages trustee variable base rate at a rate which is not higher than the
Halifax variable base rate from time to time.
If applicable, the servicer will also be responsible for setting any
variable margins in respect of new tracker rate loans that are assigned to the
mortgages trustee in the future. However, in maintaining, determining or
setting these variable margins, except in the limited circumstances as set out
in "THE SERVICING AGREEMENT -- UNDERTAKINGS BY THE SERVICER", the servicer has
undertaken to maintain, determine or set the variable margins at a level which
is not higher than the variable margins set in accordance with the seller's
policy from time to time. The seller has a variable base rate cap whereby it
has limited its variable base rates to no more than two per cent. above the
Bank of England base rate at any time.
REPAYMENT FEES
The borrower may be required to pay a repayment fee if certain events occur
during the predetermined product period and the loan agreement states that the
borrower is liable for repayment fees. The seller also offered some products in
the past with repayment fee periods that extended beyond the product period.
Although these types of products are not currently offered to new borrowers,
some are included in the portfolio. These events include a full or partial
unscheduled repayment of principal, or an agreement between the seller and the
borrower to switch to a different mortgage product. If all or part of the
principal owed by the borrower, other than the scheduled monthly payments, is
repaid before the end of the product period, the borrower will be liable to pay
to the seller all or part of the repayment fee based on the amount of principal
borrowed at the outset of the mortgage (if a mortgage is redeemed in part, then
a proportionate part of the repayment fee set out in the loan offer is
payable). If the borrower has more than one product attached to the mortgage,
the borrower may choose under which product the principal should be allocated.
The seller currently permits borrowers to repay up to 10 per cent. of the
amount outstanding on a mortgage in addition to scheduled repayments in any one
year without having to pay a repayment fee, though the seller may withdraw this
concession at its discretion. The seller currently has a policy not to charge
the repayment fee in certain circumstances, for example if the repayment is due
to the death of the borrower.
If the seller changes the borrower's interest rate or the rate by which the
variable base rate cap exceeds the Bank of England base rate and the loan is
subject to a repayment fee, the borrower may in certain circumstances repay the
mortgage debt in full within three months of receiving notice of the change
without being charged the repayment fee.
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The mortgages trustee has agreed to pay back to the seller any repayment
fees received on the loan, so any sums received will be for the seller's
account and not for the account of the mortgages trustee.
Some of the loans offered by the seller include a "CASHBACK" feature under
which the borrower is offered a sum of money, usually paid on completion of the
loan. The incentive may take the form of a fixed amount, a percentage of the
loan amount, or a combination of the two. Where any loan is subject to a
cashback, if there is an unscheduled principal repayment or a product switch
(as described in "-- PRODUCT SWITCHES"), in either case before a date specified
in the agreement, then a repayment fee may be repayable by the borrower.
Some mortgage products do not include any provisions for the payment of a
repayment fee by the borrower.
OVERPAYMENTS AND UNDERPAYMENTS
Borrowers with interest calculated annually who pay more than the scheduled
monthly payment will have the benefit of an interest adjustment on the amount
overpaid. This will only be done in cases where the total overpayment in a
month is [GBP]250 or more and the borrower has paid the normal required monthly
payments due for the rest of the year. The seller will not make any adjustment
to the interest charged in respect of the borrower's normal monthly payments,
but the borrower will be credited with interest at the rate of interest charged
on the borrower's mortgage. This concession may be withdrawn or changed by the
seller.
If borrowers with daily calculations of interest pay more than the scheduled
monthly payment, the balance on their mortgage account will be reduced. The
seller will charge interest on the reduced balance, which reduces the amount of
interest the borrower must pay.
Borrowers may underpay to the extent of previous overpayments.
Missed payments or underpayments are rolled up and added to the mortgage,
and must be repaid over the remaining life of the mortgage unless it is
otherwise agreed by the seller and the borrower to extend the mortgage term.
Any overpayments will be treated as prepayments of principal on the loans.
PAYMENT HOLIDAYS
The seller offers "payment holidays" during which a borrower may suspend
mortgage payments without penalty. This option may be exercised, upon the
seller's agreement, for a maximum of six months during the life of the
mortgage. The payment holiday option does not include insurance premiums.
In order to qualify, the mortgage cannot be more than one month in arrears
when the payment holiday is applied for and no payment arrangement may be
either currently in force or have been in force within the last six months.
Additionally, at least three months must have elapsed since the date of the
latest advance to the borrower. If a borrower's account is more than one month
in arrears, the seller will automatically reject the payment holiday
application.
Furthermore, an applicant can neither be currently applying for, or in
receipt of, income support, nor in receipt of amounts to pay the mortgage under
a mortgage repayments insurance policy at the time of the application. The
applicant may not borrow any further money from the seller during the course of
the payment holiday.
Payments deferred under the payment holiday program are rolled up and added
to the mortgage and must be repaid over the remaining life of the mortgage,
unless the seller and the borrower agree to amend the mortgage term. The seller
will provide the borrower with a new scheduled monthly payment based on the new
amount owed. The total debt accumulated must not exceed 97 per cent. of the
value of the property and must comply with the seller's normal lending limits.
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FURTHER ADVANCES
If a borrower wishes to take out a further loan secured by the same
mortgage, the borrower will need to make a further advance application and the
seller will use the lending criteria applicable to further advances at that
time in determining whether to approve the application. All further advances
will be funded solely by the seller. Where the aggregate of the initial advance
and the further advance is greater than 90 per cent. of the indexation value of
the property, the seller will reassess the property's value, by instructing a
valuer, who may physically inspect the property. A new loan-to-value, or LTV,
ratio will be calculated by dividing the aggregate of the outstanding amount
and the further advance by the reassessed valuation. The seller reserves the
right to re-underwrite the loans. The aggregate of the outstanding amount of
the loan and the further advance may be greater than the original amount of the
loan. However, no loans will be assigned to the mortgages trustee where the LTV
ratio at the time of origination or further advance is in excess of 97 per
cent.
In certain instances the further advance may be granted subject to the
completion of improvements, alterations, or repairs to the property. The seller
reserves the right to confirm the completion of the work, either through an
inspection of the improvement bills or a physical inspection of the property.
In addition, the seller offers a further advance product called Home Cash
Reserve, which is a facility linked to a borrower's mortgage whereby a borrower
may draw additional funds from time to time. A borrower must have had a Halifax
mortgage for a minimum of three months to qualify for the Home Cash Reserve.
The total amount of the facility must not be less than [GBP]25,005, and
borrowers must draw down amounts of at least [GBP]1,000 at a time. Funds drawn
under the Home Cash Reserve are added to the mortgage loan. No redraw facility
is available under the Home Cash Reserve.
None of the loans in the portfolio obliges the seller to make further
advances save for retentions and Home Cash Reserve withdrawals. However, some
loans in the portfolio may have further advances made on them prior to their
assignment to the mortgages trustee and new loans added to the portfolio in the
future may have had further advances made on them prior to that time.
If a loan is subject to a further advance, the seller will be required to
repurchase the loan under the relevant mortgage account and its related
security from the mortgages trustee unless the relevant loan is in arrears
(although making further advances to borrowers in arrears is not in the normal
course of the seller's business) in which case no repurchase will be required.
PRODUCT SWITCHES
From time to time borrowers may request or the servicer may offer a
variation in the financial terms and conditions applicable to the borrower's
loan. In limited circumstances, if a loan is subject to a product switch as a
result of a variation, then the seller will be required to repurchase the loan
or loans under the relevant mortgage account and their related security from
the mortgages trustee unless the relevant loan is in arrears in which case no
repurchase will be required. Those limited circumstances are that as at the
relevant date, any of the conditions precedent to the assignment of new loans
to the mortgages trustee as described in "ASSIGNMENT OF LOANS AND THEIR RELATED
SECURITY -- ASSIGNMENT OF NEW LOANS AND THEIR RELATED SECURITY TO THE MORTGAGES
TRUSTEE" at paragraphs (A) to (P) has not been satisfied. From the date when
those conditions precedent have been satisfied, then a loan that has been
subject to a product switch will not be so repurchased by the seller. See
further "RISK FACTORS -- IN LIMITED CIRCUMSTANCES LOANS SUBJECT TO PRODUCT
SWITCHES WILL BE REPURCHASED BY THE SELLER FROM THE MORTGAGES TRUSTEE, WHICH
WILL AFFECT THE PREPAYMENT RATE OF THE LOANS, AND THIS MAY AFFECT THE YIELD TO
MATURITY OF THE ISSUER NOTES" and "ASSIGNMENT OF THE LOANS AND THEIR RELATED
SECURITY".
ORIGINATION OF THE LOANS
The seller currently derives its mortgage-lending business from the
following sources: through the Halifax and Bank of Scotland branch network
throughout the United Kingdom (including Halifax estate agency branches),
through intermediaries, through internet applications and from telephone
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sales. Of the loans in the portfolio as at [__] , approximately __ per cent.
were originated through the branch network, approximately __ per cent. through
intermediaries and approximately __ per cent. through other channels.
Under the Halifax Mortgage Promise, the seller can provide customers with an
agreement in principle to lend almost immediately upon application. In May
2000, the seller launched the Halifax Mortgage Promise online. In June 2000,
the seller launched Mortgage Enquirer, allowing customers to view the progress
of their mortgage application via the Internet and selected intermediaries to
view their portfolio of customers' applications.
In an effort to improve mortgage customer retention, the seller introduced
the Mortgage Review in May 2000. Over one million existing mortgage customers
were contacted during the remainder of 2000 and offered a review of their
mortgage. The programme continued throughout 2001. The seller believes that the
Mortgage Review was instrumental in retaining more existing customers and as a
result, the level of mortgage principal repaid has declined since 1999.
The seller is a member of the Financial Ombudsman Scheme, which is a
statutory scheme under the FSMA, and follows both the Code of Banking Practice
and the Council of Mortgage Lenders' Code of Mortgage Lending Practice. The
seller has pledged its support for regulation of the UK mortgage industry by
the FSA and, in particular, the implementation of CAT marked loans. CAT is a
voluntary UK Government standard that was introduced for mortgages in 2000. The
CAT mark indicates that the product meets minimum standards for charges, access
and terms.
UNDERWRITING
Traditionally, the seller's decision whether to underwrite or not underwrite
a loan has been made by underwriters in one of the seller's business centres,
who liaise with the intermediaries and sales staff in the branch network. Each
underwriter must undertake a training programme conducted by the seller to gain
the authority to approve loans. The seller has established various levels of
authority for its underwriters who approve loan applications. The levels are
differentiated by, among other things, degree of risk and the ratio of the loan
amount to the value of the property in the relevant application. An underwriter
wishing to move to the next level of authority must undertake further training.
During 2001, the seller introduced a new automated system whereby the
majority of mortgages are underwritten at the point of sale and do not make use
of the traditional system of full evaluation by an underwriter. Mortgages
qualifying for the new underwriting format are, typically, either applications
from existing customers, applicants with long-standing credit or mortgages with
a low LTV ratio. Those mortgages qualifying for point-of-sale underwriting
remain subject to the seller's underwriting policies, lending criteria, and
internal procedures for compliance with government regulations, such as those
concerning money laundering.
[All mortgage underwriting decisions, whether completed at the point of sale
or in a servicing centre, are subject to internal monitoring by the seller in
order to ensure the seller's procedures and policies regarding underwriting are
being followed by staff. All of the mortgages in the portfolio pre-date the
introduction of point-of-sale underwriting and will have been underwritten by
the traditional method.]
LENDING CRITERIA
Each loan in the portfolio was originated according to the seller's lending
criteria applicable at the time the loan was offered, which included some or
all of the criteria set out in this section. New loans may only be included in
the portfolio if they are originated in accordance with the lending criteria
applicable at the time the loan is offered and if the conditions contained in
"ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY -- ASSIGNMENT OF NEW LOANS
AND THEIR RELATED SECURITY TO THE MORTGAGES TRUSTEE" have been satisfied.
However, the seller retains the right to revise its lending criteria from time
to time, so the criteria applicable to new loans may not be the same as those
currently used. Some of the factors currently used in making a lending decision
are as follows.
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(1) Type of property
Properties may be either freehold or leasehold. In the case of leasehold
properties, there must be at least 30 years left on the lease at the end of the
mortgage term. The property must be used solely for residential purposes (with
extremely limited case-by-case exceptions) and must be in sound structural
condition and repair or be capable of being put into such state. House boats,
mobile homes, and any property on which buildings insurance cannot be arranged
are not acceptable. All persons who are to be legal owners of the property on
completion must be borrowers under the mortgage.
All properties have been valued by a valuer approved by the seller or, where
appropriate, according to a methodology which would meet the standards of a
reasonable, prudent mortgage lender (as referred to under "THE SERVICING
AGREEMENT -- UNDERTAKINGS BY THE SERVICER") and which has been approved by the
seller.
(2) Term of loan
There is no minimum term on home purchase loans and the current maximum term
is 25 years for repayment loans. A maximum term of 40 years is currently
available for interest-only mortgages. The seller has recently approved
measures whereby the maximum term of 40 years would be available for repayment
as well as interest-only loans but these measures have yet to be implemented. A
repayment period for a new further advance that would extend beyond the term of
the original advance may also be accepted at the seller's discretion, subject
to the following:
* the consent of any subsequent lender or guarantor to the further
advance;
* the seller may in its discretion extend the period of the original
advance, provided that, in the case of all leasehold properties,
not less than 30 years of the lease must be left unexpired at the
end of the term of the mortgage; and
* the approval of the valuers is required where the valuer has
previously recommended a term which is shorter than the maximum
loan terms referred to above.
If the customer requests to increase the term of the existing loan, the
maximum term for a repayment loan is 25 years from the date from which the
extended term is granted. However, the total term from the start date of the
account must not exceed 40 years.
(3) Age of applicant
All borrowers must be aged 18 or over. There is no maximum age limit.
However, if the term of the mortgage extends into retirement, the seller will
attempt to ascertain the borrower's anticipated income in retirement. If the
seller determines the borrower will not be able to afford the mortgage into
retirement, the application will be declined. If the borrower is already
retired, the seller will consider the borrower's ability to support the loan.
(4) Loan-to-value (or LTV) ratio
The maximum original LTV ratio of loans in the portfolio is __ per cent. For
properties of [GBP]150,000 or less, the seller may currently lend up to 97 per
cent. of the improved valuation of the property (the original valuation plus
the increase in value deriving from any improvements). For properties in excess
of [GBP]150,000, the permissible LTV ratio decreases as the property value
increases. The seller has recently approved measures whereby it may lend up to
97 per cent. of the LTV for properties of [GBP]250,000 or less but this measure
has yet to be implemented. The seller does not provide loans in excess of 100
per cent. of the sum of the purchase price and the increase in value deriving
from any improvements.
In the case of a property that is being purchased, value is determined by
the lower of the valuation and the purchase price. In the case of a remortgage
or further advance, value is determined on the basis of a valuation only.
(5) Mortgage indemnity guarantee policies and high LTV fees
Borrowers are currently required to pay high LTV fees to the seller for each
mortgage account where the aggregate of the outstanding principal balance of
the relevant loan(s) at origination (excluding any capitalised high LTV fees
and/or booking fees and/or valuation fees) exceeds certain specified
percentages.
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If the LTV ratio exceeds 90 per cent., the borrower pays high LTV fees based
on the difference between the actual LTV ratio and a 75 per cent. LTV ratio.
Prior to 1st January, 2001, the seller required cover under mortgage
indemnity guarantee, or MIG, policies for mortgages where the LTV ratio
exceeded 75 per cent., though during 1999 and 2000 the seller paid the premium
for the MIG cover if the LTV ratio was between 75 per cent. and 90 per cent.
Approximately __ per cent. of the loans in the portfolio as at [__] are covered
by MIG policies. Since 1st January, 2001, the seller has not required cover
under MIG policies for any mortgage loans. See "-- INSURANCE POLICIES --
MORTGAGE INDEMNITY GUARANTEE POLICIES AND HIGH LTV FEES" below.
(6) Status of applicant(s)
The maximum amount of the aggregate loan(s) under a mortgage account is
determined by a number of factors, including the applicant's income. In
determining income, the seller includes basic salary as primary income, along
with performance or profit-related pay, allowances, mortgage subsidies,
pensions, annuities and state benefits. Payments for overtime, bonus and
commissions will not be automatically included in income. The seller will
deduct the annual cost of existing commitments from the applicant's gross
income, depending on the applicant's credit score. The seller will also verify
the applicant's employment.
In cases where a single borrower is attempting to have the seller take a
secondary income into account, the seller will consider the sustainability of
the borrower's work hours, the similarity of the jobs and/or skills, the
commuting time and distance between the jobs, the length of employment at both
positions and whether the salary is consistent with the type of employment. The
seller will determine, after assessing the above factors, if it is appropriate
to use both incomes. If so, both incomes will be used as part of the normal
income calculation.
When there are two applicants, the seller adds joint incomes together for
the purpose of calculating the applicants' total income. The seller may at its
discretion consider the income of one additional applicant as well, but only a
maximum rate of one times that income.
Positive proof of the borrower's identity and address must be established.
In exceptional circumstances this requirement can be waived (provided money
laundering regulations are complied with), but the reasons for doing so must be
fully documented.
The seller may exercise discretion within its lending criteria in applying
those factors that are used to determine the maximum amount of the loan(s).
Accordingly, these parameters may vary for some loans. The seller may take the
following into account when exercising discretion: credit score result,
existing customer relationship, percentage of LTV, stability of employment and
career progression, availability of living allowances and/or mortgage subsidy
from the employer, employer's standing, regularity of overtime, bonus or
commission (up to a maximum of 60 per cent. of the income), credit commitments,
quality of security (such as type of property, repairs, location or
saleability), and the increase in income needed to support the loan.
The seller may not exercise discretion where it is lending over 95 per cent.
of value or the borrower's credit score fails. There is an exception from this
policy for existing Halifax mortgage customers who are moving home and the
seller's overall position is improved.
(7) Credit history
(a) Credit search
With the exception, in some circumstances, of further advances to
existing Halifax borrowers, a credit search is carried out in
respect of all applicants. Applications may be declined where an
adverse credit history (for example, county court judgment,
default, or bankruptcy notice) is revealed.
(b) Existing lender's reference
In some cases, the seller may seek a reference from any existing
and/or previous lender. Any reference must satisfy the seller that
the account has been properly conducted and that no history of
material arrears exists.
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(c) First time buyers/applicants in rented accommodation
Where applicants currently reside in rented accommodation, the
seller may seek a landlord's reference. In addition, if considered
appropriate, a further reference may be taken in connection with
any other property rented by the applicant(s) within the preceding
18 months.
(d) Bank reference
A bank reference may be sought or the applicant may be required to
provide bank statements in support of his or her application.
(8) Scorecard
The seller uses some of the criteria described here and various other
criteria to produce an overall score for the application that reflects a
statistical analysis of the risk of advancing the loan. The lending policies
and processes are determined centrally to ensure consistency in the management
and monitoring of credit risk exposure. Full use is made of software technology
in credit scoring new applications. Credit scoring applies statistical analysis
to publicly available data and customer-provided data to assess the likelihood
of an account going into arrears. In addition, the seller is currently
developing behavioral scoring, which will enable it to use customer data on
existing accounts to make further lending decisions and to prioritise action in
the case of arrears. Mortgage collection is conducted through a number of
payment collection departments.
The seller reserves the right to decline an application that has received a
passing score. The seller does have an appeals process if a potential borrower
believes his or her application has been unfairly denied. It is the seller's
policy to allow only authorised individuals to exercise discretion in granting
variances from the scorecard.
CHANGES TO THE UNDERWRITING POLICIES AND THE LENDING CRITERIA
The seller's underwriting policies and lending criteria are subject to
change within the seller's sole discretion. New loans and further advances that
are originated under lending criteria that are different from the criteria set
out here may be assigned to the mortgages trustee.
INSURANCE POLICIES
INSURANCE ON THE PROPERTY
A borrower is required to insure the mortgaged property with buildings
insurance. The insurance may be purchased through the seller, or alternatively
the borrower or landlord (in the case of a leasehold property) may arrange for
the buildings insurance independently. In either case, the borrower must ensure
that the buildings insurance payments are kept up to date.
If the borrower does not insure the property, or insures the property but
violates a provision of the insurance contract, the seller will upon becoming
aware of the same insure the property itself, in which case the seller may
determine who the insurer will be, what will be covered by the policy, the
amount of the sum insured and any excess. The borrower will be responsible for
the payment of insurance premiums. The seller retains the right to settle all
insurance claims on reasonable terms without the borrower's consent.
HALIFAX POLICIES
If the buildings insurance is purchased by the borrower through the seller,
the seller will arrange the insurance through Halifax General Insurance
Services Limited. The premiums paid by the borrower will be calculated
depending on the location of the borrower's residence, the type, age and use of
the borrower's property, and the borrower's age and past claims history. The
borrower will have the option of paying the premium as a lump sum or over a 12-
month period with the borrower's monthly mortgage payments. If paid monthly,
interest will be charged. Any unpaid premiums will be added directly to the
mortgage loan and interest charged. The policy will be automatically renewed
each year. The seller will provide cover from the date the purchase contracts
for a property are exchanged; if the borrower already owns the property, cover
will start on the date that the borrower's mortgage is completed.
97
The borrower must ensure that nothing occurs which reduces the risk coverage
or the amount of the sum insured, increases the premiums or the excess,
prevents or hinders any claim from being settled in full, or renders the
insurance invalid. On newly originated loans, the conveyancer will advise the
customer in writing of the need to ensure that adequate insurance cover is in
place.
The buildings insurance available through the seller does not cover the
contents of the borrower's home. Separate contents insurance is also available
through Halifax General Insurance Services Limited. Halifax General Insurance
Services Limited does not underwrite the buildings or contents insurance
itself; it acts as a broker and administrator for such policies. All buildings
and contents insurance is currently underwritten by Royal & Sun Alliance
Insurance plc ("ROYAL & SUN ALLIANCE").
In the event of a claim, the insured will receive up to the full cost of
rebuilding the property in the same form as before the damage occurred,
including the costs of complying with local authority and other statutory
requirements, professional fees and related costs. Standard policy conditions
apply. Amounts paid under the insurance policy are generally utilised to fund
the reinstatement of the property or are otherwise paid to the seller to reduce
the amount of the loan(s).
The seller has procured the endorsement of Royal & Sun Alliance to the
inclusion of Funding 1 and the mortgages trustee as an insured under the
Halifax policies in so far as the seller was so insured prior to the assignment
of the relevant loans to the mortgages trustee. In the servicing agreement, the
seller, acting in its capacity as servicer, has also agreed to deal with claims
under the Halifax policies in accordance with its normal procedures. If the
seller, acting in its capacity as servicer, receives any claim proceeds
relating to a loan which has been assigned to the mortgages trustee, these will
be required to be paid into the mortgages trustee's, rather than the seller's,
accounts.
BORROWER-ARRANGED BUILDINGS INSURANCE
A borrower may elect not to take up a Halifax policy, or a borrower who
originally had a Halifax policy may elect to insure the property with an
independent insurer. The seller requires that any borrower-arranged insurance
policy be drawn in the joint names of the seller and all of the applicants and
be maintained in their joint names for the duration of the mortgage. If this is
not possible, for example because the property is leasehold and the lease
provides for the landlord to insure, the borrower must arrange for the seller's
interest to be noted on the landlord's policy. The seller also requires that
the sum insured be for an amount not less than the full reinstatement value of
the property and be reviewed annually, that the borrower inform the seller of
any damage to the property that occurs, and that the borrower make a claim
under the insurance for any damages covered by it unless the borrower makes
good the damage.
If the borrower fails to maintain the existing insurance cover over his or
her property or wishes to change insurance providers, the borrower must contact
the seller and provide the details of any new insurance cover it has taken out.
Otherwise, the seller will arrange buildings insurance for the property under
its insurance arrangements with Royal & Sun Alliance and debit the insurance
premium amount to the borrower's account.
MORTGAGE PROTECTION PLANS
The seller currently offers borrowers the option to purchase a total
mortgage protection plan. A total mortgage protection plan can provide cover in
cases of death, unemployment, accident, sickness, critical illness, or
disability. The borrower may choose the types and amount of cover that is
needed up to a maximum of [GBP]200,000 combined life and critical illness
cover, and may change the plan details each year. The borrower's premiums are
paid monthly in advance by direct debit separate from the monthly mortgage
payments. The seller has also offered mortgage repayments insurance in the
past, underwritten by Halifax Insurance Ireland Limited from 2nd January, 2001,
and by General Electric Financial Insurance before that date. Though the seller
does not currently market the mortgage repayment insurance, in some instances
it is offered to borrowers. In those instances, the insurance continues to be
underwritten by Halifax Insurance Ireland Limited. Existing mortgage repayment
insurance policies will continue unless a borrower requests to change to a
total mortgage protection plan.
98
PROPERTIES IN POSSESSION COVER
When a mortgaged property is taken into possession by the seller and
buildings insurance has been arranged through the seller, Halifax General
Insurance Services Limited takes the necessary actions to ensure that the
appropriate insurance cover is provided on the property. The seller may claim
under this policy for any damage occurring to the property while in the
seller's possession.
The seller also maintains a freedom of agency indemnity policy with Royal &
Sun Alliance, which provides cover for damage to properties over which the
seller exercises its power of sale and where insurance independently arranged
by the borrower will not cover the damage.
The seller has procured the endorsement of Royal & Sun Alliance to the
inclusion of Funding 1 and the mortgages trustee as insured under the
properties in possession cover. To the extent that any proceeds are received by
the servicer, it has agreed to pay these into the mortgages trustee's accounts.
The servicer will make claims in accordance with the seller's policy and pay
proceeds relating to the loans into the mortgages trustee's accounts.
In the mortgage sale agreement the seller has agreed to make and enforce
claims under the relevant policies and to hold the proceeds of claims on trust
for the mortgages trustee or as the mortgages trustee may direct.
TITLE INSURANCE
As at the closing date, there will be no loans in the portfolio for which
the underlying mortgages have the benefit of a title insurance policy, although
the portfolio may contain loans of this type in the future. Inclusion of loans
in the portfolio having the benefit of a title insurance policy will be subject
to the approval of the security trustee and confirmation from each rating
agency that inclusion of these loans will not cause the downgrade or withdrawal
of the rating of any issuer note. Relevant representations and warranties will
be given in relation to any title insurance policy each time that Funding 1
provides consideration for the assignment of new loans to the mortgages trust.
MORTGAGE INDEMNITY GUARANTEE ("MIG") policies and high LTV fees
The seller currently requires borrowers to pay high LTV fees for loans made
to borrowers that are over 90 per cent. of the property's value. The seller
currently does not use secondary cover, but collects high LTV fees from the
relevant borrower itself, with the risk remaining on the seller's balance
sheet. The high LTV fees are charged to the borrower based on the difference
between the actual LTV ratio and a 75 per cent. LTV ratio.
Approximately __ per cent. of the mortgages in the portfolio as at [__] are
subject to MIG policies arranged when the loan was originated by the seller.
MIG policies are a type of agreement between a lender and an insurance company
to underwrite the amount of each relevant mortgage account that exceeds a
certain LTV ratio. Each MIG policy sets out a formula to calculate the limit of
indemnity in respect of each mortgage covered by the MIG policy. See "--
CHARACTERISTICS OF THE LOANS -- LENDING CRITERIA -- (5) MORTGAGE INDEMNITY
GUARANTEE POLICIES AND HIGH LTV FEES". The seller previously contracted with GE
Capital, General Accident, Halifax Mortgage Re Ltd, a wholly owned subsidiary
of the seller, and Royal & Sun Alliance from 1st February, 1996 until 31st May,
1996. The seller then contracted with GE Capital, General Accident and Halifax
Mortgage Re Ltd from 1st June, 1996 until 31st December, 1997. From 1st
January, 1998 until 31st December, 2000, Halifax Mortgage Re Ltd was the
seller's sole MIG insurer. The seller stopped placing MIG policies as of 1st
January, 2001. During the 1996-2000 period, cover under an MIG policy was
mandatory where the LTV ratio of a loan exceeded 75 per cent.
On 19th December, 2001, the insurance business, including the MIG policies,
of Halifax Mortgage Re Ltd was acquired by HBOS Insurance (PCC) Guernsey
Limited by portfolio transfer. HBOS Insurance (PCC) Guernsey Limited was
registered on 14th December, 2001 as a protected cell company in accordance
with provisions of the Guernsey Protected Cell Companies Ordinance 1997.
The insured under each MIG policy is the seller and in certain circumstances
its relevant subsidiary. The seller has formally assigned, or will formally
assign, its interest in each MIG policy contracted with HBOS Insurance (PCC)
Guernsey Limited to the mortgages trustee to the extent that it relates to the
loans from time to time comprised in the portfolio. For MIG policies contracted
99
with GE Capital, General Accident or Royal & Sun Alliance, the seller has
procured or will procure the endorsement of each insurer to the inclusion of
Funding 1 and the mortgages trustee as an insured under each policy.
Practically speaking, this has little effect on the way in which claims are
made and paid under the policies as they continue to be administered by the
seller acting in its capacity as servicer. To the extent that claims relate to
loans in the portfolio, their proceeds will be paid by the seller into the
mortgages trustee's accounts a nd all other claims will be paid into the
seller's account.
Management of the seller believes that financial information relating to
HBOS Insurance (PCC) Guernsey Limited is not material to an investor's decision
to purchase the issuer notes. HBOS Insurance (PCC) Guernsey Limited is not
rated by any nationally recognised statistical rating agency.
STATISTICAL INFORMATION ON THE PORTFOLIO
The statistical and other information contained in this prospectus has been
compiled by reference to the loans and mortgage accounts in the portfolio as at
__, 2003. Columns stating percentage amounts may not add up to 100 per cent.
due to rounding. A loan will be removed from the portfolio if in the period up
to (and including) the closing date the loan is repaid in full or if the loan
does not comply with the terms of the mortgage sale agreement on the closing
date. Except as otherwise indicated, these tables have been prepared using the
current balance, which includes all principal and accrued interest for the
loans in the pool.
OUTSTANDING CURRENT BALANCES
Range of outstanding current balances:
AGGREGATE
RANGE OF OUTSTANDING CURRENT OUTSTANDING
BALANCES (INCLUDING CAPITALISED CURRENT NUMBER OF
HIGH LTV FEES AND/OR BOOKING FEES BALANCE MORTGAGE
AND/OR VALUATION FEES) ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- --------------------------------- ----------- ---------- --------- ----------
[GBP]24,999.99................... __ __ __ __
[GBP]25,000 -- [GBP]49,999.99.... __ __ __ __
[GBP]50,000 -- [GBP]74,999.99.... __ __ __ __
[GBP]75,000 -- [GBP]99,999.99.... __ __ __ __
[GBP]100,000 -- [GBP]124,999.99.. __ __ __ __
[GBP]125,000 -- [GBP]149,999.99.. __ __ __ __
[GBP]150,000 -- [GBP]174,999.99.. __ __ __ __
[GBP]175,000 -- [GBP]199,999.99.. __ __ __ __
[GBP]200,000 -- [GBP]224,999.99.. __ __ __ __
[GBP]225,000 -- [GBP]249,999.99.. __ __ __ __
[GBP]250,000 -- [GBP]349,999.99.. __ __ __ __
[GBP]350,000 -- [GBP]400,000..... __ __ __ __
----------- ---------- --------- ----------
Totals........................... __ __ __ __
=========== ========== ========= ==========
The largest mortgage account has an outstanding current balance of [GBP]__
and the smallest mortgage account has an outstanding current balance of [GBP]l.
The average outstanding current balance is approximately [GBP]__.
LTV RATIOS AT ORIGINATION
The following table shows the range of LTV ratios, which express the
outstanding balance of a mortgage loan as at the date of the original initial
mortgage loan origination divided by the value of the property securing that
mortgage loan at the same date. Please note, where additional lending
100
has taken place on the account since origination, the original valuation may
have been updated with a more recent valuation. Where this is the case, this
revised valuation has been used in formulating this data.
AGGREGATE
RANGE OF LTV RATIOS AT ORIGINATION OUTSTANDING
(EXCLUDING CAPITALISED HIGH LTV CURRENT NUMBER OF
FEES AND/OR BOOKING FEES AND/OR BALANCE MORTGAGE
VALUATION FEES) ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ---------------------------------- ----------- ---------- --------- ----------
0.00% -- 24.99%................... __ __ __ __
25.00% -- 49.99%.................. __ __ __ __
50.00% -- 74.99%.................. __ __ __ __
75.00% -- 79.99%.................. __ __ __ __
80.00% -- 84.99%.................. __ __ __ __
85.00% -- 89.99%.................. __ __ __ __
90.00% -- 94.99%.................. __ __ __ __
95.00% -- 97.00%.................. __ __ __ __
----------- ---------- --------- ----------
Totals............................ __ __ __ __
=========== ========== ========= ==========
The weighted average LTV ratio of the mortgage accounts (excluding any
capitalised high LTV fees and capitalised booking fees) at origination was __
per cent. The highest LTV ratio of any mortgage account (excluding any
capitalised high LTV fees and any capitalised booking fees) at origination was
__ per cent. and the lowest was __ per cent.
CURRENT LTV RATIOS
The following table shows the range of LTV ratios, which express the
outstanding current balance of the mortgage loan as at the date of the
provisional portfolio divided by the indexed valuation of the property securing
that mortgage loan at the same date.
RANGE OF CURRENT LTV RATIOS AGGREGATE
(INCLUDING ANY OUTSTANDING FEES, OUTSTANDING NUMBER OF
SUCH AS INSURANCE FEES AND/OR HIGH CURRENT BALANCE MORTGAGE
LTV FEES) ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ---------------------------------- --------------- ---------- -------------- ----------
0.00% -- 24.99%................... __ __ __ __
25.00% -- 49.99%.................. __ __ __ __
50.00% -- 74.99%.................. __ __ __ __
75.00% -- 79.99%.................. __ __ __ __
80.00% -- 84.99%.................. __ __ __ __
85.00% -- 89.99%.................. __ __ __ __
90.00% -- 94.99%.................. __ __ __ __
95.00% -- 96.99%.................. __ __ __ __
97.00% -- 100%.................... __ __ __ __
--------------- ---------- -------------- ----------
Totals............................ __ __ __ __
=============== ========== ============== ==========
The weighted average current LTV ratio of the mortgage accounts (including
any capitalised high LTV fees and capitalised booking fees) was __ per cent.
The highest current LTV ratio of any mortgage account (including any
capitalised high LTV fees and any capitalised booking fees) was __ per cent.
and the lowest was __ per cent.
101
GEOGRAPHICAL SPREAD
The following table shows the spread of properties throughout England and
Wales. No properties are situated outside England and Wales. The geographical
location of a property has no impact upon the seller's lending criteria and
current credit scoring tests.
AGGREGATE
OUTSTANDING
CURRENT NUMBER OF
BALANCE MORTGAGE
HALIFAX MAPPED REGION ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ---------------------- ----------- ---------- --------- ----------
London & South East... __ __ __ __
Midlands & East Anglia __ __ __ __
North................. __ __ __ __
North West............ __ __ __ __
South, West & Wales... __ __ __ __
Other................. __ __ __ __
----------- ---------- --------- ----------
Totals................ __ __ __ __
=========== ========== ========= ==========
SEASONING OF LOANS
The following table shows the time that has elapsed since the date of
origination of the loans. The data in this table has been forecast forward to
__, 2003 for the purposes of calculating the seasoning.
AGGREGATE
OUTSTANDING
CURRENT NUMBER OF
BALANCE MORTGAGE
AGE OF LOANS IN MONTHS ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ---------------------- ----------- ---------- --------- ----------
0 to <6............... __ __ __ __
6 to <12.............. __ __ __ __
12 to <18............. __ __ __ __
18 to <24............. __ __ __ __
24 to <30............. __ __ __ __
30 to <36............. __ __ __ __
36 to <42............. __ __ __ __
42 to <48............. __ __ __ __
48 to <54............. __ __ __ __
54 to <60............. __ __ __ __
60 to <66............. __ __ __ __
66 to <72............. __ __ __ __
>> 72................. __ __ __ __
----------- ---------- --------- ----------
Totals................ __ __ __ __
=========== ========== ========= ==========
The weighted average seasoning of loans was __ months and the maximum
seasoning of loans was __ months. The minimum seasoning of loans was __ months.
102
YEARS TO MATURITY OF LOANS
The following table shows the number of years of the mortgage term which
remain unexpired:
AGGREGATE
OUTSTANDING
CURRENT NUMBER OF
BALANCE MORTGAGE
YEARS TO MATURITY ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ----------------- ----------- ---------- --------- ----------
0 to <5.......... __ __ __ __
5 to <10......... __ __ __ __
10 to <15........ __ __ __ __
15 to <20........ __ __ __ __
20 to <25........ __ __ __ __
25 to <30........ __ __ __ __
30 to < 35....... __ __ __ __
35 to < 37....... __ __ __ __
----------- ---------- --------- ----------
Totals........... __ __ __ __
=========== ========== ========= ==========
The weighted average remaining term of loans was __ years and the maximum
remaining term was __ years. The minimum remaining term was __ years.
PURPOSE OF LOAN
The following table shows the purpose of the loans on origination:
AGGREGATE
OUTSTANDING
CURRENT NUMBER OF
BALANCE MORTGAGE
USE OF PROCEEDS ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- --------------- ----------- ---------- --------- ----------
Purchase....... __ __ __ __
Remortgage..... __ __ __ __
----------- ---------- --------- ----------
Totals......... __ __ __ __
=========== ========== ========= ==========
PROPERTY TYPE
The following table shows the types of properties to which the loans relate.
Descriptions of certain of the terms used in these property types are contained
in the glossary.
AGGREGATE
OUTSTANDING
CURRENT
BALANCE NUMBER OF
PROPERTY TYPE ([GBP]) % OF TOTAL PROPERTIES % OF TOTAL
- ------------- ----------- ---------- ---------- ----------
Detached..... __ __ __ __
Semi-detached __ __ __ __
Terraced..... __ __ __ __
Other........ __ __ __ __
Unknown...... __ __ __ __
----------- ---------- ---------- ----------
Totals....... __ __ __ __
=========== ========== ========== ==========
103
DISTRIBUTION OF FIXED RATE LOANS
Fixed rate loans remain at the relevant fixed rate for a period of time as
specified in the offer conditions, after which they move to a variable base
rate or some other rate as specified in the offer conditions.
AGGREGATE
OUTSTANDING
INTEREST
BEARING NUMBER OF % OF TOTAL
BALANCE PRODUCT FIXED RATE
FIXED RATE % ([GBP]) % OF TOTAL HOLDINGS HOLDINGS
- ------------ ----------- ---------- --------- ----------
<4.00............................... __ __ __ __
4.00 -- 4.99........................ __ __ __ __
5.00 -- 5.99........................ __ __ __ __
6.00 -- 6.99........................ __ __ __ __
7.00 -- 7.99........................ __ __ __ __
8.00 -- 8.99........................ __ __ __ __
----------- ---------- --------- ----------
Totals.............................. __ __ __ __
=========== ========== ========= ==========
AGGREGATE
OUTSTANDING
INTEREST
BEARING NUMBER OF % OF TOTAL
BALANCE PRODUCT FIXED RATE
YEAR IN WHICH FIXED RATE PERIOD ENDS ([GBP]) % OF TOTAL HOLDINGS HOLDINGS
- ------------------------------------ ----------- ---------- --------- ----------
2003................................ __ __ __ __
2004................................ __ __ __ __
2005................................ __ __ __ __
2006................................ __ __ __ __
2007................................ __ __ __ __
2008................................ __ __ __ __
2009................................ __ __ __ __
__.................................. __ __ __ __
----------- ---------- --------- ----------
Totals.............................. __ __ __ __
=========== ========== ========= ==========
CHARACTERISTICS OF UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET
The housing market in the UK is primarily one of owner-occupied housing. At
[31st December, 2001], owner-occupation and privately rented accommodation
accounted for [68] per cent. and [10] per cent. of the housing stock
respectively, according to the Department of Transport, Local Government, and
the Regions. The remainder were in some form of public/social ownership.
DRAFT:(2) 23/09/03
According to the Council of Mortgage Lenders, at [31st December, 2002],
mortgage loans outstanding in the UK amounted to [GBP][671] billion, with banks
and building societies holding [70] per cent. and [18] per cent. of the total
respectively, and outstanding mortgage debt grew by [13.5] per cent., well
above the long-term average of [7] per cent. during 1992-2002.
Set out in the following tables are a number of characteristics of the
United Kingdom mortgage market.
104
INDUSTRY AND CPR RATES
This quarterly industry constant prepayment rate ("INDUSTRY CPR") data was
calculated by dividing the amount of scheduled and unscheduled repayments of
mortgages made by building societies in a quarter by the quarterly balance of
mortgages outstanding for building societies in the UK. These quarterly
repayment rates were then annualised using standard methodology.
Over the past 40 years, industry CPRs experienced in respect of residential
mortgage loans made by building societies have been between [9.5] per cent. and
[14.0] per cent. for approximately [73] per cent. of that time.
AGGREGATE AGGREGATE AGGREGATE AGGREGATE
QUARTERS QUARTERS QUARTERS QUARTERS
OVER 40 CPR OVER 40 CPR OVER 40 CPR OVER 40
CPR (%) YEARS (%) YEARS (%) YEARS (%) YEARS
- --------- --------- --- --------- --- --------- --- ---------
7.0 __ __ __ __ __ __ __
7.5 __ __ __ __ __ __ __
8.0 __ __ __ __ __ __ __
8.5 __ __ __ __ __ __ __
9.0 __ __ __ __ __ __ __
9.5 __ __ __ __ __ __ __
10.0 __ __ __ __ __ __ __
10.5 __ __ __ __ __ __ __
11.0 __ __ __ __ __ __ __
- ----------
Source: Council of Mortgage Lenders
Over the past 40 years, the highest single quarter industry CPR experienced
in respect of residential mortgage loans made by building societies was
recorded in [September 2002] at a level of [22.40] per cent. The lowest level
was [7.94] per cent. in [June and March of 1974].
The highest 12-month rolling average industry CPR over the same 40-year
period was [20.79] per cent. The lowest was [8.84] per cent.
INDUSTRY INDUSTRY
CPR RATE 12-MONTH CPR RATE 12-MONTH
FOR THE ROLLING FOR THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
QUARTER (%) (%) QUARTER (%) (%)
- -------------- -------- -------- ------------- -------- --------
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
105
INDUSTRY INDUSTRY
CPR RATE 12-MONTH CPR RATE 12-MONTH
FOR THE ROLLING FOR THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
QUARTER (%) (%) QUARTER (%) (%)
- -------------- -------- -------- ------------- -------- --------
September 1990 9.66 9.58 December 1990 10.58 9.63
March 1991.... 9.07 9.67 June 1991.... 10.69 10.00
September 1991 11.57 10.48 December 1991 10.24 10.39
March 1992.... 9.14 10.41 June 1992.... 9.12 10.02
September 1992 9.75 9.56 December 1992 7.96 8.99
March 1993.... 8.53 8.84 June 1993.... 9.97 9.05
September 1993 10.65 9.28 December 1993 10.01 9.79
March 1994.... 8.97 9.90 June 1994.... 10.48 10.03
September 1994 11.05 10.13 December 1994 10.68 10.29
March 1995.... 9.15 10.34 June 1995.... 10.51 10.35
September 1995 11.76 10.53 December 1995 11.61 10.76
March 1996.... 10.14 11.00 June 1996.... 11.32 11.21
September 1996 13.20 11.57 December 1996 12.58 11.81
March 1997.... 9.75 11.71 June 1997.... 15.05 12.65
September 1997 12.18 12.39 December 1997 11.17 12.04
March 1998.... 10.16 12.14 June 1998.... 12.05 11.39
September 1998 13.79 11.79 December 1998 13.43 12.36
March 1999.... 11.14 12.60 June 1999.... 14.27 13.16
September 1999 15.60 13.61 December 1999 14.94 13.99
March 2000.... 13.82 14.66 June 2000.... 13.87 14.56
September 2000 14.89 14.38 December 2000 15.57 14.54
March 2001.... 15.48 14.95 June 2001.... 17.39 15.83
September 2001 19.17 16.90 December 2001 19.03 17.77
March 2002.... 18.70 18.57 June 2002.... 19.91 19.20
September 2002 22.40 20.01 December 2002 22.14 20.79
March 2003.... __ __ June 2003.... __ __
September 2003 __ __
- ----------
Source of repayment and outstanding mortgage information: Council of Mortgage
Lenders
REPOSSESSION RATE
The repossession rate of residential properties in the UK has steadily
declined since 1991:
REPOSSESSIONS REPOSSESSIONS REPOSSESSIONS
YEAR (%) YEAR (%) YEAR (%)
- --------- ------------- ---- ------------- ---- -------------
1982..... 0.11 1989 0.17 1996 0.40
1983..... 0.12 1990 0.47 1997 0.31
1984..... 0.17 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
106
HOUSE PRICE TO EARNINGS RATIO
The following table shows the ratio for any one year of the average annual
value of houses (sourced prior to and including 1993 from the "DEPARTMENT OF
THE ENVIRONMENT, TRANSPORT AND THE REGIONS/BUILDING SOCIETIES ASSOCIATION FIVE
PER CENT. SAMPLE SURVEY OF BUILDING SOCIETY MORTGAGE COMPLETIONS" and sourced
from and including 1994 from the "DEPARTMENT OF THE ENVIRONMENT, TRANSPORT AND
THE REGIONS/COUNCIL OF MORTGAGE LENDERS SURVEY OF MORTGAGE LENDERS") compared
to the average annual salary in the UK as calculated from the weekly earnings
in April of the same year of male employees whose earnings were not affected by
their absence from work (as recorded by the Department of Education and
Employment). While this is a good indication of house affordability, it does
not take into account the fact that the majority of households have more than
one income to support a mortgage loan.
HOUSE PRICE TO HOUSE PRICE TO
YEAR EARNINGS RATIO YEAR EARNINGS RATIO
- --------- -------------- ---- --------------
1988..... 4.57 1996 3.47
1989..... 5.06 1997 3.64
1990..... 4.56 1998 3.84
1991..... 4.17 1999 4.08
1992..... 3.79 2000 4.47
1993..... 3.58 2001 4.64
1994..... 3.56
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 Price Index (collectively the "HOUSING INDICES"), have
generally followed the UK Retail Price Index over an extended period.
Nationwide is a UK building society and Halifax is a UK bank.
The housing market has been through three economic cycles since 1976. The
greatest year-to-year increases in the Housing Indices occurred in the late
1970s and late 1980s with the greatest decrease in the early 1990s.
107
The Housing Indices have generally increased since 1996.
NATIONWIDE
RETAIL PRICE HOUSE HALIFAX HOUSE
INDEX PRICE INDEX PRICE INDEX
--------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE INDEX CHANGE INDEX CHANGE
- -------------- ----- -------- ----- -------- ----- --------
March 1975.... 31.5 NA 20.7 NA NA NA
June 1975..... 34.8 NA 21.4 NA NA NA
September 1975 35.6 NA 21.9 NA NA NA
December 1975. 37.0 NA 22.5 NA NA NA
March 1976.... 38.2 19.17 23.0 10.54 NA NA
June 1976..... 39.5 12.91 23.4 8.93 NA NA
September 1976 40.7 13.38 23.9 8.74 NA NA
December 1976. 42.6 14.04 24.4 8.11 NA NA
March 1977.... 44.6 15.48 24.8 7.53 NA NA
June 1977..... 46.5 16.30 25.3 7.81 NA NA
September 1977 47.1 14.52 25.9 8.04 NA NA
December 1977. 47.8 11.46 26.2 7.12 NA NA
March 1978.... 48.6 8.72 27.6 10.70 NA NA
June 1978..... 50.0 7.15 28.9 13.30 NA NA
September 1978 50.8 7.53 31.7 20.21 NA NA
December 1978. 51.8 8.04 33.6 24.88 NA NA
March 1979.... 53.4 9.34 35.5 25.17 NA NA
June 1979..... 55.7 10.76 38.1 27.64 NA NA
NATIONWIDE
RETAIL PRICE HOUSE HALIFAX HOUSE
INDEX PRICE INDEX PRICE INDEX
--------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE INDEX CHANGE INDEX CHANGE
- -------------- ----- -------- ----- -------- ----- --------
September 1979 59.1 15.25 40.9 25.48 NA NA
December 1979. 60.7 15.90 43.8 26.51 NA NA
March 1980.... 63.9 18.04 45.2 24.16 NA NA
June 1980..... 67.4 19.05 46.6 20.14 NA NA
September 1980 68.5 14.73 47.1 14.11 NA NA
December 1980. 69.9 14.09 46.9 6.84 NA NA
March 1981.... 72.0 11.87 47.3 4.54 NA NA
June 1981..... 75.0 10.73 48.1 3.17 NA NA
September 1981 76.3 10.80 48.3 2.52 NA NA
December 1981. 78.3 11.38 47.5 1.27 NA NA
March 1982.... 79.4 9.85 48.2 1.88 NA NA
June 1982..... 81.9 8.77 49.2 2.26 NA NA
September 1982 81.9 7.02 49.8 3.06 NA NA
December 1982. 82.5 5.26 51.0 7.11 NA NA
March 1983.... 83.1 4.53 52.5 8.55 97.1 NA
June 1983..... 84.8 3.59 54.6 10.41 99.4 NA
September 1983 86.1 5.02 56.2 12.09 101.5 NA
December 1983. 86.9 5.17 57.1 11.30 102.3 NA
March 1984.... 87.5 5.11 59.2 12.01 104.1 6.96
June 1984..... 89.2 5.01 61.5 11.90 106 6.43
September 1984 90.1 4.60 62.3 10.30 108.4 6.58
December 1984. 90.9 4.48 64.9 12.80 111.0 8.16
March 1985.... 92.8 5.90 66.2 11.18 113.5 8.65
June 1985..... 95.4 6.73 68.2 10.34 115.4 8.50
108
NATIONWIDE
RETAIL PRICE HOUSE HALIFAX HOUSE
INDEX PRICE INDEX PRICE INDEX
--------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE INDEX CHANGE INDEX CHANGE
- -------------- ----- -------- ----- -------- ----- --------
September 1985 95.4 5.75 69.2 10.50 116.8 7.46
December 1985. 96.1 5.54 70.7 8.56 120.6 8.29
March 1986.... 96.7 4.15 71.1 7.14 124 8.85
June 1986..... 97.8 2.46 73.8 7.89 128.1 10.44
September 1986 98.3 2.95 76.3 9.77 132.2 12.39
December 1986. 99.6 3.65 79.0 11.10 136.8 12.60
March 1987.... 100.6 3.92 81.6 13.77 142.3 13.77
June 1987..... 101.9 4.12 85.8 15.07 146.7 13.56
September 1987 102.4 4.09 88.6 14.95 151.5 13.63
December 1987. 103.3 3.63 88.5 11.36 158 14.41
March 1988.... 104.1 3.42 90.0 9.80 167 16.01
June 1988..... 106.6 4.51 97.6 12.89 179.4 20.12
September 1988 108.4 5.69 108.4 20.17 197.4 26.46
December 1988. 110.3 6.56 114.2 25.49 211.8 29.30
March 1989.... 112.3 7.58 118.8 27.76 220.7 27.88
June 1989..... 115.4 7.93 124.2 24.10 226.1 23.14
September 1989 116.6 7.29 125.2 14.41 225.5 13.31
December 1989. 118.8 7.42 122.7 7.18 222.5 4.93
March 1990.... 121.4 7.79 118.9 0.08 223.7 1.35
June 1990..... 126.7 9.34 117.7 (5.38) 223.3 (1.25)
September 1990 129.3 10.34 114.2 (9.20) 222.7 (1.25)
December 1990. 129.9 8.93 109.6 (11.29) 223 0.22
March 1991.... 131.4 7.92 108.8 (8.88) 223.1 (0.27)
June 1991..... 134.1 5.68 110.6 (6.22) 221.9 (0.63)
September 1991 134.6 4.02 109.5 (4.20) 219.5 (1.45)
NATIONWIDE
RETAIL PRICE HOUSE HALIFAX HOUSE
INDEX PRICE INDEX PRICE INDEX
--------------- --------------- ----------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE INDEX CHANGE INDEX CHANGE
- -------------- ----- -------- ----- -------- ------ --------
December 1991. 135.7 4.37 107.0 (2.40) 217.7 (2.41)
March 1992.... 136.7 3.95 104.1 (4.42) 213.2 (4.54)
June 1992..... 139.3 3.80 105.1 (5.10) 208.8 (6.08)
September 1992 139.4 3.50 104.2 (4.96) 206.9 (5.91)
December 1992. 139.2 2.55 100.1 (6.67) 199.5 (8.73)
March 1993.... 139.3 1.88 100.0 (4.02) 199.6 (6.59)
June 1993..... 141.0 1.21 103.6 (1.44) 201.7 (3.46)
September 1993 141.9 1.78 103.2 (0.96) 202.6 (2.10)
December 1993. 141.9 1.92 101.8 1.68 203.5 1.99
March 1994.... 142.5 2.27 102.4 2.37 204.60 2.47
June 1994..... 144.7 2.59 102.5 (1.07) 202.90 0.59
September 1994 145.0 2.16 103.2 0.00 202.70 0.05
December 1994. 146.0 2.85 104.0 2.14 201.90 (0.79)
March 1995.... 147.5 3.45 101.9 (0.49) 201.80 (1.38)
June 1995..... 149.8 3.46 103.0 0.49 199.30 (1.79)
September 1995 150.6 3.79 102.4 (0.78) 197.80 (2.45)
December 1995. 150.7 3.17 101.6 (2.33) 199.20 (1.35)
March 1996.... 151.5 2.68 102.5 0.59 202.10 0.15
June 1996..... 153.0 2.11 105.8 2.68 206.70 3.65
109
NATIONWIDE
RETAIL PRICE HOUSE HALIFAX HOUSE
INDEX PRICE INDEX PRICE INDEX
--------------- --------------- ----------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE INDEX CHANGE INDEX CHANGE
- -------------- ----- -------- ----- -------- ------ --------
September 1996 153.8 2.10 107.7 5.05 208.80 5.41
December 1996. 154.4 2.43 110.1 8.03 213.90 7.12
March 1997.... 155.4 2.54 111.3 8.24 216.70 6.98
June 1997..... 157.5 2.90 116.5 9.64 220.20 6.33
September 1997 159.3 3.51 121.2 11.81 222.60 6.40
December 1997. 160.0 3.56 123.3 11.32 225.40 5.24
March 1998.... 160.8 3.42 125.5 12.01 228.40 5.26
June 1998..... 163.4 3.68 130.1 11.04 232.1 5.26
September 1998 164.4 3.15 132.4 8.84 234.8 5.34
December 1998. 164.4 2.71 132.3 7.05 237.2 5.10
March 1999.... 164.1 2.03 134.6 7.00 238.6 4.37
June 1999..... 165.6 1.34 139.7 7.12 245.5 5.61
September 1999 166.2 1.09 144.4 8.68 255.5 8.45
December 1999. 167.3 1.75 148.9 11.82 264.1 10.74
March 2000.... 168.4 2.59 155.0 14.11 273.1 13.50
June 2000..... 171.1 3.27 162.0 14.81 272.8 10.54
September 2000 171.7 3.26 161.5 11.19 275.9 7.68
December 2000. 172.2 2.89 162.8 8.92 278.6 5.34
March 2001.... 172.2 2.23 167.5 7.76 281.7 3.10
June 2001..... 174.4 1.91 174.8 7.60 293.2 7.21
September 2001 174.6 1.67 181.6 11.73 302.4 9.17
December 2001. 173.4 0.69 184.6 12.57 311.8 11.26
March 2002.... 174.5 1.33 190.2 12.71 329.1 15.55
June 2002..... 176.2 1.03 206.5 16.67 343.8 15.92
September 2002 177.6 1.70 221.1 19.68 366.9 19.33
December 2002. 178.5 2.90 231.3 22.55 394.0 23.40
March 2003.... __ __ __ __ __ __
June 2003..... __ __ __ __ __ __
September 2003 __ __ __ __ __ __
- ----------
Source: Datastream, Nationwide Building Society and Halifax plc, respectively.
"NA" indicates that the relevant figure is not available.
110
THE SERVICER
THE SERVICER
Under the servicing agreement, Halifax plc has been appointed as the
servicer of the loans. The day-to-day servicing of the loans is performed by
the servicer through the servicer's retail branches, telephone and customer
service centres. The servicer's registered office is Trinity Road, Halifax,
West Yorkshire HX1 2RG, United Kingdom.
This section describes the servicer's procedures in relation to mortgage
loans generally. A description of the servicer's obligation under the servicing
agreement follows in the next section.
SERVICING OF LOANS
Servicing procedures include responding to customer enquiries, monitoring
compliance with and servicing the loan features and facilities applicable to
the loans and management of loans in arrears. See "THE SERVICING AGREEMENT".
Pursuant to the terms and conditions of the loans, borrowers must pay the
monthly amount required under the terms and conditions of the loans on or
before each monthly instalment due date, within the month they are due.
Interest accrues in accordance with the terms and conditions of each loan and
is collected from borrowers monthly.
In the case of variable rate loans, the servicer sets the mortgages trustee
variable base rate and the margin applicable to any tracker rate loan on behalf
of the mortgages trustee and the beneficiaries, except in the limited
circumstances as set out in the servicing agreement. In the case of some loans
that are not payable at the mortgages trustee variable base rate, for example
loans at a fixed rate, the borrower will continue to pay interest at the
relevant fixed rate until the relevant period ends in accordance with the
borrower's offer conditions. After that period ends, and unless the servicer
offers, and the borrower accepts, another option with an incentive, interest
will be payable at the mortgages trustee variable base rate. In addition, some
other types of loans are payable or may change so as to become payable by
reference to other rates not under the control of the servicer such as LIBOR or
rates set by the Bank of England, which rates may also include a fixed or
variable rate margin set by the servicer.
The servicer will take all steps necessary under the mortgage terms to
notify borrowers of any change in the interest rates applicable to the loans,
whether due to a change in the mortgages trustee variable base rate or any
variable margin or as a consequence of any provisions of those terms.
Payments of interest and principal on repayment loans are payable monthly in
arrear. Payments of interest on interest-only loans are paid in the month that
they are due. The servicer is responsible for ensuring that all payments are
made by the relevant borrower into the collection account and transferred into
the mortgages trustee GIC account on a regular basis but in any event in the
case of payments by direct debits no later than the next business day after
they are deposited in the seller's account. All amounts which are paid to the
collection account will be held on trust by the seller for the mortgages
trustee until they are transferred to the mortgages trustee GIC account.
Payments from borrowers are generally made by direct debits from a suitable
bank or building society account or through a Halifax banking account although
in some circumstances borrowers pay by cash, cheque or standing order.
The servicer initially credits the mortgages trustee GIC account with the
full amount of the borrowers' monthly payments. However, direct debits may be
returned unpaid up to three days after the due date for payment, and, under the
Direct Debit Indemnity Scheme, a borrower may make a claim at any time to their
bank for a refund of direct debit payments. In each case, the servicer is
permitted to reclaim from the mortgages trustee GIC account the corresponding
amounts previously credited. In these circumstances the usual arrears
procedures described in "-- ARREARS AND DEFAULT PROCEDURES" will be taken.
111
ARREARS AND DEFAULT PROCEDURES
The servicer regularly provides the mortgages trustee and the beneficiaries
with written details of loans that are in arrears. A loan is identified as
being "IN ARREARS" when the aggregate of all amounts overdue is at least equal
to the monthly payment then due. In general, the servicer attempts to collect
all payments due under or in connection with the loans, having regard to the
circumstances of the borrower in each case. The servicer uses a case control
cycle featuring three stages: collection, counselling and recovery.
The arrears are reported after one full payment has been missed. After the
arrears are first reported, the borrower is contacted and asked for payment of
the arrears. This is an automatic process and the borrower is contacted through
a series of letters. The servicer then continues to contact the borrower asking
for payment of the arrears.
Where considered appropriate, the servicer may enter into arrangements with
the borrower regarding the arrears, including:
* arrangements to make each monthly payment as it falls due plus an
additional amount to pay the arrears over a period of time;
* arrangements to pay only a portion of each monthly payment as it
falls due; and
* a deferment for an agreed period of time of all payments, including
interest and principal or parts of any of them.
Any arrangements may be varied from time to time at the discretion of the
servicer, the primary aim being to rehabilitate the borrower and recover the
situation.
Once the arrears are more than two months overdue the collection process
shifts to the servicer's personnel in the customer payment centres. The
servicer's personnel will contact the borrower via telephone or arrange an
interview and attempt to reach a solution with the borrower. The servicer's
employees responsible for settling arrears are trained in counselling borrowers
and establishing viable repayment plans.
Legal proceedings do not usually commence until the arrears become at least
four months overdue for medium to higher risk loans (loans of above 50 per
cent. LTV) and six months overdue for lower risk loans (loans below 50 per
cent. LTV). However, legal proceedings may commence earlier or later than these
dates depending on the circumstances of the account.
Once legal proceedings have commenced, the servicer or the servicer's
solicitor may send further letters to the borrower encouraging the borrower to
enter into discussions to pay the arrears, and may still enter into an
arrangement with a borrower at any time prior to a court hearing. If a court
order is made for payment and the borrower subsequently defaults in making the
payment, then the servicer may take action as it considers appropriate,
including entering into a further arrangement with the borrower. If the
servicer applies to the court for an order for possession, the court has
discretion as to whether it will grant the order.
After possession, the servicer may take action as it considers appropriate,
including to:
* secure, maintain or protect the property and put it into a suitable
condition for sale;
* create any estate or interest on the property, including a
leasehold; and
* dispose of the property (in whole or in parts) or of any interest
in the property, by auction, private sale or otherwise, for a price
it considers appropriate.
The servicer has discretion as to the timing of any of these actions,
including whether to postpone the action for any period of time. The servicer
may also carry out works on the property as it considers appropriate, including
the demolition of the whole or any part of it.
The servicer has discretion to deviate from these procedures. In particular,
the servicer may deviate from these procedures where a borrower suffers from a
mental or physical infirmity, is deceased or where the borrower is otherwise
prevented from making payment due to causes beyond the borrower's control. This
is the case for both sole and joint borrowers.
112
It should also be noted that the servicer's ability to exercise its power of
sale in respect of the property is dependent upon mandatory legal restrictions
as to notice requirements. In addition, there may be factors outside the
control of the servicer, such as whether the borrower contests the sale and the
market conditions at the time of sale, that may affect the length of time
between the decision of the servicer to exercise its power of sale and final
completion of the sale.
The net proceeds of sale of the property are applied against the sums owed
by the borrower to the extent necessary to discharge the mortgage including any
accumulated fees, expenses of the servicer and interest. Where these proceeds
are insufficient to cover all amounts owing under the mortgage, a claim is made
under the MIG policy, if appropriate. Where the funds arising from application
of these default procedures are insufficient to pay all amounts owing in
respect of a loan, the funds are applied first in paying interest and costs,
and secondly in paying principal. The servicer may then institute recovery
proceedings against the borrower. If after the sale of the property and
redemption of the mortgage there are remaining funds, those funds will be
distributed first to any other persons possessing subsequent mortgages over the
property, and thereafter to the borrower.
These arrears and security enforcement procedures may change over time as a
result of a change in the servicer's business practices or legislative and
regulatory changes.
ARREARS EXPERIENCE
The following table summarises loans in arrears and repossession experience
for loans serviced by Halifax, including the loans that are contained in the
portfolio as at [__]. All of the loans in the table were originated by Halifax,
but not all of the loans form part of the portfolio. For arrears and
repossession experience specific to the portfolio during the period [__] to
[__], see Annex A.
113
HALIFAX PLC RESIDENTIAL MORTGAGE LOANS
31ST 31ST 31ST 31ST 31ST 31ST 30TH
JANUARY, JANUARY, JANUARY, JANUARY, JANUARY, JANUARY, JUNE,
1998 1999 2000 2001 2002 2003 2003
-------- -------- -------- -------- -------- -------- -----
Outstanding balance
([GBP] millions)........................... 65,668.4 68,337.9 71,642.0 76,385.3 84,922.2 __ __
Number of loans
outstanding (thousands).................... 2,016.1 2,013.3 2,006.3 2,014.8 2,056.0 __ __
Outstanding balance of loans in arrears
([GBP] millions)
30-59 days in arrears...................... 1,558.7 1,988.2 1,648.0 1,682.7 1,778.3 __ __
60-89 days in arrears...................... 591.6 647.0 493.4 528.1 456.0 __ __
90-119 days in arrears..................... 363.6 378.3 280.8 297.2 258.1 __ __
120 or more days in arrears................ 1,196.6 982.3 731.7 643.8 564.6 __ __
-------- -------- -------- -------- -------- -------- -----
Total outstanding balance of loans in
arrears.................................... 3,710.5 3,995.8 3,153.9 3,151.8 3,057.0 __ __
======== ======== ======== ======== ======== ======== =====
Total outstanding balance of loans
90 days or more in arrears ([GBP] millions) 1,560.2 1,360.6 1,012.5 941.0 822.7 __ __
======== ======== ======== ======== ======== ======== =====
Total outstanding balance of loans
90 days or more in arrears as % of the
outstanding balance........................ 2.3759% 1.9910% 1.4133% 1.2319% 0.9688% __ __
======== ======== ======== ======== ======== ======== =====
Outstanding balance of arrears
([GBP] millions)
30-59 days in arrears...................... 14.9 18.6 14.9 15.8 14.2 __ __
60-89 days in arrears...................... 10.8 12.0 8.8 9.8 7.7 __ __
90-119 days in arrears..................... 9.6 10.4 7.1 8.0 6.4 __ __
120 or more days in arrears................ 95.6 74.4 52.2 44.0 35.1 __ __
-------- -------- -------- -------- -------- -------- -----
Total balance of arrears................... 130.9 115.4 83.0 77.6 63.4 __ __
======== ======== ======== ======== ======== ======== =====
Total balance of loans 90 days or more
in arrears ([GBP] millions)................ 105.2 84.8 59.3 52.0 41.5 __ __
======== ======== ======== ======== ======== ======== =====
Total balance of loans 90 days or more
in arrears as % of the number of loans
outstanding................................ 0.1602% 0.1241% 0.0828% 0.0681% 0.0489% __ __
======== ======== ======== ======== ======== ======== =====
Number of loans outstanding in arrears
(thousands)
30-59 days in arrears...................... 41.8 51.3 42.5 40.6 39.0 __ __
60-89 days in arrears...................... 15.5 16.5 12.7 13.0 11.1 __ __
90-119 days in arrears..................... 9.4 9.5 7.1 7.5 6.5 __ __
120 or more days in arrears................ 28.3 23.2 17.8 16.1 14.2 __ __
-------- -------- -------- -------- -------- -------- -----
Total number of loans outstanding in
arrears.................................... 95.0 100.5 80.1 77.2 70.8 __ __
======== ======== ======== ======== ======== ======== =====
Total number of loans outstanding
90 days or more in arrears (thousands)..... 37.7 32.7 24.9 23.6 20.7 __ __
======== ======== ======== ======== ======== ======== =====
Total number of loans outstanding
90 days or more in arrears as % of the
number of loans outstanding................ 1.8699% 1.6242% 1.2411% 1.1713% 1.0068% __ __
======== ======== ======== ======== ======== ======== =====
114
31ST 31ST 31ST 31ST 31ST 31ST 30TH
DECEMBER, DECEMBER, DECEMBER, DECEMBER, DECEMBER, DECEMBER, JUNE,
1997 1998 1999 2000 2001 2002 2003
--------- --------- --------- --------- ---- ---- --------- -------
Amount of loan Losses ([GBP] millions) 63.7 48.3 38.5 21.3 14.9 __ 5.4
Loan losses as % of total outstanding
balance............................... 0.0970% 0.0707% 0.0537% 0.0279% 0.0175% __% 0.0062%
- ----------
(1) This table includes mortgage loans from both Scotland and Northern Ireland
as well as England and Wales. The seller's arrears experience for the loans
from Scotland and Northern Ireland does not differ materially from its
experience for the loans from England and Wales.
There can be no assurance that the arrears experience with respect to the
loans comprising the portfolio will correspond to the experience of Halifax's
originated loan portfolio as set forth in the foregoing table. The statistics
in the preceding table represent only the arrears experience for the periods
presented, whereas the arrears experience on the loans in the portfolio depends
on results obtained over the life of the loans in the portfolio. The foregoing
statistics include loans with a variety of payment and other characteristics
that may not correspond to those of the loans in the portfolio. Moreover, if
the property market experiences an overall decline in property values so that
the value of the properties in the portfolio falls below the principal balances
of the loans comprising the overall pool, the actual rates of arrears could be
significantly higher than those previously experienced by the servicer. 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 and losses with
respect to the loans in the portfolio. Noteholders should observe that the
United Kingdom experienced relatively low and stable interest rates during the
periods covered in the preceding table. If interest rates were to rise, it is
likely that the rate of arrears would rise.
Halifax's level of mortgage arrears has been on a downward trend since the
recession in the UK in the early nineties. The introduction of the scorecard in
judging applications -- and thus reducing discretion -- has helped to keep the
arrears level low, as have a healthy economic climate and continued interest
rate reductions. The percentage of loans by total loan balance which were in
arrears by more than 90 days fell to __ per cent. of the book as at 30th June,
2003 (31 January, 2003: __ per cent.; 31st January, 2002 : 0.9688 per cent.;
31st January, 2001 : 1.2319 per cent.).
House price inflation has indirectly contributed to the improved arrears
situation by enabling borrowers to sell at a profit if they encounter financial
hardship. In the late 1980s house prices rose substantially faster than
inflation as housing turnover increased to record levels. This was at a time
when the economy grew rapidly, which led to falling unemployment and relatively
high rates of real income growth. These fed into higher demand for housing, and
house prices rose rapidly. Demand was further increased by changes in taxation
legislation with regard to tax relief on mortgage payments in 1988. When
monetary policy was subsequently tightened (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 mortgages.
Halifax regularly reviews its lending policies in the light of prevailing
market conditions and reviews actions so as to mitigate possible problems. The
performance of Halifax new business and the arrears profiles are continuously
monitored in monthly reports. Any deterioration of the arrears level is
investigated and the internal procedures are reviewed if necessary.
115
THE SERVICING AGREEMENT
The following section contains a summary of the material terms of the
servicing agreement. The summary does not purport to be complete and is subject
to the provisions of the servicing agreement, a form of which has been filed as
an exhibit to the registration statement of which this prospectus is a part.
INTRODUCTION
On 14th June, 2002, Halifax was appointed by the mortgages trustee, Funding
1 and the seller under the servicing agreement to be their agent to service the
loans and their related security and State Street Bank and Trust Company (the
security trustee on behalf of the Funding 1 secured creditors at 14th June,
2002) consented to the appointment. Halifax has undertaken that in its role as
servicer it will comply with any proper directions and instructions that the
mortgages trustee, Funding 1, the seller or the security trustee may from time
to time give to Halifax in accordance with the provisions of the servicing
agreement. The servicer is required to administer the loans in the following
manner:
* in accordance with the servicing agreement; and
* as if the loans and mortgages had not been assigned to the
mortgages trustee but remained with the seller, and in accordance
with the seller's procedures and administration and enforcement
policies as they apply to those loans from time to time.
The servicer's actions in servicing the loans in accordance with its
procedures are binding on the mortgages trustee. The servicer may, in some
circumstances, delegate or sub-contract some or all of its responsibilities and
obligations under the servicing agreement. However, the servicer remains liable
at all times for servicing the loans and for the acts or omissions of any
delegate or sub-contractor.
POWERS
Subject to the guidelines for servicing set forth in the preceding section,
the servicer has the power, among other things:
* to exercise the rights, powers and discretions of the mortgages
trustee, the seller and Funding 1 in relation to the loans and
their related security and to perform their duties in relation to
the loans and their related security; and
* to do or cause to be done any and all other things which it
reasonably considers necessary or convenient or incidental to the
administration of the loans and their related security or the
exercise of such rights, powers and discretions.
UNDERTAKINGS BY THE SERVICER
The servicer has undertaken, among other things, the following:
(A) To maintain approvals, authorisations, consents, and licences
required in order properly to service the loans and their related
security and to perform or comply with its obligations under the
servicing agreement.
(B) To determine and set the mortgages trustee variable base rate and
any variable margin applicable in relation to any tracker rate loan
in relation to the loans comprising the trust property except in
the limited circumstances described in this paragraph (B) when the
mortgages trustee will be entitled to do so. It will not at any
time, without the prior consent of the mortgages trustee and
Funding 1, set or maintain:
(i) the mortgages trustee variable base rate at a rate which is
higher than (although it may be lower than or equal to) the
then prevailing Halifax variable base rate which applies to
loans beneficially owned by the seller outside the portfolio;
116
(ii) a margin in respect of any tracker rate loan which, where the
offer conditions for that loan provide that the margin shall be
the same as the margin applicable to all other loans having the
same offer conditions in relation to interest rate setting, is
higher or lower than the margin then applying to those loans
beneficially owned by the seller outside the portfolio; and
(iii) a margin in respect of any other tracker rate loan which is
higher than the margin which would then be set in accordance
with the seller's policy from time to time in relation to that
loan.
In particular, the servicer shall determine on each Funding 1 interest
payment date, having regard to the aggregate of:
(a) the income which Funding 1 would expect to receive during the next
succeeding interest period;
(b) the mortgages trustee variable base rate, any variable margins
applicable in relation to any tracker rate loans and the variable
mortgage rates in respect of the loans which the servicer proposes
to set under the servicing agreement; and
(c) the other resources available to Funding 1 including the Funding 1
swap agreement and the reserve fund,
whether Funding 1 would receive an amount of income during that loan interest
period which is less than the amount which is the aggregate of (1) the amount
of interest which will be payable in respect of all term AAA advances on the
Funding 1 interest payment date falling at the end of that loan interest period
and (2) the other senior expenses of Funding 1 ranking in priority to interest
due on all those term AAA advances.
If the servicer determines that there will be a shortfall in the foregoing
amounts, it will give written notice to the mortgages trustee, Funding 1 and
the security trustee, within one London business day, of the amount of the
shortfall and the mortgages trustee variable base rate and any variable margins
applicable in relation to any tracker rate loans which would, in the servicer's
opinion, need to be set in order for no shortfall to arise, having regard to
the date(s) on which the change to the mortgages trustee variable base rate and
any variable margins would take effect and at all times acting in accordance
with the standards of a reasonable, prudent mortgage lender as regards the
competing interests of borrowers with mortgages trustee variable base rate
loans and borrowers with tracker rate loans. If the mortgages trustee, Funding
1 and the security trustee notify the servicer that, having regard to the
obligations of Funding 1, the mortgages trustee variable base rate and/or any
variable margins should be increased, the servicer will take all steps which
are necessary to increase the mortgages trustee variable base rate and/or any
variable margins including publishing any notice which is required in
accordance with the mortgage terms.
The mortgages trustee and/or Funding 1 and the security trustee may
terminate the authority of the servicer to determine and set the mortgages
trustee variable base rate and any variable margins on the occurrence of a
"SERVICER TERMINATION EVENT" as defined under "-- REMOVAL OR RESIGNATION OF THE
SERVICER", in which case the mortgages trustee will set the mortgages trustee
variable base rate and any variable margins itself in accordance with this
paragraph (B).
(C) To the extent so required by the relevant mortgage terms and
applicable law, to notify borrowers of any change in interest
rates, whether due to a change in the mortgages trustee variable
base rate, the margin applicable to any tracker rate loan or as a
consequence of any provisions of the mortgage conditions or the
offer conditions. It will also notify the mortgages trustee, the
security trustee and the beneficiaries of any change in the
mortgages trustee variable base rate.
(D) To execute all documents on behalf of the mortgages trustee, the
seller and Funding 1 which are necessary or desirable for the
efficient provision of services under the servicing agreement.
(E) To keep records and accounts on behalf of the mortgages trustee in
relation to the loans.
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(F) To keep the customer files and title deeds in safe custody and
maintain records necessary to enforce each mortgage. It will ensure
that each title deed is capable of identification and retrieval and
that each title deed is distinguishable from information held by
the servicer for other persons. If the servicer's short-term,
unsecured, unsubordinated and unguaranteed debt is rated less than
[A-1] by Standard & Poor's and [P-1] by Moody's and [F1] by Fitch,
it will use reasonable endeavours to ensure the customer files and
title deeds are identified as distinct from customer files and
title deeds which relate to loans held outside the trust property.
(G) To provide the mortgages trustee, Funding 1 and the security
trustee with access to the title deeds and other records relating
to the administration of the loans and mortgages.
(H) To make available to beneficial owners of the issuer notes, who
have provided the beneficial ownership certification as described
in the servicing agreement, on a monthly basis a report containing
information about the loans in the mortgages trust.
(I) To assist the cash manager in the preparation of a quarterly report
substantially in the form set out in the cash management agreement
on, among other things, arrears.
(J) To take all reasonable steps, in accordance with the usual
procedures undertaken by a reasonable, prudent mortgage lender, to
recover all sums due to the mortgages trustee, including
instituting proceedings and enforcing any relevant loan or
mortgage.
(K) To enforce any loan which is in default in accordance with its
enforcement procedures or, to the extent that the enforcement
procedures are not applicable having regard to the nature of the
default in question, with the usual procedures undertaken by a
reasonable, prudent mortgage lender on behalf of the mortgages
trustee.
(L) To not knowingly fail to comply with any legal requirements in the
performance of its obligations under the servicing agreement.
The requirement for any action to be taken according to the standards of a
"REASONABLE, PRUDENT MORTGAGE LENDER" is as defined in the glossary. For the
avoidance of doubt, any action taken by the servicer to set variable base rates
and any variable margins applicable in relation to any tracker rate loans which
are lower than that of the competitors of the seller will be deemed to be in
accordance with the standards of a reasonable, prudent mortgage lender.
COMPENSATION OF THE SERVICER
The servicer receives a fee for servicing the loans. The mortgages trustee
will pay to the servicer a servicing fee of 0.05 per cent. per annum (inclusive
of VAT) on the aggregate outstanding amount of the portfolio as of the
preceding Funding 1 interest payment date. The fee is payable in arrear on each
distribution date only to the extent that the mortgages trustee has sufficient
funds to pay it. Any unpaid balance will be carried forward until the next
distribution date and, if not paid earlier, will be payable on the final
repayment date of the previous intercompany loans, the issuer intercompany loan
and all new intercompany loans or on their earlier repayment in full by Funding
1.
REMOVAL OR RESIGNATION OF THE SERVICER
The mortgages trustee and/or Funding 1 and the security trustee may, upon
written notice to the servicer, terminate the servicer's rights and obligations
immediately if any of the following events (each a "SERVICER TERMINATION
EVENT") occurs:
* the servicer defaults in the payment of any amount due and fails to
remedy that default for a period of three London business days
after becoming aware of the default;
* the servicer fails to comply with any of its other material
obligations under the servicing agreement which in the opinion of
the security trustee is materially prejudicial to noteholders of
the issuer or any new issuers and does not remedy that failure
within 20 London business days after becoming aware of the failure;
or
* an insolvency event (as defined in the glossary) occurs in relation
to the servicer.
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Subject to the fulfilment of a number of conditions, the servicer may
voluntarily resign by giving not less than 12 months' notice to the mortgages
trustee and the beneficiaries, provided that a substitute servicer has been
appointed. The substitute servicer is required to have a management team which
has experience of administering mortgages in the United Kingdom and to enter
into a servicing agreement with the mortgages trustee, Funding 1 and the
security trustee substantially on the same terms as the relevant provisions of
the servicing agreement. It is a further condition precedent to the resignation
of the servicer that the current ratings of the issuer notes are not adversely
affected as a result of the resignation, unless the relevant classes of
noteholders otherwise agree by an extraordinary resolution.
If the appointment of the servicer is terminated, the servicer must deliver
the title deeds and customer files relating to the loans to, or at the
direction of, the mortgages trustee. The servicing agreement will terminate
when Funding 1 no longer has an interest in the trust property.
RIGHT OF DELEGATION BY THE SERVICER
The servicer may sub-contract or delegate the performance of its duties
under the servicing agreement, provided that it meets particular conditions,
including that:
* Funding 1 and the security trustee consent to the proposed sub-
contracting or delegation;
* notification has been given to each of the rating agencies;
* where the arrangements involve the custody or control of any
customer files and/or title deeds the sub-contractor or delegate
will provide a written acknowledgement that those customer files
and/or title deeds will be held to the order of the mortgages
trustee (as trustee for the beneficiaries);
* where the arrangements involve the receipt by the sub-contractor or
delegate of monies belonging to the beneficiaries which are paid
into the mortgages trustee GIC account and/or the Funding 1 GIC
account, the sub-contractor or delegate will execute a declaration
that any such monies are held on trust for the beneficiaries and
will be paid forthwith into the mortgages trustee GIC account and/
or the Funding 1 GIC account in accordance with the terms of the
mortgages trust deed;
* the sub-contractor or delegate has executed a written waiver of any
security interest arising in connection with the delegated
services; and
* Funding 1 and the security trustee have no liability for any costs,
charges or expenses in relation to the proposed sub-contracting or
delegation.
The consent of Funding 1 and the security trustee referred to here will not
be required in respect of any delegation to a wholly-owned subsidiary of
Halifax or HBOS plc from time to time or to persons such as receivers, lawyers
or other relevant professionals.
If the servicer sub-contracts or delegates the performance of its duties, it
will nevertheless remain responsible for the performance of those duties to
Funding 1, the mortgages trustee and the security trustee.
LIABILITY OF THE SERVICER
The servicer will indemnify the mortgages trustee and the beneficiaries
against all losses, liabilities, claims, expenses or damages incurred as a
result of negligence or wilful default by the servicer in carrying out its
functions or as a result of a breach of the terms of the servicing agreement.
If the servicer does breach the terms of the servicing agreement and thereby
causes loss to the beneficiaries, then the seller share of the trust property
will be reduced by an amount equal to the loss.
GOVERNING LAW
The servicing agreement is governed by English law.
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ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY
The following section contains a summary of the material terms of the
mortgage sale agreement. The summary does not purport to be complete and is
subject to the provisions of the mortgage sale agreement, a form of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
INTRODUCTION
Loans and their related security have been and will continue to be assigned
to the mortgages trustee pursuant to the terms of the mortgage sale agreement.
The mortgage sale agreement has six primary functions:
* it provides for the sale of the loans and their related security;
* it sets out the circumstances under which new loans can be sold to
the mortgages trustee;
* it provides for the legal assignment of the loans to the mortgages
trustee;
* it sets out the representations and warranties given by the seller;
* it provides for the repurchase of mortgage accounts and related
security which have loans (1) which (in limited circumstances) are
subject to a product switch or (2) which are subject to a further
advance or (3) which cause the seller to be in breach of any of its
warranties in respect of the loans; and
* it provides for drawings in respect of home cash reserve products
contained in the trust property and any flexible loans that may be
contained in the trust property in the future.
ASSIGNMENT OF FURTHER LOANS AND THEIR RELATED SECURITY TO THE MORTGAGES
TRUSTEE ON THE ASSIGNMENT DATES
Under the mortgage sale agreement, on 14th June, 2002, the seller
transferred by way of an equitable assignment to the mortgages trustee its
interest in the initial loans, together with all of the related security to
those loans. On subsequent dates, the seller has assigned further loans
(together with their related security) to the mortgages trustee pursuant to the
mortgage sale agreement. Most recently, loans (together with their related
security) were assigned by the seller to the mortgages trustee on [__] October,
2003. Full legal assignment of the loans will be deferred until a later date,
as described under "-- LEGAL ASSIGNMENT OF THE LOANS TO THE MORTGAGES TRUSTEE".
On the date of each assignment, the consideration paid to the seller has
consisted of:
* a cash sum, funded by the previous intercompany loans made by the
previous issuers; and/or
* the promise by the mortgages trustee to hold the trust property on
trust for the seller (as to the seller share) and Funding 1 (as to
the Funding 1 share) in accordance with the terms of the mortgages
trust deed.
Funding 1 and the seller (as beneficiaries of the mortgages trust) will not
be entitled to retain any fees received by the mortgages trustee, which, upon
receipt and identification by the servicer, the mortgages trustee will return
to the seller.
ASSIGNMENT OF NEW LOANS AND THEIR RELATED SECURITY TO THE MORTGAGES TRUSTEE
The mortgage sale agreement provides that the seller may assign new loans
and their related security to the mortgages trustee, which may have the effect
of increasing or maintaining the overall size of the trust property. The new
loans may include loans with characteristics that are not currently being
offered to borrowers or that have not yet been developed, such as flexible
loans. New loans and their related security can only be assigned if certain
conditions, as described in this section, are met. The mortgages trustee will
hold the new loans and their related security on trust for the seller and
Funding 1 pursuant to the terms of the mortgages trust deed.
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The consideration for the assignment of the new loans and their new related
security (in all cases at their face value) to the mortgages trustee will
consist of:
* a payment by Funding 1 to the seller of the proceeds of any new
term advance borrowed from a new issuer pursuant to a new
intercompany loan agreement; and/or
* the promise of the mortgages trustee to hold the trust property
(including the new loans and their related security) on trust for
the seller (as to the seller share) and Funding 1 (as to the
Funding 1 share) in accordance with the terms of the mortgages
trust deed.
The assignment of new loans and their related security to the mortgages
trustee will in all cases be subject to the following conditions being
satisfied on the relevant date of assignment ("ASSIGNMENT DATE"):
(A) no event of default under the transaction documents shall have
occurred which is continuing as at the relevant assignment date;
(B) the principal deficiency ledger does not have a debit balance as at
the most recent Funding 1 interest payment date after applying all
Funding 1 available revenue receipts on that Funding 1 interest
payment date (for a description of the principal deficiency ledger,
see "CREDIT STRUCTURE -- PRINCIPAL DEFICIENCY LEDGER");
(C) the mortgages trustee is not aware that the purchase of the new
loans on the assignment date would adversely affect the then
current ratings by Moody's, Standard & Poor's or Fitch of the
current notes or any of them;
(D) as at the relevant assignment date the seller has not received any
notice that the short-term, unsecured, unguaranteed and
unsubordinated debt obligations of the seller are not rated at
least P-1 by Moody's, A-1 by Standard and Poor's and F1 by Fitch at
the time of, and immediately following, the assignment of new loans
to the mortgages trustee;
(E) as at the relevant assignment date, the aggregate outstanding
principal balance of loans in the mortgages trust, in respect of
which the aggregate amount in arrears is more than three times the
monthly payment then due, is less than 5 per cent. of the aggregate
outstanding principal balance of loans in the mortgages trust;
(F) except where Funding 1 is paying amounts to the mortgages trustee
in consideration of new loans to be assigned to it, the aggregate
outstanding principal balance (excluding arrears of interest (as
defined in the glossary) of new loans transferred in any one
interest period does not exceed 15 per cent. of the aggregate
outstanding principal balance of loans (excluding arrears of
interest) in the mortgages trust as at the beginning of that
interest period;
(G) the assignment of new loans on the relevant assignment date does
not result in the product of the weighted average repossession
frequency ("WAFF") and the weighted average loss severity ("WALS")
for the loans comprised in the mortgages trust after such purchase
calculated on such assignment date in the same way as for the loans
comprised in the mortgages trust as at the closing date (or as
agreed by the servicer and the rating agencies from time to time)
exceeding the product of the WAFF and WALS for the loans comprised
in the mortgages trust calculated on the closing date, plus 0.25
per cent;
(H) the yield on the loans in the mortgages trust together with the new
loans to be assigned to the mortgages trustee on the relevant
assignment date is at least 0.50 per cent. greater than LIBOR for
three-month sterling deposits, after taking into account the
average yield on the loans which are variable rate loans, tracker
rate loans and fixed rate loans and the margins on the Funding 1
swap(s), in each case as at the relevant assignment date;
(I) the assignment of new loans on the relevant assignment date does
not result in the loan-to-value ratio of the loans and the new
loans, after application of the LTV test on the relevant assignment
date, exceeding the loan-to-value ratio (based on the LTV test), as
determined in relation to the loans comprised in the trust property
on the closing date, plus 0.25 per cent.;
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(J) the assignment of new loans on the relevant assignment date does
not result in the loans (other than fixed rate loans) which after
taking into account the Funding 1 swap will yield less than LIBOR
plus 0.50 per cent. at the relevant assignment date and have more
than 2 years remaining on their incentive period accounting for
more than 10 per cent. of the aggregate outstanding principal
balance of loans comprised in the trust property;
(K) the assignment of the new loans on the relevant assignment date
does not result in the fixed rate loans which have more than 1 year
remaining on their incentive period accounting for more than 50 per
cent. of the aggregate outstanding principal balance of loans
comprised in the trust property;
(L) no assignment of new loans may occur after the interest payment
date falling in [June 2007] if the option to redeem the issuer
notes on the interest payment date in [June 2007] pursuant to
condition number 5 of the terms and conditions of the notes is not
exercised;
(M) as at the assignment date the adjusted reserve fund is equal to or
greater than the reserve fund threshold;
(N) if the assignment of loans would include the assignment of new
types of loan products (such as flexible loans or buy-to-let loans)
to the mortgages trustee, then the security trustee has received
written confirmation from each of the rating agencies that such new
types of loan products may be assigned to the mortgages trustee and
that such assignment of new types of loan products would not have
an adverse effect on the then current ratings of the notes;
(O) the Funding 1 swap agreement has been modified if and as required
(or, if appropriate, Funding 1 has entered into a new Funding 1
swap agreement) to hedge against the interest rates payable in
respect of such new loans and the floating rate of interest payable
on the issuer intercompany loan; and
(P) no trigger event has occurred on or before the relevant assignment
date.
On the relevant assignment date, the representations and warranties in
respect of new loans and their related security (described below in "--
REPRESENTATIONS AND WARRANTIES") will also be given by the seller.
In the mortgage sale agreement, the seller promises to use all reasonable
efforts to offer to assign to the mortgages trustee, and the mortgages trustee
promises to use all reasonable efforts to acquire from the seller and hold in
accordance with the terms of the mortgages trust deed, until the earlier of the
interest payment date falling in and the occurrence of a trigger event,
sufficient new loans and their related security so that the aggregate
outstanding principal balance of loans in the mortgages trust is not less than
__ before (or another amount notified by Funding 1 to the seller). However, the
seller is not obliged on any distribution date to assign to the mortgages
trustee, and the mortgages trustee is not obliged to acquire, new loans and
their related security if, in the opinion of the seller, that assignment would
adversely affect the business of the seller. If Funding 1 enters into a new
intercompany loan, then the period during which the seller covenants to use
reasonable efforts to maintain the aggregate outstanding principal balance of
loans in the mortgages trust at a specified level prior to a trigger event may
be extended.
LEGAL ASSIGNMENT OF THE LOANS TO THE MORTGAGES TRUSTEE
The existing loans in the portfolio were assigned and any new loans will be
assigned, to the mortgages trustee by way of equitable assignment. This means
that legal title to the loans and their related security remains with the
seller until notice of the assignment is given by the seller to the borrowers.
Legal assignment of the loans and their related security (including, where
appropriate, their registration) to the mortgages trustee will be deferred,
save in the limited circumstances described in this section. See "RISK FACTORS
- -- THERE MAY BE RISKS ASSOCIATED WITH THE FACT THE MORTGAGES TRUSTEE HAS NO
LEGAL TITLE TO THE MORTGAGES WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER
NOTES".
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Legal assignment of the loans and their related security to the mortgages
trustee will be completed on the 20th London business day after the earliest of
the following:
(A) the service of an intercompany loan acceleration notice in relation
to any intercompany loan or a note acceleration notice in relation
to any notes of any issuer;
(B) the seller being required, by an order of a court of competent
jurisdiction, or by a regulatory authority of which the seller is a
member or any organisation whose members comprise, but are not
necessarily limited to, mortgage lenders with whose instructions it
is customary for the seller to comply, to perfect legal title to
the mortgages;
(C) it being rendered necessary by law to take such actions;
(D) the security under the Funding 1 deed of charge or any material
part of that security being in jeopardy and the security trustee
deciding to take that action to reduce materially that jeopardy;
(E) unless otherwise agreed by the rating agencies and the security
trustee, the termination of the seller's role as servicer under the
servicing agreement;
(F) the seller requesting that transfer by notice to the mortgages
trustee, Funding 1 and the security trustee;
(G) the date on which the seller ceases to be assigned a long-term
unsecured, unsubordinated unguaranteed debt obligation rating by
Moody's of at least Baa3 or by Standard & Poor's of at least BBB-
or by Fitch of at least BBB-;
(H) the occurrence of an insolvency event in relation to the seller;
and
(I) the latest of the last repayment dates of the previous intercompany
loans, the issuer intercompany loan and any new intercompany loans
where any intercompany loan has not been discharged in full.
Pending completion of the transfer, the right of the mortgages trustee to
exercise the powers of the legal owner of the mortgages will be secured by an
irrevocable power of attorney granted by the seller in favour of the mortgages
trustee, Funding 1 and the security trustee.
The title deeds and customer files relating to the loans are currently held
by or to the order of the seller or by solicitors or licensed conveyancers
acting for the seller in connection with the creation of the loans and their
related security. The seller has undertaken that all the title deeds and
customer files relating to the loans which are at any time in its possession or
under its control or held to its order will be held to the order of the
mortgages trustee.
REPRESENTATIONS AND WARRANTIES
Neither the mortgages trustee, Funding 1, the security trustee nor the
issuer has made or has caused to be made on its behalf any enquiries, searches
or investigations in respect of the loans and their related security. Instead,
each is relying entirely on the representations and warranties by the seller
contained in the mortgage sale agreement. The representations and warranties in
relation to each loan are made on the relevant assignment date that the loan
(together with its related security) is assigned to the mortgages trustee. The
parties to the mortgage sale agreement may, with the prior written consent of
the security trustee (which consent may (subject as provided below) be given if
the rating agencies confirm in writing that the ratings of the notes as at that
time will not be adversely affected as a result), amend the representations and
warranties in the mortgage sale agreement. The material representations and
warranties are as follows:
* each loan was originated by the seller in pounds sterling and is
denominated in pounds sterling (or was originated and is
denominated in euro if the euro has been adopted as the lawful
currency of the UK);
* each loan in the portfolio as at the relevant assignment date was
made not earlier than 1st February, 1996 and not later than 15th
November, 2002;
* the final maturity date of each loan is no later than June 2040;
* no loan has an outstanding principal balance of more than
[GBP]400,000;
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* prior to the making of each advance under a loan, the lending
criteria and all preconditions to the making of any loan were
satisfied in all material respects subject only to exceptions as
would be acceptable to a reasonable, prudent mortgage lender;
* other than with respect to monthly payments, no borrower is or has,
since the date of the relevant mortgage, been in material breach of
any obligation owed in respect of the relevant loan or under the
related security and accordingly no steps have been taken by the
seller to enforce any related security;
* the total amount of arrears of interest or principal, together with
any fees, commissions and premiums payable at the same time as that
interest payment or principal repayment, on any loan is not on the
relevant assignment date in respect of any loan, nor has been
during the 12 months immediately preceding the relevant assignment
date, more than the amount of the monthly payment then due;
* all of the borrowers are individuals;
* at least two monthly payments have been made in respect of each
loan;
* the whole of the outstanding principal balance on each loan and any
arrears of interest and all accrued interest is secured by a
mortgage;
* each mortgage constitutes a valid and subsisting first charge by
way of legal mortgage over the relevant property, and subject only
in certain appropriate cases to applications for registrations at
H.M. Land Registry;
* all of the properties are in England or Wales;
* not more than twelve months (or a longer period as may be
acceptable to a reasonable, prudent mortgage lender) prior to the
grant of each mortgage, the seller received a valuation report on
the relevant property (or another form of report concerning the
valuation of the relevant property as would be acceptable to a
reasonable, prudent mortgage lender), the contents of which were
such as would be acceptable to a reasonable, prudent mortgage
lender;
* the benefit of all valuation reports, any other valuation report
referred to in this section (if any) and certificates of title
which were provided to the seller not more than two years prior to
the date of the mortgage sale agreement can be validly assigned to
the mortgages trustee without obtaining the consent of the relevant
valuer, solicitor or licensed conveyancer;
* prior to the taking of each mortgage (other than a remortgage), the
seller instructed its solicitor or licensed conveyancer to carry
out an investigation of title to the relevant property and to
undertake other searches, investigations, enquiries and other
actions on behalf of the seller in accordance with the instructions
which the seller issued the relevant solicitor as are set out in
the CML's Lenders' Handbook for England & Wales (or, for mortgages
taken before the CML's Lenders' Handbook for England and Wales was
adopted in 1999, the seller's Mortgage Practice Notes) or other
comparable or successor instructions and/or guidelines as may for
the time being be in place, subject only to those variations as
would be acceptable to a reasonable, prudent mortgage lender;
* insurance cover for each property is available under either a
policy arranged by the borrower or a Halifax policy or a seller-
introduced insurance policy or a policy arranged by the relevant
landlord or the properties in possession cover;
* where applicable, the MIG policies are in full force and effect in
relation to the portfolio and all premiums have been paid;
* the seller has good title to, and is the absolute unencumbered
legal and beneficial owner of, all property, interests, rights and
benefits agreed to be sold by the seller to the mortgages trustee
under the mortgage sale agreement;
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* the seller has, since the making of each loan, kept or procured the
keeping of full and proper accounts, books and records showing
clearly all transactions, payments, receipts, proceedings and
notices relating to such loan; and
* there are no governmental authorisations, approvals, licences or
consents required as appropriate for the seller to enter into or to
perform the obligations under the mortgage sale agreement or to
make the mortgage sale agreement legal, valid, binding and
enforceable.
If new types of loans are to be assigned to the mortgages trustee, then the
representations and warranties in the mortgage sale agreement will be modified
as required to accommodate these new types of loans. Your prior consent to the
requisite amendments will not be obtained.
REPURCHASE OF LOANS UNDER A MORTGAGE ACCOUNT
Under the mortgage sale agreement, if a loan does not materially comply on
the assignment date with the representations and warranties made under the
mortgage sale agreement:
(A) the seller is required to remedy the breach within 20 London
business days of the seller becoming aware of the breach; or
(B) if the breach is not remedied within the 20 London business-day
period then, at the direction of Funding 1 and the security
trustee, the mortgages trustee will require the seller to purchase
the loan or loans under the relevant mortgage account and their
related security from the mortgages trustee at a price equal to
their outstanding principal balances, together with any arrears of
interest and accrued interest and expenses to the date of purchase.
The seller is also required to repurchase the loan or loans under any
mortgage account and their related security if a court or other competent
authority or any ombudsman makes any determination in respect of that loan and
its related security that:
(A) any term which relates to the recovery of interest under the
standard documentation applicable to that loan and its related
security is unfair; or
(B) the interest payable under any loan is to be set by reference to
the Halifax variable base rate (and not that of the seller's
successors or assigns or those deriving title from them); or
(C) the variable margin above the Bank of England repo rate under any
tracker rate loan must be set by the seller (rather than its
successors or assigns or those deriving title from them); or
(D) the interest payable under any loan is to be set by reference to an
interest rate other than that set out or purported to be set by
either the servicer or the mortgages trustee as a result of the
seller having more than one variable mortgage rate.
If the seller fails to pay the consideration due for the repurchase (or
otherwise fails to complete the repurchase), then the seller share of the trust
property shall be deemed to be reduced by an amount equal to that
consideration.
DRAWINGS UNDER FLEXIBLE LOANS
The seller is solely responsible for funding all future drawings in respect
of any flexible loans that may be contained in the trust property in the
future. The amount of the seller's share of the trust property will increase by
the amount of the drawing.
FURTHER ADVANCES
If at its discretion the seller makes or causes the servicer to offer a
further advance under a loan to a borrower, then the seller will be required to
repurchase the relevant loan under the mortgage account (save for any loan in
arrears where no repurchase will be required) at a price equal to the
outstanding principal balance of those loans together with accrued and unpaid
interest and expenses to the date of purchase.
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PRODUCT SWITCHES
If on any distribution date, the seller is in breach of the conditions
precedent to the sale of new loans to the mortgages trustee as described in
paragraphs (A) to (P) of "-- ASSIGNMENT OF NEW LOANS AND THEIR RELATED SECURITY
TO THE MORTGAGES TRUSTEE" then from and including that date to but excluding
the date when those conditions precedent have been satisfied, the seller will
be required to repurchase any loans and their related security that are subject
to product switches (save for any loan in arrears where no repurchase will be
required). The seller will be required to repurchase the relevant loan or loans
under the relevant mortgage account and their related security from the
mortgages trustee at a price equal to the outstanding principal balance of
those loans together with any accrued and unpaid interest and expenses to the
date of purchase.
A loan will be subject to a "PRODUCT SWITCH" if the borrower and the seller
agree or the servicer offers a variation in the financial terms and conditions
applicable to the relevant borrower's loan other than:
* any variation agreed with a borrower to control or manage arrears
on the loan;
* any variation to the interest rate as a result of borrowers being
linked to HVR 2;
* any variation in the maturity date of the loan unless, while the
issuer intercompany loan is outstanding, it is extended beyond June
2040;
* any variation imposed by statute;
* any variation of the rate of interest payable in respect of the
loan where that rate is offered to the borrowers of more than 10
per cent. by outstanding principal amount of loans in the trust
property in any interest period; or
* any variation in the frequency with which the interest payable in
respect of the loan is charged.
REASONABLE, PRUDENT MORTGAGE LENDER
Reference in the documents to the seller and/or the servicer acting to the
standard of a reasonable, prudent mortgage lender mean the seller and/or the
servicer, as applicable, acting in accordance with the standards of 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.
GOVERNING LAW
The mortgage sale agreement is governed by English law.
126
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 1 as
beneficiaries. The mortgages trust was formed for the financings of the
previous issuers, for the financings described in this prospectus and for the
future financings of any new issuers and Funding 2.
This section describes the material terms of the mortgages trust, including
how money is distributed from the mortgages trust to Funding 1 and the seller.
If new issuers are established or Funding 2 becomes a beneficiary of the
mortgages trust or new types of loans are added to the mortgages trust, then
the terms of the mortgages trust will be amended. Such amendments may affect
the timing of payments on the notes. The prior consent of noteholders will not
be sought in relation to any of the proposed amendments to the mortgages trust
deed, provided (amongst other things) that the rating agencies confirm that the
ratings of the current notes will not be adversely affected by such amendments.
There can be no assurance that the effect of any such amendments will not
ultimately adversely affect your interests (see "RISK FACTORS -- THE SECURITY
TRUSTEE MAY AGREE MODIFICATIONS TO THE ISSUER TRANSACTION DOCUMENTS WITHOUT
YOUR PRIOR CONSENT, WHICH MAY ADVERSELY AFFECT YOUR INTERESTS").
Under the terms of the mortgages trust deed, the mortgages trustee holds all
of the trust property on trust absolutely for Funding 1 (as to Funding 1's
share) and for the seller (as to the seller's share). The "TRUST PROPERTY" is:
* the sum of [GBP]100 settled by SFM Offshore Limited on trust on the
date of the mortgages trust deed;
* the portfolio of loans and their related security assigned to the
mortgages trustee by the seller;
* any new loans and their related security assigned to the mortgages
trustee by the seller after the closing date;
* any increase in the outstanding principal balance of a loan due to
a borrower taking payment holidays or making underpayments under a
loan or a borrower making a drawing under any flexible loan;
* any interest and principal paid by borrowers on their loans;
* any other amounts received under the loans and related security
(excluding third party amounts);
* rights under the insurance policies that are assigned to the
mortgages trustee or which the mortgages trustee has the benefit
of; and
* amounts on deposit (and interest earned on those amounts) in the
mortgages trustee GIC account;
* less
* any actual losses in relation to the loans and any actual
reductions occurring in respect of the loans as described in
paragraph (1) in "-- FUNDING 1 SHARE OF TRUST PROPERTY" below; and
* distributions of principal made from time to time to the
beneficiaries of the mortgages trust.
Funding 1 is not entitled to particular loans and their related security
separately from the seller; rather, each of them has an undivided interest in
all of the loans and their related security constituting the trust property.
127
At the closing date, the share of Funding 1 in the trust property will be
approximately [GBP]__, which corresponds to approximately __ per cent. of the
trust property. The actual percentage share of Funding 1 in the trust property
will not be determined until the closing date.
At the closing date, the share of the seller in the trust property will be
approximately [GBP]__, which corresponds to approximately __ per cent. of the
trust property. The actual percentage share of the seller in the trust property
will not be determined until the closing date.
FLUCTUATION OF SHARES IN THE TRUST PROPERTY
The shares of Funding 1 and the seller in the trust property will fluctuate
depending on a number of factors, including:
* the allocation of principal receipts on the loans to Funding 1 and/
or the seller;
* losses arising on the loans;
* if new loans and their related security are assigned to the
mortgages trustee;
* if Funding 1 acquires part of the seller's share of the trust
property from the seller (as will happen on the closing date -- see
further under "-- ACQUISITION BY FUNDING 1 OF AN INCREASED INTEREST
IN TRUST PROPERTY");
* if a borrower makes underpayments or takes payment holidays under a
loan;
* if a borrower makes a drawing under a flexible loan; and
* if the seller acquires part of Funding 1's share of the trust
property as described in "-- ACQUISITION BY SELLER OF AN INTEREST
RELATING TO CAPITALISED INTEREST" below and "-- PAYMENT BY THE
SELLER TO FUNDING 1 OF THE AMOUNT OUTSTANDING UNDER AN INTERCOMPANY
LOAN" below.
The shares of Funding 1 and the seller in the trust property are
recalculated by the cash manager on each calculation date. A calculation date
is the first day (or, if not a London business day, the next succeeding London
business day) of each month (each being a "NORMAL CALCULATION DATE") or the
date on which Funding 1 acquires a further interest in the trust property. The
recalculation is based on the total outstanding principal balance of the loans
in the trust property as at the close of business on the business day
immediately preceding the relevant calculation date (as adjusted from time to
time). The period from (and including) one calculation date, to (but excluding)
the next calculation date, is known as a "CALCULATION PERIOD". The first
calculation period in respect of this issue will be the period from (and
including) the closing date to (but excluding) __.
The reason for the recalculation is to determine the new Funding 1
percentage share and the new seller percentage share in the trust property. The
Funding 1 percentage share and the seller percentage share determines the
entitlement of Funding 1 and the seller to interest (including capitalised
interest) and principal receipts from the loans in the trust property and also
the allocation of losses arising on the loans. The method for determining the
new Funding 1 percentage share and the seller percentage share is set out in
the next two sections.
Two London business days after each calculation date (the "DISTRIBUTION
DATE") the mortgages trustee distributes principal and revenue receipts to
Funding 1 and the seller, as described below. In relation to each distribution
date, the "RELEVANT SHARE CALCULATION DATE" means the calculation date at the
start of the most recent completed calculation period.
FUNDING 1 SHARE OF TRUST PROPERTY
On each calculation date (also referred to in this section as the "RELEVANT
CALCULATION DATE") or such time as the mortgages trust terminates, the interest
of Funding 1 in the trust property is recalculated to take effect from the next
distribution date in accordance with the following formulae:
* The share of Funding 1 in the trust property will be an amount
equal to:
A -- B -- C + D + E + F
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* The percentage share of Funding 1 in the trust property will be an
amount equal to:
A -- B -- C + D + E + F
----------------------- x 100
G
in the latter case, expressed as a percentage and rounded upwards to five
decimal places,
where:
A = the amount of the share of Funding 1 in the trust property
calculated on the immediately preceding calculation date;
B = the amount of any principal receipts on the loans to be distributed
to Funding 1 on the distribution date immediately following the
relevant calculation date (as described under "-- MORTGAGES TRUST
ALLOCATION AND DISTRIBUTION OF PRINCIPAL RECEIPTS PRIOR TO THE
OCCURRENCE OF A TRIGGER EVENT", "-- MORTGAGES TRUST ALLOCATION AND
DISTRIBUTION OF PRINCIPAL RECEIPTS ON OR AFTER THE OCCURRENCE OF A
NON-ASSET TRIGGER EVENT BUT PRIOR TO THE OCCURRENCE OF AN ASSET
TRIGGER EVENT" and "MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF
PRINCIPAL RECEIPTS ON OR AFTER THE OCCURRENCE OF AN ASSET TRIGGER
EVENT");
C = the amount of losses sustained on the loans in the period from the
immediately preceding calculation date to the relevant calculation
date and the amount of any reductions occurring in respect of the
loans as described in paragraphs (1) to (4) below, in each case
allocated to Funding 1 in the calculation period ending on the
relevant calculation date;
D = the amount of any consideration to be paid by Funding 1 to the
seller with respect to any new loans to be assigned to the
mortgages trustee on the distribution date immediately following
the relevant calculation date;
E = the amount of any consideration to be paid by Funding 1 to the
seller in relation to the acquisition by Funding 1 from the seller
on the distribution date immediately following the relevant
calculation date of an interest in the trust property;
F = the amount equal to any capitalised interest accruing on a loan due
to borrowers taking payment holidays and which has been allocated
to Funding 1 since the immediately preceding calculation date, less
the amount to be paid by the seller on the relevant distribution
date to acquire an interest in trust property as described in "--
ACQUISITION BY SELLER OF AN INTEREST RELATING TO CAPITALISED
INTEREST" below; and
G = the aggregate outstanding principal balance of all the loans in the
trust property as at the relevant calculation date after making the
distributions, allocations and additions referred to in "B", "C",
"D", "E" and "F" and after taking account of:
* any distribution of principal receipts to Funding 1 and the
seller,
* the amount of any losses allocated to Funding 1 and the seller,
* the amount of any increase in the loan balances due to
capitalisation of insurance premiums due by borrowers or
borrowers taking payment holidays (including flexible loans),
* the adjustments referred to in paragraphs (1) to (4) below, and
* the amount of any other additions or subtractions to the trust
property.
If any of the following events occurs during a calculation period, then the
aggregate total outstanding principal balance of the loans in the trust
property will be reduced or deemed to be reduced for the purposes of the
calculation of "G" on the calculation date at the end of that calculation
period:
129
(1) any borrower exercises a right of set-off so that the amount of
principal and interest owing under a loan is reduced but no
corresponding payment is received by the mortgages trustee. In this
event, the aggregate outstanding principal balance of the loans in
the trust property will be reduced by an amount equal to the amount
of that set- off; and/or
(2) a loan or its related security is (i) in breach of the loan
warranties contained in the mortgage sale agreement or (ii) the
subject of a further advance or (iii) in limited circumstances the
subject of a product switch or other obligation of the seller to
repurchase, and in each case the seller fails to repurchase the
loan or loans under the relevant mortgage account and their related
security to the extent required by the terms of the mortgage sale
agreement. In this event, the aggregate outstanding principal
balance of the loans in the trust property will be deemed to be
reduced for the purposes of the calculation in "G" by an amount
equal to the outstanding principal balance of the relevant loan or
loans under the relevant mortgage account (together with arrears of
interest and accrued interest); and/or
(3) the seller would be required to repurchase a loan and its related
security as required by the terms of the mortgage sale agreement,
but the loan is not capable of being repurchased. In this event,
the aggregate outstanding principal balance of the loans in the
trust property will be deemed to be reduced for the purposes of the
calculation in "G" by an amount equal to the outstanding principal
balance of the relevant loan or loans under the relevant mortgage
account (together with arrears of interest and accrued interest);
and/or
(4) the seller materially breaches any other material warranty under
the mortgage sale agreement and/or (for so long as the seller is
the servicer) the servicing agreement, which will also be grounds
for terminating the appointment of the servicer. In this event, the
aggregate outstanding principal balance of the loans in the trust
property will be deemed to be reduced by an amount equal to the
resulting loss incurred by the beneficiaries.
The reductions or deemed reductions set out in paragraphs (1) to (4) above
will be made on the relevant calculation date first to the seller's share
(including the minimum seller share) of the trust property only, and thereafter
will be made to the Funding 1 share of the trust property.
Any sums that are subsequently recovered by the mortgages trustee in
connection with a reduction or deemed reduction of the trust property under
paragraphs (1) to (4) above, will constitute a revenue receipt under the
relevant loan. Such revenue receipt will belong to Funding 1 (but only if and
to the extent that the related reductions were applied against Funding 1's
share of the trust property) and thereafter will belong to the seller.
SELLER SHARE OF TRUST PROPERTY
On each calculation date or such time as the mortgages trust terminates, the
interest of the seller in the trust property is recalculated to take effect
from the next distribution date in accordance with the following formulae:
The share of the seller in the trust property will be an amount equal to:
* the aggregate outstanding principal balance of all the loans in the
trust property as at that calculation date -- the Funding 1 share
as calculated on that calculation date.
The percentage share of the seller in the trust property is an amount equal
to:
* 100 per cent. -- the Funding 1 percentage share as calculated on
that calculation date.
Neither the Funding 1 share nor the seller share of the trust property may
be reduced below zero.
130
MINIMUM SELLER SHARE
The seller's share of the trust property includes an amount known as the
"MINIMUM SELLER SHARE". As at the closing date, the minimum seller share will
be approximately __, but the amount of the minimum seller share will fluctuate
depending on changes to the characteristics of the loans in the trust property.
The seller will not be entitled to receive principal receipts which would
reduce the seller share of the trust property to an amount less than the
minimum seller share unless and until Funding 1's share of the trust is in an
amount equal to zero or an asset trigger event occurs. The minimum seller share
will be the amount determined on each calculation date (after any assignment of
loans to the mortgages trustee on that calculation date) in accordance with the
following formula:
X + Y + Z
where:
X = 5 per cent. of the aggregate outstanding principal balance of loans
in the trust property;
Y = the product of: (p X q) X r
where:
p = 8 per cent.;
q = the "FLEXIBLE DRAW CAPACITY", being an amount equal to the
excess of (1) the maximum amount that borrowers may draw under
flexible loans included in the trust property (whether or not
drawn) over (2) the aggregate principal balance of actual
flexible loan advances in the trust property on the relevant
calculation date; and
r = 3;
and
Z = the aggregate sum of reductions deemed made (if any) in accordance
with paragraphs (2), (3) and (4) as described in "-- FUNDING 1
SHARE OF TRUST PROPERTY" above.
The purpose of "X" is to mitigate the risks relating to certain set-off
risks relating to the loans. The amount of "X" may be reduced from time to time
at the request of the seller or Funding 1 (acting reasonably) provided that the
security trustee has received written confirmation from the rating agencies
that there will be no adverse effect on the then current ratings of the notes
as a result thereof.
The purpose of the calculation in "Y" is to mitigate the risk of the seller
failing to fund a drawing under a flexible loan.
The purpose of the calculation in "Z" is to mitigate the risk of the seller
materially breaching any material warranty under the mortgage sale agreement
and/or the servicing agreement and failing to repurchase certain loans and
their related security to the extent required by the terms of the mortgage sale
agreement.
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 1".
MORTGAGES TRUST CALCULATION OF REVENUE RECEIPTS
"MORTGAGES TRUST AVAILABLE REVENUE RECEIPTS" is calculated by the cash
manager on each calculation date and is an amount equal to the sum of:
* revenue receipts on the loans (but excluding principal receipts);
and
* interest payable to the mortgages trustee on the mortgages trustee
GIC account;
less
* amounts due to third parties (also known as "THIRD PARTY AMOUNTS"),
including:
131
(1) amounts under a direct debit which are repaid to the bank
making the payment if that bank is unable to recoup that amount
itself from its customer's account;
(2) payments by borrowers of any fees and other charges which are
due to the seller; or
(3) recoveries in respect of amounts deducted from loans as
described in paragraphs (1) to (4) in "-- FUNDING 1 SHARE OF
TRUST PROPERTY" above, which will belong to and be paid to
Funding 1 and/or the seller as described therein,
which amounts may be paid daily from monies on deposit in the mortgages trustee
GIC account.
On each distribution date, the cash manager applies mortgages trust
available revenue receipts in the following order of priority (the "MORTGAGES
TRUST CALCULATION OF REVENUE RECEIPTS"):
(A) in no order of priority between them but in proportion to the
respective amounts due, to pay amounts due to:
* the mortgages trustee under the provisions of the mortgages
trust deed; and
* third parties from the mortgages trustee in respect of the
mortgages trust, but only if:
(1) payment is not due as a result of a breach by the mortgages
trustee of the documents to which it is a party; and/or
(2) payment has not already been provided for elsewhere;
(B) in payment of amounts due to the servicer or to become due to the
servicer during the following calculation period under the
provisions of the servicing agreement;
(C) to allocate and pay to Funding 1 an amount equal to the lesser of:
(x) an amount determined by multiplying the total amount of the
remaining mortgages trust available revenue receipts by Funding
1's percentage share of the trust property as calculated on the
relevant share calculation date; and
(y) the aggregate of Funding 1's obligations on the immediately
succeeding Funding 1 interest payment date as set out under the
Funding 1 pre-enforcement revenue priority of payments or, as
the case may be, the Funding 1 post-enforcement priority of
payments (but excluding any principal amount due under any
intercompany loan and/or items (I) and (J) of the Funding 1
post-enforcement priority of payments), less (in each case only
to the extent that such amounts of interest or income would not
otherwise be payable under an intercompany loan or, as
applicable, any notes, on the succeeding interest payment date)
the sum of (i) the interest or other income credited or to be
credited to Funding 1's bank accounts on the immediately
succeeding Funding 1 interest payment date and (ii) all other
income (not derived from the distribution of revenue receipts
under the mortgages trust) which will constitute Funding 1
available revenue receipts on the succeeding Funding 1 interest
payment date;
(D) to allocate and pay to the mortgages trustee and/or Funding 1 (as
applicable), an amount equal to any loss amount (as defined below)
suffered or incurred by it or them (as applicable) ; and
(E) to allocate and pay to the seller an amount (if positive) equal to
the amount of the mortgages trust available revenue receipts less
the amount of such mortgages trust available revenue receipts
applied and/or allocated under (A) to (D) above.
For the purposes of item (D) above, "LOSS AMOUNT" means the amount of any
costs, expenses, losses or other claims suffered or incurred by, as applicable,
the mortgages trustee and/or Funding 1 in connection with any recovery of
interest on the loans to which the seller, the mortgages trustee or Funding 1
was not entitled or could not enforce as a result of any determination by any
court or other competent authority or any ombudsman in respect of any loan and
its related security that;
132
* any term which relates to the recovery of interest under the
standard documentation applicable to that loan and its related
security is unfair; or
* the interest payable under any loan is to be set by reference to
the Halifax variable base rate (and not that of the seller's
successors or assigns or those deriving title from them); or
* the variable margin above the Bank of England repo rate under any
tracker rate loan must be set by the seller; or
* the interest payable under any loan is to be set by reference to an
interest rate other than that set or purported to be set by either
the servicer or the mortgages trustee as a result of the seller
having more than one variable mortgage rate.
Amounts due to the mortgages trustee and the servicer include value added
tax ("VAT"), if any, payable. At the date of this prospectus, VAT is calculated
at the rate of 17.5 per cent. of the amount to be paid. Payment of VAT will not
reduce the amounts ultimately available to pay interest on the issuer 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 distributes
principal receipts on the loans on each distribution date (the "MORTGAGES TRUST
PRINCIPAL PRIORITY OF PAYMENTS") you need to understand the definitions set out
below.
On each calculation date, prior to distributing any principal receipts, the
cash manager will ascertain whether the distribution date is within a cash
accumulation period relating to a bullet term advance or a scheduled
amortisation instalment (each a "CASH ACCUMULATION ADVANCE") and will ascertain
Funding 1's cash accumulation requirement and repayment requirement.
The cash accumulation period will be calculated separately for each bullet
term advance and scheduled amortisation instalment.
The following table sets out the "SCHEDULED REPAYMENT DATE" (being the
Funding 1 interest payment date falling in the indicated month) and "RELEVANT
ACCUMULATION AMOUNT" in relation to each cash accumulation advance:
133
RELEVANT
SCHEDULED ACCUMULATION AMOUNT
CASH ACCUMULATION ADVANCE REPAYMENT DATE
- ------------------------------------------------------------------------------ ------------------- -------------------
Advances made by the issuer
Series 1 term AAA advance..................................................... [September 2004] __
Series 2 term AAA advance..................................................... [December 2006] __
Series 3 term AAA advance -- first scheduled amortisation instalment.......... __ __
Series 3 term AAA advance -- second scheduled amortisation instalment......... __ __
Series 4 term AAA advance -- first amortisation instalment.................... __ __
Series 4 term AAA advance -- second amortisation instalment................... __ __
Advances made by Permanent Financing (No. 2) PLC
Previous series 1 term AAA advance............................................ March 2004 [GBP]633,312,000
Previous series 2 term AAA advance............................................ September 2005 [GBP]1,108,016,000
Previous series 3 term AAA advance -- first scheduled amortisation instalment. March 2006 [GBP]427,187,500
Previous series 3 term AAA advance -- second scheduled amortisation instalment June 2006 [GBP]427,187,500
Previous series 4 term AAA advance............................................ December 2007 [GBP]1,107,250,000
Advances made by Permanent Financing (No. 1) PLC
Previous series 2 term AAA advance............................................ June 2005 [GBP]509,614,731
Previous series 3 term AAA advance............................................ December 2005 [GBP]748,299,320
Previous series 4A1 term AAA advance.......................................... June 2007 [GBP]484,000,000
Any bullet term advance in respect of a new issuer............................ as indicated in the the principal
relevant amount of that
prospectus bullet term
advance
Any scheduled amortisation instalment in respect of a new as indicated in the the principal
issuer ....................................................................... relevant amount that
prospectus scheduled
amortisation
instalment
Definitions:
"CASH ACCUMULATION PERIOD" means the period beginning on the earlier of:
* the commencement of the anticipated cash accumulation period
relating to the relevant accumulation amount; and
* in respect of an original bullet term advance, six months prior to
the scheduled repayment date of that original bullet term advance
and, in respect of an original scheduled amortisation instalment,
three months prior to the scheduled repayment date of that original
scheduled amortisation instalment;
and ending when Funding 1 has fully repaid that bullet term advance or
scheduled amortisation instalment, as applicable.
"ANTICIPATED CASH ACCUMULATION PERIOD" means on any normal calculation date
the anticipated number of months required to accumulate sufficient principal
receipts to pay the relevant accumulation amount in relation to the relevant
cash accumulation advance, which will be equal to:
J + K -- L
----------
M X (N X O)
calculated in months and rounded up to the nearest whole number, where:
134
J = the relevant accumulation amount;
K = the aggregate principal amount outstanding on that normal
calculation date of:
* each bullet term advance or scheduled amortisation term advance
that was not fully repaid on its scheduled repayment date; and
* each other bullet term advance or scheduled amortisation term
advance, the scheduled repayment date of which falls on or
before the scheduled repayment date of the relevant cash
accumulation advance;
L = the amount of any available cash already standing to the credit of
the cash accumulation ledger at the start of that normal
calculation date plus the aggregate amount of cash accumulation
requirement paid to Funding 1 since the previous Funding 1 interest
payment date;
* M = means the sum of each monthly CPR on the 12 most recent
normal calculation dates which have occurred prior to that
date divided by 12;
N = 0.85; and
O = the aggregate outstanding principal balance of the loans comprising
the trust property on the previous normal calculation date.
"MONTHLY CPR" on any normal calculation date means the total principal
receipts received during the period of one month (or, if shorter, from and
including the initial closing date) ending on that normal calculation date
divided by the aggregate outstanding principal balance of the loans comprised
in the trust property as at the immediately preceding normal calculation date.
"SCHEDULED AMORTISATION INSTALMENT" means that part of a scheduled
amortisation term advance which is payable on each of the scheduled repayment
dates of that term advance. The issuer series 3 term AAA advance will consist
of [two] equal scheduled amortisation instalments.
"CASH ACCUMULATION REQUIREMENT" means on a calculation date:
* the outstanding principal amounts in relation to each cash
accumulation advance;
* plus amounts due in items (A) and (B) of the Funding 1 pre-
enforcement principal priority of payments;
* less the amount standing to the credit of the cash accumulation
ledger at the last Funding 1 interest payment date (which amount
was not distributed on that Funding 1 interest payment date to the
issuer);
* less the sum of each cash accumulation requirement amount paid to
Funding 1 on a previous distribution date during the relevant
interest period.
The "CASH ACCUMULATION LEDGER" means a ledger maintained by the cash manager
for Funding 1, which records amounts accumulated by Funding 1 to pay relevant
accumulation amounts.
"REPAYMENT REQUIREMENT" means on a calculation date the amount, if any, by
which:
* the aggregate of all amounts that will be payable by Funding 1 on
the next Funding 1 interest payment date as described in items (C)
to (E) (inclusive) of the priority of payments under "-- REPAYMENT
OF TERM ADVANCES OF EACH SERIES PRIOR TO THE OCCURRENCE OF A
TRIGGER EVENT AND PRIOR TO THE SERVICE ON FUNDING 1 OF AN
INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER
OF A NOTE ACCELERATION NOTICE" in the "CASHFLOWS -- DISTRIBUTION OF
FUNDING 1 AVAILABLE PRINCIPAL RECEIPTS" section below on the basis:
* that there would be no deferral in relation to term advances
pursuant to Rule (1) set out in that section;
* that where Rule (2) or Rule (3) set out in that section applies to
an intercompany loan, the amount so payable by Funding 1 in respect
of term advances (other than bullet term advances and scheduled
amortisation instalments) under that intercompany loan shall be
treated as the lesser of (A) the amount due and payable in respect
of those term
135
advances, and (B) the amount of the limit determined under that
Rule (2) or Rule (3) in relation to that intercompany loan (but,
for this purpose, amounts credited to the principal deficiency
ledger on that date or on the immediately preceding Funding 1
interest payment date shall be excluded in calculating that limit);
* that term advances will be treated as due and payable if they are
already due and payable, or would become due and payable on or
before the next Funding 1 interest payment date if all principal
receipts were paid to Funding 1 on that calculation date; and
* excluding amounts due and payable in respect of bullet term
advances and scheduled amortisation instalments,
exceeds the sum of:
* the amounts standing to the credit of the Funding 1 principal
ledger as at the last Funding 1 interest payment date (which amount
was not distributed on that Funding 1 interest payment date to the
issuer); and
* the sum of each repayment requirement amount paid to Funding 1 on a
previous distribution date during the relevant interest period.
A "TRIGGER EVENT" means an asset trigger event and/or a non-asset trigger
event.
An "ASSET TRIGGER EVENT" will occur when an amount is debited to the AAA
principal deficiency sub-ledger. For more information on the principal
deficiency ledger, see "CREDIT STRUCTURE".
A "NON-ASSET TRIGGER EVENT" will occur on a calculation date if:
* an insolvency event occurs in relation to the seller on or about
that calculation date;
* the seller's role as servicer is terminated and a new servicer is
not appointed within 60 days;
* the seller share at any time is equal to or less than the minimum
seller share (in each case by reference to the most recent
calculation date); or
* on any calculation date the aggregate outstanding principal balance
of loans comprising the trust property at that date during the
period from and including the closing date to but excluding the
interest payment date in is less than [GBP]__.
The definitions of "ASSET TRIGGER EVENT" and "NON-ASSET TRIGGER EVENT" may
change as new loans are assigned to the mortgages trustee.
MORTGAGES TRUST CALCULATION OF PRINCIPAL RECEIPTS
"MORTGAGES TRUST AVAILABLE PRINCIPAL RECEIPTS" are calculated by the cash
manager on each calculation date and will be equal to the amount that is
standing to the credit of the principal ledger on that calculation date. The
repayment requirement and the cash accumulation requirement is calculated by
the cash manager on each calculation date and the relevant amounts notified to
the mortgages trustee (who will be entitled to rely on such notifications).
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF PRINCIPAL RECEIPTS PRIOR TO THE
OCCURRENCE OF A TRIGGER EVENT
On each distribution date where no trigger event has occurred on or before
the immediately preceding calculation date, the cash manager will apply
mortgages trust available principal receipts as follows:
(A) first, where Funding 1 has no cash accumulation requirement and no
repayment requirement on that distribution date, all such receipts
will be allocated and paid to the seller until the seller share of
the trust property (as calculated on the relevant share calculation
date) is equal to the minimum seller share;
(B) then, if Funding 1 has a cash accumulation requirement on that
distribution date, such receipts will be allocated and paid to
Funding 1 in an amount up to but not exceeding Funding 1's cash
accumulation requirement on that distribution date;
136
(C) then, if Funding 1 has a repayment requirement on that distribution
date, such receipts will be allocated and paid to Funding 1 in an
amount up to but not exceeding Funding 1's repayment requirement on
that date; and
(D) then, the remainder, if any, of such receipts will be allocated and
paid to the seller until the seller share of the trust property (as
calculated on the relevant share calculation date) is equal to the
minimum seller share.
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF PRINCIPAL RECEIPTS ON OR AFTER
THE OCCURRENCE OF A NON-ASSET TRIGGER EVENT BUT PRIOR TO THE OCCURRENCE OF AN
ASSET TRIGGER EVENT
On each distribution date where a non-asset trigger event has occurred on or
before the immediately preceding calculation date and an asset trigger event
has not occurred on or before that calculation date, the cash manager will
apply mortgages trust available principal receipts as follows:
(A) first, all such receipts will be allocated and paid to Funding 1
until the Funding 1 share of the trust property (as calculated on
the relevant share calculation date) is zero, and
(B) then, the remainder, if any, of such receipts will be allocated and
paid to the seller.
Following the occurrence of a non-asset trigger event, the issuer notes will
be subject to prepayment risk (that is, they may be repaid earlier than
expected).
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF PRINCIPAL RECEIPTS ON OR AFTER
THE OCCURRENCE OF AN ASSET TRIGGER EVENT
On each distribution date where an asset trigger event has occurred on or
before the immediately preceding calculation date, the cash manager will
allocate and pay mortgages trust available principal receipts, with no order of
priority between them but in proportion to the respective amounts due, to
Funding 1 and the seller according to the Funding 1 percentage share of the
trust property (as calculated on the relevant share calculation date) and the
seller percentage share of the trust property (as calculated on the relevant
share calculation date) respectively (until, in the case of Funding 1, the
Funding 1 share of the trust property is zero).
Following the occurrence of an asset trigger event, the series 1 class A
issuer notes, the series 2 class A issuer notes and the series 3 class A issuer
notes may not be repaid in full by their respective final maturity dates. See
"RISK FACTORS -- THE YIELD TO MATURITY OF THE ISSUER NOTES MAY BE ADVERSELY
AFFECTED BY PREPAYMENTS OR REDEMPTIONS ON THE LOANS".
LOSSES
All losses arising on the loans will be applied in reducing the Funding 1
share and the seller share of the trust property. Funding 1's share and the
seller's share of the losses will be determined by multiplying the amount of
losses during a calculation period by the Funding 1 share percentage (as
calculated on the relevant share calculation date), which will be allocated to
Funding 1 (until the Funding 1 share of the trust property is zero), and the
remainder, which will be allocated to the seller, on each calculation date in
each case prior to calculating the allocation of mortgages trustee available
principal receipts on that calculation date.
DISPOSAL OF TRUST PROPERTY
The trust property is held on trust for the benefit of Funding 1 and the
seller. Subject to the terms of the mortgages trust deed, the mortgages trustee
is not entitled to dispose of the trust property or create any security
interest over the trust property.
If an event of default occurs under any intercompany loan agreement (an
"INTERCOMPANY LOAN EVENT OF DEFAULT") and the security trustee determines to
serve an intercompany loan acceleration notice on Funding 1, then the security
trustee will be entitled, among other things, to sell Funding 1's share of the
trust property. For further information on the security granted by Funding 1
over its assets, see "SECURITY FOR FUNDING 1'S OBLIGATIONS".
137
ADDITIONS TO TRUST PROPERTY
The trust property may be increased from time to time by the assignment of
new loans and their related security to the mortgages trustee. The mortgages
trustee will hold the new loans and their related security on trust for Funding
1 and the seller according to the terms of the mortgages trust deed. For
further information on the assignment of new loans and their related security
to the mortgages trustee, see "ASSIGNMENT OF THE LOANS AND THEIR RELATED
SECURITY".
ACQUISITION BY FUNDING 1 OF AN INCREASED INTEREST IN TRUST PROPERTY
If Funding 1 enters into a new intercompany loan, then it may apply the
proceeds of that new intercompany loan to make a payment to the seller so as to
give rise to an increase in Funding 1's share of the trust property (and giving
rise to a corresponding decrease in the seller's share of the trust property)
on a distribution date. Funding 1 will be permitted to do this only if it meets
a number of conditions, including:
* that on the relevant acquisition date no intercompany loan event of
default has occurred under any intercompany loan agreement that has
not been remedied or waived;
* as at the most recent Funding 1 interest payment date, no
deficiency is recorded on Funding 1's principal deficiency ledger;
* the security trustee is not aware that the proposed increase in the
Funding 1 share of the trust property (or the corresponding
decrease in the seller share) would adversely affect the ratings at
that time by the rating agencies of the current notes;
* as at the relevant distribution date, the aggregate outstanding
principal balance of loans constituting the trust property, in
respect of which the aggregate amount in arrears is more than three
times the monthly payment then due, is less than 5 per cent. of the
aggregate outstanding principal balance of all loans constituting
the trust property; and
* the seller has not received written notice that the short-term,
unsecured, unguaranteed and unsubordinated debt obligations of the
seller are not rated at least P-1 by Moody's, A-1 by Standard &
Poor's and F1 by Fitch at the time of, and immediately following
the payment made by Funding 1 on the relevant distribution date.
* on the closing date, Funding 1 will apply the proceeds of the
issuer intercompany loan to acquire part of the seller's share of
the trust property. This will cause Funding 1's share of the trust
property to increase and the seller's share to correspondingly
decrease.
ACQUISITION BY SELLER OF AN INTEREST RELATING TO CAPITALISED INTEREST
If a borrower takes a payment holiday under a loan (as permitted by the
terms of the loan), then the outstanding principal balance of the loan will
increase by the amount of interest that would have been paid on the relevant
loan if not for such payment holiday (the "CAPITALISED INTEREST").
The increase in the loan balance due to the capitalised interest will be
allocated to the Funding 1 share of the trust property and to the seller share
of the trust property, based on their respective percentage shares in the trust
property as calculated on the previous calculation date.
Prior to an insolvency event occurring in respect of the seller, on each
distribution date, the seller will make a cash payment to Funding 1 in an
amount equal to Funding 1's share of the capitalised interest in respect of
those loans that are subject to payment holidays. Following such payment:
* the seller share of the trust property will increase by an amount
equal to the amount paid to Funding 1 for Funding 1's share of the
capitalised interest, and Funding 1's share of the trust property
will decrease by a corresponding amount; and
* Funding 1 will apply the proceeds of the amount paid by the seller
in accordance with the Funding 1 pre-enforcement revenue priority
of payments and, after enforcement of the Funding 1 security, in
accordance with the Funding 1 post-enforcement priority of
payments.
138
If an insolvency event occurs in respect of the seller, then the seller may
continue to make payments to Funding 1 in an amount equal to Funding 1's share
of the capitalised interest in the same manner and for the same purpose
described above, but it is not obliged to do so.
PAYMENT BY THE SELLER TO FUNDING 1 OF THE AMOUNT OUTSTANDING UNDER AN
INTERCOMPANY LOAN
If the seller offers to make a payment to Funding 1 of the amount
outstanding under an intercompany loan, then Funding 1 may accept that offer
but only if:
* the security trustee has received written confirmation from each of
the rating agencies that there would not be any adverse effect on
the then current ratings of the notes if Funding 1 accepted the
offer;
* Funding 1 would receive the payment on a Funding 1 interest payment
date; and
* the relevant issuer has confirmed to Funding 1 that the proceeds of
the corresponding payment made by Funding 1 to the relevant issuer
would be applied to repay the relevant intercompany loan.
The Funding 1 share of the trust property would decrease by an amount equal
to the payment made by the seller and the seller share would increase by a
corresponding amount.
TERMINATION OF MORTGAGES TRUST
The mortgages trust will terminate on the later to occur of:
* the date on which all amounts due from Funding 1 to its secured
creditors have been paid in full; and
* any other date agreed in writing by Funding 1 and the seller.
RETIREMENT OF MORTGAGES TRUSTEE
The mortgages trustee is not entitled to retire or otherwise terminate its
appointment. The seller and Funding 1 cannot replace the mortgages trustee.
GOVERNING LAW
The mortgages trust deed is governed by English law.
139
THE ISSUER INTERCOMPANY LOAN AGREEMENT
The following section contains a summary of the material terms of the issuer
intercompany loan agreement. The summary does not purport to be complete and is
subject to the provisions of the issuer intercompany loan agreement, a form of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
The issuer intercompany loan agreement will provide that, subject to
satisfying the conditions described in "-- CONDITIONS TO DRAWDOWN" below, on
the closing date, the issuer will lend to Funding 1 an amount in sterling equal
to the proceeds of the issue of the issuer notes, after converting the US
dollar proceeds of the series 1 issuer notes, the series 2 issuer notes and the
series 3 issuer notes into sterling at the relevant issuer dollar currency
exchange rates and after converting the euro proceeds of the series 4 issuer
notes, the series 5 class B issuer notes and the series 5 class C issuer notes
into sterling at the relevant issuer euro currency exchange rate. Funding 1 will
then pay the proceeds of the issuer intercompany loan to the seller as
consideration for the addition to Funding 1's already existing share of the
trust property.
The issuer intercompany loan will be split into 15 separate sub-loans, or
"ISSUER TERM ADVANCES", as described in the following table:
CLASS OF INITIAL PRINCIPAL
DESIGNATED CLASS OF CORRESPONDING AMOUNT OF EACH
TERM ADVANCE CORRESPONDING ISSUER SWAP ISSUER TERM
SERIES NAME RATING ISSUER NOTES (IF ANY) ADVANCE
- ----------------- ------------ ------------- ------------- -----------------
series 1......... AAA class A class 1A [GBP]__
series 1......... AA class B class 1B [GBP]__
series 1......... BBB class C class 1C [GBP]__
series 2......... AAA class A class 2A [GBP]__
series 2......... AA class B class 2B [GBP]__
series 2......... BBB class C class 2C [GBP]__
series 3......... AAA class A class 3A [GBP]__
series 3......... AA class B class 3B [GBP]__
series 3......... BBB class C class 3C [GBP]__
series 4......... AAA class A class 4A [GBP]__
series 4......... AA class B class 4B [GBP]__
series 4......... BBB class C class 4C [GBP]__
series 5......... AAA class A [GBP]__
series 5......... AA class B Class 5B [GBP]__
series 5......... BBB class C Class 5C [GBP]__
Total:........... [GBP]__
TERM ADVANCE RATINGS ASSIGNED TO THE ISSUER TERM ADVANCES
The designated term advance ratings of the issuer term AAA advances reflect
the ratings expected to be assigned to the series 2 class A issuer notes, the
series 3 class A issuer notes, the series 4 class A issuer notes and the series
5 class A issuer notes by the rating agencies on the closing date. The issuer
series 1 term AAA advance will have the same rating as the issuer series 2 term
AAA advance, the issuer series 3 term AAA advance, the issuer series 4 term AAA
advance and the issuer series 5 term AAA advance despite the series 1 class A
issuer notes having different, short-term ratings. The designated term advance
ratings of the issuer term AA advances reflect the rating expected to be
assigned to the class B issuer notes by the rating agencies on the closing
date. The designated term advance ratings of the issuer term BBB advances
reflect the rating expected to be assigned to the class C issuer notes by the
rating agencies on the closing date. If, after the closing date, the rating
agencies subsequently change the ratings assigned to each class of the issuer
notes, then this will not affect the term advance ratings of the issuer term
advances under the issuer intercompany loan.
The final repayment date of each issuer term advance will be the final
maturity date of the corresponding class of issuer notes.
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The issuer intercompany loan agreement will provide that, subject to
satisfying the conditions in "-- CONDITIONS TO DRAWDOWN", the following
advances will be made available by the issuer to Funding 1 by way of the issuer
intercompany loan made on the closing date:
* the issuer term AAA advances in an aggregate principal amount of
[GBP]__, which shall be funded by the issue of the class A issuer
notes on the closing date, and which shall consist of the issuer
series 1 term AAA advance in the amount of [GBP]__, the issuer
series 2 term AAA advance in the amount of [GBP]__, the issuer
series 3 term AAA advance in the amount of [GBP]__, the issuer
series 4 term AAA advance in the amount of [GBP]__ and the issuer
series 5 term AAA advance in the amount of [GBP]__;
* the issuer term AA advances in an aggregate principal amount of
[GBP]__, which shall be funded by the issue of the class B issuer
notes on the closing date, and which shall consist of the issuer
series 1 term AA advance in the amount of [GBP]__, the issuer
series 2 term AA advance in the amount of [GBP]__, the issuer
series 3 term AA advance in the amount of [GBP]__, the issuer
series 4 term AA advance in the amount of [GBP]__ and the issuer
series 5 term AA advance in the amount of [GBP]__; and
* the issuer term BBB advances in an aggregate principal amount of
[GBP]__, which shall be funded by the issue of the class C issuer
notes on the closing date, and which shall consist of the issuer
series 1 term BBB advance in the amount of [GBP]__, the issuer
series 2 term BBB advance in the amount of [GBP]__ the issuer
series 3 term BBB advance in the amount of [GBP]__, and the issuer
series 4 term BBB advance in the amount of [GBP]__ and the issuer
series 5 term BBB advance in the amount of [GBP]__.
The money received by Funding 1 under the advances will be used by Funding 1
on the closing date to pay, among other things, the consideration due to the
seller in relation to the assignment by the seller to Funding 1 of part of its
share of the trust property, thereby increasing the Funding 1 share of the
trust property, and correspondingly decreasing the seller's share of the trust
property. Funding 1's interest in the portfolio will constitute the Funding 1
share of the trust property.
The issuer will make payments of interest and principal on the issuer notes
from, among other things, respective payments of interest and principal made by
Funding 1 to the issuer under the issuer term AAA advances, the issuer term AA
advances and the issuer term BBB advances of the issuer intercompany loan and
from amounts paid by the issuer swap providers to the issuer under the issuer
swaps.
The issuer has no obligation to make any further advances to Funding 1 under
the terms of the issuer intercompany loan agreement.
CONDITIONS TO DRAWDOWN
The issuer will not be obliged to make the advances available to Funding 1
unless the security trustee is satisfied on the closing date that a number of
conditions have been met, including:
* that the issuer notes have been issued and the proceeds received by
or on behalf of the issuer;
* that Funding 1 has delivered a certificate certifying that it is
solvent; and
* that each of the issuer transaction documents has been duly
executed by the relevant parties to them.
REPRESENTATIONS AND AGREEMENTS
Funding 1 will make several representations to the issuer in the issuer
intercompany loan agreement including representations that Funding 1 has been
duly incorporated and that it has the requisite corporate power and authority
to enter into the transaction documents to which it is a party.
141
In addition, Funding 1 will agree that:
* it will not create or permit to subsist any encumbrance, unless
arising by operation of law, or other security interest over any of
its assets other than pursuant to the transaction documents;
* it will not carry on any business or engage in any activity
whatsoever which is not incidental to or necessary in connection
with any of the activities in which the transaction documents
provide or envisage that Funding 1 will engage;
* it will not have any subsidiaries, any subsidiary undertakings,
both as defined in the Companies Act 1985 as amended, or any
employees or premises;
* it will not transfer, sell, lend, part with or otherwise dispose of
all or any of its assets, properties or undertakings or any
interest, estate, right, title or benefit therein other than as
contemplated in the transaction documents;
* it will not pay any dividend or make any other distribution to its
shareholders, other than in accordance with the Funding 1 deed of
charge, and it will not issue any new shares;
* it will not incur any indebtedness in respect of any borrowed money
or give any guarantee in respect of any indebtedness or of any
obligation of any person whatsoever other than indebtedness
contemplated by the transaction documents; and
* it will not enter into any amalgamation, demerger, merger or
reconstruction, nor acquire any assets or business nor make any
investments other than as contemplated in the transaction
documents.
PAYMENTS OF INTEREST
The interest rates applicable to the issuer term advances from time to time
will be determined by reference to LIBOR for three-month sterling deposits
(other than, in each case, in respect of the first interest period) plus, in
each case, a margin which will differ for each separate advance. [For the first
interest period, LIBOR will be determined on the basis of a linear
interpolation between LIBOR for [__-month] and [__-month sterling deposits].]
LIBOR for an interest period will be determined on the relevant Funding 1
interest determination date. The "FUNDING 1 INTEREST DETERMINATION DATE" will
be the Funding 1 interest payment date (as described later in this section) on
which the relevant interest period (as described in this section) commences or,
in the case of the first interest period, the closing date.
The following table sets out details relating to the payment of interest on
the issuer term advances, as described further in this section:
STEPPED-UP
DESIGNATED TERM INITIAL INTEREST INTEREST RATE PER
SERIES NAME ADVANCE RATING RATE PER ANNUM STEP-UP DATE ANNUM
- ----------- --------------- ---------------- ------------ -----------------
series 1 AAA LIBOR minus __% N/A __
series 1 AA LIBOR plus __% __ LIBOR plus __%
series 1 BBB LIBOR plus __% __ LIBOR plus __%
series 2 AAA LIBOR plus __% N/A __
series 2 AA LIBOR plus __% __ LIBOR plus __%
series 2 BBB LIBOR plus __% __ LIBOR plus __%
series 3 AAA LIBOR plus __% __ LIBOR plus __%
series 3 AA LIBOR plus __% __ LIBOR plus __%
series 3 BBB LIBOR plus __% __ LIBOR plus __%
series 4 AAA LIBOR plus __% __ LIBOR plus __%
series 4 AA LIBOR plus __% __ LIBOR plus __%
series 4 BBB LIBOR plus __% __ LIBOR plus __%
series 5 AAA __% p.a. __ __% p.a
series 5 AA LIBOR plus __% __ LIBOR plus __%
series 5 BBB LIBOR plus __% __ LIBOR plus __%
142
The initial interest rate indicated in relation to an issuer term advance in
the above table shall apply to that issuer term advance for each interest
period relating to that issuer term advance to and including the interest
period which ends on the relevant step-up date indicated in that table in
relation to that issuer term advance.
The stepped-up interest rate indicated in relation to an issuer term advance
in the above table shall apply to that issuer term advance for each interest
period relating to that issuer term advance from and including the interest
period which starts on the relevant step-up date indicated in that table in
relation to that issuer term advance.
The first interest period in relation to the issuer term advances will
commence on and include the closing date and end on but exclude the Funding 1
interest payment date falling in __. Each subsequent interest period will
commence on and include a Funding 1 interest payment date and end on but
exclude the following Funding 1 interest payment date.
In addition, prior to enforcement of the Funding 1 security Funding 1 will
agree to pay an additional fee to the issuer on each Funding 1 interest payment
date or otherwise when required. The fee on each Funding 1 interest payment
date will be equal to the amount needed by the issuer to pay or provide for
other amounts falling due, if any, to be paid to its creditors (other than
amounts of interest and principal due on the issuer notes and tax that can be
met out of the issuer's profits) and a sum (in an amount up to 0.01 per cent.
of the interest paid to the issuer on the term advances on each Funding 1
interest payment date), to be retained by the issuer as profit. The fee will be
paid by Funding 1 out of the Funding 1 available revenue receipts.
REPAYMENT OF PRINCIPAL ON THE ISSUER TERM ADVANCES
The issuer term advances will be repaid on the dates and in the priorities
described in "CASHFLOWS -- DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL
RECEIPTS". You should note that, in the circumstances described in Rule (1) of
that section of this prospectus, payments on the issuer term BBB advances, the
issuer term AA advances, the issuer series 3 term AAA advance, the issuer
series 4 term AAA advance and the issuer series 5 term AAA advance will be
deferred.
LIMITED RECOURSE
Funding 1 will only be obliged to pay amounts to the issuer under the issuer
intercompany loan to the extent that it has funds to do so after making
payments ranking in priority to amounts due on the issuer term advances.
If, on the final repayment date of an issuer term advance, there is a
shortfall between the amount of interest and/or principal due on that issuer
term advance and the amount available to Funding 1 to make that payment, then
that shortfall shall not be due and payable to the issuer until the time (if
ever) when Funding 1 has enough money available to pay the shortfall on that
issuer term advance (after making any other payments due that rank higher in
priority to that advance).
If, on the final repayment date of the issuer intercompany loan, there is a
shortfall between the amount required to pay all outstanding interest and/or
principal on the issuer term AA advances and/or the issuer term BBB advances
and the amount available to Funding 1 to make those payments, then the
shortfall shall be deemed to be not due and payable under the issuer
intercompany loan agreement and any claim that the issuer may have against
Funding 1 in respect of that shortfall will be extinguished.
ISSUER INTERCOMPANY LOAN EVENTS OF DEFAULT
The issuer intercompany loan agreement will contain events of default (each
an "ISSUER INTERCOMPANY LOAN EVENT OF DEFAULT"), which will include, among
others, the following events:
* a default by Funding 1 for a period of three London business days
in the payment of any amount payable under any intercompany loan
agreement (whether the previous intercompany loan agreements, the
issuer intercompany loan agreement or any new intercompany loan
agreement) (but subject to the limited recourse provisions
described later in this section and in "-- LIMITED RECOURSE");
143
* Funding 1 does not comply in any material respect with its
obligations under any of the transaction documents (other than non-
payment as set out in the preceding paragraph) and that non-
compliance, if capable of remedy, is not remedied promptly and in
any event within 20 London business days of Funding 1 becoming
aware of its non-compliance or of receipt of written notice from
the security trustee requiring Funding 1's non-compliance to be
remedied; and
* insolvency events occur in relation to Funding 1 or it is, or
becomes, unlawful for Funding 1 to perform its obligations under
any of the transaction documents.
Investors should note that, as described in "-- LIMITED RECOURSE", it will
not be an event of default under an intercompany loan agreement (whether the
previous intercompany loan agreements, the issuer intercompany loan agreement
or any new intercompany loan agreement) if default is made by Funding 1 in
paying amounts due under an intercompany loan agreement where Funding 1 does
not have the money available to make the relevant payment. The ability of the
issuer to repay the issuer notes will depend upon payments to the issuer from
Funding 1 under the issuer intercompany loan agreement. See "RISK FACTORS --
FAILURE BY FUNDING 1 TO MEET ITS OBLIGATIONS UNDER THE ISSUER INTERCOMPANY LOAN
AGREEMENT WOULD ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES".
Investors should also note that an event of default by Funding 1 in respect
of a previous intercompany loan and any new intercompany loan or any agreement
entered into by Funding 1 in connection with that previous intercompany loan or
new intercompany loan, will constitute an event of default under the issuer
intercompany loan.
If an issuer intercompany loan event of default occurs, then the security
trustee will be entitled to deliver a notice to Funding 1 stating that the
issuer intercompany loan event of default has occurred (an "ISSUER INTERCOMPANY
LOAN ACCELERATION NOTICE"). Upon the service of an issuer intercompany loan
acceleration notice, the security trustee may direct that the issuer term
advances become immediately due and payable and/or that the issuer term
advances become due and payable on the demand of the security trustee.
NEW INTERCOMPANY LOAN AGREEMENTS
Holdings is expected to establish new issuers, each of which would issue new
notes to investors. The issuer intercompany loan agreement will provide that
Funding 1 may at any time, by written notice to the security trustee and the
rating agencies, enter into a new intercompany loan agreement with a new issuer
and draw new term advances thereunder. Each new term advance will be financed
by the issue of new notes, and will only be permitted if certain conditions
precedent are satisfied, including:
* the proceeds of the new intercompany loan are used by Funding 1 (1)
to pay the seller for new loans to be assigned to the mortgages
trustee under the mortgage sale agreement and/or (2) to acquire
part of the current seller share of the trust property from the
seller and/or (3) to refinance the existing debts of Funding 1,
including the refinancing of any intercompany loan or intercompany
loans and/or (4) to apply a portion thereof to further fund the
reserve fund;
* each of the rating agencies confirms in writing to the security
trustee that there will not, as a result of the new issuer issuing
any new notes, be any adverse effect on the ratings of the current
notes at that time by the rating agencies then rating the notes;
* no intercompany loan event of default under any intercompany loan
agreement is continuing or unwaived on the date when the advance is
drawn; and
* no principal deficiency is recorded on the principal deficiency
ledger.
Each new intercompany loan agreement will be on substantially the same terms
as the issuer intercompany loan agreement, except as to the amount advanced,
the rating of the new notes to which the new term advances correspond (the
designated "NEW TERM ADVANCE RATINGS"), the interest rates applicable to the
new term advances, the date that the new term advances are drawn and the terms
for repayment.
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Subject to the rules regarding the application of principal receipts by
Funding 1 (see "CASHFLOWS -- DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL
RECEIPTS -- REPAYMENT OF TERM ADVANCES OF EACH SERIES PRIOR TO THE OCCURRENCE
OF A TRIGGER EVENT AND PRIOR TO THE SERVICE ON FUNDING 1 OF AN INTERCOMPANY
LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF A NOTE ACCELERATION
NOTICE"), Funding 1 shall pay interest and repay principal which is due and
payable on the term advances to the issuer, each previous issuer and each new
issuer in an order of priority which will depend on the relative term advance
ratings of each term advance. Each term AAA advance due and payable will rank
equally and proportionately, except that principal will be paid to each
earliest maturing term AAA advance ahead of other term AAA advances. Payments
on the term AAA advances will rank ahead of payments of interest and principal
due and payable to the issuer and any previous issuer on the term AA advances
and the term BBB advances. Similarly, each term AA advance due and payable will
rank equally and proportionately as to payment of interest and principal due
and payable, ahead of payments of interest and principal due and payable on the
term BBB advances. Investors should note that amounts due and payable on the
previous term advances and any new term advances may be paid to the previous
issuer and to any new issuer ahead of payments due and payable on the issuer
term advances.
FUNDING 1'S BANK ACCOUNTS
Funding 1 maintains two bank accounts in England in its name with Bank of
Scotland. These are:
(1) the Funding 1 GIC account: the reserve fund is credited to this
account and on each distribution date Funding 1's share of the
mortgages trustee available revenue receipts, any distribution of
principal receipts to Funding 1 under the mortgages trust and any
balance remaining in the cash accumulation ledger are initially
deposited in this account. On each Funding 1 interest payment date,
amounts required to meet Funding 1's obligations to its various
creditors are, with the consent of the security trustee,
transferred to the Funding 1 transaction account; and
(2) the Funding 1 transaction account: on each Funding 1 interest
payment date, monies standing to the credit of the Funding 1 GIC
account are, with the consent of the security trustee, transferred
to the Funding 1 transaction account and applied by the cash
manager in accordance with the relevant order for priority of
payments. Amounts representing Funding 1's profits are retained in
the Funding 1 transaction account.
If Funding 1 makes a Funding 1 stand-by drawing under the Funding 1
liquidity facility, then Funding 1 shall open a new account in its name,
subject to the terms of the Funding 1 liquidity facility agreement, called the
"FUNDING 1 LIQUIDITY FACILITY STAND-BY ACCOUNT" into which the Funding 1 stand-
by drawing will be deposited. See "CREDIT STRUCTURE -- FUNDING 1 LIQUIDITY
FACILITY".
GOVERNING LAW
The issuer intercompany loan agreement will be governed by English law.
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SECURITY FOR FUNDING 1'S OBLIGATIONS
Funding 1 has granted security for its obligations under each previous
intercompany loan agreement (and the other transaction documents to which it is
a party) by entering into the Funding 1 deed of charge and the first deed of
accession with the security trustee, the cash manager, the account bank, the
seller, the corporate services provider, each previous issuer, the Funding 1
swap provider, the Funding 1 GIC provider, the Funding 1 liquidity facility
provider, the first start-up loan provider and the second start-up loan
provider. Together with the third start-up loan provider, we will enter into
the second deed of accession to the Funding 1 deed of charge which means that
we will share in the security granted by Funding 1 under the Funding 1 deed of
charge. If Funding 1 enters into new intercompany loan agreements with new
issuers, then the new issuers (together with any new start-up loan providers
and any new Funding 1 swap provider) will enter into deeds of accession in
relation to the Funding 1 deed of charge. This means that they will also share
in the security granted by Funding 1 under the Funding 1 deed of charge with
the existing Funding 1 secured creditors.
The Funding 1 deed of charge has seven primary functions:
* it sets out the covenants of Funding 1;
* it creates security interests in favour of the security trustee
which the security trustee then holds on trust for each of the
Funding 1 secured creditors;
* it sets out the order in which the cash manager applies money
received by Funding 1 prior to enforcement of the security;
* it sets out the enforcement procedures relating to a default by
Funding 1 on its covenants under the transaction documents
(including provisions relating to the appointment of a receiver);
* it sets out the order in which the security trustee applies money
received by Funding 1 after the service of an intercompany loan
acceleration notice on Funding 1;
* it sets out the appointment of the security trustee, its powers and
responsibilities and the limitations on those responsibilities; and
* it sets out how new creditors of Funding 1 can accede to the terms
of the Funding 1 deed of charge.
The following section contains a summary of the material terms of the
Funding 1 deed of charge. The summary does not purport to be complete and is
subject to the provisions of the Funding 1 deed of charge, a form of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
COVENANTS OF FUNDING 1
The Funding 1 deed of charge contains covenants made by Funding 1 in favour
of the security trustee on trust for the benefit of itself, any receiver of
Funding 1 and the Funding 1 secured creditors. The main covenants are that
Funding 1 will pay all amounts due to each of the Funding 1 secured creditors
as they become due (subject to the limited recourse provisions of each
intercompany loan) and that it will comply with its other obligations under the
transaction documents.
FUNDING 1 SECURITY
Under the Funding 1 deed of charge, Funding 1 has created the following
security interests in favour of the security trustee for and on behalf of the
secured creditors (also known as the "FUNDING 1 SECURITY") in respect of all
the intercompany loans outstanding at any one time and Funding 1's obligations
under the transaction documents to which it is a party:
* a first ranking fixed charge (which may take effect as a floating
charge) over the Funding 1 share of the trust property;
* an assignment of all of its right, benefit and interest in the
transaction documents to which Funding 1 is a party from time to
time;
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* a first ranking fixed charge (which may take effect as a floating
charge) over all of the right, title, interest and benefit of
Funding 1 in the Funding 1 GIC account, the Funding 1 transaction
account and the Funding 1 liquidity facility stand-by account, all
amounts standing to the credit of those accounts from time to time
and all authorised investments purchased from those accounts
including all monies and income payable under them; and
* a first floating charge over all of the property assets and the
undertaking of Funding 1 not otherwise secured by any fixed
security interest detailed above.
NATURE OF SECURITY -- FIXED CHARGE
Funding 1 may not deal with those of its assets which are subject to a fixed
charge without the prior written consent of the security trustee. Accordingly,
Funding 1 is not permitted to deal with the assets which are expressed to be
subject to a fixed charge in its ordinary course of business. In this way, the
security is said to "fix" over those assets which are expressed to be subject
to a fixed charge (being the charges and assignments described in the first
three bullet points in this section).
NATURE OF SECURITY -- FLOATING CHARGE
Unlike the fixed charges, the floating charge does not attach to specific
assets but instead "floats" over a class of assets which may change from time
to time, allowing Funding 1 to deal with those assets and to give third parties
title to those assets free from any encumbrance in the event of sale, discharge
or modification, provided those dealings and transfers of title are in the
ordinary course of Funding 1's business. Any of Funding 1's assets acquired
after the initial closing date (including assets acquired as a result of the
disposition of any other asset of Funding 1), which are not subject to the
fixed charges mentioned in this section will also be subject to the floating
charge.
[The Funding 1 deed of charge was created prior to the 15th September, 2003
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 1 deed of
charge.]
[The existence of the floating charge allows the security trustee to appoint
an administrative receiver of Funding 1 and thereby prevent the appointment of
an administrator or receiver of Funding 1 by one of Funding 1's other
creditors. This ensures that in the event that enforcement proceedings are
commenced in respect of amounts due and owing by Funding 1, the security
trustee will always be able to control those proceedings in the best interests
of the Funding 1 secured creditors.]
[The interest of the Funding 1 secured creditors in property and assets over
which there is a floating charge only will rank behind the claims of certain
preferential creditors on enforcement of the Funding 1 security . This means
that preferential creditors will be paid out of the proceeds of enforcement of
the floating charge ahead of amounts due to the issuer under the issuer
intercompany loan agreement.]
[The floating charge created by the Funding 1 deed of charge may
"crystallise" and become a fixed charge over the relevant class of assets owned
by Funding 1 at the time of crystallisation. Crystallisation will occur
automatically following the occurrence of specific events set out in the
Funding 1 deed of charge, including, among other events, notice to Funding 1
from the security trustee following an intercompany loan event of default. A
crystallised floating charge will rank ahead of the claims of unsecured
creditors but will continue to rank behind the claims of preferential creditors
(as referred to in this section) on enforcement of the Funding 1 security.]
FUNDING 1 PRE-ENFORCEMENT PRIORITY OF PAYMENTS
The Funding 1 deed of charge sets out the order of priority of distribution
by the cash manager, as at the closing date and prior to the service of an
intercompany loan acceleration notice on Funding 1, of amounts standing to the
credit of the Funding 1 transaction account on
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each Funding 1 interest payment date. This order of priority is described in
"CASHFLOWS -- DISTRIBUTION OF FUNDING 1 AVAILABLE REVENUE RECEIPTS" and
"CASHFLOWS -- DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL RECEIPTS".
FOLLOWING THE CREATION OF NEW INTERCOMPANY LOAN AGREEMENTS
As new issuers are established to issue new notes and accordingly to make
new term advances to Funding 1, those new issuers (together with any new start-
up loan providers and any new Funding 1 swap providers) will enter into deeds
of accession in relation to the Funding 1 deed of charge which will amend the
Funding 1 pre-enforcement revenue priority of payments, the Funding 1 pre-
enforcement principal priority of payments (including those priorities of
payments applying if a trigger event occurs or if a note acceleration notice is
served on one or more of the issuers), and the Funding 1 post-enforcement
priority of payments to reflect the amounts due to the new issuer and any new
start-up loan provider and any new Funding 1 swap provider. The ranking of
those new amounts due will be as follows:
* subject to the rules regarding the application of principal
receipts by Funding 1 (see "CASHFLOWS -- DISTRIBUTION OF FUNDING 1
AVAILABLE PRINCIPAL RECEIPTS -- REPAYMENT OF TERM ADVANCES OF EACH
SERIES PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO THE
SERVICE ON FUNDING 1 OF AN INTERCOMPANY LOAN ACCELERATION NOTICE OR
THE SERVICE ON EACH ISSUER OF A NOTE ACCELERATION NOTICE"), all
amounts due and payable to the issuer, the previous issuer and any
new issuer will be paid, subject to their relevant repayment dates,
in descending order of the respective ratings of their term
advances so the term advance with the highest term advance rating
will be paid first and the term advance with the lowest term
advance rating will be paid last;
* all Funding 1 swap providers will rank in no order of priority
between themselves but in proportion to the respective amounts due
to them; and
* all start-up loan providers will rank in no order of priority
between themselves but in proportion to the respective amounts due
to them.
ENFORCEMENT
The Funding 1 deed of charge sets out the general procedures by which the
security trustee may take steps to enforce the security created by Funding 1 so
that the security trustee can protect the interests of each of the Funding 1
secured creditors.
The Funding 1 deed of charge requires the security trustee to consider the
interests of each of the Funding 1 secured creditors as to the exercise of its
powers, trusts, authorities, duties and discretions, but requires the security
trustee in the event of a conflict between the interests of the issuer, the
previous issuers and any new issuers and the interests of any other Funding 1
secured creditors, to consider only, unless stated otherwise, the interests of
the issuer, the previous issuers and any new issuers.
As among the issuer, the previous issuers and any new issuers, the security
trustee will exercise its rights under the Funding 1 deed of charge only in
accordance with the directions of the issuer, the previous issuers and/or the
new issuer(s) with the highest-ranking term advance ratings. If the issuer, the
previous issuer and/or any new issuers with term advances of equal ratings give
conflicting directions, then the security trustee will act in accordance with
the directions of the issuer, any previous issuer or new issuer (or two or more
of them if in agreement) whose aggregate principal amount outstanding of its/
their highest-ranking term advances is the greatest. In all cases, the security
trustee will only act if it is indemnified and/or secured to its satisfaction.
The Funding 1 security will become enforceable upon the service of an
intercompany loan acceleration notice under any intercompany loan, provided
that, if the Funding 1 security has become enforceable otherwise than by reason
of a default in payment of any amount due on any of the term advances, the
security trustee will not be entitled to dispose of all or part of the assets
comprised in the Funding 1 security unless either:
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* a sufficient amount would be realised to allow a full and immediate
discharge of all amounts owing in respect of the term AAA advances
-- including the term AAA advances made under the issuer
intercompany loan, each previous intercompany loan and any new
intercompany loans (or, once these term AAA advances have been
repaid, the term advances with the next highest term advance
rating, and so on); or
* the security trustee is of the sole opinion that the cashflow
expected to be received by Funding 1 will not (or that there is a
significant risk that it will not) be sufficient, having regard to
any other relevant actual, contingent or prospective liabilities of
Funding 1, to discharge in full over time all amounts owing in
respect of the term AAA advances -- including the term AAA advances
made under the issuer intercompany loan, the previous intercompany
loans and any new intercompany loans (or, once these term AAA
advances have been repaid, the term advances with the next highest
term advance rating, and so on).
Each of the Funding 1 secured creditors will agree under the Funding 1 deed
of charge that they will not take steps directly against Funding 1 for any
amounts owing to them, unless the security trustee has become bound to enforce
the Funding 1 security but has failed to do so within 30 days of becoming so
bound.
FUNDING 1 POST-ENFORCEMENT PRIORITY OF PAYMENTS
The Funding 1 deed of charge sets out the order of priority of distribution
as at the closing date by the security trustee, following service of an
intercompany loan acceleration notice, of amounts received or recovered by the
security trustee or a receiver appointed on its behalf. This order of priority
is described in "CASHFLOWS -- DISTRIBUTION OF FUNDING 1 PRINCIPAL RECEIPTS AND
FUNDING 1 REVENUE RECEIPTS FOLLOWING THE SERVICE OF AN INTERCOMPANY LOAN
ACCELERATION NOTICE ON FUNDING 1".
FOLLOWING THE CREATION OF NEW INTERCOMPANY LOAN AGREEMENTS
Any deeds of accession will amend the Funding 1 post-enforcement priority of
payments to reflect the amounts due to the new issuer and any new start-up loan
provider and any new Funding 1 swap provider or any other relevant creditor
that has acceded to the terms of the Funding 1 deed of charge. The prior
consent of noteholders and other secured creditors of Funding 1 and the issuer
will not be obtained in relation to the accession of a new issuer or other
relevant creditor to the Funding 1 deed of charge. The Funding 1 deed of charge
will direct the security trustee to execute any deed of accession for and on
behalf of the Funding 1 secured creditors, provided that the conditions
precedent to the creation of a new intercompany loan have been satisfied.
APPOINTMENT, POWERS, RESPONSIBILITIES AND LIABILITIES OF THE SECURITY TRUSTEE
The security trustee is appointed to act as trustee on behalf of the Funding
1 secured creditors on the terms and conditions of the Funding 1 deed of
charge. It holds the benefit of the security created by the Funding 1 deed of
charge on trust for each of the Funding 1 secured creditors in accordance with
the terms and conditions of the Funding 1 deed of charge.
The security trustee may, without the consent or sanction of Funding 1's
secured creditors, concur with any person in making or sanctioning any
modifications to the transaction documents:
* which in the opinion of the security trustee it may be expedient to
make, provided that the security trustee is of the opinion acting
reasonably that such modification will not be materially
prejudicial to the interests of the secured creditors or, if it is
not of that opinion in relation to any secured creditor, such
secured creditor has given its consent to such modification; or
* which in the opinion of the security trustee is made to correct a
manifest error or is of a formal, minor or technical nature.
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The security trustee will be entitled to assume that the exercise of its
discretions will not be materially prejudicial to the interests of the
noteholders if each of the rating agencies has confirmed that the then current
rating by it of the current notes would not be adversely affected by such
exercise.
In addition, the security trustee will give its consent to any modifications
to the mortgage sale agreement, the servicing agreement, the cash management
agreement, the Funding 1 deed of charge, the Funding 1 liquidity facility
agreement, the Funding 1 swap agreement, the terms and conditions of the
intercompany loans, the bank account agreement and the master definitions and
construction agreement, that are requested by Funding 1 or the cash manager,
provided that Funding 1 or the cash manager certifies to the security trustee
that such modifications are required in order to accommodate:
(i) the entry by Funding 1 into new intercompany loan agreements, and/
or the issue of new types of notes by new issuers and/or the
addition of other relevant creditors to the transaction;
(ii) the inclusion of Funding 2 as a beneficiary of the mortgages trust;
(iii) the issue of new notes by Funding 2;
(iv) the assignment of new types of loans to the mortgages trustee;
(v) changes to be made to the reserve fund required amount and/or the
manner in which the reserve fund is funded;
(vi) changes to be made to the definitions of asset trigger event and
non-asset trigger event; and
(vii) the addition of an additional Funding 1 liquidity facility in the
circumstances described in "CREDIT STRUCTURE -- ADDITIONAL FUNDING
1 LIQUIDITY FACILITY",
and provided further that:
* in respect of the matters listed in paragraphs (i) to (iv), the
relevant conditions precedent to, as applicable, the addition of
new issuers, the inclusion of Funding 2 as a beneficiary of the
mortgages trust or the assignment of new loans to the mortgages
trustee, have been satisfied; and
* in respect of the matters listed in paragraphs (i) to (vii) the
security trustee has received written confirmation from each of the
rating agencies then rating the current notes that the relevant
modifications will not adversely affect the then current ratings of
the notes.
The actual consent of the Funding 1 liquidity facility provider, the Funding
1 swap provider and the issuer swap providers will be required in order to make
the changes described above (subject to the terms of the issuer transaction
documents).
SECURITY TRUSTEE'S FEES AND EXPENSES
Funding 1 shall reimburse the security trustee for all its costs and
expenses properly incurred in acting as security trustee. The security trustee
shall be entitled to a fee payable quarterly in the amount agreed from time to
time by the security trustee and Funding 1. Funding 1 has agreed to indemnify
the security trustee and each of its officers, employees and advisers from and
against all claims, actions, proceedings, demands, liabilities, losses,
damages, costs and expenses arising out of or in connection with:
* the transaction documents; or
* the security trustee's engagement as security trustee,
which it or any of its officers, employees or advisers may suffer as a
result of Funding 1 failing to perform any of its obligations.
Funding 1 will not be responsible under the Funding 1 deed of charge for any
liabilities, losses, damages, costs or expenses resulting from fraud,
negligence or wilful default by the security trustee or any of its officers,
employees or advisers.
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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 1.
In order to be eligible to act as security trustee, such successor security
trustee must agree to be bound by the terms of the Funding 1 deed of charge and
must meet the applicable eligibility requirements under the Funding 1 deed of
charge, including the requirement that it satisfies the minimum capitalization
and other applicable conditions in regards to trustee eligibility set forth in
the United States Investment Company Act of 1940, as amended. If within 60 days
of having given notice of its intention to retire, Funding 1 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 1
deed of charge, and further provided that such rating agencies confirm that the
current ratings of the notes shall not be either downgraded, reviewed or
withdrawn as a result of such appointment).
Funding 1 may remove the security trustee at any time provided that it has
the consent, which must not be unreasonably withheld or delayed, of each of the
Funding 1 secured creditors to the removal.
In addition, the security trustee may, subject to conditions specified in
the Funding 1 deed of charge, appoint a co-trustee to act jointly with it.
A successor security trustee must be appointed in accordance with the
conditions specified in the Funding 1 deed of charge, before the retirement of
the current security trustee becomes effective.
ADDITIONAL PROVISIONS OF THE FUNDING 1 DEED OF CHARGE
The Funding 1 deed of charge contains a range of provisions regulating the
scope of the security trustee's duties and liabilities. These include the
following:
* the security trustee will, if reasonably practicable, give prior
written notification to the seller, the cash manager and each
Funding 1 secured creditor of the security trustee's intention to
enforce the Funding 1 security (although any failure to so notify
will not prejudice the ability of the security trustee to enforce
the Funding 1 security);
* the security trustee is not responsible for the adequacy or
enforceability of the Funding 1 deed of charge or the security
interests created thereby or any other transaction document;
* the security trustee is not required to exercise its powers under
the Funding 1 deed of charge without being directed to do so by the
issuer or the other Funding 1 secured creditors;
* the security trustee may rely (without investigation or further
inquiry) on documents provided by the mortgages trustee, Funding 1
and the cash manager, the ratings agencies and the advice of
consultants and advisers and shall not be liable for any loss or
damage arising as a result of such reference;
* the security trustee is not required to monitor whether an
intercompany loan event of default under any intercompany loan has
occurred or compliance by Funding 1 with the transaction documents;
* the security trustee will be taken not to have knowledge of the
occurrence of an intercompany loan event of default under any
intercompany loan unless the security trustee has received written
notice from a Funding 1 secured creditor stating that an
intercompany loan event of default has occurred and describing that
intercompany loan event of default;
* the security trustee has no duties or responsibilities except those
expressly set out in the Funding 1 deed of charge or the
transaction documents;
* any action taken by the security trustee under the Funding 1 deed
of charge or any transaction document binds all of the Funding 1
secured creditors;
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* each Funding 1 secured creditor must make its own independent
investigations, without reliance on the security trustee, as to the
affairs of Funding 1 and whether or not to request that the
security trustee take any particular course of action under any
transaction document;
* the security trustee and its affiliates may engage in any kind of
business with Funding 1 or any of the Funding 1 secured creditors
as if it were not security trustee and may receive consideration
for services in connection with any transaction document or
otherwise without having to account to the Funding 1 secured
creditors;
* the security trustee has no liability under or in connection with
the Funding 1 deed of charge or any other transaction document,
whether to a Funding 1 secured creditor or otherwise, other than to
the extent to which (1) the liability is able to be satisfied in
accordance with the Funding 1 deed of charge out of the property
held by it on trust under the Funding 1 deed of charge and (2) it
is actually indemnified for the liability. This limitation of
liability does not apply to a liability of the security trustee to
the extent that it is not satisfied because there is a reduction in
the extent of the security trustee's indemnification as a result of
its fraud, negligence or wilful misconduct or breach of the terms
of the Funding 1 deed of charge; and
* the security trustee is not responsible for any deficiency which
may arise because it is liable to tax in respect of the proceeds of
security.
The security trustee has had no involvement in the preparation of any part
of this prospectus, other than any particular reference to the security
trustee. The security trustee expressly disclaims and takes no responsibility
for any other part of this prospectus. The security trustee makes no statement
or representation in this prospectus, has not authorised or caused the issue of
any part of it and takes no responsibility for any part of it. The security
trustee does not guarantee the performance of the issuer notes or the payment
of principal or interest on the issuer notes.
GOVERNING LAW
The Funding 1 deed of charge is governed by English law.
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SECURITY FOR THE ISSUER'S OBLIGATIONS
The issuer will provide security for its obligations by entering into the
issuer deed of charge with the issuer secured creditors, who are the security
trustee, the issuer noteholders, the note trustee, the paying agents, the
registrar, the transfer agent, the agent bank, the issuer swap providers, the
corporate services provider under the issuer corporate services agreement, the
issuer cash manager and the issuer account bank.
The issuer deed of charge has five primary functions:
* it sets out covenants of the issuer;
* it creates security interests in favour of the security trustee
which the security trustee then holds on trust for each of the
issuer secured creditors;
* it sets out the enforcement procedures relating to a default by the
issuer of its covenants under the transaction documents (including
the appointment of a receiver);
* it sets out the order in which the security trustee applies monies
standing to the credit of the issuer transaction account both prior
to and following the service of a note acceleration notice on the
issuer; and
* it sets out the appointment of the security trustee, its powers and
responsibilities and the limitations on those responsibilities.
The following section contains a summary of the material terms of the issuer
deed of charge. The summary does not purport to be complete and is subject to
the provisions of the issuer deed of charge, a form of which has been filed as
an exhibit to the registration statement of which this prospectus is a part.
COVENANTS OF THE ISSUER
The issuer deed of charge contains covenants made by the issuer in favour of
the security trustee on trust for the benefit of itself, any receiver of the
issuer and the issuer secured creditors. The main covenants are that the issuer
will pay all amounts due to each of the issuer secured creditors as they become
due and that it will comply with its other obligations under the issuer
transaction documents.
ISSUER SECURITY
Under the issuer deed of charge, the issuer creates the following security
interests in favour of the security trustee for and on behalf of the secured
creditors in respect of its obligations:
* an assignment of all of the issuer's right, benefit and interest
under the issuer transaction documents to which it is a party,
including the issuer intercompany loan agreement, the Funding 1
deed of charge, the issuer swap agreements, the issuer paying agent
and agent bank agreement, the issuer underwriting agreement, the
issuer subscription agreement, the issuer corporate services
agreement, the issuer bank account agreement, the issuer cash
management agreement and the issuer trust deed;
* a first ranking fixed charge (which may take effect as a floating
charge) over all of the issuer's right, title, interest and benefit
present and future in the issuer transaction account and any
amounts deposited in them from time to time;
* a first ranking fixed charge (which may take effect as a floating
charge) over all of the issuer's right, title, interest and benefit
in all authorised investments made by or on behalf of the issuer,
including all monies and income payable under them; and
* a first floating charge over all of the issuer's property, assets
and undertaking not already secured under the security interests
described above.
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NATURE OF SECURITY -- FIXED CHARGE
The issuer may not deal with those of its assets which are subject to a
fixed charge without the prior written consent of the security trustee.
Accordingly, the issuer will not be permitted to deal in its ordinary course of
business with the assets which are expressed to be subject to a fixed charge.
In this way, the security is said to "fix" over those assets which are
expressed to be subject to a fixed charge (being the charges and assignments
described in the first three bullet points in this section).
NATURE OF SECURITY -- FLOATING CHARGE
Unlike the fixed charges, the floating charge does not attach to specific
assets but instead "FLOATS" over a class of assets which may change from time
to time, allowing the issuer to deal with those assets and to give third
parties title to those assets free from any encumbrance in the event of sale,
discharge or modification, provided those dealings and transfers of title are
in the ordinary course of the issuer's business. Any assets acquired by the
issuer after the closing date (including assets acquired as a result of the
disposition of any other assets of the issuer) which are not subject to fixed
charges described in the preceding section will also be subject to the floating
charge.
[The existence of the floating charge allows the security trustee to appoint
an administrative receiver of the issuer and thereby prevent the appointment of
an administrator or receiver of the issuer by one of the issuer's other
creditors. This ensures that in the event that enforcement proceedings are
commenced in respect of amounts due and owing by the issuer, the security
trustee will always be able to control those proceedings in the best interest
of the issuer secured creditors. However, see "RISK FACTORS -- CHANGES OF LAW
MAY ADVERSELY AFFECT YOUR INTERESTS" relating to the appointment of
administrative receivers.]
[The interest of the issuer secured creditors in property and assets over
which there is a floating charge will rank behind the claims of certain
preferential creditors on enforcement of the issuer security additionally, a
"prescribed part" (currently up to a maximum amount of [GBP]600,000) of the
floating charge realisations available for distribution (the fund) must be set
aside by to satisfy the claims of unsecured creditors. This means that the
claims of preferential creditors and the beneficiaries of the fund will be paid
out of the proceeds of enforcement of the floating charge ahead of amounts due
to noteholders.[The floating charge created by the issuer deed of charge may
"crystallise" and become a fixed charge over the relevant class of assets owned
by the issuer at the time of crystallisation. Crystallisation will occur
automatically following the occurrence of specific events set out in the issuer
deed of charge, including, among other events, notice to the issuer from the
security trustee following an event of default under the issuer notes. A
crystallised floating charge will rank ahead of the claims of unsecured
creditors which are in excess of the fund but will to rank behind the claims of
preferential creditors and the beneficiaries of the fund on enforcement of the
issuer security.
ENFORCEMENT
The issuer deed of charge sets out the general procedures by which the
security trustee may take steps to enforce the security created by the issuer
so that the security trustee can protect the interests of each of the issuer
secured creditors.
The issuer deed of charge requires the security trustee to consider the
interests of each of the issuer secured creditors as to the exercise of its
powers, trusts, authorities, duties and discretions, but requires the security
trustee in the event of a conflict between the interests of the noteholders and
the interests of any other issuer secured creditor, to consider only, unless
stated otherwise, the interests of the noteholders. As among noteholders, the
security trustee will exercise its rights under the issuer deed of charge only
in accordance with the directions of the class of noteholders with the highest-
ranking issuer notes. If there is a conflict between the interests of the class
A noteholders of one series and the class A noteholders of another series, or a
conflict between the interests of class B noteholders of one series and the
class B noteholders of another series or a conflict between the interests of
the class C noteholders of one series and the class C noteholders of another
series then a resolution directing the security trustee to take any action must
be passed
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at separate meetings of the holders of each series of the class A issuer notes
or, as applicable, each series of the class B issuer notes or each series of
the class C issuer notes. In all such cases, the security trustee will only act
if it is indemnified and/or secured to its satisfaction.
The issuer security will become enforceable at any time following the
service of an issuer note acceleration notice on the issuer or if there are no
issuer notes outstanding, following a default in payment of any other secured
obligation of the issuer, provided that, if the issuer security has become
enforceable otherwise than by reason of a default in payment of any amount due
on the issuer notes, the security trustee will not be entitled to dispose of
all or part of the assets comprised in the issuer security unless either:
* a sufficient amount would be realised to allow a full and immediate
discharge of all amounts owing in respect of the class A issuer
notes or, if the class A issuer notes have been fully repaid, the
class B issuer notes or, if the class B issuer notes have been
fully repaid, the class C issuer notes; or
* the security trustee is of the sole opinion that the cashflow
expected to be received by the issuer will not, or that there is a
significant risk that it will not, be sufficient, having regard to
any other relevant actual, contingent or prospective liabilities of
the issuer, to discharge in full over time all amounts owing in
respect of the class A issuer notes or, if the class A issuer notes
have been fully repaid, the class B issuer notes or, if the class B
issuer notes have been fully repaid, the class C issuer notes.
Each of the issuer secured creditors (other than the noteholders, the note
trustee acting on behalf of the noteholders and the security trustee) will
agree under the issuer deed of charge that they will not take steps directly
against the issuer for any amounts owing to them, unless the security trustee
has become bound to enforce the issuer security but has failed to do so within
30 business days of becoming so bound.
ISSUER POST-ENFORCEMENT PRIORITY OF PAYMENTS
The issuer deed of charge sets out the order of priority of distribution by
the security trustee, following service of an issuer note acceleration notice,
of amounts received or recovered by the security trustee (or a receiver
appointed on its behalf). There are two separate payment orders of priority
depending on whether the Funding 1 security has also been enforced. These
orders of priority are described in "CASHFLOWS".
APPOINTMENT, POWERS, RESPONSIBILITIES AND LIABILITIES OF THE SECURITY TRUSTEE
The security trustee is appointed to act as trustee on behalf of the issuer
secured creditors on the terms and conditions of the issuer deed of charge. It
holds the benefit of the security created by the issuer deed of charge on trust
for each of the issuer secured creditors in accordance with the terms and
conditions of the issuer deed of charge.
The security trustee may, without the consent or sanction of the issuer
secured creditors, concur with any person in making or sanctioning any
modifications to the transaction documents:
* which in the opinion of the security trustee it may be expedient to
make, provided that the security trustee is of the opinion that
such modification will not be materially prejudicial to the
interests of the secured creditors or, if it is not of that opinion
in relation to any secured creditor, such secured creditor has
given its written consent to such modification; or
* which in the opinion of the security trustee is made to correct a
manifest error or is of a formal, minor or technical nature.
The security trustee will be entitled to assume that the exercise of its
rights, powers, duties and discretions will not be materially prejudicial to
the interests of the noteholders if each of the rating agencies has confirmed
that the then current rating by it of the notes would not be adversely affected
by such exercise.
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In addition, the security trustee will give its consent to any modifications
to the mortgage sale agreement, the servicing agreement, the cash management
agreement, the Funding 1 deed of charge, the Funding 1 liquidity facility
agreement, the Funding 1 swap agreement, the terms and conditions of the
intercompany loans, the bank account agreement and the master definitions and
construction schedule, that are requested by Funding 1 or the cash manager,
provided that Funding 1 or the cash manager certifies to the security trustee
in writing that such modifications are required in order to accommodate:
(i) the entry by Funding 1 into new intercompany loan agreements and/or
the addition of other relevant creditors to the transaction
documents;
(ii) the issue of new types of notes by new issuers;
(iii) the inclusion of Funding 2 as a beneficiary of the mortgages trust;
(iv) the issue of new notes by Funding 2;
(v) the assignment of new types of loans to the mortgages trustee;
(vi) changes to be made to the reserve fund required amount and/or the
manner in which the reserve fund is funded;
(vii) changes to be made to the definitions of asset trigger event and
non-asset trigger event; and
(viii) the addition of an additional Funding 1 liquidity facility in
the circumstances described in "CREDIT STRUCTURE -- ADDITIONAL
FUNDING 1 LIQUIDITY FACILITY",
and provided further that:
* in respect of the matters listed in paragraphs (i) to (v), the
relevant conditions precedent to, as applicable, the addition of
new issuers, the inclusion of Funding 2 as a beneficiary of the
mortgages trust or the assignment of new loans to the mortgages
trustee, have been satisfied; and
* in respect of the matters listed in paragraphs (i) to (vii), the
security trustee has received written confirmation from each of the
rating agencies then rating the notes that the relevant
modifications will not adversely affect the then current ratings of
the current notes.
The actual consent of the Funding 1 liquidity facility provider, the Funding
1 swap provider and the issuer swap providers will be required in order to make
the changes described above (subject to the terms of the issuer transaction
documents).
SECURITY TRUSTEE'S FEES AND EXPENSES
The issuer will reimburse the security trustee for all its costs and
expenses properly incurred in acting as security trustee. The security trustee
shall be entitled to a fee payable quarterly in the amount agreed from time to
time by the security trustee and the issuer. The issuer has agreed to indemnify
the security trustee and each of its officers, employees and advisers from and
against all claims, actions, proceedings, demands, liabilities, losses,
damages, costs and expenses arising out of or in connection with:
* the issuer transaction documents; or
* the security trustee's engagement as security trustee,
which it or any of its officers, employees or advisers may suffer as a result
of the issuer failing to perform any of its obligations.
The issuer will not be responsible under the issuer deed of charge for any
liabilities, losses, damages, costs or expenses resulting from the fraud,
negligence or wilful default on the part of the security trustee or any of its
officers, employees and advisers or breach by them of the terms of the issuer
deed of charge.
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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 the issuer.
In order to be eligible to act as security trustee, such successor security
trustee must agree to be bound by the terms of the issuer deed of charge and
must meet the applicable eligibility requirements under the issuer deed of
charge, including the requirement that it satisfies the minimum capitalization
and other applicable conditions in regards to trustee eligibility set forth in
the United States Investment Company Act of 1940, as amended. If within 60 days
of having given notice of its intention to retire, the issuer 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 issuer deed
of charge, and further provided that rating agencies confirm that the current
ratings of the notes shall not be either downgraded, reviewed or withdrawn as a
result of such appointment).
The issuer may remove the security trustee at any time providing that it has
the consent, which must not be unreasonably withheld or delayed, of each of the
issuer secured creditors to the removal.
In addition, the security trustee may, subject to the conditions specified
in the issuer deed of charge, appoint a co-trustee to act jointly with it.
A successor security trustee must be appointed in accordance with the
conditions specified in the issuer deed of charge before the retirement of the
current security trustee becomes effective.
ADDITIONAL PROVISIONS OF THE ISSUER DEED OF CHARGE
The issuer deed of charge contains a range of provisions regulating the
scope of the security trustee's duties and liability. These include the
following:
* the security trustee will, if reasonably practicable, give prior
written notification to the seller of the security trustee's
intention to enforce the issuer security (although any failure to
so notify will not prejudice the ability of the security trustee to
enforce the issuer security);
* the security trustee is not responsible for the adequacy or
enforceability of the issuer deed of charge or the security
interests created thereby or any other issuer transaction document;
* the security trustee is not required to exercise its powers under
the issuer deed of charge without being directed or requested to do
so by an extraordinary resolution of the noteholders or in writing
by the holders of at least 25 per cent. of the aggregate principal
amount outstanding of the issuer notes then outstanding or by any
other issuer secured creditor (and then only to the extent that it
is indemnified and/or secured to its satisfaction) provided that:
(i) the security trustee will not act at the direction or request
of the class B noteholders unless either so to do would not,
in its sole opinion, be materially prejudicial to the
interests of the class A noteholders or the action is
sanctioned by an extraordinary resolution of the class A
noteholders;
(ii) the security trustee will not act at the direction or request
of the class C noteholders unless either so to do would not,
in its sole opinion, be materially prejudicial to the
interests of the class A noteholders and/or the class B
noteholders or the action is sanctioned by extraordinary
resolutions of the class A noteholders and/or the class B
noteholders, as the case may be; and
(iii) the security trustee will not act at the direction or
request of any other issuer secured creditor unless so to
do would not, in its sole opinion, be materially prejudicial
to the interests of the noteholders or the action is
sanctioned by extraordinary resolutions of the noteholders
and each of the other relevant secured creditors that ranks
ahead of that issuer secured creditor (in the issuer
post-enforcement priority of payments) also consents to that
action;
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* the security trustee may rely (without investigation or further
inquiry) on documents provided by the issuer, the issuer cash
manager, the issuer swap providers, the agent bank, the paying
agents, the registrar, the transfer agent, the issuer account bank,
the corporate services provider, the rating agencies and the advice
of consultants and advisers and shall not be liable for any loss or
damage arising as a result of such reliance;
* the security trustee is not required to monitor whether an issuer
note event of default has occurred or compliance by the issuer with
the issuer transaction documents;
* the security trustee will be taken not to have knowledge of the
occurrence of an issuer note event of default unless the security
trustee has received written notice from an issuer secured creditor
stating that an issuer note event of default has occurred and
describing that issuer note event of default;
* the security trustee may rely (without investigation or further
inquiry) on any instructions or directions given to it by the note
trustee as being given on behalf of the relevant class of
noteholders without inquiry about compliance with the issuer trust
deed and shall not be liable for any loss or damage arising as a
result of such reliance;
* the security trustee has no duties or responsibilities except those
expressly set out in the issuer deed of charge or the issuer
transaction documents;
* any action taken by the security trustee under the issuer deed of
charge or any of the issuer transaction documents binds all of the
issuer secured creditors;
* each issuer secured creditor must make its own independent
investigations, without reliance on the security trustee, as to the
affairs of the issuer and whether or not to request that the
security trustee take any particular course of action under any
issuer transaction document;
* the security trustee in a capacity other than as security trustee
can exercise its rights and powers as such as if it were not acting
as the security trustee;
* the security trustee and its affiliates may engage in any kind of
business with the issuer or any of the issuer secured creditors as
if it were not the security trustee and may receive consideration
for services in connection with any issuer transaction document or
otherwise without having to account to the issuer secured
creditors;
* the security trustee has no liability under or in connection with
the issuer deed of charge or any other issuer transaction document,
whether to an issuer secured creditor or otherwise, (1) other than
to the extent to which the liability is able to be satisfied in
accordance with the issuer deed of charge out of the property held
by it on trust under the issuer deed of charge and (2) it is
actually indemnified for the liability. This limitation of
liability does not apply to a liability of the security trustee to
the extent that it is not satisfied because there is a reduction in
the extent of the security trustee's indemnification as a result of
its fraud, negligence, wilful misconduct or breach of the terms of
the issuer deed of charge; and
* the security trustee is not responsible for any deficiency which
may arise because it is liable to tax in respect of the proceeds of
security.
The security trustee has had no involvement in the preparation of any part
of this prospectus, other than any particular reference to the security
trustee. The security trustee expressly disclaims and takes no responsibility
for any other part of this prospectus. The security trustee makes no statement
or representation in this prospectus, has not authorised or caused the issue of
any part of it and takes no responsibility for any part of it. The security
trustee does not guarantee the success of the issuer notes or the payment of
principal or interest on the issuer notes.
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TRUST INDENTURE ACT PREVAILS
The issuer deed of charge contains a provision that, if any other provision
of the issuer deed of charge limits, qualifies or conflicts with another
provision which is required to be included in the issuer deed of charge by, and
is not subject to contractual waiver under, the US Trust Indenture Act of 1939
(as amended), then the required provision of that Act will prevail.
GOVERNING LAW
The issuer deed of charge will be governed by English law.
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CASHFLOWS
DISTRIBUTION OF FUNDING 1 AVAILABLE REVENUE RECEIPTS
DEFINITION OF FUNDING 1 AVAILABLE REVENUE RECEIPTS
"FUNDING 1 AVAILABLE REVENUE RECEIPTS" will be calculated by the cash
manager on the day falling four business days prior to each Funding 1 interest
payment date and will be an amount equal to the sum of:
* all mortgages trustee available revenue receipts distributed to
Funding 1 during the interest period ending on the immediately
following Funding 1 interest payment date;
* any amounts paid by the seller to Funding 1 in consideration of the
seller acquiring a further interest in the trust property (see "THE
MORTGAGES TRUST -- ACQUISITION BY SELLER OF AN INTEREST RELATING TO
CAPITALISED INTEREST");
* other net income of Funding 1 including all amounts of interest
received on the Funding 1 GIC account, the Funding 1 transaction
account and/or authorised investments (as defined in the glossary),
amounts received by Funding 1 under the Funding 1 swap agreement
(other than any early termination amount received by Funding 1
under the Funding 1 swap agreement), in each case to be received
on or prior to the immediately following Funding 1 interest payment
date; and
* the amounts standing to the credit of the reserve ledger.
Funding 1 available revenue receipts will not include any payment received
by Funding 1 as described in "THE MORTGAGES TRUST -- PAYMENT BY THE SELLER TO
FUNDING 1 OF THE AMOUNT OUTSTANDING UNDER AN INTERCOMPANY LOAN" and will not
include any proceeds of a new intercompany loan (see "THE ISSUER INTERCOMPANY
LOAN AGREEMENT -- NEW INTERCOMPANY LOAN AGREEMENTS"). Four business days prior
to each Funding 1 interest payment date, the cash manager will calculate
whether there will be an excess or a deficit of Funding 1 available revenue
receipts (including the reserve fund) to pay items (A) to (F), (H) and (J) of
the Funding 1 pre-enforcement revenue priority of payments.
If there is a deficit on a Funding 1 interest payment date, then Funding 1
shall pay or provide for that deficit by applying amounts then standing to the
credit of the Funding 1 principal ledger, if any, and the cash manager shall
make a corresponding entry in the relevant principal deficiency ledger, as
described in "CREDIT STRUCTURE".
Funding 1 principal receipts may not be used to pay interest on any term
advance if and to the extent that would result in a deficiency being recorded
or an existing deficiency being increased, on a principal deficiency sub-ledger
relating to a higher ranking term advance.
Funding 1 shall apply any excess revenue to extinguish any balance on the
principal deficiency ledger, as described in "CREDIT STRUCTURE".
If, on a Funding 1 interest payment date, there is a deficit of Funding 1
available revenue receipts and there are no (or insufficient) amounts standing
to the credit of the Funding 1 principal ledger to cure that deficit as
described above, then the cash manager will direct Funding 1 to request a
drawing under the Funding 1 liquidity facility to apply towards the deficit
(see "CREDIT STRUCTURE -- FUNDING 1 LIQUIDITY FACILITY").
DISTRIBUTION OF FUNDING 1 AVAILABLE REVENUE RECEIPTS PRIOR TO THE SERVICE OF AN
INTERCOMPANY LOAN ACCELERATION NOTICE ON FUNDING 1
This section sets out the order of priority of payments of Funding 1
available revenue receipts as at the closing date. If Funding 1 enters into new
intercompany loan agreements, then this order of priority will change -- see
"SECURITY FOR FUNDING 1'S OBLIGATIONS".
Except for amounts due to third parties by the issuer and/or the previous
issuers and/or Funding 1 under paragraph (A) or amounts due to the account bank
and/or the issuer account bank and/or account banks for the previous issuers,
which shall be paid when due, on each Funding 1
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interest payment date prior to the service of an intercompany loan acceleration
notice on Funding 1, the cash manager will apply the Funding 1 available
revenue receipts in the following order of priority (the "FUNDING 1 PRE-
ENFORCEMENT REVENUE PRIORITY OF PAYMENTS"):
(A) first, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to:
* the security trustee (together with interest and any amount in
respect of VAT on those amounts) and to provide for any amounts
due or to become due in the immediately following interest
period to the security trustee under the Funding 1 deed of
charge;
* in no order of priority between them but in proportion to the
respective amounts due, to pay amounts due to (1) the issuer in
respect of the issuer's obligations specified in items (A) to
(C) inclusive of the issuer pre-enforcement revenue priority of
payments or, as the case may be, items (A) and (B) of the
issuer post-enforcement priority of payments, as described in
"-- DISTRIBUTION OF ISSUER REVENUE RECEIPTS PRIOR TO THE
SERVICE OF A NOTE ACCELERATION NOTICE ON THE ISSUER" and "--
DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS AND ISSUER REVENUE
RECEIPTS FOLLOWING THE SERVICE OF A NOTE ACCELERATION NOTICE ON
THE ISSUER AND THE SERVICE OF AN INTERCOMPANY LOAN ACCELERATION
NOTICE ON FUNDING 1" and (2) the previous issuers in respect of
the previous issuer's similar obligations under their
respective priorities of payments; and
* any third party creditors of Funding 1 (other than those
referred to later in this order of priority of payments), which
amounts have been incurred without breach by Funding 1 of the
transaction documents to which it is a party (and for which
payment has not been provided for elsewhere) and to provide for
any of these amounts expected to become due and payable in the
immediately following interest period by Funding 1 and to pay
or discharge any liability of Funding 1 for corporation tax on
any chargeable income or gain of Funding 1;
(B) then, to pay amounts due to the [Funding 1 liquidity facility
provider] under the [Funding 1 liquidity facility agreement]
(except for amounts drawn thereunder to repay principal due on the
bullet term advances and any "FUNDING 1 LIQUIDITY SUBORDINATED
AMOUNTS", which are:
* any withholding taxes and increased costs on the provision of
the Funding 1 liquidity facility; and
* any additional costs incurred by the Funding 1 liquidity
facility provider to comply with the requirements of the Bank
of England, the Financial Services Authority, the European
Central Bank and/or changes to the capital adequacy rules
applicable to the Funding 1 liquidity facility provider and
Funding 1);
(C) then, towards payment of amounts due and payable to the cash
manager under the cash management agreement (together with any
amount in respect of VAT on those amounts);
(D) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of amounts, if any, due and
payable to the account bank under the terms of the bank account
agreement and to the corporate services provider under the Funding
1 corporate services agreement;
(E) then, towards payment of all amounts (if any) due and payable to
the Funding 1 swap provider under the Funding 1 swap agreement
(including termination payments but excluding any Funding 1 swap
excluded termination amount (as defined later in this section);
(F) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of interest due and payable
on the term AAA advances;
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(G) then, towards a credit to the AAA principal deficiency sub-ledger
in an amount sufficient to eliminate any debit on that ledger;
(H) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of interest due and payable
on the term AA advances;
(I) then, towards a credit to the AA principal deficiency sub-ledger in
an amount sufficient to eliminate any debit on that ledger;
(J) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of interest due and payable
on the term BBB advances;
(K) then, towards a credit to the BBB principal deficiency sub-ledger
in an amount sufficient to eliminate any debit on that ledger;
(L) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of any amounts due to the
issuer and any previous issuer in respect of their respective
obligations (if any) to make a termination payment to a current
swap provider (but excluding any current swap excluded termination
amount);
(M) then, towards a credit to the reserve ledger in an amount up to the
reserve fund required amount (as defined in "Credit structure --
Reserve fund"), taking into account any net replenishment of the
reserve fund on that Funding 1 interest payment date from Funding 1
available principal receipts (see paragraph (B) of the Funding 1
pre-enforcement principal priority of payments);
(N) then, in no order of priority between them but in proportion to the
respective amounts due, to pay amounts due (without double
counting) to:
* the issuer and/or any previous issuer, as the case may be, in
respect of their respective obligations to pay any termination
payment to a current swap provider following a current swap
provider default or an issuer swap provider following an issuer
swap provider downgrade termination event;
* any other amounts due to the issuer under the issuer
intercompany loan agreement and/or to any previous issuers
under any previous intercompany loan agreements, and not
otherwise provided for in this order of priorities;
* after the occurrence of a Funding 1 swap provider default or a
Funding 1 swap provider downgrade termination event, towards
payment of any termination amount due and payable by Funding 1
under the Funding 1 swap agreement; and
* the Funding 1 liquidity facility provider to pay any Funding 1
liquidity subordinated amounts due under the Funding 1
liquidity facility agreement;
(O) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of amounts due to the
start-up loan provider under the start-up loan agreements;
(P) then, towards payment of an amount equal to 0.01 per cent. of the
Funding 1 available revenue receipts; and
(Q) then, towards payment to the shareholders of Funding 1 of any
dividend declared by Funding 1.
As used in this prospectus:
* "CURRENT SWAP PROVIDERS" means the issuer swap providers and the
previous swap providers;
* "CURRENT SWAP PROVIDER DEFAULT" means the occurrence of an event of
default (as defined in the relevant current swap agreement) where a
current swap provider is the defaulting party (as defined in the
relevant current swap agreement);
* "CURRENT SWAP AGREEMENTS" means the issuer swap agreements and the
previous swap agreements;
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* "FUNDING 1 SWAP PROVIDER DEFAULT" means the occurrence of an event
of default (as defined in the Funding 1 swap agreement) where the
Funding 1 swap provider is the defaulting party (as defined in the
Funding 1 swap agreement);
* "FUNDING 1 SWAP PROVIDER DOWNGRADE TERMINATION EVENT" means the
occurrence of an additional termination event following the failure
by the Funding 1 swap provider to comply with the requirements of
the ratings downgrade provisions set out in the Funding 1 swap
agreement;
* "ISSUER SWAP PROVIDER DEFAULT" means the occurrence of an event of
default (as defined in the relevant issuer swap agreement) where
the relevant issuer swap provider is the defaulting party (as
defined in the relevant issuer swap agreement);
* "ISSUER SWAP PROVIDER DOWNGRADE TERMINATION EVENT" means the
occurrence of an additional termination event following the failure
by an issuer swap provider to comply with the requirements of the
ratings downgrade provisions set out in the relevant issuer swap
agreement;
* "ISSUER SWAP EXCLUDED TERMINATION AMOUNT" means in relation to an
issuer swap agreement an amount equal to:
(a) the amount of any termination payment due and payable to the
relevant issuer swap provider as a result of an issuer swap
provider default or to the relevant issuer swap provider
following an issuer swap provider downgrade termination event;
less
(b) the amount, if any, received by the issuer from a replacement
swap provider upon entry by the issuer into an agreement with
such replacement swap provider to replace such issuer swap
agreement which has terminated as a result of such issuer swap
provider default or following the occurrence of such issuer
swap provider downgrade termination event;
* "CURRENT SWAP EXCLUDED TERMINATION AMOUNT" in relation to a current
swap agreement an amount equal to:
(a) the amount of any termination payment due and payable to the
relevant current swap provider as a result of a current swap
provider default or to the relevant issuer swap provider
following an issuer swap provider downgrade termination event;
less
(b) the amount, if any, received by the issuer from a replacement
swap provider upon entry by the issuer into an agreement with
such replacement swap provider to replace such current swap
agreement which has terminated as a result of such current swap
provider default or following the occurrence of such issuer
swap provider downgrade termination event; and
* "FUNDING 1 SWAP EXCLUDED TERMINATION AMOUNT" means in relation to
the Funding 1 swap agreement an amount equal to:
(a) the amount of any termination payment due and payable to the
Funding 1 swap provider as a result of a Funding 1 swap
provider default or a Funding 1 swap provider downgrade
termination event;
less
(b) the amount, if any, received by Funding 1 from a replacement
swap provider upon entry by Funding 1 into an agreement with
such replacement swap provider to replace the Funding 1 swap
agreement which has terminated as a result of such Funding 1
swap provider default or following the occurrence of such
Funding 1 swap provider downgrade termination event.
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DISTRIBUTION OF ISSUER REVENUE RECEIPTS
DEFINITION OF ISSUER REVENUE RECEIPTS
"ISSUER REVENUE RECEIPTS" will be calculated by the issuer cash manager four
business days prior to each interest payment date and will be an amount equal
to the sum of:
* interest to be paid by Funding 1 on the relevant Funding 1 interest
payment date in respect of the issuer term advances under the
issuer intercompany loan;
* fees to be paid to the issuer by Funding 1 on the relevant Funding
1 interest payment date under the terms of the issuer intercompany
loan;
* interest payable on the issuer's bank accounts and any authorised
investments (as defined in the glossary) and which will be received
on or before the relevant interest payment date in respect of the
issuer notes; and
* other net income of the issuer including amounts received or to be
received under the issuer swap agreements on or before the relevant
interest payment date (without double counting).
DISTRIBUTION OF ISSUER REVENUE RECEIPTS PRIOR TO THE SERVICE OF A NOTE
ACCELERATION NOTICE ON THE ISSUER
The issuer cash management agreement sets out the order of priority of
distribution by the issuer cash manager, prior to the service of a note
acceleration notice on the issuer, of amounts received by the issuer on each
interest payment date. As at the closing date, the order of priority will be as
described in this section.
Except for amounts due to third parties by the issuer under paragraph (B)
below or amounts due to the issuer account bank under paragraph (C) below,
which shall be paid when due, on each interest payment date the issuer cash
manager will apply issuer revenue receipts in the following order of priority
(the "ISSUER PRE-ENFORCEMENT REVENUE PRIORITY OF PAYMENTS"):
(A) first, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to:
* the security trustee, together with interest and any amount in
respect of VAT on those amounts, and to provide for any amounts
due or to become due during the following interest period to
the security trustee under the issuer deed of charge;
* the note trustee, together with interest and any amount in
respect of VAT on those amounts, and to provide for any amounts
due or to become due during the following interest period to
the note trustee under the issuer trust deed; and
* the agent bank, the paying agents, the registrar and the
transfer agent, together with interest and any amount in
respect of VAT on those amounts, and any costs, charges,
liabilities and expenses then due or to become due during the
following interest period to the agent bank, the registrar, the
transfer agent and the paying agents under the issuer paying
agent and agent bank agreement;
(B) then, to pay amounts due to any third party creditors of the issuer
(other than those referred to later in this order of priority of
payments), which amounts have been incurred without breach by the
issuer of the issuer transaction documents to which it is a party
and for which payment has not been provided for elsewhere and to
provide for any of those amounts expected to become due and payable
during the following interest period by the issuer and to pay or
discharge any liability of the issuer for corporation tax on any
chargeable income or gain of the issuer;
(C) then, in no order of priority between them but in proportion to the
respective amounts due, to pay amounts due to the issuer cash
manager, together with any amount in respect of VAT on those
amounts, and to provide for any amounts due, or to become due to
the issuer cash manager in the immediately succeeding interest
period, under the
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issuer cash management agreement and to the corporate services provider under
the issuer corporate services agreement and to the issuer account bank under
the issuer bank account agreement;
(D) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* on each Funding 1 interest payment date amounts due to the
series 1 issuer swap provider in respect of the series 1 class
A issuer swap (including any termination payment but excluding
any related issuer swap excluded termination amount) and from
amounts received from the series 1 issuer swap provider to pay
on each interest payment date interest due and payable on the
series 1 class A issuer notes;
* on each Funding 1 interest payment date amounts due to the
series 2 issuer swap provider in respect of the series 2 class
A issuer swap (including any termination payment but excluding
any related issuer swap excluded termination amount) and from
amounts received from the issuer swap provider to pay on each
interest payment date interest due and payable on the series 2
class A issuer notes;
* on each Funding 1 interest payment date amounts due to the
series 3 issuer swap provider in respect of the series 3 class
A issuer swap (including any termination payment but excluding
any related issuer swap excluded termination amount) and from
amounts received from the series 3 issuer swap provider in
relation to such swap to pay interest due and payable on the
series 3 class A issuer notes;
* on each Funding 1 interest payment date amounts due to the
series 4 issuer swap provider in respect of the series 4 class
A issuer swap (including any termination payment but excluding
any related issuer swap excluded termination amount) and from
amounts received from the series 4 issuer swap provider in
relation to such swap to pay on each interest payment date
interest due and payable on the series 4 class A issuer notes;
and
* interest due and payable on the series 5 class A issuer notes;
(E) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 issuer swap provider in respect of
the series 1 class B issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 1
issuer swap provider in relation to such swap to pay interest
due and payable on the series 1 class B issuer notes;
* amounts due to the series 2 issuer swap provider in respect of
the series 2 class B issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 2
issuer swap provider in relation to such swap to pay interest
due and payable on the series 2 class B issuer notes;
* amounts due to the series 3 issuer swap provider in respect of
the series 3 class B issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 3
issuer swap provider in relation to such swap to pay interest
due and payable on the series 3 class B issuer notes;
* amounts due to the series 4 issuer swap provider in respect of
the series 4 class B issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 4
issuer swap provider in relation to such swap to pay interest
due and payable on the series 4 class B issuer notes; and
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* amounts due to the series 5 issuer swap provider in respect of
the series 5 class B issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 5
issuer swap provider in relation to such swap to pay interest
due and payable on the series 5 class B issuer notes;
(F) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 issuer swap provider in respect of
the series 1 class C issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 1
issuer swap provider in relation to such swap to pay interest
due and payable on the series 1 class C issuer notes;
* amounts due to the series 2 issuer swap provider in respect of
the series 2 class C issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 2
issuer swap provider in relation to such swap to pay interest
due and payable on the series 2 class C issuer notes;
* amounts due to the series 3 issuer swap provider in respect of
the series 3 class C issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 3
issuer swap provider in relation to such swap to pay interest
due and payable on the series 3 class C issuer notes;
* amounts due to the series 4 issuer swap provider in respect of
the series 4 class C issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 4
issuer swap provider in relation to such swap to pay interest
due and payable on the series 4 class C issuer notes; and
* amounts due to the series 5 issuer swap provider in respect of
the series 5 class C issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 5
issuer swap provider in relation to such swap to pay interest
due and payable on the series 5 class C issuer notes;
(G) then, in no order of priority between them but in proportion to the
respective amounts due, to pay any termination payment due (without
double counting) to:
* the series 1 issuer swap provider as a result of an issuer swap
provider default or an issuer swap provider downgrade
termination event in respect of the series 1 issuer swap
provider;
* the series 2 issuer swap provider as a result of an issuer swap
provider default or an issuer swap provider downgrade
termination event in respect of the series 2 issuer swap
provider;
* the series 3 issuer swap provider as a result of an issuer swap
provider default or an issuer swap provider downgrade
termination event in respect of the series 3 issuer swap
provider;
* the series 4 issuer swap provider as a result of an issuer swap
provider default or an issuer swap provider downgrade
termination event in respect of the series 4 issuer swap
provider; and
* the series 5 issuer swap provider as a result of an issuer swap
provider default or an issuer swap provider downgrade
termination event in respect of the series 5 issuer swap
provider.
(H) then, to the issuer, an amount equal to 0.01 per cent. of the
interest received on the issuer term advances, to be retained by
the issuer as profit; and
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(I) then, to pay to shareholders of the issuer any dividend declared by
the issuer.
DISTRIBUTION OF ISSUER REVENUE RECEIPTS AFTER THE SERVICE OF A NOTE
ACCELERATION NOTICE ON THE ISSUER BUT PRIOR TO THE SERVICE OF AN INTERCOMPANY
LOAN ACCELERATION NOTICE ON FUNDING 1
Following the service of a note acceleration notice on the issuer under the
issuer deed of charge, but prior to the service of an intercompany loan
acceleration notice on Funding 1 under the Funding 1 deed of charge, the
security trustee will apply issuer revenue receipts in the same order of
priority as set out in "DISTRIBUTION OF ISSUER REVENUE RECEIPTS" except that:
* in addition to the amounts due to the security trustee under
paragraph (A) of "-- DISTRIBUTION OF ISSUER REVENUE RECEIPTS PRIOR
TO THE SERVICE OF A NOTE ACCELERATION NOTICE ON THE ISSUER",
issuer revenue receipts will be applied to pay amounts due to any
receiver appointed by the security trustee together with interest
and any amount in respect of VAT on those amounts, and to provide
for any amounts due or to become due to the receiver during the
following interest period; and
* the security trustee will not be required to pay amounts due to any
entity which is not an issuer secured creditor.
DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL RECEIPTS
PRINCIPAL RECEIPTS PAID TO FUNDING 1 BY THE MORTGAGES TRUSTEE ON EACH
DISTRIBUTION DATE
On each distribution date mortgages trustee available principal receipts
shall be paid to Funding 1 in the manner and to the extent provided by the
mortgages trustee principal priority of payments (see "THE MORTGAGES TRUST --
MORTGAGES TRUST CALCULATION OF PRINCIPAL RECEIPTS" above) and shall be
deposited in the Funding 1 GIC account and credited by the cash manager to
"FUNDING 1 PRINCIPAL LEDGER" (being a ledger maintained by the cash manager for
Funding 1).
DEFINITION OF FUNDING 1 AVAILABLE PRINCIPAL RECEIPTS
"FUNDING 1 AVAILABLE PRINCIPAL RECEIPTS" will be calculated by the cash
manager on the day falling four business days prior to each Funding 1 interest
payment date and will be an amount equal to the sum of:
* all Funding 1 principal receipts received by Funding 1 during the
interest period ending on the relevant Funding 1 interest payment
date;
* all other Funding 1 principal receipts standing to the credit of
the cash accumulation ledger which are to be applied on the next
Funding 1 interest payment date to repay a bullet term advance and/
or, subject to Rule (1) below, a scheduled amortisation instalment,
or to make a payment under items (A) or (B) of the Funding 1 pre-
enforcement principal priority of payments and, if such Funding 1
interest payment date occurs on or after a trigger event, the
remainder of such receipts standing to the credit of the cash
accumulation ledger;
* the amount, if any, to be credited to the principal deficiency
ledger pursuant to items (G), (I) and (K) in "-- Distribution of
Funding 1 available revenue receipts prior to the service of an
intercompany loan acceleration notice on Funding 1" on the relevant
Funding 1 interest payment date;
* in so far as available for and needed to make eligible liquidity
facility principal repayments (see "CREDIT STRUCTURE -- FUNDING 1
LIQUIDITY FACILITY" below), any amounts available to be drawn under
the Funding 1 liquidity facility (but less any amounts applied or
to be applied on the relevant date in payment of interest and other
revenue expenses as set out in items (A) to (F) and (H) and (J)
(inclusive) of the Funding 1 pre-enforcement revenue priority of
payments plus any amounts which will be repaid to the Funding 1
liquidity facility provider under item (A) of the relevant priority
of payments (relating to the allocation of Funding 1 available
principal receipts) on the next Funding 1 interest payment date
(i.e. occurring at the end of such period of four business days) to
the extent that such repayment is available to be redrawn on that
Funding 1 interest payment date); and
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* in so far as available for and needed to make eligible reserve fund
principal repayments (see "CREDIT STRUCTURE -- RESERVE FUND"
below), the amount that would then be standing to the credit of the
reserve ledger (but less any amounts applied or to be applied on
the relevant date in payment of interest and other revenue expenses
as set out in items (A) to (L) (inclusive) of the Funding 1 pre-
enforcement revenue priority of payments plus any amounts which
will be credited to the reserve ledger under item (B) of the
relevant priority of payments (relating to the allocation of
Funding 1 available principal receipts) on the next Funding 1
interest payment date (i.e. occurring at the end of such period of
four business days),
less amounts to be applied on the relevant Funding 1 interest payment date
to pay items (A) to (F) (inclusive), (H) and (J) of the Funding 1 pre-
enforcement revenue priority of payments.
DUE AND PAYABLE DATES OF ISSUER TERM ADVANCES
An issuer term advance shall become "DUE AND PAYABLE" on the earlier to
occur of:
(1) the date being:
* in relation to the issuer series 1 term AAA advance, the
Funding 1 interest payment date falling in September, 2004;
* in relation to the issuer series 2 term AAA advance, the
Funding 1 interest payment date falling in December, 2006;
* in relation to the issuer series 3 term AAA advance, the
Funding 1 interest payment date falling in __ and __;
* in relation to the issuer series 4 term AAA advance, the
Funding 1 interest payment date falling in __;
* in relation to the issuer series 5 term AAA advance, the
Funding 1 interest payment date falling in __ and __;
* in relation to the issuer series 1 term AA advance, the Funding
1 interest payment date falling ON OR AFTER the date on which
the issuer series 1 term AAA advance has been fully repaid;
* in relation to the issuer series 2 term AA advance, the Funding
1 interest payment date falling ON OR AFTER the date on which
the issuer series 2 term AAA advance has been fully repaid;
* in relation to the issuer series 3 term AA advance, the Funding
1 interest payment date falling ON OR AFTER the date on which
the issuer series 3 term AAA advance has been fully repaid;
* in relation to the issuer series 4 term AA advance, the Funding
1 interest payment date falling ON OR AFTER the date on which
the issuer series 4 term AAA advance has been fully repaid;
* in relation to the issuer series 5 term AA advance, the Funding
1 interest payment date falling ON OR AFTER the date on which
the issuer series 5 term AAA advance has been fully repaid;
* in relation to the issuer series 1 term BBB advance, the
Funding 1 interest payment date falling ON OR AFTER the date on
which the issuer series 1 term AA advance has been fully
repaid;
* in relation to the issuer series 2 term BBB advance, the
Funding 1 interest payment date falling ON OR AFTER the date on
which the issuer series 2 term AA advance has been fully
repaid;
* in relation to the issuer series 3 term BBB advance, the
Funding 1 interest payment date falling ON OR AFTER the date on
which the issuer series 3 term AA advance has been fully
repaid;
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* in relation to the issuer series 4 term BBB advance, the
Funding 1 interest payment date falling ON OR AFTER the date on
which the issuer series 4 term AA advance has been fully
repaid; and
* in relation to the issuer series 5 term BBB advance, the
Funding 1 interest payment date falling ON OR AFTER the date on
which the issuer series 5 term AA advance has been fully
repaid;
(2) the date upon which a trigger event occurs;
(3) the date upon which a note acceleration notice is served on the
issuer under the issuer deed of charge;
(4) the date upon which an intercompany loan acceleration notice is
served on Funding 1 under the Funding 1 deed of charge; and
(5) the date upon which a step-up date occurs in relation to the
relevant issuer term advance.
In each case, when an issuer term advance becomes due and payable, it shall
continue to be due and payable until it is fully repaid. If there are
insufficient funds available to repay an issuer term advance on a Funding 1
interest payment date upon which that issuer term advance is due and payable,
then the shortfall will be repaid on subsequent Funding 1 interest payment
dates from Funding 1 available principal receipts until that issuer term
advance is fully repaid.
REPAYMENT OF TERM ADVANCES OF EACH SERIES PRIOR TO THE OCCURRENCE OF A TRIGGER
EVENT AND PRIOR TO THE SERVICE ON FUNDING 1 OF AN INTERCOMPANY LOAN
ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF A NOTE ACCELERATION NOTICE
On each Funding 1 interest payment date (but prior to the occurrence of a
trigger event or the service on Funding 1 of an intercompany loan acceleration
notice or the service on each issuer of a note acceleration notice), the cash
manager shall apply Funding 1 available principal receipts in the following
order of priority:
(A) first, towards repayment of the Funding 1 liquidity facility
provider amounts outstanding under the Funding 1 liquidity facility
that were drawn in order to make eligible liquidity facility
principal repayments;
(B) then, towards replenishment of the reserve fund to the extent only
that monies have been drawn from the reserve fund to make eligible
reserve fund principal repayments;
(C) then, towards repayment of all term AAA advances that are then due
and payable in an order of priority based on their final repayment
date, so that the earliest maturing term AAA advance is paid first
(and if any term AAA advances have the same final repayment date,
then those term advances will be paid in no order of priority
between them but in proportion to their respective amounts due), in
each case subject to Rules (1), (2) and (3) below;
(D) then, towards repayment of all term AA advances that are then due
and payable in no order of priority between them but in proportion
to the respective amounts due, in each case subject to Rules (1),
(2) and (3) below;
(E) then, towards repayment of all term BBB advances that are then due
and payable in no order of priority between them but in proportion
to the respective amounts due, in each case subject to Rules (1),
(2) and (3) below;
(F) then, towards a credit to the cash accumulation ledger until the
balance is equal to Funding 1's cash accumulation liability (as
calculated after any payments are made at item (C) of this priority
of payments); and
(G) then, the remainder shall be credited to the Funding 1 principal
ledger.
In the applicable circumstances, the following Rules apply in determining
the amounts to be paid under items (C), (D) and (E) of the priority of payments
set out above and below:
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RULE (1) -- DEFERRAL OF REPAYMENT OF PASS-THROUGH TERM ADVANCES AND/OR
SCHEDULED AMORTISATION INSTALMENTS IN CERTAIN CIRCUMSTANCES.
(A) Deferral of term AA advances and/or term BBB advances
If on a Funding 1 interest payment date:
(1) there is a debit balance on the BBB principal deficiency sub-ledger
or the AA principal deficiency sub-ledger, after application of the
Funding 1 available revenue receipts on that Funding 1 interest
payment date; or
(2) the adjusted reserve fund level is less than the reserve fund
threshold; or
(3) the aggregate outstanding principal balance of loans in the
mortgages trust, in respect of which the aggregate amount in
arrears is more than three times the monthly payment then due, is
more than 5 per cent. of the aggregate outstanding principal
balance of loans in the mortgages trust
then until the relevant circumstance as described in sub-paragraphs (1),
(2) or (3) above has been cured or otherwise ceases to exist, if:
(a) any term AAA advance (whether or not such term AAA advance is then
due and payable) remains outstanding after making the payments
under item (C) of the above priority of payments, the term AA
advances (including the issuer term AA advances) will not be
entitled to principal repayments under item (D) of the above
priority of payments; and/or
(b) any term AAA advance or any AA term advance (whether or not such
term AAA advance or term AA advance is then due and payable)
remains outstanding after making the payments under items (C) and/
or (D) of the above priority of payments then the term BBB advances
(including the issuer term BBB advances) will not be entitled to
principal repayments under item (E) of the priority of payments set
out above.
(B) Deferral of scheduled amortisation term advances when CPR is below certain
threshold(s) prior to step-up date
If on a Funding 1 interest payment date:
(1) one or more bullet term advances are within a cash accumulation
period at that time (irrespective of whether any scheduled
amortisation instalments are then in a cash accumulation period);
and
(2) either:
(a) the quarterly CPR is less than 10 per cent; or
(b) both:
(i) the quarterly CPR is equal to or greater than 10 per cent,
but less than 15 per cent, and
(ii)the annualised CPR is less than 10 per cent;
then on or before their step-up dates the scheduled amortisation
term advances will be entitled to principal repayments under item
(C) of the priority of payments set out above only to the extent
permitted under the scheduled amortisation repayment restrictions.
(C) Deferral of original pass-through term advances when CPR is below a certain
threshold prior to step-up date
If on a Funding 1 interest payment date:
(1) one or more bullet term advances and/or scheduled amortisation
instalments are within a cash accumulation period at that time;
(2) the quarterly CPR is less than 15 per cent; and
(3) there is a cash accumulation shortfall at that time
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then, on or before their step-up dates, the original pass-through term
advances will be entitled to principal repayments under items (C), (D)
and (E) (as applicable) of the priority of payments above only to the
extent permitted under the pass through repayment restrictions.
In this prospectus:
"ANNUALISED CPR" means the result of:
1-((1-M)^(12))
where "M" is expressed as a percentage and determined as at the most recent
normal calculation date as indicated in the definition of "ANTICIPATED CASH
ACCUMULATION PERIOD" (see "THE MORTGAGES TRUST -- CASH MANAGEMENT OF TRUST
PROPERTY -- PRINCIPAL RECEIPTS" above);
"BULLET ACCUMULATION LIABILITY" means on any Funding 1 interest payment date
prior to any payment under item (C) of the above priority of payments the
aggregate of each relevant accumulation amount at that time of each bullet term
advance which is within a cash accumulation period;
"BULLET ACCUMULATION SHORTFALL" means at any time that the cash accumulation
ledger amount is less than the bullet accumulation liability;
"CASH ACCUMULATION LIABILITY" means on any Funding 1 interest payment date
prior to any payment under item (C) of the above priority of payments the sum
of:
(1) the bullet accumulation liability at that time; and
(2) the aggregate of each relevant accumulation amount at that time of
each scheduled amortisation instalment which is within a cash
accumulation period;
"CASH ACCUMULATION SHORTFALL" means at any time that the cash accumulation
ledger amount is less than the cash accumulation liability;
"CASH ACCUMULATION LEDGER AMOUNT" means at any time the amount standing to
the credit of the cash accumulation ledger at that time (immediately prior to
any drawing to be applied on that interest payment date and prior to any
payment under item (F) of the above priority of payments);
"PASS-THROUGH REPAYMENT RESTRICTIONS" means at any time on a Funding 1
interest payment date no amount may be applied in repayment of any original
pass-through term advance unless:
(1) the sum of the cash accumulation ledger amount and the amount of
Funding 1 available principal receipts after the application of
items (A) and (B) and before item (C) of the above priority of
payments,
is greater than or equal to
(2) the sum of the cash accumulation liability and the aggregate amount
of all original pass-through term advances which are due and
payable as at that time; and
"SCHEDULED AMORTISATION REPAYMENT RESTRICTIONS" means at any time on a
Funding 1 interest payment date:
(1) where there is not a bullet accumulation shortfall at that time,
the total amount withdrawn from the cash accumulation ledger on
that Funding 1 interest payment date for repayment of the relevant
scheduled amortisation instalments shall not exceed the cash
accumulation ledger amount less the bullet accumulation liability
at that time; and
(2) where there is a bullet accumulation shortfall at that time:
(a) no amount may be withdrawn from the cash accumulation ledger on
that Funding 1 interest payment date to be applied in repayment
of the relevant scheduled amortisation instalments; and
(b) no amount may be applied in repayment of the relevant scheduled
amortisation instalments unless:
(i) the sum of the cash accumulation ledger amount and the
amount of Funding 1 available principal receipts after the
application of items (A) and (B) and before item (C) of the
above priority of payments,
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is greater than or equal to
(ii)the sum of the bullet accumulation liability and the
aggregate amount of scheduled amortisation instalments
which are due and payable as at that time.
RULE (2) -- REPAYMENT OF PAYABLE PASS-THROUGH TERM ADVANCES AFTER THE
OCCURRENCE OF A STEP-UP DATE
Following the occurrence of the step-up date under an intercompany loan
("INTERCOMPANY LOAN A") but prior to the time which Rule (3) becomes applicable
and provided that the Funding 1 share of the trust property is greater than
zero, the aggregate amount repaid on a Funding 1 interest payment date in
relation to term advances (other than bullet term advances or scheduled
amortisation instalments) under that intercompany loan A under items (C), (D)
and (E) of the priority of payments set out above shall be limited to an amount
calculated as follows:
Outstanding principal balance of intercompany loan A
Funding 1 principal funds x ----------------------------------------------------
Aggregate outstanding principal balance of all
intercompany loans
where "FUNDING 1 PRINCIPAL FUNDS" means in respect of any Funding 1
interest payment date the sum of:
(A) the aggregate of the following amount for each calculation period
which has ended in the period from the previous Funding 1 interest
payment date to the most recent normal calculation date, such
amount being the product of:
(1) the Funding 1 share percentage as calculated at the start of
the relevant calculation period; and
(2) the aggregate amount of principal receipts received by the
mortgages trustee in the relevant calculation period;
(B) the amount credited to the principal deficiency ledger on the
relevant Funding 1 interest payment date; and
(C) the amount, if any, credited to the Funding 1 principal ledger
pursuant to item (G) of the Funding 1 pre-enforcement priority of
payments on the immediately preceding Funding 1 interest payment
date.
RULE (3) -- REPAYMENT OF TERM ADVANCES AFTER A NOTE ACCELERATION NOTICE HAS
BEEN SERVED ON ONE OR MORE (BUT NOT ALL) OF THE ISSUERS.
If a note acceleration notice has been served on one or more issuers (but
not all the issuers), then this Rule (3) will apply. In these circumstances:
(i) enforcement of an issuer's security will not result in automatic
enforcement of the Funding 1 security;
(ii) the term advances (including any outstanding bullet term advances
and scheduled amortisation instalments) under the intercompany loan
relating to the relevant issuer whose security is being enforced
("INTERCOMPANY LOAN B") will become immediately due and payable;
(iii) the cash manager shall apply the appropriate amount of Funding 1
available principal receipts allocated to intercompany loan B at
the relevant level of the applicable Funding 1 priority of payments
to repay any term AAA advances outstanding under that intercompany
loan B in no order of priority between them but in proportion to
the respective amounts due (that is, those term AAA advances will
not be repaid in an order of priority based on their final
repayment date) ; and
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(iv) the aggregate amount repaid on a Funding 1 interest payment date in
respect of intercompany loan B under items (C), (D) and (E) of the
relevant priority of payments shall be limited to an amount
calculated as follows:
Outstanding principal balance of intercompany loan B
Funding 1 principal funds x ----------------------------------------------------
Aggregate outstanding principal balance of all
intercompany loans
where "FUNDING 1 PRINCIPAL FUNDS" means in respect of any Funding 1
interest payment date the sum of:
(A) the aggregate of the following amount for each calculation period
which has ended in the period from the previous Funding 1 interest
payment date to the most recent normal calculation date, such
amount being the product of:
(1) the Funding 1 share percentage as calculated at the start of
the relevant calculation period; and
(2) the aggregate amount of principal receipts received by the
mortgages trustee in the relevant calculation period;
(B) the amount credited to the principal deficiency ledger on the
relevant Funding 1 interest payment date; and
(C) the amount, if any, credited to the Funding 1 principal ledger
pursuant to item (G) of the Funding 1 pre-enforcement priority of
payments on the immediately preceding Funding 1 interest payment
date.
Allocations involving Rule (2) or Rule (3)
Where Rule (2) or Rule (3) applies at a level of any priority of payments,
the funds available for making payments at that level shall first be allocated
without reference to Rule (2) or Rule (3) (as applicable). However, if the
amount so allocated to one or more term advances exceeds the amount permitted
under Rule (2) or Rule (3) (as applicable) to be paid in respect of those term
advances (the "CAPPED ADVANCES"), the excess shall then be reallocated among
any other relevant term advances at that level using the method of allocation
as applies at that level but without reference to the capped advances in
calculating such reallocation. If a further such excess arises as a result of
the reallocation process, the reallocation process shall be repeated at that
level in relation to each such further excess that arises until no further
funds can be allocated at that level following which the remaining excess shall
then be applied at the next level of that priority of payments.
REPAYMENT OF TERM ADVANCES OF EACH SERIES FOLLOWING THE OCCURRENCE OF A NON-
ASSET TRIGGER EVENT BUT PRIOR TO THE SERVICE ON FUNDING 1 OF AN INTERCOMPANY
LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF A NOTE ACCELERATION
NOTICE
Following the occurrence of a non-asset trigger event (where no asset
trigger event has occurred) under the mortgages trust deed but prior to the
service on Funding 1 of an intercompany loan acceleration notice under the
Funding 1 deed of charge or the service on each issuer of a note acceleration
notice under their respective deeds of charge, the bullet term advances and the
scheduled amortisation term advances in respect of any intercompany loan will
be deemed to be pass-through term advances and on each Funding 1 interest
payment date Funding 1 will be required to apply Funding 1 available principal
receipts in the following order of priority:
(A) first, towards repayment of the Funding 1 liquidity facility
provider amounts outstanding under the Funding 1 liquidity facility
that were drawn in order to make eligible liquidity facility
principal repayments;
(B) then, towards replenishment of the reserve fund to the extent only
that monies have been drawn from the reserve fund to make eligible
reserve fund principal repayments;
(C) then, to repay the term AAA advance with the earliest final
repayment date, then to repay the term AAA advance with the next
earliest final repayment date, and so on until the term AAA
advances are fully repaid;
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(D) then, in no order of priority between them but in proportion to the
amounts due, to repay the term AA advances until those term AA
advances are fully repaid; and
(E) then, in no order of priority between them but in proportion to the
amounts due, to repay the term BBB advances until those term BBB
advances are fully repaid.
REPAYMENT OF TERM ADVANCES OF EACH SERIES FOLLOWING THE OCCURRENCE OF AN ASSET
TRIGGER EVENT BUT PRIOR TO THE SERVICE ON FUNDING 1 OF AN INTERCOMPANY LOAN
ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF A NOTE ACCELERATION NOTICE
Following the occurrence of an asset trigger event (whether or not a non-
asset trigger event occurs or has occurred) but prior to the service on Funding
1 of an intercompany loan acceleration notice under the Funding 1 deed of
charge or the service on each issuer of a note acceleration notice under their
respective deeds of charge, the bullet term advances and the scheduled
amortisation term advances in respect of any intercompany loan will be deemed
to be pass-through term advances and on each Funding 1 interest payment date
Funding 1 will be required to apply Funding 1 available principal receipts in
the following order of priority:
(A) first, towards repayment of the Funding 1 liquidity facility
provider amounts outstanding under the Funding 1 liquidity that
were drawn in order to make eligible liquidity facility principal
repayments;
(B) then, towards replenishment of the reserve fund to the extent only
that monies have been drawn from the reserve fund to make eligible
reserve fund principal repayments;
(C) then, in no order of priority between them, but in proportion to
the amounts due, to repay the term AAA advances until each of those
term AAA advances is fully repaid;
(D) then, in no order of priority between them, but in proportion to
the amounts due, to repay the term AA advances until each of those
term AA advances is fully repaid; and
(E) then, in no order of priority between them, but in proportion to
the amounts due, to repay the term BBB advances until each of those
term BBB advances is fully repaid.
REPAYMENT OF TERM ADVANCES OF EACH SERIES FOLLOWING THE SERVICE ON EACH ISSUER
OF A NOTE ACCELERATION NOTICE BUT PRIOR TO THE SERVICE ON FUNDING 1 OF AN
INTERCOMPANY LOAN ACCELERATION NOTICE
If a note acceleration notice is served on each issuer under their
respective deeds of charge, then that will not result in automatic enforcement
of the Funding 1 security under the Funding 1 deed of charge. In those
circumstances, however, the bullet term advances and any scheduled amortisation
term advances under any intercompany loans will be deemed to be pass-through
term advances and Funding 1 will be required to apply Funding 1 available
principal receipts on each Funding 1 interest payment date in the following
order of priority:
(A) first, towards repayment of the Funding 1 liquidity facility
provider amounts drawn under the Funding 1 liquidity facility on
the prior Funding 1 interest payment date in order to make eligible
liquidity facility principal repayments;
(B) then, towards replenishment of the reserve fund to the extent only
that monies have been drawn from the reserve fund to make eligible
reserve fund principal repayments;
(C) then, in no order of priority between them, but in proportion to
the amounts due, to repay the term AAA advances until each of those
advances is fully repaid;
(D) then, in no order of priority between them, but in proportion to
the amounts due, to repay the term AA advances, until each of those
advances is fully repaid; and
(E) then, in no order of priority between them, but in proportion to
the amounts due, to repay the term BBB advances until each of those
advances is fully repaid.
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REPAYMENT OF TERM ADVANCES WHEN FUNDING 1 RECEIVES THE AMOUNT OUTSTANDING UNDER
AN INTERCOMPANY LOAN
If Funding 1 receives a payment from the seller in the circumstances
described in "THE MORTGAGES TRUST -- PAYMENT BY THE SELLER TO FUNDING 1 OF THE
AMOUNT OUTSTANDING UNDER AN INTERCOMPANY LOAN" or the proceeds of a new
intercompany loan which are to be used to refinance another intercompany loan
as described in "THE ISSUER INTERCOMPANY LOAN AGREEMENT -- NEW INTERCOMPANY
LOAN AGREEMENTS" (such payment by the seller or such proceeds being a "FULL
REPAYMENT AMOUNT"), then Funding 1 will not apply the full repayment amount as
described above in "-- DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL RECEIPTS".
Rather, Funding 1 will apply the full repayment amount to repay the relevant
intercompany loan. If at any time only one intercompany loan is outstanding,
then Funding 1 shall apply the full repayment amount first to repay the Funding
1 liquidity facility provider any amounts outstanding under the Funding 1
liquidity facility to the extent that such funds were drawn in order to repay
the principal amounts of any bullet term advances made under any of the
intercompany loans and the remainder shall be applied to repay the relevant
intercompany loan.
DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS
DEFINITION OF ISSUER PRINCIPAL RECEIPTS
Prior to the service of a note acceleration notice on the issuer, "ISSUER
PRINCIPAL RECEIPTS" will be calculated by the issuer cash manager four business
days prior to each interest payment date and will be an amount equal to the sum
of all principal amounts to be repaid by Funding 1 to the issuer under the
issuer intercompany loan during the relevant interest period.
Following the service of a note acceleration notice on the issuer, but prior
to the service of an intercompany loan acceleration notice on Funding 1,
"ISSUER PRINCIPAL RECEIPTS" means the sum calculated by the security trustee
four business days prior to each interest payment date as the amount to be
repaid by Funding 1 to the issuer under the issuer intercompany loan during the
relevant interest period and/or the sum otherwise recovered by the security
trustee (or the receiver appointed on its behalf) representing the principal
balance of the issuer notes.
DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS PRIOR TO THE SERVICE OF A NOTE
ACCELERATION NOTICE ON THE ISSUER
Prior to the service of a note acceleration notice on the issuer, the
issuer, or the issuer cash manager on its behalf, will apply any issuer
principal receipts on each interest payment date to repay the issuer notes in
the following manner (the "ISSUER PRE-ENFORCEMENT PRINCIPAL PRIORITY OF
PAYMENTS"):
CLASS A ISSUER NOTES
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 1 term AAA advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 1
issuer swap provider, and on each applicable interest payment date
the series 1 class A issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 1 issuer swap provider under the series 1 class A
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 2 term AAA advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 2
issuer swap provider, and on each applicable interest payment date
the series 2 class A issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 2 issuer swap provider under the series 2 class A
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 3 term AAA advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 3
issuer swap provider, and on each applicable interest payment
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date the series 3 class A issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 3 issuer swap provider under the series 3 class A
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4 term AAA advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 4
issuer swap provider, and on each applicable interest payment date
the series 4 class A issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 4 issuer swap provider under the series 4 class A
issuer swap; and
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 5 term AAA advance on each Funding 1
interest payment date shall be applied by the issuer to redeem the
series 5 class A issuer notes on each applicable interest payment
date.
CLASS B ISSUER NOTES
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 1 term AA advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 1
issuer swap provider, and on each applicable interest payment date
the series 1 class B issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 1 issuer swap provider under the series 1 class B
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 2 term AA advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 2
issuer swap provider, and on each applicable interest payment date
the series 2 class B issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 2 issuer swap provider under the series 2 class B
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 3 term AA advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 3
issuer swap provider, and on each applicable interest payment date
the series 3 class B issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 3 issuer swap provider under the series 3 class B
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4 term AA advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 4
issuer swap provider, and on each applicable interest payment date
the series 4 class B issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 4 issuer swap provider under the series 4 class B
issuer swap; and
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 5 term AA advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 5
issuer swap provider, and on each applicable interest payment date
the series 5 class B issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 5 issuer swap provider under the series 5 class B
issuer swap.
CLASS C ISSUER NOTES
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 1 term BBB advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 1
issuer swap provider, and on each applicable interest payment date
the series 1 class C issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 1 issuer swap provider under the series 1 class C
issuer swap;
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* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 2 term BBB advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 2
issuer swap provider, and on each applicable interest payment date
the series 2 class C issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 2 issuer swap provider under the series 2 class C
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 3 term BBB advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 3
issuer swap provider, and on each applicable interest payment date
the series 3 class C issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 3 issuer swap provider under the series 3 class C
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4 term BBB advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 4
issuer swap provider, and on each applicable interest payment date
the series 4 class C issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 4 issuer swap provider under the series 4 class C
issuer swap; and
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 5 term BBB advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 5
issuer swap provider, and on each applicable interest payment date
the series 5 class C issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 5 issuer swap provider under the series 5 class C
issuer swap.
DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS FOLLOWING THE SERVICE OF A NOTE
ACCELERATION NOTICE ON THE ISSUER BUT PRIOR TO THE SERVICE OF AN INTERCOMPANY
LOAN ACCELERATION NOTICE ON FUNDING 1
The issuer deed of charge sets out the order of priority of distribution of
issuer principal receipts received or recovered by the security trustee (or a
receiver appointed on its behalf) following the service of a note acceleration
notice on the issuer but prior to the service of an intercompany loan
acceleration notice on Funding 1. In these circumstances, the security trustee
will apply issuer principal receipts on each interest payment date to repay the
issuer notes in the following manner:
(A) first, in no order of priority between them, but in proportion to
the amounts due, to repay the class A issuer notes as follows:
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 1 term AAA advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 1 issuer swap provider, and on each interest payment
date the series 1 class A issuer notes will be redeemed in
amounts corresponding to the principal exchange amounts (if
any) received from the series 1 issuer swap provider under the
series 1 class A issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 2 term AAA advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 2 issuer swap provider, and on each interest payment
date the series 2 class A issuer notes will be redeemed in
amounts corresponding to the principal exchange amounts (if
any) received from the series 2 issuer swap provider under the
series 2 class A issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 3 term AAA advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 3 issuer swap provider, and on each interest payment
date the series 3 class A issuer notes will be redeemed in
amounts corresponding to the principal exchange amounts (if
any) received from the series 3 issuer swap provider under the
series 3 class A issuer swap;
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* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4 term AAA advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 4 issuer swap provider, and on each interest payment
date the series 4 class A issuer notes will be redeemed in
amounts corresponding to the principal exchange amounts (if
any) received from the series 4 issuer swap provider under the
series 4 class A issuer swap; and
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 5 term AAA advance on each Funding
1 interest payment date shall be applied by the issuer to
redeem the series 5 class A notes;
(B) then, in no order of priority between them, but in proportion to
the amounts due, to repay the class B issuer notes as follows:
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 1 term AA advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 1 issuer swap provider, and on each interest payment
date the series 1 class B issuer notes will be redeemed in
amounts corresponding to the principal exchange amounts (if
any) received from the series 1 issuer swap provider under the
series 1 class B issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 2 term AA advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 2 issuer swap provider, and on each interest payment
date the series 2 class B issuer notes will be redeemed in
amounts corresponding to the principal exchange amounts (if
any) received from the series 2 issuer swap provider under the
series 2 class B issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 3 term AA advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 3 issuer swap provider, and on each interest payment
date the series 3 class B issuer notes will be redeemed in
amounts corresponding to the principal exchange amounts (if
any) received from the series 3 issuer swap provider under the
series 3 class B issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4 term AA advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 4 issuer swap provider, and on each applicable interest
payment date the series 4 class B issuer notes will be redeemed
in amounts corresponding to the principal exchange amounts (if
any) received from the series 4 issuer swap provider under the
series 4 class B issuer swap; and
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 5 term AA advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 5 issuer swap provider, and on each applicable interest
payment date the series 5 class B issuer notes will be redeemed
in amounts corresponding to the principal exchange amounts (if
any) received from the series 5 issuer swap provider under the
series 5 class B issuer swap.
(C) then, in no order of priority between them, but in proportion to
the amounts due, to repay the class C issuer notes as follows:
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 1 term BBB advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 1 issuer swap provider, and on each interest payment
date the series 1 class C issuer notes will be redeemed in
amounts corresponding to the principal exchange amounts (if
any) received from the series 1 issuer swap provider under the
series 1 class C issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 2 term BBB advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 2 issuer swap provider, and on each interest
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payment date the series 2 class C issuer notes will be redeemed
in amounts corresponding to the principal exchange amounts (if
any) received from the series 2 issuer swap provider under the
series 2 class C issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 3 term BBB advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 3 issuer swap provider, and on each interest payment
date the series 3 class C issuer notes will be redeemed in
amounts corresponding to the principal exchange amounts (if
any) received from the series 3 issuer swap provider under the
series 3 class C issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4 term BBB advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 4 issuer swap provider, and on each applicable interest
payment date the series 4 class C issuer notes will be redeemed
in amounts corresponding to the principal exchange amounts (if
any) received from the series 4 issuer swap provider under the
series 4 class C issuer swap; and
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 5 term BBB advance on each Funding
1 interest payment date, shall be paid by the issuer to the
series 5 issuer swap provider, and on each applicable interest
payment date the series 5 class C issuer notes will be redeemed
in amounts corresponding to the principal exchange amounts (if
any) received from the series 5 issuer swap provider under the
series 5 class C issuer swap.
DISTRIBUTION OF FUNDING 1 PRINCIPAL RECEIPTS AND FUNDING 1 REVENUE RECEIPTS
FOLLOWING THE SERVICE OF AN INTERCOMPANY LOAN ACCELERATION NOTICE ON FUNDING 1
The Funding 1 deed of charge sets out the order of priority of distribution
as at the closing date of amounts received or recovered by the security trustee
or a receiver appointed on its behalf following the service of an intercompany
loan acceleration notice on Funding 1. If Funding 1 enters into new
intercompany loan agreements, then this order of priority will change -- see
"SECURITY FOR FUNDING 1'S OBLIGATIONS".
The security trustee will apply amounts received or recovered following the
service of an intercompany loan acceleration notice on Funding 1 on each
Funding 1 interest payment date in accordance with the following order of
priority (the "FUNDING 1 POST-ENFORCEMENT PRIORITY OF PAYMENTS"):
(A) first, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to:
* the security trustee and any receiver appointed by the security
trustee, together with interest and any amount in respect of
VAT on those amounts, and to provide for any amounts due or to
become due to the security trustee and the receiver in the
following interest period under the Funding 1 deed of charge;
and
* the issuer, any previous issuer and any new issuer in respect
of the issuer's obligations specified in items (A) and (B) of
the issuer post-enforcement priority of payments;
(B) then, towards payment of amounts due and payable to the cash
manager and any costs, charges, liabilities and expenses then due
or to become due and payable to the cash manager under the cash
management agreement, together with VAT on those amounts;
(C) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of amounts (if any) due to
the account bank under the terms of the bank account agreement and
to the corporate services provider under the Funding 1 corporate
services agreement;
(D) then, towards payment of amounts (if any) due to the Funding 1
liquidity facility provider under the Funding 1 liquidity facility
agreement (except for any Funding 1 liquidity facility subordinated
amounts);
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(E) then, towards payment of amounts (if any) due to the Funding 1 swap
provider under the Funding 1 swap agreement (including any
termination payment but excluding any Funding 1 swap excluded
termination amount);
(F) then, in no order of priority between them but in proportion to the
respective amounts due, towards payments of interest and principal
due and payable on the term AAA advances;
(G) then, in no order of priority between them but in proportion to the
respective amounts due, towards payments of interest and principal
due and payable on the term AA advances;
(H) then, in no order of priority between them but in proportion to the
respective amounts due, towards payments of interest and principal
due and payable on the term BBB advances;
(I) then, towards payment of any amounts due to the issuer and/or any
previous issuer in respect of their respective obligations (if any)
to make a termination payment to a current swap provider (but
excluding any current swap excluded termination amount);
(J) then, in no order of priority between them but in proportion to the
respective amounts due, to pay (without double counting):
* amounts due to the issuer and/or any previous issuer in respect
of their respective obligations to pay any termination amount
to a current swap provider as a result of a current swap
provider default or an issuer swap provider downgrade
termination event (as appropriate);
* any other amounts due to the issuer under the issuer
intercompany loan agreement and any previous issuer under any
previous intercompany loan agreement and not otherwise provided
for earlier in this order of priorities;
* any Funding 1 liquidity subordinated amounts due to the Funding
1 liquidity facility provider; and
* amounts due to the Funding 1 swap provider in respect of
Funding 1's obligation to pay any termination amount to the
Funding 1 swap provider as a result of a Funding 1 swap
provider default or a Funding 1 swap provider downgrade
termination event; and
(K) last, in no order of priority between them but in proportion to the
amounts then due, towards payment of amounts due to the start-up
loan provider under the start-up loan agreements.
DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS AND ISSUER REVENUE RECEIPTS FOLLOWING
THE SERVICE OF A NOTE ACCELERATION NOTICE ON THE ISSUER AND THE SERVICE OF AN
INTERCOMPANY LOAN ACCELERATION NOTICE ON FUNDING 1
If an intercompany loan acceleration notice is served on Funding 1 under the
Funding 1 deed of charge, then there will be an automatic enforcement of the
issuer security under the issuer deed of charge. The issuer deed of charge sets
out the order of priority of distribution by the security trustee, following
the service of a note acceleration notice on the issuer and the service of an
intercompany loan acceleration notice on Funding 1 (known as the "ISSUER POST-
ENFORCEMENT PRIORITY OF PAYMENTS"), of amounts received or recovered by the
security trustee (or a receiver appointed on its behalf). On each interest
payment date, the security trustee will apply amounts received or recovered
following enforcement of the issuer security as follows:
(A) first, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to:
* the security trustee and any receiver appointed by the security
trustee together with interest and any amount in respect of VAT
on those amounts and any amounts then due or to become due to
the security trustee and the receiver under the provisions of
the issuer deed of charge;
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* the note trustee together with interest and any amount in
respect of VAT on those amounts and any amounts then due or to
become due and payable to the note trustee under the provisions
of the issuer trust deed; and
* the agent bank, the paying agents, the registrar and the
transfer agent together with interest and any amount in respect
of VAT on those amounts and any costs, charges, liabilities and
expenses then due or to become due and payable to them under
the provisions of the issuer paying agent and agent bank
agreement;
(B) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of amounts (together with
any amount in respect of VAT on those amounts) due and payable to
the issuer cash manager under the issuer cash management agreement
and to the corporate services provider under the issuer corporate
services agreement and to the issuer account bank;
(C) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 issuer swap provider in respect of
the series 1 class A issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 1
issuer swap provider in respect of the series 1 class A issuer
swap to pay interest and principal due and payable on the
series 1 class A issuer notes;
* amounts due to the series 2 issuer swap provider in respect of
the series 2 class A issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 2
issuer swap provider in respect of the series 2 class A issuer
swap to pay interest and principal due and payable on the
series 2 class A issuer notes;
* amounts due to the series 3 issuer swap provider in respect of
the series 3 class A issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 3
issuer swap provider in respect of the series 3 class A issuer
swap to pay interest and principal due and payable on the
series 3 class A issuer notes;
* amounts due to the series 4 issuer swap provider in respect of
the series 4 class A issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 4
issuer swap provider in respect of the series 4 class A issuer
swap to pay interest and principal due and payable on the
series 4 class A issuer notes; and
* interest and principal on the series 5 class A issuer notes;
(D) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 issuer swap provider in respect of
the series 1 class B issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 1
issuer swap provider in respect of the series 1 class B issuer
swap to pay interest and principal due and payable on the
series 1 class B issuer notes;
* amounts due to the series 2 issuer swap provider in respect of
the series 2 class B issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 2
issuer swap provider in respect of the series 2 class B issuer
swap to pay interest and principal due and payable on the
series 2 class B issuer notes;
* amounts due to the series 3 issuer swap provider in respect of
the series 3 class B issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 3
issuer swap provider in respect of the series 3 class B issuer
swap to pay interest and principal due and payable on the
series 3 class B issuer notes;
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* amounts due to the series 4 issuer swap provider in respect of
the series 4 class B issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 4
issuer swap provider in respect of the series 4 class B issuer
swap to pay interest and principal due and payable on the
series 4 class B issuer notes; and
* amounts due to the series 5 issuer swap provider in respect of
the series 5 class B issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 5
issuer swap provider in respect of the series 5 class B issuer
swap to pay interest and principal due and payable on the
series 5 class B issuer notes.
(E) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 issuer swap provider in respect of
the series 1 class C issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 1
issuer swap provider in respect of the series 1 class C issuer
swap to pay interest and principal due and payable on the
series 1 class C issuer notes;
* amounts due to the series 2 issuer swap provider in respect of
the series 2 class C issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 2
issuer swap provider in respect of the series 2 class C issuer
swap to pay interest and principal due and payable on the
series 2 class C issuer notes;
* amounts due to the series 3 issuer swap provider in respect of
the series 3 class C issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 3
issuer swap provider in respect of the series 3 class C issuer
swap to pay interest and principal due and payable on the
series 3 class C issuer notes;
* amounts due to the series 4 issuer swap provider in respect of
the series 4 class C issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 4
issuer swap provider in respect of the series 4 class C issuer
swap to pay interest and principal due and payable on the
series 4 class C issuer notes; and
* amounts due to the series 5 issuer swap provider in respect of
the series 5 class C issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 5
issuer swap provider in respect of the series 5 class C issuer
swap to pay interest and principal due and payable on the
series 5 class C issuer notes.
(F) then, in no order of priority between them but in proportion to the
respective amounts due, to pay any termination payment due (without
double counting) to:
* the series 1 issuer swap provider, following an issuer swap
provider default or an issuer swap provider downgrade
termination event by the series 1 issuer swap provider;
* the series 2 issuer swap provider, following an issuer swap
provider default or an issuer swap provider downgrade
termination event by the series 2 issuer swap provider;
* the series 3 issuer swap provider, following an issuer swap
provider default or an issuer swap provider downgrade
termination event by the series 3 issuer swap provider;
* the series 4 issuer swap provider, following an issuer swap
provider default or an issuer swap provider downgrade
termination event by the series 4 issuer swap provider; and
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* the series 5 issuer swap provider, following an issuer swap
provider default or an issuer swap provider downgrade
termination event by the series 5 issuer swap provider.
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CREDIT STRUCTURE
The issuer notes will be obligations of the issuer only and will not be
obligations of, or the responsibility of, or guaranteed by, any other party.
However, there are a number of main features of the transaction which enhance
the likelihood of timely receipt of payments to noteholders, as follows:
* Funding 1 available revenue receipts are expected to exceed
interest and fees payable to the issuer;
* a shortfall in Funding 1 available revenue receipts may be met from
Funding 1's principal receipts;
* a reserve fund has been established to help meet shortfalls in
principal due on the original bullet term advances and original
scheduled amortisation term advances in the circumstances described
below;
* the reserve fund may also be used to increase the available revenue
receipts (to help meet any shortfall which may arise, for example,
due to non-performance of loans in the mortgages trust);
* payments on the class C issuer notes will be subordinated to
payments on the class A issuer notes and the class B issuer notes;
* payments on the class B issuer notes will be subordinated to
payments on the class A issuer notes;
* the mortgages trustee GIC account and the Funding 1 GIC account
each earn interest at the rate of 0.25 per cent. below LIBOR for
three-month sterling deposits;
* a liquidity facility is available to Funding 1 to pay interest on
all term advances (including the issuer term advances) and
principal amounts due on the original bullet term advances and
original scheduled amortisation term advances in the circumstances
described below; and
* a third start-up loan will be provided to increase the reserve fund
and meet the costs of setting up the structure.
Each of these factors is considered more fully in the remainder of this
section.
CREDIT SUPPORT FOR THE ISSUER NOTES PROVIDED BY FUNDING 1 AVAILABLE REVENUE
RECEIPTS
It is anticipated that, during the life of the issuer notes, the Funding 1
share of the interest received from borrowers on the loans will, assuming that
all of the loans are fully performing, be greater than the sum of the interest
which the issuer has to pay on all of the issuer notes, the interest which the
previous issuer has to pay on all of the previous notes, the interest which
each new issuer has to pay on all of the new notes (if and when issued) and the
other costs and expenses of the structure. In other words, the Funding 1
available revenue receipts will be sufficient to pay the amounts payable under
items (A) to (F), (H) and (J) of the Funding 1 pre-enforcement revenue priority
of payments assuming all loans are fully performing.
The actual amount of any excess will vary during the life of the issuer
notes. Two of the key factors determining the variation are as follows:
* the interest rate on the portfolio; and
* the level of arrears experienced.
LEVEL OF ARREARS EXPERIENCED
If the level of arrears of interest payments made by the borrowers results
in Funding 1 experiencing an income deficit, Funding 1 will be able to use the
following amounts to cure that income deficit:
first, amounts standing to the credit of the reserve fund, as described
in "-- RESERVE FUND";
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second, principal receipts, if any, as described in "-- USE OF FUNDING 1
PRINCIPAL RECEIPTS TO PAY FUNDING 1 INCOME DEFICIENCY"; and
third, drawings under the Funding 1 liquidity facility, if available, as
described in "-- FUNDING 1 LIQUIDITY FACILITY".
Any excess of Funding 1 revenue receipts will be applied on each Funding 1
interest payment date to the extent described in the Funding 1 pre-enforcement
revenue priority of payments, including to extinguish amounts standing to the
debit of any principal deficiency ledger and to replenish the reserve fund.
USE OF FUNDING 1 PRINCIPAL RECEIPTS TO PAY FUNDING 1 INCOME DEFICIENCY
Four business days prior to each Funding 1 interest payment date, the cash
manager will calculate whether there will be an excess or a deficit of Funding
1 available revenue receipts (including the reserve fund) to pay items (A) to
(F), (H) and (J) of the Funding 1 pre-enforcement revenue priority of payments.
If there is a deficit, then Funding 1 shall pay or provide for that deficit
by the application of Funding 1 available principal receipts (plus any part of
the balance of the cash accumulation ledger which is not comprised in Funding 1
available principal receipts), if any, and the cash manager shall make a
corresponding entry in the relevant principal deficiency sub-ledger, as
described in "-- PRINCIPAL DEFICIENCY LEDGER" as well as making a debit in the
Funding 1 principal ledger. Any such entry and debit shall be made and taken
into account (including as to which priority of payments shall apply) prior to
the application of Funding 1 available principal receipts on the relevant
Funding 1 interest payment date.
Funding 1 principal receipts may not be used to pay interest on any term
advance if and to the extent that would result in a deficiency being recorded,
or an existing deficiency being increased, on a principal deficiency sub-ledger
relating to a higher ranking term advance.
Funding 1 shall apply any excess Funding 1 available revenue receipts to
extinguish any balance on the principal deficiency ledger, as described in "--
PRINCIPAL DEFICIENCY LEDGER".
RESERVE FUND
A reserve fund has been established:
* to help meet any deficit in Funding 1 available revenue receipts
(including to help meet any deficit recorded on the principal
deficiency ledger); and
* to make, where necessary, "ELIGIBLE RESERVE FUND PRINCIPAL
REPAYMENTS", being:
(i) prior to the occurrence of a trigger event;
(a) repayments of principal which are then due and payable in
respect of the original bullet term advances; and
(b) repayments of principal in respect of original scheduled
amortisation term advances on their respective final
maturity dates only; and
(ii)on or after the occurrence of a non-asset trigger event or an
asset trigger event, repayments of principal in respect of
original bullet term advances and original scheduled
amortisation term advances on their respective final maturity
dates only,
in each case prior to the service of an intercompany loan
acceleration notice on Funding 1.
The reserve fund:
(i) was initially funded on 14th June, 2002 from a portion of the
first start-up loan, was further funded on 6th March, 2003 by a
portion of the second start up loan and will amount to [GBP]l
on the closing date after crediting a drawing of [GBP]l under
the third start-up loan to the reserve ledger (see "-- THIRD
START-UP LOAN" below);
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(ii) may be replenished from excess Funding 1 available revenue receipts
(as described further below), after Funding 1 has paid all of its
obligations in respect of items ranking higher than the reserve
fund in the Funding 1 pre-enforcement revenue priority of payments
on each Funding 1 interest payment date (see "CASHFLOWS --
DISTRIBUTION OF FUNDING 1 AVAILABLE REVENUE RECEIPTS PRIOR TO THE
SERVICE OF AN INTERCOMPANY LOAN ACCELERATION NOTICE ON FUNDING 1").
A reserve ledger is maintained by the cash manager to record the balance
from time to time of the reserve fund.
On each Funding 1 interest payment date the amount of the reserve fund is
added to certain other income of Funding 1 in calculating Funding 1 available
revenue receipts.
The reserve fund is replenished up to and including an amount equal to the
reserve fund required amount from any excess Funding 1 available revenue
receipts on a Funding 1 interest payment date at item (M) of the Funding 1 pre-
enforcement revenue priority of payments. The "RESERVE FUND REQUIRED AMOUNT" is
an amount equal to [GBP]__.
The seller, Funding 1 and the security trustee may agree to increase,
decrease or amend the reserve fund required amount from time to time. The prior
consent of noteholders and other creditors of Funding 1 will not be obtained in
relation to such amendment, provided that the rating agencies have confirmed
that the ratings of the notes will not be adversely affected by the proposed
amendment.
PRINCIPAL DEFICIENCY LEDGER
A principal deficiency ledger has been established to record:
* on each calculation date, any principal losses on the loans
allocated to Funding 1; and/or
* on each Funding 1 interest payment date, any application of Funding
1 available principal receipts to meet any deficiency in Funding
1's available revenue receipts (as described in "-- USE OF FUNDING
1 PRINCIPAL RECEIPTS TO PAY FUNDING 1 INCOME DEFICIENCY").
The principal deficiency ledger is split into three sub-ledgers which will
each correspond to all the term advances, as follows:
* the AAA principal deficiency sub-ledger corresponding to the term
AAA advances;
* the AA principal deficiency sub-ledger corresponding to the term AA
advances; and
* the BBB principal deficiency sub-ledger corresponding to the term
BBB advances.
Losses on the loans and/or the application of Funding 1 available principal
receipts to pay interest on the term advances will be recorded as follows:
* first, on the BBB principal deficiency sub-ledger until the balance
of the BBB principal deficiency sub-ledger is equal to the
aggregate principal amount outstanding of the term BBB advances;
* second, on the AA principal deficiency sub-ledger until the balance
of the AA principal deficiency sub-ledger is equal to the aggregate
principal amount outstanding of the term AA advances; and
* third, on the AAA principal deficiency sub-ledger, at which point
there will be an asset trigger event.
On each distribution date, any capitalised interest in respect of those
loans that are subject to payment holidays (see "THE MORTGAGES TRUST --
ACQUISITION BY SELLER OF AN INTEREST RELATING TO CAPITALISED INTEREST") shall
be applied to reduce the debit balance on the principal deficiency ledger (if
any). Losses on the loans and/or the application of Funding 1 available
principal receipts to pay interest on the term advances will not be recorded on
the principal deficiency ledger on any day to the extent that the Funding 1
share of the trust property together with amounts standing to the credit of the
Funding 1 cash accumulation ledger and the Funding 1 principal ledger, in
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aggregate is greater than or equal to the aggregate outstanding principal
balance of the intercompany loans on that day, after taking account of such
losses or the relevant application of principal receipts.
Prior to the service of an intercompany loan acceleration notice on Funding
1, Funding 1 available revenue receipts will be applied on each Funding 1
interest payment date in the manner and to the extent described in the Funding
1 pre-enforcement revenue priority of payments as follows:
* first, in an amount necessary to reduce to zero the balance on the
AAA principal deficiency sub-ledger;
* second, provided that interest due on the term AAadvances has been
paid, in an amount necessary to reduce to zero the balance on the
AA principal deficiency sub-ledger; and
* third, provided that interest due on the term BBB advances has been
paid, in an amount necessary to reduce to zero the balance on the
BBB principal deficiency sub-ledger.
See also "-- USE OF FUNDING 1 PRINCIPAL RECEIPTS TO PAY FUNDING 1 INCOME
DEFICIENCY".
In general, if Funding 1 borrows a new term advance under a new intercompany
loan, and that new term advance does not have a term advance rating of either
AAA, AA or BBB, then Funding 1 will establish a new principal deficiency sub-
ledger. That new principal deficiency sub-ledger will correspond to and be
known by the term advance rating of the relevant new term advance.
Losses on the loans and/or the application of Funding 1 available principal
receipts to pay interest on the term advances will first be recorded on the
lowest ranking principal deficiency sub-ledger, and then in ascending order of
rating priority up to the highest-ranking principal deficiency sub-ledger. Any
excess revenue of Funding 1 will be applied to the highest-ranking principal
deficiency sub-ledger, in descending order of rating priority down to the
lowest ranking principal deficiency sub-ledger.
ISSUER AVAILABLE FUNDS
On each Funding 1 interest payment date in respect of the issuer
intercompany loan, the issuer will receive from Funding 1 an amount equal to or
less than the amount which it needs to pay out on the corresponding interest
payment date in respect of the issuer notes in accordance with the issuer pre-
enforcement principal priority of payments and the issuer pre-enforcement
revenue priority of payments. It is not intended that any surplus cash will be
accumulated in the issuer.
Please see also the description of the issuer swaps under "THE SWAP
AGREEMENTS".
THE CLASS B ISSUER NOTES AND THE CLASS C ISSUER NOTES
The order of payments of interest to be made on the classes of notes will be
prioritised so that interest payments on the class C issuer notes will be
subordinated to interest payments on the class B issuer notes and interest
payments on the class B issuer notes will be subordinated to interest payments
on the class A issuer notes, in each case in accordance with the issuer
priority of payments.
Any shortfall in payments of interest on the class B issuer notes and/or the
class C issuer notes will be deferred until the next interest payment date. On
the next interest payment date, the amount of interest due on each class of
notes will be increased to take account of any deferred interest. If on that
interest payment date, there is still a shortfall, that shortfall will be
deferred again. This deferral process will continue until the final repayment
date of the notes, at which point if there is insufficient money available to
us to pay interest on the class B issuer notes or the class C issuer notes,
then you may not receive all interest amounts payable on those classes of
issuer notes.
We are not able to defer payments of interest due on any interest payment
date in respect of the class A issuer notes. The failure to pay interest on the
class A issuer notes will be an event of default under those classes of issuer
notes.
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The class A issuer notes, the class B issuer notes and the class C issuer
notes will be constituted by the issuer trust deed and will share the same
security. However, upon enforcement of the issuer security or the occurrence of
a trigger event, the class A issuer notes will rank in priority to the class B
issuer notes and the class C issuer notes and the class B issuer notes will
rank in priority to the class C issuer notes.
MORTGAGES TRUSTEE GIC ACCOUNT/FUNDING 1 GIC ACCOUNT
All amounts held by the mortgages trustee have been and will continue to be
deposited in the mortgages trustee GIC account with the mortgages trustee GIC
provider. This account is subject to the mortgages trustee guaranteed
investment contract under which the mortgages trustee GIC provider has agreed
to pay a variable rate of interest on funds in the mortgages trustee GIC
account of 0.25 per cent. per annum below LIBOR for three-month sterling
deposits.
Amounts held in the collection account will not have the benefit of a
guaranteed investment contract but following receipt will be transferred into
the mortgages trustee GIC account on a regular basis and in any event in the
case of direct debits no later than the next business day after they are
deposited in the collection account.
All amounts held by Funding 1 have been and will continue to be deposited in
the Funding 1 GIC account in the first instance. The Funding 1 GIC account is
maintained with the Funding 1 GIC provider. This account is subject to the
Funding 1 guaranteed investment contract under which the Funding 1 GIC provider
has agreed to pay a variable rate of interest on funds in the Funding 1 GIC
account of 0.25 per cent. per annum below LIBOR for three-month sterling
deposits.
FUNDING 1 LIQUIDITY FACILITY
The following section contains a summary of the material terms of the
Funding 1 liquidity facility. The summary does not purport to be complete and
is subject to the provisions of the Funding 1 liquidity facility, a form of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
GENERAL DESCRIPTION
The Funding 1 liquidity facility comprises the "INITIAL FUNDING 1 LIQUIDITY
FACILITY" (being the facility made available under and upon the terms of the
Funding 1 liquidity facility agreement entered into on 14th June, 2002), the
"FIRST AMENDED AND RESTATED FUNDING 1 LIQUIDITY FACILITY" (being the facility
made available under and upon the terms of the amended and restated liquidity
facility entered into on 6th March, 2003) [and the "SECOND AMENDED AND RESTATED
FUNDING 1 LIQUIDITY FACILITY" (being a further facility which will be made
available under and upon the terms of the Funding 1 liquidity facility
agreement to be entered into on the closing date and, together with the initial
Funding 1 liquidity facility and the first amended and restated Funding 1
liquidity shall be known as the Funding 1 liquidity facility)].Under the
Funding 1 liquidity facility, the Funding 1 liquidity facility provider agrees
to make advances to Funding 1 subject to the conditions described below for the
purpose of:
* paying in full on any Funding 1 interest payment date interest due
and payable on all term advances as specified in the Funding 1 pre-
enforcement revenue priority of payments provided that:
(1) drawings may not be made under the Funding 1 liquidity facility
to pay interest on the item specified in (F) of the Funding 1
pre-enforcement revenue priority of payments (being payment of
interest on the term AAA advances) if, at the date of the
relevant drawing, the debit balance on the AAA principal
deficiency sub-ledger is in an amount equal to or in excess of
50 per cent. of the principal amount outstanding of the term
AAA advances; and
(2) drawings may not be made under the Funding 1 liquidity facility
to pay interest on the item specified in (H) of the Funding 1
pre-enforcement revenue priority of payments (being payment of
interest on the term AA advances) if, at the date of
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the relevant drawing, the debit balance on the AA principal
deficiency sub- ledger is in an amount equal to or in excess of
50 per cent. of the principal amount outstanding of the term AA
advances; and
(3) drawings may not be made under the Funding 1 liquidity facility
to pay interest on the item specified in (J) of the Funding 1
pre-enforcement revenue priority of payments (being payment of
interest on the term BBB advances) if, at the date of the
relevant drawing, the debit balance on the BBB principal
deficiency sub-ledger is in an amount equal to or in excess of
50 per cent. of the principal amount outstanding of the term
BBB advances; and/or
* making "ELIGIBLE LIQUIDITY FACILITY PRINCIPAL REPAYMENTS", being:
(i) prior to the occurrence of a trigger event:
(a) repayments of principal which are then due and payable in
respect of the original bullet term advances; and
(b) repayments of principal in respect of original scheduled
amortisation term advances on their respective final
maturity dates only; and
(ii)on or after the occurrence of a non-asset trigger event but
prior to the occurrence of an asset trigger event, repayments
of principal in respect of original bullet term advances and
original scheduled amortisation term advances on their
respective final maturity dates only;
in each case prior to the service of an intercompany loan
acceleration notice on Funding 1 and taking into account any
allocation of principal to meet any deficiency in Funding 1's
available revenue receipts.
Following the occurrence of an asset trigger event the Funding 1 liquidity
facility will not be available to repay principal in respect of original bullet
term advances or original scheduled amortisation term advances.
The Funding 1 liquidity facility will be a 364-day committed facility. Each
year, Funding 1 may request a renewal of the Funding 1 liquidity facility for a
further 364 days by giving written notice to the Funding 1 liquidity facility
provider not more than 60 days and not less than 30 days before the expiration
of the 364-day period.
FUNDING 1 LIQUIDITY DRAWINGS
If the cash manager determines on the London business day immediately
preceding a Funding 1 interest payment date that Funding 1 will not have
sufficient funds to make the payments specified in "GENERAL DESCRIPTION" (a
shortfall known as the "FUNDING 1 LIQUIDITY SHORTFALL"), then the cash manager
must direct Funding 1 to request a drawing under the Funding 1 liquidity
facility to apply towards the Funding 1 liquidity shortfall. The drawing will
be the lesser of the amount of the Funding 1 liquidity shortfall and the amount
available for drawing under the Funding 1 liquidity facility. A drawing may
only be made by a duly completed drawdown notice signed by an authorised
signatory of Funding 1.
CONDITIONS PRECEDENT TO A FUNDING 1 LIQUIDITY DRAWING
A drawing may be made under the Funding 1 liquidity facility:
* if no event of default exists under the Funding 1 liquidity
facility;
* if no asset trigger event has occurred; and
* if insufficient amounts are available for drawing from the reserve
fund.
FUNDING 1 LIQUIDITY FACILITY STAND-BY ACCOUNT
The Funding 1 liquidity facility agreement provides that if:
* the relevant rating(s) of the Funding 1 liquidity facility provider
is or are, as applicable, downgraded by a rating agency below the
rating(s) specified (in accordance with the requirements of the
rating agencies as at the initial closing date) in the Funding 1
liquidity facility agreement in relation to the initial Funding 1
liquidity facility; or
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* the relevant rating(s) of the Funding 1 liquidity facility provider
is or are, as applicable, downgraded by a rating agency below the
rating(s) specified (in accordance with the requirements of the
rating agencies as at 6th March, 2003 in the Funding 1 liquidity
facility agreement in relation to the first amended and restated
Funding 1 liquidity facility; or
* the relevant rating(s) of the Funding 1 liquidity facility provider
is or are, as applicable, downgraded by a rating agency below the
rating(s) specified (in accordance with the requirements of the
rating agencies as at the closing date) in the Funding 1 liquidity
facility agreement in relation to the second amended and restated
Funding 1 liquidity facility; or
* the Funding 1 liquidity facility provider does not agree to renew
the Funding 1 liquidity facility beyond each 364-day commitment
period,
then Funding 1 may require the Funding 1 liquidity facility provider to pay an
amount equal to the then undrawn commitment under the Funding 1 liquidity
facility agreement (the "FUNDING 1 STAND-BY DRAWING") into a designated bank
account of Funding 1 (the "FUNDING 1 LIQUIDITY FACILITY STAND-BY ACCOUNT"). The
Funding 1 liquidity facility stand-by account must be maintained with a bank
having the requisite ratings, which will be the Funding 1 liquidity facility
provider if it has the requisite ratings. Amounts standing to the credit of the
Funding 1 liquidity facility stand-by account will be available for drawing
during the period that the Funding 1 liquidity facility is available in the
circumstances described and for investing in short-term authorised investments.
All interest accrued on the amount on deposit in the Funding 1 liquidity
facility stand-by account will belong to Funding 1 in so far as that amount
relates to a Funding 1 stand-by drawing in respect of the initial Funding 1
liquidity facility, will belong to the Funding 1 liquidity facility provider in
so far as that amount relates to a Funding 1 stand-by drawing in respect of the
first amended and restated Funding 1 liquidity facility and will belong to [the
Funding 1 liquidity facility provider] in so far as that amendment relates to a
Funding 1 stand-by drawing in respect of the second amended and restated
Funding 1 liquidity facility.
Funding 1 may require that the Funding 1 liquidity facility provider
transfer its rights and obligations under the Funding 1 liquidity facility
agreement to a replacement Funding 1 liquidity facility provider which has the
requisite ratings so long as the then current ratings of the notes (whether the
previous notes, the issuer notes or any new notes) are not adversely affected
by that transfer.
INTEREST ON FUNDING 1 LIQUIDITY DRAWINGS
Interest is payable to the Funding 1 liquidity facility provider on the
principal amount drawn under the Funding 1 liquidity facility but is not
payable on the principal amount of a Funding 1 stand-by drawing in respect of
the first amended and restated Funding 1 liquidity facility. This interest is
payable at a rate based on three-month sterling LIBOR plus a margin of [0.50]
per cent. Unpaid interest will be added to the principal amount owed to the
Funding 1 liquidity facility provider and interest accrues on that amount [TO
BE CONFIRMED].
A commitment fee is also payable at the rate of [0.08] per cent. per annum
on the undrawn, uncancelled amount of the Funding 1 liquidity facility. The
commitment fee is payable quarterly in arrear on each Funding 1 interest
payment date. However, in the event that a Funding 1 stand-by drawing is made
in respect of the first amended and restated Funding 1 liquidity facility such
commitment fee shall no longer be payable in respect of that Funding 1 stand-by
drawing and instead a contingent fee will be payable at the rate of 0.38 per
cent. per annum on that Funding 1 stand-by drawing [TO BE CONFIRMED].
Interest and fees on the Funding 1 liquidity facility are senior to amounts
due to the Funding 1 swap provider under the Funding 1 pre-enforcement priority
of payments and under the Funding 1 post-enforcement priority of payments.
190
REPAYMENT OF FUNDING 1 LIQUIDITY DRAWINGS
If an amount has been drawn down under the Funding 1 liquidity facility, the
principal amount is repayable on the following Funding 1 interest payment date
from Funding 1 available principal receipts (to the extent that the drawing has
been made to repay principal on the relevant Funding 1 term advance) or from
Funding 1 available revenue receipts (to the extent that the drawing has been
made to pay interest on other relevant revenue expenses), prior to making
payments on the term advances.
EVENTS OF DEFAULT UNDER THE FUNDING 1 LIQUIDITY FACILITY
It is an event of default under the Funding 1 liquidity facility, whether or
not that event is within the control of Funding 1, if, among other things:
(A) Funding 1 does not pay within three business days of the due date
any amount due and payable under the Funding 1 liquidity facility,
other than Funding 1 liquidity subordinated amounts where funds are
available;
(B) an event of default occurs under any intercompany loan and notice
is or should be served on Funding 1 in relation to that default; or
(C) it is or becomes unlawful for Funding 1 to perform any of its
obligations under the Funding 1 liquidity facility.
CONSEQUENCES OF DEFAULT
After the occurrence of an event of default under the Funding 1 liquidity
facility agreement, the Funding 1 liquidity facility provider may by notice to
Funding 1:
* cancel the Funding 1 liquidity facility commitment; and/or
* demand that all or part of the loans made to Funding 1 under the
Funding 1 liquidity facility, together with accrued interest and
all other amounts accrued under the Funding 1 liquidity facility
agreement, be immediately due and payable, in which case they shall
become immediately due and payable; and/or
* demand that all or part of the loans made under the Funding 1
liquidity facility be repayable on demand, in which case they will
immediately become repayable on demand.
The occurrence of an event of default under the Funding 1 liquidity facility
agreement may constitute an intercompany loan event of default as set out in
"THE ISSUER INTERCOMPANY LOAN AGREEMENT -- ISSUER INTERCOMPANY LOAN EVENTS OF
DEFAULT".
FUNDING 1 LIQUIDITY FACILITY PROVIDER A SECURED CREDITOR
The Funding 1 liquidity facility provider is a secured creditor of Funding 1
pursuant to the Funding 1 deed of charge. All amounts owing to the Funding 1
liquidity facility provider will, on the service of an intercompany loan
acceleration notice on Funding 1, rank in priority to the payment of all
amounts of interest and principal in respect of the term AAA advances.
GOVERNING LAW
The Funding 1 liquidity facility agreement is governed by English law.
ADDITIONAL FUNDING 1 LIQUIDITY FACILITY
If the rating of the short-term unsecured, unguaranteed and unsubordinated
debt obligations of the seller fall below A-1 by Standard & Poor's, P-1 by
Moody's and F1 by Fitch, then Funding 1 (unless otherwise agreed in writing
with the rating agencies and the security trustee) will enter into an
additional liquidity facility agreement (the "ADDITIONAL FUNDING 1 LIQUIDITY
FACILITY AGREEMENT"). The additional Funding 1 liquidity facility provider will
be a bank the short-term unsecured, unguaranteed and unsubordinated debt
obligations of which are rated at least A-1+ by Standard & Poor's, P-1 by
Moody's and F1+ by Fitch, unless otherwise agreed by the rating agencies and
the security trustee.
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Under the terms of the additional Funding 1 liquidity facility agreement,
Funding 1 will be permitted to make drawings only if (i) an insolvency event
(as defined in the glossary) occurs in relation to the seller and (ii) no
intercompany loan acceleration notice has been served by the security trustee,
in order to pay interest and amounts ranking in priority to interest in the
Funding 1 pre-enforcement revenue priority of payments.
The other terms of the additional Funding 1 liquidity facility agreement
will be agreed at the time that Funding 1 is required to enter into such an
agreement, subject to the prior written approval of the rating agencies and the
security trustee.
The additional Funding 1 liquidity facility provider will accede to the
terms of the Funding 1 deed of charge and will be a secured creditor of Funding
1, and all payments due to the additional Funding 1 liquidity facility provider
will rank in priority to payments of interest and principal on the term
advances, and will rank equally and proportionately with amounts due to the
existing Funding 1 liquidity facility provider. The other Funding 1 secured
creditors (including the issuer) will agree on the closing date to the proposed
accession.
If the Funding 1 liquidity facility has been used to pay any amounts in
relation to the Funding 1 pre-enforcement revenue priority of payments as
described in "-- FUNDING 1 LIQUIDITY FACILITY -- GENERAL DESCRIPTION", then the
Funding 1 liquidity facility provider will be repaid from Funding 1 revenue
receipts prior to paying interest on the term advances. If the Funding 1
liquidity facility has been used to pay principal amounts due on the eligible
liquidity facility term advances, then the Funding 1 liquidity facility
provider will be repaid from Funding 1 principal receipts prior to paying
principal amounts due on the term advances.
THIRD START-UP LOAN
The following section contains a summary of the material terms of the third
start-up loan agreement. The summary does not purport to be complete and is
subject to the provisions of the third start-up loan agreement, a form of which
has been filed as an exhibit to the registration statement of which this
prospectus is a part. Funding 1 has also entered into the first start-up loan
agreement and the second start-up loan agreement as described in "-- RESERVE
FUND" above.
GENERAL DESCRIPTION
On the closing date, Halifax (the "START-UP LOAN PROVIDER"), acting through
its office at Trinity Road, Halifax, West Yorkshire HX1 2RG, will make
available to Funding 1 the third start-up loan under the third start-up loan
agreement. This will be a subordinated loan facility in an amount of [GBP]l,
which will be used for increasing the reserve fund on the closing date by
[GBP]l and for meeting the costs and expenses incurred by Funding 1 in
connection with the assignment by the seller to Funding 1 of a portion of its
share in the trust property and the fees payable under the issuer intercompany
loan agreement which relate to the costs of issue of the issuer notes.
INTEREST ON THE THIRD START-UP LOAN
The third start-up loan will bear interest until the interest payment date
ending in __ at the rate of LIBOR for three-month sterling deposits plus 0.25
per cent. per annum and from the interest payment date in lat the rate of LIBOR
for three-month sterling deposits at __ per cent. per annum. [For the first
interest period, LIBOR will be determined on the basis of a linear
interpolation between LIBOR for [__-month and [__-month sterling deposits.] Any
unpaid interest will be added to the principal amount owed and will bear
interest. Interest is payable by Funding 1 on each Funding 1 interest payment
date.
REPAYMENT OF THE THIRD START-UP LOAN
Funding 1 will repay the third start-up loan, but only to the extent that it
has Funding 1 available revenue receipts after making higher ranking payments
(see further "SECURITY FOR FUNDING 1'S OBLIGATIONS -- FUNDING 1 PRE-ENFORCEMENT
PRIORITY OF PAYMENTS" and "SECURITY FOR FUNDING 1'S OBLIGATIONS -- FUNDING 1
POST-ENFORCEMENT PRIORITY OF PAYMENTS"). Amounts due to the start-up loan
provider are payable after amounts due on the term advances to the current
issuers. After Funding 1 has repaid the third start-up loan, it will have no
further recourse to the start-up loan provider.
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EVENT OF DEFAULT
It will be an event of default under a start-up loan agreement if Funding 1
has available revenue receipts to pay amounts due to the start-up loan
provider, and it does not pay them.
The occurrence of an event of default under any start-up loan agreement may
constitute an issuer intercompany loan event of default as set out in "THE
ISSUER INTERCOMPANY LOAN AGREEMENT -- ISSUER INTERCOMPANY LOAN EVENTS OF
DEFAULT".
ACCELERATION
If notice is given that the security granted by Funding 1 under the Funding
1 deed of charge is to be enforced, then the third start-up loan will become
immediately due and payable.
GOVERNING LAW
The third start-up loan agreement will be governed by English law.
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THE SWAP AGREEMENTS
The following section contains a summary of the material terms of the
Funding 1 swap agreement and the issuer swap agreements. The summary does not
purport to be complete and is subject to the provisions of those swap
agreements, forms of which has been filed as an exhibit to the registration
statement of which this prospectus is a part.
GENERAL
Funding 1 has entered into the Funding 1 swap agreement with Halifax as the
Funding 1 swap provider and the security trustee. The issuer will enter into
issuer swaps with the issuer swap providers and the security trustee. In
general, the swaps are designed to do the following:
* Funding 1 swap: to hedge against the possible variance between the
mortgages trustee variable base rate payable on the variable rate
loans, the rates of interest payable on the tracker rate loans and
the fixed rates of interest payable on the fixed rate loans and a
LIBOR based rate for three-month sterling deposits;
* issuer dollar currency swaps: to protect the issuer against changes
in the sterling to dollar exchange rate following the closing date
and the possible variance between a LIBOR based rate for three-
month sterling deposits and either (i) a LIBOR based rate for one-
month dollar deposits applicable to the series 1 class A issuer
notes, or (ii) a LIBOR based rate for three-month dollar deposits,
applicable to the series 1 class B issuer notes, the series 1 class
C issuer notes, the series 2 issuer notes and the series 3 issuer
notes, and to address the difference in periodicity between the
interest payment dates in respect of the intercompany loans, which
occur quarterly and the interest payment dates in respect of the
series 1 class A issuer notes, which occur (i) monthly until the
occurrence of a trigger event or enforcement of the issuer security
and (ii) quarterly on and following the interest payment date
occurring immediately thereafter; and
* issuer euro currency swaps: to protect the issuer against changes
in the sterling to euro exchange rate following the closing date
and the possible variance between a LIBOR based rate for three-
month sterling deposits and a EURIBOR based rate for three-month
euro deposits applicable to the series 4 issuer notes, series 5
class B issuer notes and series 4 class C issuer notes.
THE FUNDING 1 SWAP
Some of the loans in the portfolio pay a variable rate of interest for a
period of time which may either be linked to the mortgages trustee variable
base rate or linked to an interest rate other than the mortgages trustee
variable base rate, such as a rate set by the Bank of England. Other loans pay
a fixed rate of interest for a period of time. However, the interest rate
payable by Funding 1 with respect to the issuer term advances is calculated as
a margin over LIBOR for three-month sterling deposits. To provide a hedge
against the possible variance between:
(1) the mortgages trustee variable base rate payable on the variable
rate loans, the rates of interest payable on the tracker rate loans
and the fixed rates of interest payable on the fixed rate loans;
and
(2) a LIBOR based rate for three-month sterling deposits,
Funding 1, the Funding 1 swap provider and the security trustee will amend
and restate the Funding 1 swap agreement on the closing date. The Funding 1
swap will:
* have a notional amount that is sized to hedge against any potential
interest rate mismatches in relation to the current issues; and
* provide for the notional amount to be increased as appropriate to
hedge against similar potential interest rate mismatches in
relation to any new issues.
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Under the Funding 1 swap, on each calculation date, as defined in the
glossary, the following amounts will be calculated:
* the amount produced by applying LIBOR for three-month sterling
deposits (as determined in respect of the corresponding interest
period under the intercompany loans) plus a spread for the relevant
calculation period to the notional amount of the Funding 1 swap as
described later in this section (known as the "CALCULATION PERIOD
SWAP PROVIDER AMOUNT") ; and
* the amount produced by applying a rate equal to the weighted
average of:
(i) the average of the standard variable mortgage rates or their
equivalent charged to existing borrowers on residential
mortgage loans as published from time to time, after excluding
the highest and the lowest rate, of [Abbey National plc, HSBC
Bank plc, Lloyds TSB plc], National Westminster Bank Plc,
Nationwide Building Society, Northern Rock plc, and Woolwich
plc (and where those banks have more than one standard variable
rate, the highest of those rates);
(ii) the rates of interest payable on the tracker rate loans; and
(iii) the rates of interest payable on the fixed rate loans,
for the relevant calculation period to the notional amount of the Funding 1
swap (known as the "CALCULATION PERIOD FUNDING 1 AMOUNT").
On each Funding 1 interest payment date the following amounts will be
calculated:
* the sum of each of the calculation period swap provider amounts
calculated during the preceding interest period; and
* the sum of each of the calculation period Funding 1 amounts
calculated during the preceding interest period.
After these two amounts are calculated in relation to a Funding 1 interest
payment date, the following payments will be made on that Funding 1 interest
payment date:
* if the first amount is greater than the second amount, then the
Funding 1 swap provider will pay the difference to Funding 1;
* if the second amount is greater than the first amount, then Funding
1 will pay the difference to the Funding 1 swap provider; and
* if the two amounts are equal, neither party will make a payment to
the other.
If a payment is to be made by the Funding 1 swap provider, that payment will
be included in the Funding 1 available revenue receipts and will be applied on
the relevant Funding 1 interest payment date according to the relevant order of
priority of payments of Funding 1. If a payment is to be made by Funding 1, it
will be made according to the relevant order of priority of payments of Funding
1.
The notional amount of the Funding 1 swap in respect of a calculation period
will be an amount in sterling equal to:
* the aggregate principal amount outstanding of all intercompany
loans during the relevant calculation period, less
* the balance of the principal deficiency ledger attributable to all
intercompany loans during the relevant calculation period, less
* the amount of the principal receipts in the Funding 1 GIC account
attributable to all intercompany loans during the relevant
calculation period.
In the event that the Funding 1 swap is terminated prior to the service of
any issuer intercompany loan acceleration notice or final repayment of any
intercompany loan, Funding 1 shall enter into a replacement Funding 1 swap on
terms acceptable to the rating agencies, with the security trustee and with a
swap provider whom the rating agencies have previously confirmed in writing to
Funding 1, the issuer and the security trustee will not cause the then current
ratings of
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the issuer notes to be downgraded, withdrawn or qualified. If Funding 1 is
unable to enter into a replacement Funding 1 swap on terms acceptable to the
rating agencies, this may affect amounts available to pay interest on the
intercompany loans.
THE ISSUER DOLLAR CURRENCY SWAPS AND THE ISSUER EURO CURRENCY SWAPS
The issuer intercompany loan will be denominated in sterling and interest
payable by Funding 1 to the issuer under the issuer term advances is calculated
as a margin over LIBOR for three-month sterling deposits. However, some of the
issuer notes will be denominated in US dollars and will accrue interest at
either a LIBOR based rate for one-month dollar deposits or a LIBOR based rate
for three-month deposits. In addition, the series 4 issuer notes, series 5
class B issuer notes and series 5 class C issuer notes will be denominated in
euro and will accrue interest at a EURIBOR based rate for three-month euro
deposits. To deal with the potential interest rate and/or currency mismatch
between (i) its receipts and liabilities in respect of the issuer intercompany
loan and (ii) its receipts and liabilities under the issuer notes, the issuer
will, pursuant to the terms of the issuer swaps, swap its receipts and
liabilities in respect of all euro denominated issuer notes and all US dollar
denominated issuer notes into sterling on terms that match the issuer's
obligations under the US dollar denominated issuer notes or the euro
denominated issuer notes, as applicable.
The currency amount of each issuer swap will be the principal amount
outstanding under the term advance for the issuer notes to which the relevant
issuer swap relates. In order to allow for the effective currency amount of
each issuer swap to amortise at the same rate as the relevant class of issuer
notes, each issuer swap agreement will provide that, as and when the issuer
notes amortise, a corresponding portion of the currency amount of the relevant
issuer swap will amortise. Pursuant to each issuer swap agreement, any portion
of the issuer swap so amortised will be swapped from sterling into US dollars
at the relevant dollar currency exchange rate or into euro at the euro currency
exchange rate, as applicable.
In the event that any issuer swap is terminated prior to the service of an
issuer note acceleration notice or the final redemption of the relevant US
dollar denominated or euro denominated issuer notes, as applicable, the issuer
shall enter into a replacement issuer swap in respect of that class and series
of issuer notes. Any replacement issuer swap must be entered into on terms
acceptable to the rating agencies, the issuer and the security trustee and with
a replacement issuer swap provider whom the rating agencies have previously
confirmed in writing to the issuer and the security trustee will not cause the
then current ratings of the issuer notes to be downgraded, withdrawn or
qualified. If the issuer is unable to enter into any replacement issuer swaps
on terms acceptable to the rating agencies, this may affect amounts available
to pay amounts due under the issuer notes.
If an issuer swap agreement is terminated and the issuer is unable to enter
into a replacement swap as described above, then any payments received by the
issuer from Funding 1 on each Funding 1 interest payment date shall be
deposited in the issuer bank account (or such other account opened for this
purpose) and applied by the issuer to repay the issuer notes on each interest
payment date after exchanging at the "spot" rate the relevant proceeds from
sterling into dollars [or euros] as required.
RATINGS DOWNGRADE OF SWAP PROVIDERS
Under each of the swap agreements, in the event that the relevant rating(s)
of a swap provider is or are, as applicable, downgraded by a rating agency
below the rating(s) specified in the relevant swap agreement (in accordance
with the requirements of the rating agencies) for such swap provider, and, as a
result of the downgrade, the then current ratings of the current notes, in
respect of the Funding 1 swap, or the issuer notes corresponding to the
relevant issuer swap, in respect of the relevant issuer swap, would or may, as
applicable, be adversely affected, the relevant swap provider will, in
accordance with the Funding 1 swap or the relevant issuer swap, as applicable,
be required to take certain remedial measures which may include providing
collateral for its obligations under the relevant swap, arranging for its
obligations under the relevant swap to be transferred to an entity with
rating(s) required by the relevant rating agency as specified in the relevant
swap agreement (in accordance with the requirements of the relevant rating
agency),
196
procuring another entity with rating(s) required by the relevant rating agency
as specified in the relevant swap agreement (in accordance with the
requirements of the relevant rating agency), to become co-obligor in respect of
its obligations under the relevant swap, or taking such other action as it may
agree with the relevant rating agency.
TERMINATION OF THE SWAPS
* The Funding 1 swap will terminate on the date on which the
aggregate principal amount outstanding under all intercompany loans
is reduced to zero.
* Each issuer swap (other than the series 1 class A issuer swap, the
series 2 class A issuer swap, the series 3 class A issuer swap and
the series 4 class issuer swap) will terminate on the earlier of
the interest payment date falling in __ June 2042 and the date on
which all of the relevant class and series of issuer notes are
redeemed in full. The series 1 class A issuer swap will terminate
on the earlier of the interest payment date falling in September
2004 and the date on which the series 1 class A issuer notes are
redeemed in full. The series 2 class A issuer swap will terminate
on the earlier of the interest payment date falling in December
2006 and the date on which the series 2 class A issuer notes are
redeemed in full. The series 3 class A issuer swap will terminate
on the earlier of the interest payment date falling in __ and the
date on which the series 3 class A issuer notes are redeemed in
full. The series 4 class A issuer swap will terminate on the
earlier of the interest payment date falling in __ and the date on
which the series 4 class A issuer notes are redeemed in full.
* Any swap agreement may also be terminated in any of the following
circumstances, each referred to as a "SWAP EARLY TERMINATION
EVENT":
* at the option of one party to the swap agreement, if there is a
failure by the other party to pay any amounts due under that swap
agreement;
* in respect of the issuer swaps, if an event of default under the
issuer notes occurs and the security trustee serves an issuer note
acceleration notice;
* in respect of the Funding 1 swap, if an event of default under any
intercompany loan occurs and the security trustee serves an
intercompany loan acceleration notice;
* upon the occurrence of an insolvency of the relevant swap provider,
or its guarantor, or the merger of one of the parties without an
assumption of the obligations under the relevant swap agreement
(except in respect of a transfer by Funding 1 or the issuer to the
relevant security trustee), or, under the issuer swap agreements,
the occurrence of certain other events in relation to the issuer
which, in the opinion of the security trustee would materially
affect the issuer's ability to make payment under the relevant
issuer swap agreement or changes in law resulting in the
obligations of one of the parties becoming illegal; and
* if the relevant swap provider or its guarantor, as applicable, is
downgraded and fails to comply with the requirements of the ratings
downgrade provision contained in the relevant swap agreement and
described above under "-- RATINGS DOWNGRADE OF SWAP PROVIDERS".
Upon the occurrence of a swap early termination event, the issuer or the
relevant issuer swap provider may be liable to make a termination payment to
the other and/or Funding 1 or the Funding 1 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 issuer swap is terminated early and a termination payment is due by
the issuer to an issuer swap provider, as the case may be, then, pursuant to
its obligations under the issuer intercompany loan, Funding 1 shall pay to the
issuer an amount equal to the termination payment
197
due to the relevant issuer swap provider. These payments will be made by
Funding 1 only after paying interest amounts due on the issuer term advances
and after providing for any debit balance on the principal deficiency ledger.
The issuer shall apply amounts received from Funding 1 under the issuer
intercompany loan in accordance with the issuer pre-enforcement revenue
priority of payments or, as the case may be, the issuer post-enforcement
priority of payments. The application by the issuer of termination payments due
to an issuer swap provider may affect the funds available to pay amounts due to
the noteholders (see further "RISK FACTORS -- YOU MAY BE SUBJECT TO EXCHANGE
RATE RISKS ON THE SERIES 1 ISSUER NOTES, THE SERIES 2 ISSUER NOTES, THE SERIES
3 ISSUER NOTES, THE SERIES 4 ISSUER NOTES, THE SERIES 5 CLASS B ISSUER NOTES
AND SERIES 5 CLASS C ISSUER NOTES").
If the issuer receives a termination payment from an issuer 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 replacement issuer swap
is entered into and/or to acquire a replacement issuer swap. Noteholders will
not receive extra amounts (over and above interest and principal payable on the
issuer notes) as a result of the issuer receiving a termination payment.
TRANSFER OF THE ISSUER SWAPS
Each issuer swap provider may, at its option, transfer its obligations under
any of the issuer swaps to any of its affiliates. Any such transfer is subject
to certain conditions, including among other things (i) that the transferee has
ratings equal or higher to the ratings specified in the relevant issuer swap
agreement (in accordance with the requirements of the rating agencies), or the
transferee's performance under the relevant issuer swap will be guaranteed in
full by the relevant issuer swap provider, (ii) that the transfer must not
cause an event of default or a swap early termination event under the relevant
issuer swap and (iii) that the rating agencies have confirmed that the transfer
will not result in the then current rating of the relevant series and class of
issuer notes being downgraded.
TAXATION
Neither Funding 1 nor the issuer is obliged under any of the swaps to gross
up payments made by them if withholding taxes are imposed on payments made
under the Funding 1 swap or the issuer swaps.
A swap provider will be obliged to gross up payments made by it to Funding 1
or the issuer, as appropriate, if withholding taxes are imposed on payments
made under the Funding 1 swap or the issuer swaps.
GOVERNING LAW
The Funding 1 swap agreement, the issuer dollar currency swap agreements and
the issuer euro currency swap agreements will be governed by English law.
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CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING 1
The following section contains a summary of the material terms of the cash
management agreement. The summary does not purport to be complete and is
subject to the provisions of the cash management agreement, a form of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
Halifax was appointed on 14th June, 2002 by the mortgages trustee, Funding 1
and State Street Bank and Trust Company (the security trustee on behalf of the
Funding 1 secured creditors as of 14th June, 2002) to provide cash management
services in relation to the mortgages trust and Funding 1.
CASH MANAGEMENT SERVICES PROVIDED IN RELATION TO THE MORTGAGES TRUST
The cash manager's duties in relation to the mortgages trust include but are
not limited to:
(A) determining the current shares of Funding 1 and the seller in the
trust property in accordance with the terms of the mortgages trust
deed;
(B) maintaining the following ledgers on behalf of the mortgages
trustee:
* the Funding 1 share/seller share ledger, which records the
current shares of the seller and Funding 1 in the trust
property;
* the losses ledger, which records losses on the loans;
* the principal ledger, which records principal receipts on the
loans received by the mortgages trustee and payments of
principal from the mortgages trustee GIC account to Funding 1
and the seller; and
* the revenue ledger, which records revenue receipts on the loans
received by the mortgages trustee and payments of revenue
receipts from the mortgages trustee GIC account to Funding 1
and the seller;
(C) distributing the mortgages trustee available revenue receipts and
the mortgages trustee principal receipts to Funding 1 and the
seller in accordance with the terms of the mortgages trust deed;
and
(D) providing the mortgages trustee, Funding 1, the security trustee
and the rating agencies with a quarterly report in relation to the
trust property.
CASH MANAGEMENT SERVICES PROVIDED TO FUNDING 1
The cash manager's duties in relation to Funding 1 include but are not
limited to:
(A) four business days before each Funding 1 interest payment date,
determining:
* the amount of Funding 1 available revenue receipts to be
applied to pay interest and fees in relation to the term
advances on the following Funding 1 interest payment date; and
* the amount of Funding 1 available principal receipts to be
applied to repay the term advances on the following Funding 1
interest payment date;
(B) if required, making drawings under the Funding 1 liquidity
facility;
(C) maintaining the following ledgers on behalf of Funding 1:
* the Funding 1 principal ledger, which records the amount of
principal receipts received by Funding 1 on each distribution
date;
* the Funding 1 revenue ledger, which records all other amounts
received by Funding 1 on each distribution date;
* the reserve ledger, which records the amount credited to the
reserve fund from a portion of the proceeds of (i) the first
start-up loan on the initial closing, (ii) the second start-up
loan on 6th March, 2003, (iii) the third start-up loan t on the
closing
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date, (iv) other amounts standing to the credit of the reserve
fund (but not exceeding the reserve fund required amount) and
(v) all deposits and other credits in respect of the reserve
fund;
* the principal deficiency ledger, which records principal
deficiencies arising from losses on the loans which have been
allocated to Funding 1's share or the use of Funding 1's
principal receipts to cover certain senior expenses (including
interest on the term advances);
* the intercompany loan ledger, which records payments of
interest and repayments of principal made on each of the term
advances under the intercompany loans;
* the cash accumulation ledger, which records the amount
accumulated by Funding 1 from time to time to pay the amounts
due on the bullet term advances and the scheduled amortisation
instalments; and
* the Funding 1 liquidity facility ledger, which will record
drawings made under the Funding 1 liquidity facility and
repayments of those drawings;
(D) investing sums standing to the credit of the Funding 1 GIC account
and the Funding 1 liquidity facility stand-by account in short-term
authorised investments (as defined in the glossary) as determined
by Funding 1, the cash manager and the security trustee;
(E) making withdrawals from the reserve fund as and when required;
(F) applying the Funding 1 available revenue receipts and Funding 1
available principal receipts in accordance with the relevant order
of priority of payments for Funding 1 contained in the Funding 1
deed of charge;
(G) providing Funding 1, the issuer, the security trustee and the
rating agencies with a quarterly report in relation to Funding 1;
and
(H) making all returns and filings in relation to Funding 1 and the
mortgages trustee and providing or procuring the provision of
company secretarial and administration services to them.
For the definitions of Funding 1 available revenue receipts, Funding 1
available principal receipts and the Funding 1 priorities of payments, see
"CASHFLOWS".
COMPENSATION OF CASH MANAGER
The cash manager is paid a rate of 0.025 per cent. per annum of the
principal amount outstanding of the intercompany loans for its services which
is paid in four equal instalments quarterly in arrear on each Funding 1
interest payment date. The rate is inclusive of VAT. The rate is subject to
adjustment if the applicable rate of VAT changes.
In addition, the cash manager is entitled to be indemnified for any expenses
or other amounts properly incurred by it in carrying out its duties. The cash
manager is paid by Funding 1 prior to amounts due to the relevant issuers on
the term advances.
RESIGNATION OF CASH MANAGER
The cash manager may resign only on giving 12 months' written notice to the
security trustee, Funding 1 and the mortgages trustee and if:
* a substitute cash manager has been appointed and a new cash
management agreement is entered into on terms satisfactory to the
security trustee, the mortgages trustee and Funding 1; and
* the ratings of the notes at that time would not be adversely
affected as a result of that replacement (unless otherwise agreed
by an extraordinary resolution of the noteholders of each class).
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TERMINATION OF APPOINTMENT OF CASH MANAGER
The security trustee may, upon written notice to the cash manager, terminate
the cash manager's rights and obligations immediately if any of the following
events occurs:
* the cash manager defaults in the payment of any amount due and
fails to remedy the default for a period of three London business
days after becoming aware of the default;
* the cash manager fails to comply with any of its other obligations
under the cash management agreement which in the opinion of the
security trustee is materially prejudicial to the Funding 1 secured
creditors and does not remedy that failure within 20 London
business days after the earlier of becoming aware of the failure
and receiving a notice from the security trustee; or
* Halifax, while acting as the cash manager, suffers an insolvency
event.
If the appointment of the cash manager is terminated or it resigns, the cash
manager must deliver its books of account relating to the loans to or at the
direction of the mortgages trustee, Funding 1 or the security trustee, as the
case may be. The cash management agreement will terminate automatically when
Funding 1 has no further interest in the trust property and the intercompany
loan and all new intercompany loans (if any) have been repaid or otherwise
discharged.
GOVERNING LAW
The cash management agreement is governed by English law.
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CASH MANAGEMENT FOR THE ISSUER
The following section contains a summary of the material terms of the issuer
cash management agreement. The summary does not purport to be complete and is
subject to the provisions of the issuer cash management agreement, a form of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
Halifax will be appointed on the closing date by the issuer and the security
trustee to provide cash management services to the issuer.
CASH MANAGEMENT SERVICES TO BE PROVIDED TO THE ISSUER
The issuer cash manager's duties will include but are not limited to:
(A) four business days before each interest payment date, determining:
* the amount of issuer revenue receipts to be applied to pay
interest on the issuer notes on the following interest payment
date and to pay amounts due to other creditors of the issuer;
and
* the amount of issuer principal receipts to be applied to repay
the issuer notes on the following interest payment date;
(B) applying issuer revenue receipts and issuer principal receipts in
accordance with the relevant order of priority of payments for the
issuer set out in the issuer cash management agreement or, as
applicable, the issuer deed of charge;
(C) providing the issuer, Funding 1, the security trustee and the
rating agencies with quarterly reports in relation to the issuer;
(D) making all returns and filings required to be made by the issuer
and providing or procuring the provision of company secretarial and
administration services to the issuer;
(E) arranging payment of all fees to the London Stock Exchange plc or,
as applicable, the Financial Services Authority; and
(F) if necessary, performing all currency and interest rate conversions
(whether it be a conversion from sterling to dollars or vice versa,
sterling to euro or vice versa, or floating rates of interest to
fixed rates of interest or vice versa) free of charge, cost or
expense at the relevant exchange rate.
ISSUER'S BANK ACCOUNTS
On the closing date, the issuer will maintain a sterling bank account in its
name with Bank of Scotland at 116 Wellington Street, Leeds LS1 4LT, the right,
benefit and interest of which is assigned to the security trustee under the
issuer deed of charge (together with any other accounts of the issuer from time
to time the "ISSUER TRANSACTION ACCOUNT"). The issuer may, with the prior
written consent of the security trustee, open additional or replacement bank
accounts.
If the short-term, unguaranteed and unsubordinated ratings of an issuer
account bank cease to be rated A-1+ by Standard & Poor's, P-1 by Moody's or F1+
by Fitch, then the relevant issuer transaction account will be closed and a new
issuer transaction account opened with a bank that has the requisite ratings.
COMPENSATION OF ISSUER CASH MANAGER
The issuer cash manager will be paid a rate of 0.025 per cent. per annum of
the principal amount outstanding of the issuer notes for its services which
will be paid in four equal instalments quarterly in arrear on each interest
payment date. The rate is inclusive of VAT. The fees will be subject to
adjustment if the applicable rate of VAT changes.
In addition, the issuer cash manager will be entitled to be indemnified for
any expenses or other amounts properly incurred by it in carrying out its
duties. The issuer cash manager will be paid by the issuer prior to amounts due
on the issuer notes.
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RESIGNATION OF ISSUER CASH MANAGER
The issuer cash manager may resign only on giving 12 months' written notice
to the security trustee and the issuer and if:
* a substitute issuer cash manager has been appointed and a new
issuer cash management agreement is entered into on terms
satisfactory to the security trustee and the issuer; and
* the ratings of the issuer notes at that time would not be adversely
affected as a result of that replacement.
TERMINATION OF APPOINTMENT OF ISSUER CASH MANAGER
The security trustee may, upon written notice to the issuer cash manager,
terminate the issuer cash manager's rights and obligations immediately if any
of the following events occurs:
* the issuer cash manager defaults in the payment of any amount due
and fails to remedy the default for a period of three London
business days after becoming aware of the default;
* the issuer cash manager fails to comply with any of its other
obligations under the issuer cash management agreement which in the
opinion of the security trustee is materially prejudicial to the
issuer secured creditors and does not remedy that failure within 20
London business days after the earlier of becoming aware of the
failure and receiving a notice from the security trustee; or
* the issuer cash manager suffers an insolvency event.
If the appointment of the issuer cash manager is terminated or it resigns,
the issuer cash manager must deliver its books of account relating to the
issuer notes to or at the direction of the security trustee. The issuer cash
management agreement will terminate automatically when the issuer notes have
been fully redeemed.
GOVERNING LAW
The issuer cash management agreement will be governed by English law.
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DESCRIPTION OF THE ISSUER TRUST DEED
GENERAL
The principal agreement governing the issuer notes will be the trust deed
dated on or about the closing date and made between the issuer and the note
trustee (the "ISSUER TRUST DEED"). The issuer trust deed has five primary
functions. It:
* constitutes the issuer notes;
* sets out the covenants of the issuer in relation to the issuer
notes;
* sets out the enforcement and post-enforcement procedures relating
to the issuer notes;
* contains provisions necessary to comply with the US Trust Indenture
Act of 1939; and
* sets out the appointment, powers and responsibilities of the note
trustee.
The following section contains a summary of the material terms of the issuer
trust deed. The summary does not purport to be complete and is subject to the
provisions of the issuer trust deed, a form of which has been filed as an
exhibit to the registration statement of which this prospectus is a part.
The issuer trust deed sets out the form of the global issuer notes and the
definitive issuer notes. It also sets out the terms and conditions, and the
conditions for the issue of definitive issuer notes and/or the cancellation of
any issuer notes. It stipulates, among other things, that the paying agents,
the registrar, the transfer agent and the agent bank will be appointed. The
detailed provisions regulating these appointments are contained in the issuer
paying agent and agent bank agreement.
The issuer trust deed also contains covenants made by the issuer in favour
of the note trustee and the noteholders. The main covenants are that the issuer
will pay interest and repay principal on each of the issuer notes when due.
Covenants are included to ensure that the issuer remains insolvency-remote, and
to give the note trustee access to all information and reports that it may need
in order to discharge its responsibilities in relation to the noteholders. Some
of the covenants also appear in the terms and conditions of the issuer notes.
See "TERMS AND CONDITIONS OF THE OFFERED ISSUER NOTES". The issuer also
covenants that it will do all things necessary to maintain the listing of the
issuer notes on the official list of the UK Listing Authority and to maintain
the trading of those issuer notes on the London Stock Exchange and to keep in
place a common depositary, paying agents and an agent bank.
The issuer trust deed provides that the class A noteholders' interests take
precedence over the interests of other noteholders for so long as the class A
issuer notes are outstanding and thereafter the interests of the class B
noteholders take precedence for so long as the class B issuer notes are
outstanding and thereafter the interests of the class C noteholders take
precedence for so long as the class C issuer notes are outstanding. Certain
basic terms of each class of issuer notes may not be amended without the
consent of the majority of the holders of that class of note. This is described
further in "TERMS AND CONDITIONS OF THE OFFERED ISSUER NOTES".
The issuer trust deed also sets out the terms on which the note trustee is
appointed, the indemnification of the note trustee, the payment it receives and
the extent of the note trustee's authority to act beyond its statutory powers
under English law. The note trustee is also given the ability to appoint a co-
trustee or any delegate or agent in the execution of any of its duties under
the issuer trust deed. The issuer trust deed also sets out the circumstances in
which the note trustee may resign or retire.
The issuer trust deed includes certain provisions mandated by the US Trust
Indenture Act of 1939. Generally, these provisions outline the duties, rights
and responsibilities of the note trustee and the issuer and the rights of the
noteholders. Specifically these include, but are not limited to:
(a) maintenance of a noteholder list by the note trustee;
(b) provision of financial statements and other information by the
issuer to the note trustee;
(c) ability of noteholders to waive certain past defaults of the
issuer;
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(d) duty of the note trustee to use the same degree of care in
exercising its responsibilities as would be exercised by a prudent
person conducting their own affairs;
(e) duty of the note trustee to notify all noteholders of any events of
default of which it has actual knowledge; and
(f) right of the note trustee to resign at any time by notifying the
issuer in writing, and the ability of the issuer to remove the note
trustee under certain circumstances.
TRUST INDENTURE ACT PREVAILS
The issuer trust deed contains a provision that, if any other provision of
the issuer trust deed limits, qualifies or conflicts with another provision
which is required to be included in the issuer trust deed by, and is not
subject to contractual waiver under, the US Trust Indenture Act of 1939 (as
amended), then the required provision of that Act will prevail.
GOVERNING LAW
The issuer trust deed will be governed by English law.
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THE ISSUER NOTES AND THE GLOBAL ISSUER NOTES
The issue of the issuer notes will be authorised by a resolution of the
board of directors of the issuer passed prior to the closing date. The issuer
notes will be constituted by an issuer trust deed to be dated the closing date,
between the issuer and the note trustee, as trustee for, among others, the
holders for the time being of the issuer notes. While the material terms of the
issuer notes and the global notes are described in this prospectus, the
statements set out in this section with regard to the issuer notes and the
global issuer notes are subject to the detailed provisions of the issuer trust
deed. The issuer trust deed will include the form of the global issuer notes
and the form of definitive issuer notes. The issuer trust deed includes
provisions which enable it to be modified or supplemented and any reference to
the issuer trust deed is a reference also to the document as modified or
supplemented in accordance with its terms.
An issuer paying agent and agent bank agreement between the issuer, the note
trustee, [Citibank, N.A.] in London as principal paying agent, the US paying
agent, the registrar, the transfer agent and the agent bank, and an agent bank
agreement between the issuer, the note trustee, the registrar, the transfer
agent and the agent bank, regulate how payments will be made on the issuer
notes and how determinations and notifications will be made. They will be dated
as of the closing date and the parties will include, on an ongoing basis, any
successor party appointed in accordance with its terms.
Each class of each series of issuer notes will be represented initially by a
global issuer note in registered form without interest coupons attached. The
series 1 issuer notes, the series 2 issuer notes and the series 3 issuer notes
will initially be offered and sold pursuant to a registration statement, of
which this prospectus forms a part, filed with the United States Securities and
Exchange Commission. The series 4 issuer notes and the series 5 issuer notes
will initially be offered and sold outside the United States to non-US persons
pursuant to Regulation S under the United States Securities Act of 1933, as
amended. The global issuer notes representing the issuer notes offered by this
prospectus (the "OFFERED GLOBAL ISSUER NOTES") will be deposited on behalf of
the beneficial owners of the issuer notes with [Citibank, N.A.] in London, as
the custodian for, and registered in the name of Cede & Co as nominee of, The
Depository Trust Company -- called "DTC". On confirmation from the custodian
that it holds the global issuer notes, DTC will record book-entry interests in
the beneficial owner's account or the participant account through which the
beneficial owner holds its interests in the issuer notes. These book-entry
interests will represent the beneficial owner's beneficial interest in the
relevant global issuer notes.
The global issuer notes representing the issuer notes other than those
represented by the offered global issuer notes (the "REG S GLOBAL ISSUER
NOTES") will be deposited on behalf of the beneficial owners of those issuer
notes with, and registered in the name of [a nominee of, Citibank, N.A.,] as
common depositary for Clearstream, Luxembourg and Euroclear. On confirmation
from the common depositary that it holds the Reg S global issuer notes,
Clearstream, Luxembourg and/or Euroclear, as the case may be, will record book-
entry interests in the beneficial owner's account or the participant account
through which the beneficial owner holds its interests in the Reg S global
issuer notes. These book-entry interests will represent the beneficial owner's
beneficial interest in the relevant Reg S global issuer notes.
The amount of issuer notes represented by each global issuer note is
evidenced by the register maintained for that purpose by the registrar.
Together, the issuer notes represented by the global issuer notes and any
outstanding definitive issuer notes will equal the aggregate principal amount
of the issuer notes outstanding at any time. However, except as described under
"-- DEFINITIVE ISSUER NOTES" below, definitive certificates representing
individual issuer notes shall not be issued.
Beneficial owners may hold their interests in the global issuer notes only
through DTC, Clearstream, Luxembourg or Euroclear, as applicable, or indirectly
through organisations that are participants in any of those systems. Ownership
of these beneficial interests in a global issuer note will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
DTC, Clearstream, Luxembourg or Euroclear (with respect to interests of their
participants) and the records of their participants (with respect to interests
of persons other than
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their participants). By contrast, ownership of direct interests in a global
issuer note will be shown on, and the transfer of that ownership will be
effected through, the register maintained by the registrar. Because of this
holding structure of issuer notes, beneficial owners of issuer notes may look
only to DTC, Clearstream, Luxembourg or Euroclear, as applicable, or their
respective participants for their beneficial entitlement to those issuer notes.
The issuer expects that DTC, Clearstream, Luxembourg or Euroclear will take any
action permitted to be taken by a beneficial owner of issuer notes only at the
direction of one or more participants to whose account the interests in a
global issuer note is credited and only in respect of that portion of the
aggregate principal amount of issuer notes as to which that participant or
those participants has or have given that direction.
Beneficial owners will be entitled to the benefit of, will be bound by and
will be deemed to have notice of, all the provisions of the issuer trust deed
and the issuer paying agent and agent bank agreement. Beneficial owners can see
copies of these agreements at the principal office for the time being of the
note trustee, which is, as of the date of this document, The Bank of New York,
[One Canada Square, London, E14 5AL] and at the specified office for the time
being of each of the paying agents. Pursuant to its obligations under the
Listing Rules made by the UK Listing Authority, the issuer will maintain a
paying agent in the United Kingdom until the date on which the issuer notes are
finally redeemed for as long as any issuer is outstanding, if the proposed
European Union Directive on Taxation of Savings implementing the conclusions of
the ECOFIN Council meeting on 21st January, 2003, or any law implementing or
complying with, or introduced in order to conform to such conclusions is
introduced, the issuer will endeavour to maintain a paying agent in a member
state of the European Union that will not be obliged to withhold or deduct tax
pursuant to such directive or any such law.
PAYMENT
Principal and interest payments on the offered global issuer notes will be
made via the paying agents to DTC or its nominee, as the registered holder of
the offered global issuer notes. DTC's practice is to credit its participants'
accounts on the applicable interest payment date according to their respective
holdings shown on DTC's records unless DTC has reason to believe that it will
not receive payment on that interest payment date.
Payments by DTC, Clearstream, Luxembourg and Euroclear participants to the
beneficial owners of issuer notes will be governed by standing instructions,
customary practice, and any statutory or regulatory requirements as may be in
effect from time to time, as is now the case with securities held by the
accounts of customers registered in "STREET NAME". These payments will be the
responsibility of the DTC, Clearstream, Luxembourg or Euroclear participant and
not of DTC, Clearstream, Luxembourg, Euroclear, any paying agent, the note
trustee or the issuer. Neither the issuer, the note trustee nor any paying
agent will have any responsibility or liability for any aspect of the records
of DTC, Clearstream, Luxembourg or Euroclear relating to payments made by DTC,
Clearstream, Luxembourg or Euroclear on account of beneficial interests in the
global issuer notes or for maintaining, supervising or reviewing any records of
DTC, Clearstream, Luxembourg or Euroclear relating to those beneficial
interests.
CLEARANCE AND SETTLEMENT
THE CLEARING SYSTEMS
DTC. DTC has advised us [and the underwriters[ that it intends to follow the
following procedures:
DTC will act as securities depository for the offered global issuer notes.
The offered global issuer notes will be issued as securities registered in the
name of Cede & Co. (DTC's nominee).
DTC has advised us that it is a:
* limited-purpose trust company organised under the New York Banking
Law;
* "BANKING ORGANISATION" within the meaning of the New York Banking
Law;
* member of the Federal Reserve System;
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* "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
organisations. Indirect access to the DTC system is also available to others
including securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a participant, either
directly or indirectly. The rules applicable to DTC and its participants are on
file with the SEC. Transfers between participants on the DTC system will occur
under DTC rules.
Purchases of issuer notes under the DTC system must be made by or through
DTC participants, which will receive a credit for the issuer notes on DTC's
records. The ownership interest of each actual beneficial owner is in turn to
be recorded on the DTC participants' and indirect participants' records.
Beneficial owners will not receive written confirmation from DTC of their
purchase. However, beneficial owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the DTC participant or indirect participant
through which the beneficial owner entered into the transaction. Transfer of
ownership interests in the offered global issuer notes are to be accomplished
by entries made on the books of DTC participants acting on behalf of beneficial
owners. Beneficial owners will not receive certificates representing their
ownership interest in issuer notes unless use of the book-entry system for the
issuer notes described in this section is discontinued.
To facilitate subsequent transfers, all global issuer notes deposited with
DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of
these global issuer notes with DTC and their registration in the name of Cede &
Co. effect no change in beneficial ownership. DTC has no knowledge of the
ultimate beneficial owners of the issuer notes. DTC's records reflect only the
identity of the DTC participants to whose accounts the beneficial interests are
credited, which may or may not be the actual beneficial owners of the issuer
notes. The DTC participants will remain responsible for keeping account of
their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC participants,
by DTC participants to indirect participants, and by DTC participants and
indirect participants to beneficial owners will be governed by arrangements
among them and by any statutory or regulatory requirements in effect from time
to time.
Redemption notices for the offered global issuer notes will be sent to DTC.
If less than all of those global issuer notes are being redeemed by investors,
DTC's practice is to determine by lot the amount of the interest of each
participant in those global issuer notes to be redeemed.
Neither DTC nor Cede & Co. will consent or vote on behalf of the offered
global issuer notes. Under its usual procedures, DTC will mail an omnibus proxy
to the issuer as soon as possible after the record date, which assigns the
consenting or voting rights of Cede & Co to those DTC participants to whose
accounts the book-entry interests are credited on the record date, identified
in a list attached to the proxy.
The issuer understands that under existing industry practices, when the
issuer requests any action of noteholders or when a beneficial owner desires to
give or take any action which a noteholder is entitled to give or take under
the issuer trust deed, DTC generally will give or take that action, or
authorise the relevant participants to give or take that action, and those
participants would authorise beneficial owners owning through those
participants to give or take that action or would otherwise act upon the
instructions of beneficial owners through them.
CLEARSTREAM, LUXEMBOURG AND EUROCLEAR. Clearstream, Luxembourg and Euroclear
each hold securities for their participating organisations and facilitate the
clearance and settlement of securities transactions between their respective
participants through electronic book-entry changes in accounts of those
participants, thereby eliminating the need for physical movement of securities.
Clearstream, Luxembourg and Euroclear provide various services including
safekeeping,
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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. Transfer between
participants on the Clearstream, Luxembourg system and participants of the
Euroclear system will occur under their respective rules and operating
procedures.
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"), under contract with Euroclear Clearance System, Societe
Cooperative, a Belgium co-operative corporation (the "EUROCLEAR CO-OPERATIVE").
All operations are conducted by the Euroclear operator. All Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear operator, not the Euroclear co-operative. The board of the Euroclear
co-operative establishes policy for the Euroclear system.
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.
The information in this section concerning DTC and DTC's book-entry system,
Clearstream, Luxembourg and Euroclear has been obtained from sources that the
issuer believes to be reliable, but the issuer takes no responsibility for the
accuracy thereof.
As the holders of book-entry interests, beneficial owners will not have the
right under the issuer trust deed to act on solicitations by the issuer for
action by noteholders. Beneficial owners will only be able to act to the extent
they receive the appropriate proxies to do so from DTC, Clearstream, Luxembourg
or Euroclear or, if applicable, their respective participants. No assurances
are made about these procedures or their adequacy for ensuring timely exercise
of remedies under the issuer trust deed.
No beneficial owner of an interest in a global issuer note will be able to
transfer that interest except in accordance with applicable procedures, in
addition to those provided for under the issuer trust deed, of DTC,
Clearstream, Luxembourg and Euroclear, as applicable. The laws of some
jurisdictions require that some purchasers of securities take physical delivery
of those securities in definitive form. These laws and limitations may impair
the ability to transfer beneficial interests in the global issuer notes.
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GLOBAL CLEARANCE AND SETTLEMENT PROCEDURES
INITIAL SETTLEMENT
The offered global issuer notes will be delivered at initial settlement to
[Citibank, N.A., London Branch] as custodian for DTC, and the Reg S global
issuer notes will be delivered to Citibank, N.A., as common depositary for
Clearstream, Luxembourg and Euroclear. Customary settlement procedures will be
followed for participants of each system at initial settlement. Issuer notes
will be credited to investors' securities accounts on the settlement date
against payment in same-day funds.
SECONDARY TRADING
Secondary market sales of book-entry interests in issuer notes between DTC
participants will occur in accordance with DTC rules and will be settled using
the procedures applicable to conventional United States corporate debt
obligations.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to these
procedures to facilitate transfers of interests in securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are not
obligated to perform these procedures. Additionally, these procedures may be
discontinued at any time. None of the issuer, any agent, the underwriters or
any affiliate of any of the foregoing, or any person by whom any of the
foregoing is controlled for the purposes of the Securities Act, will have any
responsibility for the performance by DTC, Clearstream, Luxembourg, Euroclear
or their respective direct or indirect participants or accountholders of their
respective obligations under the rules and procedures governing their
operations or for the sufficiency for any purpose of the arrangements described
herein.
DEFINITIVE ISSUER NOTES
Beneficial owners of issuer notes will only be entitled to receive
definitive issuer notes under the following limited circumstances:
* as a result of a change in UK law, the issuer or any paying agent
is or will be required to make any deduction or withholding on
account of tax from any payment on the issuer notes that would not
be required if the issuer notes were in definitive form;
* in the case of the offered global issuer notes, DTC notifies the
issuer that it is unwilling or unable to hold the offered global
issuer notes or is unwilling or unable to continue as, or has
ceased to be, a clearing agency under the United States Securities
Exchange Act of 1934 and, in each case, the issuer cannot appoint a
successor within 90 days; or
* in the case of the Reg S global issuer notes, Clearstream,
Luxembourg and Euroclear are closed for business for a continuous
period of 14 days or more (other than by reason of legal holidays)
or announce an intention to cease business permanently or do in
fact do so and no alternative clearing system satisfactory to the
issuer note trustee is available.
In no event will definitive issuer notes in bearer form be issued. Any
definitive issuer notes will be issued in registered form in denominations of
[$1,000] or [$10,000], in the case of definitive issuer notes representing the
series 1 issuer notes, the series 2 issuer notes and the series 3issuer notes,
in each case, in integral multiples thereof. Any definitive issuer notes will
be registered in that name or those names as the registrar shall be instructed
by DTC, Clearstream, Luxembourg and Euroclear, as applicable. It is expected
that these instructions will be based upon directions received by DTC,
Clearstream, Luxembourg and Euroclear from their participants reflecting the
ownership of book-entry interests. To the extent permitted by law, the issuer,
the note trustee and any paying agent shall be entitled to treat the person in
whose name any definitive issuer notes is registered as the absolute owner
thereof. The issuer paying agent and agent bank agreement contains provisions
relating to the maintenance by a registrar of a register reflecting ownership
of the issuer notes and other provisions customary for a registered debt
security.
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Any person receiving definitive issuer notes will not be obligated to pay or
otherwise bear the cost of any tax or governmental charge or any cost or
expense relating to insurance, postage, transportation or any similar charge,
which will be solely the responsibility of the issuer. No service charge will
be made for any registration of transfer or exchange of any definitive issuer
notes.
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TERMS AND CONDITIONS OF THE OFFERED ISSUER NOTES
The following is a summary of the material terms and conditions of the
series 1 issuer notes, the series 2 issuer notes, and the series 3 issuer notes
(the "OFFERED ISSUER NOTES"), numbered [1] to [15]. This summary does not need
to be read with the actual terms and conditions of the issuer notes in order to
learn all the material terms and conditions of the offered issuer notes. The
complete terms and conditions of the issuer notes are set out in the issuer
trust deed, a form of which has been filed as an exhibit to the registration
statement of which this prospectus is a part, and in the event of a conflict,
the terms and conditions of the offered issuer notes set out in the issuer
trust deed will prevail.
The issuer notes are the subject of the following documents:
* an issuer trust deed dated the closing date between the issuer and
the note trustee;
* an issuer paying agent and agent bank agreement dated the closing
date between the issuer, the principal paying agent and the agent
bank, the US paying agent, any other payment agents, the registrar,
the transfer agent and the note trustee;
* an issuer deed of charge dated the closing date between the issuer,
the note trustee, the security trustee, the issuer swap providers
and certain other parties;
* the issuer dollar currency swap agreements dated on or about the
closing date between the issuer, the issuer dollar currency swap
providers and the security trustee; and
* the issuer euro currency swap agreements dated on or about the
closing date between the issuer, the issuer euro currency swap
provider and the security trustee.
When we refer to the parties to these documents, the reference includes any
successor to that party validly appointed.
Initially the parties will be as follows:
* Permanent Financing (No. 3) PLC as issuer;
* Citibank, N.A. as principal paying agent and agent bank;
* The Bank of New York as note trustee;
* The Bank of New York as security trustee for the issuer secured
creditors under the issuer deed of charge;
* The Bank of New York as security trustee for the Funding 1 secured
creditors under the Funding 1 deed of charge;
* [Citibank, N.A.,] as registrar and transfer agent;
* [JPMorgan Chase Bank] as the Funding 1 liquidity provider;
* __ as issuer swap provider in respect of the series __ issuer
notes;
* Halifax plc as Funding 1 swap provider.
The noteholders are bound by and deemed to have notice of all of the
provisions of the issuer trust deed, the issuer deed of charge, the issuer
intercompany loan agreement, the Funding 1 deed of charge, the issuer cash
management agreement, the issuer paying agent and agent bank agreement, the
issuer dollar currency swap agreements, the issuer euro currency swap
agreements and the Funding 1 swap agreement which are applicable to them.
Noteholders can view copies of those documents at the specified office of any
of the paying agents after the closing date.
There is no English law which prohibits US residents from holding issuer
notes due solely to their residence outside the UK.
There are no UK governmental laws or regulations other than in relation to
withholding tax, as described in "UNITED KINGDOM TAXATION -- WITHHOLDING TAX",
that restrict payments made to non-UK resident noteholders.
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1. FORM, DENOMINATION AND TITLE
The offered issuer notes are being offered and sold to the public in the
United States and to institutional investors outside the United States.
The offered issuer notes are initially in global registered form, without
coupons attached. Transfers and exchanges of beneficial interests in global
issuer notes are made in accordance with the rules and procedures of DTC,
Euroclear and/or Clearstream, Luxembourg, as applicable.
A global note will be exchanged for issuer notes in definitive registered
form only under limited circumstances. The denominations of any offered issuer
notes in definitive form will be [$1,000] or [$10,000] each or integral
multiples thereof. If issuer notes in definitive form are issued, they will be
serially numbered and issued in an aggregate principal amount equal to the
principal amount outstanding of the relevant global issuer notes and in
registered form only. Title to the global issuer notes or to any definitive
issuer notes will pass on registration in the register maintained by the
registrar. The registered holder of any global issuer note is the absolute
owner of that note. Definitive issuer notes may be transferred in whole upon
surrender of the note to the registrar and completion of the relevant form of
transfer. The issuer notes are not issuable in bearer form.
2. STATUS, SECURITY AND PRIORITY
The class A issuer notes, the class B issuer notes and the class C issuer
notes are direct, secured and unconditional obligations of the issuer and are
all secured by the same security. Payments on each class of issuer notes will
be made equally among all issuer notes of that class.
Without prejudice to the repayment provisions described in number 5 (and
except if a non-asset trigger event occurs or if, prior to enforcement of the
issuer security, amounts are due and payable in respect of more than one series
of the class A issuer notes), the class A issuer notes rank, irrespective of
series, without preference or priority among themselves. Without prejudice to
the repayment provisions described in number 5 below and subject to the
relevant scheduled and/or, as applicable, permitted redemption dates or other
payment conditions of the issuer notes, payments of principal and interest due
and payable on the class A issuer notes will rank ahead of payments of
principal and interest due and payable on the class B issuer notes and the
class C issuer notes subject to the terms and conditions of the issuer notes,
the issuer cash management agreement, the issuer deed of charge, the Funding 1
deed of charge and the other issuer transaction documents.
Without prejudice to the repayment provisions described in number 5, the
class B issuer notes rank, irrespective of series, without preference or
priority among themselves. Without prejudice to the repayment provisions
described in number 5 below and subject to the relevant scheduled and/or, as
applicable, permitted redemption dates or other payment conditions of the
issuer notes, payments of principal and interest due and payable on the class B
issuer notes will rank ahead of payments of principal and interest due and
payable on the class C issuer notes and will be subordinated to those payments
due and payable on the class A issuer notes subject to the terms and conditions
of the issuer notes, the issuer cash management agreement, the issuer deed of
charge, the Funding 1 deed of charge and the other issuer transaction
documents.
Without prejudice to the repayment provisions described in number 5, the
class C issuer notes rank, irrespective of series, without preference or
priority among themselves. Without prejudice to the repayment provisions
described in number 5 below and subject to the relevant scheduled and/or, as
applicable, permitted redemption dates or other payment conditions of the
issuer notes, payments of principal and interest due and payable on the class C
issuer notes will be subordinated to payments due and payable on the class A
issuer notes and the class B issuer notes subject to the terms and conditions
of the issuer notes, the issuer cash management agreement, the issuer deed of
charge, the Funding 1 deed of charge and the other issuer transaction
documents.
In the event of the issuer security being enforced, the class A issuer notes
will rank in priority to the class B issuer notes and the class A issuer notes
and the class B issuer notes will rank in priority to the class C issuer notes.
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The note trustee and the security trustee are required to have regard to the
interests of all classes of noteholders equally. However, if there are any
class A issuer notes outstanding and there is or may be a conflict between the
interests of the class A noteholders and the interests of the class B
noteholders and/or the class C noteholders, then the note trustee and the
security trustee will have regard to the interests of the class A noteholders
only. If there are no class A issuer notes outstanding and there are any class
B issuer notes outstanding and there is or may be a conflict between the
interests of the class B noteholders and the interests of the class C
noteholders, then the note trustee and the security trustee will have regard to
the interests of the class B noteholders only.
Except in limited circumstances described in number 11, there is no
limitation on the power of class A noteholders to pass an effective
extraordinary resolution the exercise of which is binding on the class B
noteholders and the class C noteholders. However, as described in number 11,
there are provisions limiting the power of the class B 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 C noteholders. However, as described in number
11, there are provisions limiting the power of the class C noteholders to pass
an effective extraordinary resolution, depending on its effect on the class B
noteholders.
The security trustee and the note trustee are entitled to assume (without
further investigation or inquiry) that any exercise by it or them of any power,
discretion or duty under the issuer transaction documents will not be
materially prejudicial to the interests of the noteholders if the rating
agencies have confirmed that the current ratings of the issuer notes will not
be adversely affected by that exercise.
The security for the payment of amounts due under the issuer notes is
created by the issuer deed of charge. The security is created in favour of the
security trustee who will hold it on behalf of the note trustee for and on
behalf of the noteholders and on behalf of other secured creditors of the
issuer. The security consists of the following:
(1) an assignment by way of first fixed security of all of the issuer's
right, benefit and interest under the issuer transaction documents
to which it is a party, including the issuer intercompany loan
agreement, the Funding 1 deed of charge, the issuer dollar currency
swap agreements, the issuer euro currency swap agreements, the
issuer paying agent and agent bank agreement, the issuer
subscription agreement, the issuer underwriting agreement, the
issuer corporate services agreement, the issuer bank account
agreement, the issuer cash management agreement and the issuer
trust deed;
(2) a first ranking fixed charge (which may take effect as a floating
charge) over all of the issuer's right, title, interest and benefit
present and future in the issuer transaction account and any
amounts deposited in them from time to time;
(3) a first ranking fixed charge (which may take effect as a floating
charge) over all of the issuer's right, title, interest and benefit
in all authorised investments made by or on behalf of the issuer,
including all monies and income payable under them; and
(4) a first floating charge over all of the issuer's property, assets
and undertakings not already secured under (1), (2) or (3) above.
The security is described in detail in the issuer deed of charge, which is
described under the heading "SECURITY FOR THE ISSUER'S OBLIGATIONS" in this
prospectus. The issuer deed of charge also sets out how money is to be
distributed between the secured parties if the security is enforced. The
security becomes enforceable at any time following the service of a note
acceleration notice on the issuer, as described in number 9. If a note
acceleration notice is served on the issuer, the redemption of the issuer notes
will be accelerated, as described in number 10.
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3. COVENANTS
If any issuer note is outstanding, the issuer will not, unless it is
provided in or permitted by the terms of the issuer transaction documents or
with the prior written consent of the security trustee:
* create or permit to subsist any mortgage, pledge, lien, charge or
other security interest upon the whole or any part of its present
or future assets or undertakings;
* sell, assign, transfer, lease or otherwise dispose of or grant any
option or right to acquire any of its assets or undertakings or any
interest or benefit in its assets or undertakings;
* permit any person, other than itself and the security 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 issuer transaction
documents;
* carry on any business other than as described in this prospectus or
as contemplated in the issuer transaction documents relating to the
issue of the issuer notes and the related activities described in
this prospectus;
* incur any indebtedness in respect of borrowed money whatsoever or
give any guarantee or indemnity in respect of any indebtedness;
* consolidate or merge with any other person or transfer
substantially all of its properties or assets to any other person;
* waive or consent to the modification or waiver of any of the
obligations relating to the issuer security;
* have any employees, premises or subsidiaries;
* pay any dividend or make any other distributions to its
shareholders or issue any further shares or alter any rights
attaching to its shares as at the date of the issuer deed of
charge;
* purchase or otherwise acquire any issuer notes; or
* engage in any activities in the US (directly or through agents), or
derive any income from US sources as determined under US income tax
principles, or hold any property if doing so would cause it to be
engaged or deemed to be engaged in a trade or business in the US as
determined under US income tax principles.
4. INTEREST
Each offered issuer note bears interest on its principal amount outstanding
from, and including, the closing date. Interest will stop accruing on all or
any part of the principal amount outstanding of an offered issuer note from the
date it is due for redemption unless payment of principal is improperly
withheld or refused. If this happens it will continue to bear interest on the
unpaid amount in accordance with this condition, both before and after any
judgment is given, until whichever is the earlier of the following:
* the day on which all sums due in respect of that offered issuer
note is paid; and
* the day which is seven days after the principal paying agent or the
US paying agent has notified the relevant class of noteholders,
either in accordance with number 14 or individually, that the
payment will be made, provided that subsequently payment is in fact
made.
Interest on the series 1 class A issuer notes will be paid monthly in arrear
on each applicable interest payment date. If a trigger event occurs or the
issuer security is enforced prior to the interest payment date falling in
September 2004, interest on the series 1 class A issuer notes will be payable
quarterly in arrear on the relevant interest payment dates falling in
September, December, March and June in each year, as applicable.
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Interest on the offered issuer notes (other than the series 1 class A issuer
notes) will be paid quarterly in arrear on each interest payment date.
Interest in respect of the offered issuer notes for any interest period will
be calculated on the basis of actual days elapsed in a 360-day year.
Each period beginning on, and including, the closing date or any interest
payment date and ending on, but excluding, the next interest payment date is
called an interest period, except that for the series 1 class A issuer notes,
following the occurrence of a trigger event or enforcement of the issuer
security, an interest period is the period from (and including) the 10th day of
the then next to occur of September, December, March and June (or if such a day
is not a business day, the next succeeding business day) to (but excluding) the
10th day of the then next to occur of September, December, March and June (or
if such a day is not a business day, the next succeeding business day). The
first interest payment date for the series 1 class A issuer notes will be __
for the interest period from and including the closing date to but excluding
__. The first interest payment date for the offered issuer notes (other than
the series 1 class A issuer notes) will be __ for the interest period from and
including the closing date to but excluding 10th __.
The order of payments of interest to be made on the classes of issuer notes
will be prioritised so that interest payments due and payable on the class C
issuer notes will be subordinated to interest payments due and payable on the
class B issuer notes and the class A issuer notes and interest payments due and
payable on the class B issuer notes will be subordinated to interest payments
due and payable on the class A issuer notes, in each case in accordance with
the issuer priority of payments.
Any shortfall in payments of interest on the class B issuer notes and/or the
class C issuer notes will be deferred until the next interest payment date. On
the next interest payment date, the amount of interest due on each class of
issuer notes will be increased to take account of any deferred interest, and
interest shall be paid on that deferred interest. If on that interest payment
date there is still a shortfall, that shortfall will be deferred again. This
deferral process will continue until the final repayment date of the issuer
notes, at which point if there is insufficient money available to pay interest
on the class B issuer notes and/or the class C issuer notes, then noteholders
may not receive all interest amounts payable on those classes of issuer notes.
Payments of interest due on an interest payment date in respect of the class
A issuer notes will not be deferred. In the event of the delivery of a class A
issuer note acceleration 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 for each interest period for the:
* series 1 class A issuer notes will be the sum of one-month USD-
LIBOR [minus] a margin of __ per cent.] per annum;
* series 1 class B issuer notes will be the sum of three-month USD-
LIBOR plus a margin of [__ per cent.] per annum up to and including
the interest payment date in __ and thereafter the sum of three-
month USD-LIBOR plus a margin of [__ per cent.] per annum;
* series 1 class C issuer notes will be the sum of three-month USD-
LIBOR plus a margin of [__ per cent.] per annum up to and including
the interest payment date in __ and thereafter the sum of three-
month USD-LIBOR plus a margin of [__ per cent.] per annum;
* series 2 class A issuer notes will be the sum of three-month USD-
LIBOR plus a margin of [__ per cent.] per annum;
* series 2 class B issuer notes will be the sum of three-month USD-
LIBOR plus a margin of [__ per cent.] per annum up to and including
the interest payment date in __ and thereafter the sum of three-
month USD-LIBOR plus a margin of [__ per cent.] per annum;
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* series 2 class C issuer notes will be the sum of three-month USD-
LIBOR plus a margin of [__ per cent.] per annum up to and including
the interest payment date in __ and thereafter the sum of three-
month USD-LIBOR plus a margin of [__ per cent.] per annum;
* series 3 class A issuer notes will be the sum of three-month USD-
LIBOR plus a margin of [__ per cent.] per annum;
* series 3 class B issuer notes will be the sum of three-month USD-
LIBOR plus a margin of [__ per cent.] per annum; and
* series 3 class C issuer notes will be the sum of three-month USD-
LIBOR plus a margin of [__ per cent.] per annum.
"USD-LIBOR" means the London Interbank Offered Rate for dollar deposits, as
determined by the agent bank on the following basis:
(1) on the interest determination date for each class of the offered
issuer notes, the agent bank will calculate the arithmetic mean,
rounded upwards to five decimal places, of the offered quotations
to leading banks for US dollar deposits for the relevant period.
This will be determined by reference to the display as quoted on
the Moneyline Telerate Screen No. 3750. If the Telerate Screen No.
3750 stops providing these quotations, the replacement service, if
any, for the purposes of displaying this information will be used.
If the replacement service stops displaying the information,
another page as determined by the issuer with the approval of the
note trustee will be used.
In each of these cases, the determination will be made as at or
about 11.00 a.m., London time, on that date. This is called the
"SCREEN RATE" for the respective classes of the offered issuer
notes.
The "INTEREST DETERMINATION DATE" means two London business days
before the first day of an interest period for which the rate would
apply;
(2) if, on any interest determination date, the screen rate is
unavailable, the agent bank will:
* request the principal London office of each of the reference
banks to provide the agent bank with its offered quotation to
leading banks for US dollar deposits of the equivalent amount
and for the relevant period, in the London inter-bank market as
at or about 11.00 a.m. (London time); and
* calculate the arithmetic mean, rounded upwards to five decimal
places, of those quotations;
(3) if, on any interest determination date, the screen rate is
unavailable and only two or three of the reference banks provide
offered quotations, the relevant rate for that interest period will
be the arithmetic mean of the quotations as calculated in (2); and
(4) if, on any interest determination date, fewer than two reference
banks provide quotations, the agent bank will consult with the note
trustee and the issuer for the purpose of agreeing a total of two
banks to provide those quotations and the relevant rate for that
interest period will be the arithmetic mean of the quotations as
calculated in (2). If no such banks are agreed then the relevant
rate for that interest period will be the rate in effect for the
last preceding interest period for which (1) or (2) was applicable.
The agent bank will, as soon as practicable after 11.00 a.m. (London time)
on each interest determination date, calculate the amount of interest payable
on each class of offered issuer notes for that interest period. The amount of
interest payable on each issuer note will be calculated by first applying the
rate of interest for that interest period to the principal amount outstanding
of the relevant class of issuer notes as at the interest determination date and
multiplying the product by the relevant day-count fraction, in each case
rounding to the nearest cent, half a cent being rounded upwards, and then
apportioning the resulting total between the noteholders of that class of
issuer notes, in no order of priority between them but in proportion to their
respective holdings. For these purposes, in the case of the series 1 class A
issuer notes, following the occurrence of a trigger event or enforcement of the
issuer security, the principal amount outstanding will include any
217
amount of interest which would otherwise be payable on a monthly interest
payment date, which will not then fall due but will instead be deferred until
the next monthly interest payment date and will itself accrue interest at the
rate of interest applicable to subsequent interest periods in respect of the
series 1 class A issuer notes until the next quarterly interest payment date.
The rates and amounts determined by the agent bank will be notified in
writing to the issuer, the issuer cash manager, the note trustee and the paying
agents. The agent bank will also notify those rates and amounts to each stock
exchange, competent listing authority and/or quotation system on which the
issuer notes are then listed quoted and/or traded and to the relevant class of
noteholders in accordance with number 14 as soon as possible.
If the agent bank for any reason fails to make a required determination or
calculation as described, the note trustee will make the determination or
calculation as it shall deem fair and reasonable or as described in this number
4. If this happens, the determination or calculation will be deemed to have
been made by the agent bank.
The issuer, the issuer cash manager, the note trustee, the reference banks,
the agent bank and the noteholders will (in the absence of wilful default, bad
faith or manifest error) be bound by the determinations properly made.
The agent bank will ensure that there will be four reference banks with
offices in London and an agent bank while there are issuer notes outstanding.
5. REDEMPTION, PURCHASE AND CANCELLATION
(A) FINAL REDEMPTION
If the offered issuer notes have not previously been redeemed in full as
described in this number 5, the issuer will redeem the issuer notes at their
then principal amount outstanding together with all accrued interest on the
final maturity date in respect of each class of issuer notes.
(B) MANDATORY REDEMPTION
Subject as provided in the next paragraph, each class of issuer notes will
be redeemed on each interest payment date in amounts corresponding to the
amounts (if any) repaid by Funding 1 on the corresponding interest payment date
in respect of, and pursuant to, the relevant issuer term advance of the issuer
intercompany loan as set forth in the following table, in each case converted
into dollars at the relevant issuer dollar currency exchange rate:
OFFERED ISSUER NOTES ISSUER TERM ADVANCE
- -------------------- -------------------
series 1 class A.......................................... series 1 term AAA
series 1 class B.......................................... series 1 term AA
series 1 class C.......................................... series 1 term BBB
series 2 class A.......................................... series 2 term AAA
series 2 class B.......................................... series 2 term AA
series 2 class C.......................................... series 2 term BBB
series 3 class A.......................................... series 3 term AAA
series 3 class A.......................................... series 3 term AA
series 3 class A.......................................... series 3 term BBB
If on an interest payment date, prior to enforcement of the issuer security
or the occurrence of an asset trigger event, amounts are outstanding under more
than one series of the class A issuer notes, then the issuer will apply issuer
principal receipts to repay, as the case may be, (1) the series 1 class A
issuer notes prior to making payments of principal on the series 2 class A
issuer notes, the series 3 class A issuer notes, the series 4 class A issuer
notes and the series 5 class A issuer notes; (2) the series 2 class A issuer
notes prior to making payments of principal on the series 3 class A issuer
notes, the series 4 class A issuer notes and the series 5 class A issuer notes;
(3) the series 3 class A issuer notes prior to making payments of principal on
the series 4 class A issuer notes and the series 5 class A issuer notes and
[(4) the series 4 class A issuer notes prior to making payments of principal on
the series 5 class A issuer notes.
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(C) NOTE PRINCIPAL PAYMENTS, PRINCIPAL AMOUNT OUTSTANDING AND POOL FACTOR
Two business days prior to each interest payment date (the "NOTE
DETERMINATION DATE"), the issuer or the agent bank (based on information
provided to the agent bank by the issuer or the issuer cash manager) will
determine the following:
* the note principal payment of each offered issuer note, being the
amount of any principal payment payable on each offered issuer note
on the next interest payment date;
* the principal amount outstanding of each offered issuer note as at
the note determination date, which is the principal amount
outstanding of that offered issuer 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 pool factor, being the fraction obtained by dividing the
principal amount outstanding of each offered issuer note as at such
note determination date by the principal amount outstanding of that
note as at the closing date.
The issuer will notify the agent bank, paying agents, note trustee,
registrar and each stock exchange competent listing authority and/or quotation
system on or by which the issuer notes are then listed quoted and/or traded of
each determination of a note principal payment, the principal amount
outstanding and pool factor and shall publish those determinations in
accordance with number 14 as soon as possible after the relevant interest
payment date.
If the issuer or agent bank fails to make a determination as described, the
note trustee will calculate the note principal payment, principal amount
outstanding of a note on the note determination date and pool factor as
described in this subsection (C), and each of these determinations or
calculations will be deemed to have been made by the issuer. If this happens,
the issuer, the agent bank and the noteholders will (in the absence of wilful
default, bad faith or manifest error) be bound by the determinations made.
(D) OPTIONAL REDEMPTION IN FULL
The issuer may by giving not less than 30 and not more than 60 days' prior
written notice to the note trustee and the noteholders redeem all (but not some
only) of the issuer notes at the principal amount outstanding thereof, together
with any accrued interest thereon, on the following dates:
* any interest payment date falling on or after the interest payment
date in __;
* any interest payment date on which the aggregate principal amount
of the issuer notes then outstanding is less than 10 per cent. of
the aggregate principal amount outstanding of the issuer notes as
at the closing date.
The issuer may only redeem the offered issuer notes as described in this
subsection (D) if the issuer has provided to the note trustee a certificate to
the effect that the issuer will have funds available to it to make the required
payment on the interest payment date.
(E) OPTIONAL REDEMPTION FOR TAX AND OTHER REASONS
Provided that an issuer note acceleration notice has not been served and if
the issuer satisfies the note trustee that on the next interest payment date
either:
* the issuer would by virtue of a change in the law or regulations of
the United Kingdom or any other jurisdiction (or the application or
interpretation thereof) be required to withhold or deduct from
amounts due on the issuer notes any amount on account of any
present or future taxes, duties, assessments or governmental
charges of whatever nature (other than where the relevant holder or
beneficial owner has some connection with the relevant jurisdiction
other than the holding of the issuer notes); or
* Funding 1 would be required to withhold or deduct from amounts due
on the issuer intercompany loan any amount on account of any
present or future taxes, duties, assessments or governmental
charges of whatever nature, and
* such obligation of the issuer or Funding 1, as the case may be,
cannot be avoided by the issuer or Funding 1, as the case may be,
taking reasonable measures available to it,
219
then the issuer will use reasonable endeavours to arrange the substitution of
a company incorporated in another jurisdiction and approved by the note trustee
in order to avoid such a situation, provided that the issuer will not be
required to do so if that would require registration of any new security under
US securities laws or materially increase the disclosure requirements under US
law or the costs of issuance.
If the issuer is unable to arrange a substitution as described in this
subsection, then the issuer may, by giving not less than 30 and not more than
60 days' prior notice to the note trustee and the noteholders, redeem all (but
not some only) of the issuer notes at the principal amount outstanding together
with any accrued interest on the next following interest payment date, 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 the bullet points immediately 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
recognised 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 (without investigation or inquiry) such
certificate and opinion as sufficient evidence of the satisfaction of the
circumstance set out in the bullet points immediately above, in which event
they shall be conclusive and binding on the noteholders. The issuer may only
redeem the issuer notes as described above if the note trustee is satisfied in
accordance with the issuer 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 issuer notes on the relevant interest payment date,
including any amounts required to be paid in priority to or in the same
priority as the issuer notes outstanding in accordance with the issuer pre-
enforcement revenue priority of payments and the issuer pre-enforcement
principal priority of payments.
If:
(i) at any time, it would be unlawful for the issuer to make, fund or
allow to remain outstanding a term advance made by it under the
issuer intercompany loan agreement and the relevant certificate
states that the issuer requires Funding 1 to prepay the term
advance; or
[(ii) the new Basel Capital Accord (as described in the consultative
document "The New Basel Capital Accord" published in January 2001
by the Basel Committee on Banking Supervision) has been implemented
in the United Kingdom, whether by rule of law, recommendation of
best practices or by any other regulation, and provided that an
issuer note acceleration notice has not been served and in any
event not earlier than the interest payment date falling in
December 2007,]
then the issuer may redeem all (but not some only) of the issuer notes at the
principal amount outstanding thereof, together with any accrued interest
thereon, on giving not more than 60 days' and not less than 30 days' (or such
shorter period as may be required by any relevant law) prior written notice
thereof to the note trustee and the issuer noteholders in accordance with
condition 14, provided that, prior to giving any such notice, the issuer shall
have provided to the note trustee a certificate signed by two directors of the
issuer to the effect that it will have the funds, not subject to the interest
of any other person, required to redeem the issuer notes as aforesaid and any
amounts required under the issuer pre-enforcement revenue priority of payments
(or, as the case may be, the issuer post-enforcement revenue priority of
payments) currently set out in the issuer cash management agreement to be paid
in priority to or pari passu with the issuer notes outstanding in accordance
with the terms and conditions thereof.
6. PAYMENTS
Payments of principal and interest in respect of the global issuer notes
will be made 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 cheque mailed to the address of
220
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 issuer note certificates to the registrar. None of the persons appearing
on the records of DTC, Euroclear or Clearstream, Luxembourg as a holder of
issuer notes will have any direct claim against the issuer in respect of
payments due on the issuer notes while the issuer notes are represented by
global issuer notes.
If a noteholder holds definitive offered issuer notes, payments of principal
and interest on an offered issuer note (except in the case of a final payment
that pays off the entire principal on the offered issuer note) will be made by
US dollar cheque and mailed to the noteholder at the address shown in the
register on the record date. In the case of final redemption, payment will be
made only when the offered issuer note is surrendered to the registrar. If the
noteholder makes an application to the registrar, payments can instead be made
by transfer to a bank account.
All payments on the offered issuer notes are subject to any applicable
fiscal or other laws and regulations. Noteholders will not be charged
commissions or expenses on these payments.
If payment of principal on an offered note is improperly withheld or
refused, the interest which continues to accrue will still be payable in
accordance with this number 6.
The issuer can, at any time, vary or terminate the appointment of any paying
agent, the registrar or the transfer agent and can appoint successor or
additional paying agents. 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 and will notify the rating agencies
of any change.
If the due date for payment of any amount on the offered issuer notes is not
a business day in the place monies are due to be received in accordance with
this number 6, noteholders will not be entitled to payment of the amount due in
that place until the next business day in that place and noteholders shall not
be entitled to any further interest or other payment as a result of that delay.
If a paying agent makes a partial payment on an offered issuer note, the
registrar will annotate the register of noteholders, indicating the amount and
date of that payment.
If 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 rate of
interest applicable from time to time to such note until you have been
notified, in accordance with number 14, that both the unpaid interest and the
interest on that interest are available for payment.
7. PRESCRIPTION
Claims against the issuer for payment in respect of the offered issuer notes
will become void if they are not presented within the time limit for payment.
That time limit is ten years from their due date. If there is a delay in the
paying agents or, as applicable, the note trustee, receiving the funds, then
the due date, for the purposes of this time limit, is the date on which such
funds have been received and notice to that effect has been given to the
noteholder in accordance with number 14.
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 relevant paying agent will make payments of interest and principal after
such withholding or deduction for tax has been made and the issuer or the
relevant paying agent will account to the relevant authority for the amount so
withheld or deducted. Neither the issuer nor any paying agent is required to
make any additional payments to noteholders for this withholding or deduction.
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9. EVENTS OF DEFAULT
(A) CLASS A NOTEHOLDERS
The note trustee may in its absolute discretion give notice (a "CLASS A
ISSUER NOTE ACCELERATION NOTICE") of a class A issuer note event of default (as
defined in the following paragraph), and shall give such notice if it is
indemnified and/or secured to its satisfaction and it is:
* required to by the holders of at least one quarter of the aggregate
principal amount outstanding of the class A issuer notes; or
* directed to by an extraordinary resolution (as defined in the
issuer trust deed) of the class A noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS A ISSUER NOTE EVENT OF DEFAULT":
* the issuer fails to pay for a period of three business days any
amount of interest or principal on the class A issuer notes when
that payment is due and payable in accordance with these
conditions; or
* the issuer fails to perform or observe any of its other obligations
under the class A issuer notes, the issuer trust deed, the issuer
deed of charge or any other issuer transaction document, and
(except where the note trustee certifies that, in its sole opinion,
such failure is incapable of remedy, in which case no notice will
be required) it remains unremedied for 20 days after the note
trustee has given notice of it to the issuer requiring the same to
be remedied; and the note trustee has certified that the failure to
perform or observe is materially prejudicial to the interests of
the class A noteholders; or
* except for the purposes of an amalgamation or restructuring as
described in the point immediately following, the issuer stops or
threatens to stop carrying on all or a substantial part of its
business or is or 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 the value of its assets falls to less than the amount of its
liabilities (taking into account contingent and prospective
liabilities) or otherwise becomes insolvent; or
* an order is made or an effective resolution is passed for the
winding-up of the issuer except for the purposes of or pursuant to
an amalgamation or restructuring or merger previously approved by
the note trustee in writing or by an extraordinary resolution of
the class A noteholders; or
* proceedings are otherwise initiated against the issuer under any
applicable liquidation, insolvency, reorganisation or other similar
laws (including, but not limited to, presentation of a petition for
an administration order, the filing of documents with the court for
the appointment of an administrator or the service of a notice of
intention to appoint an administrator) and (except in the case of
presentation of a petition for an administration order) those
proceedings are not being disputed in good faith with a reasonable
prospect of success or an administration order is granted or the
appointment of an administrator takes effect or an administrative
receiver or other receiver, liquidator or similar official is
appointed in relation to the issuer or the whole or any substantial
part of the business or assets of the issuer, or an encumbrancer
takes possession of that business or those assets or a distress,
execution or other process is levied or enforced upon or sued out
against that business or those assets and is not discharged within
30 days, or the issuer initiates or consents to the foregoing
proceedings or makes a conveyance or assignment for the benefit of
its creditors generally or takes steps with a view to obtaining a
moratorium in respect of any indebtedness; or
* an intercompany loan acceleration notice is served on Funding 1
while any of the class A issuer notes is outstanding.
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(B) CLASS B NOTEHOLDERS
The terms described in this number 9(B) will have no effect so long as any
of the class A issuer notes are outstanding. Subject to that occurrence, the
note trustee may in its absolute discretion give notice (a "CLASS B ISSUER NOTE
ACCELERATION NOTICE") of a class B issuer note event of default (as defined in
the following paragraph), and shall give that notice if it is indemnified and/
or secured to its satisfaction and it is:
* required to by the holders of at least one quarter of the aggregate
principal amount outstanding of the class B issuer notes; or
* directed to by an extraordinary resolution of the class B
noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS B ISSUER NOTE EVENT OF DEFAULT":
* the issuer fails to pay for a period of three business days any
amount of interest or principal on the class B issuer notes when
that payment is due and payable in accordance with these
conditions; or
* the occurrence of any of the other events in number 9(A) described
above but provided that any reference to the class A issuer notes
and the class A noteholders shall be read as references to the
class B issuer notes and the class B noteholders.
(C) CLASS C NOTEHOLDERS
The terms described in this number 9(C) will have no effect so long as any
of the class A issuer notes or the class B issuer notes are outstanding.
Subject to that occurrence, the note trustee may in its absolute discretion
give notice (a "CLASS C ISSUER NOTE ACCELERATION NOTICE") of a class C issuer
note event of default (as defined in the following paragraph), and shall give
that notice if it is indemnified and/or secured to its satisfaction and it is:
* required to by the holders of at least one quarter of the aggregate
principal amount outstanding of the class C issuer notes; or
* directed to by an extraordinary resolution of the class C
noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS C ISSUER NOTE EVENT OF DEFAULT":
* the issuer fails to pay for a period of three business days any
amount of interest or principal on the class C issuer notes when
that payment is due and payable in accordance with these
conditions; or
* the occurrence of any of the other events in number 9(A) described
above but provided that any reference to the class A issuer notes
and the class A noteholders shall be read as references to the
class C issuer notes and the class C noteholders.
A class A issuer note acceleration notice, a class B issuer note
acceleration notice and a class C issuer note acceleration notice are alone or
together referred to in this prospectus as an "ISSUER NOTE ACCELERATION
NOTICE". An issuer note acceleration notice is a written notice to the issuer
and the security trustee declaring the issuer notes to be immediately due and
payable. When it is given, all issuer notes will become immediately due and
payable at their principal amount outstanding together with accrued interest
without further action or formality.
10. ENFORCEMENT OF ISSUER NOTES
At any time the note trustee and the security trustee may take steps against
the issuer to enforce the provisions of the issuer trust deed and the issuer
notes or the issuer deed of charge or any of the other issuer transaction
documents. At any time after the security under the issuer deed of charge has
become enforceable, the security trustee may, in its absolute discretion and
without notice, institute those proceedings as it thinks fit to enforce the
issuer security. Neither the note trustee nor the security trustee shall be
bound to take these steps unless it is indemnified and/or secured to its
satisfaction and:
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* it is so requested in writing by holders of at least one quarter of
the aggregate principal amount outstanding of the class A issuer
notes, the class B issuer notes or the class C issuer notes
(subject to those restrictions in the issuer trust deed and/or the
issuer deed of charge to protect the interests of any higher
ranking class of noteholders); or
* in the case of the security trustee, it has been so directed by the
note trustee acting on the instructions of an extraordinary
resolution (as described in number 11) of the class A noteholders,
class B noteholders or class C noteholders (subject to those
restrictions in the issuer trust deed and/or the issuer deed of
charge to protect the interests of any higher ranking class of
noteholders); or
* in the case of the security trustee, it is so requested in writing
by any other issuer secured creditor (subject to those restrictions
in the issuer deed of charge to protect the noteholders).
Amounts available for distribution after enforcement of the issuer security
shall be distributed in accordance with the terms of the issuer deed of charge.
No noteholder may institute any proceedings against the issuer to enforce
its rights under or in respect of the issuer notes or the issuer trust deed
unless (1) the note trustee or the security trustee, as the case may be, has
become bound to institute proceedings and has failed to do so within a
reasonable time and (2) the failure is continuing. Notwithstanding the previous
sentence and notwithstanding any other provision of the issuer trust deed, the
right of any noteholder to receive payment of principal of and interest on its
issuer notes on or after the due date for the principal or interest, or to
institute suit for the enforcement of payment of that interest or principal,
may not be impaired or affected without the consent of that noteholder. In
addition, no class B noteholder or class C noteholder will be entitled to take
proceedings for the winding-up or administration of the issuer unless:
* there are no outstanding issuer notes of a class with higher
priority; or
* if issuer notes of a class with higher priority are outstanding,
there is consent of holders of at least one quarter of the
aggregate principal amount outstanding of the class or classes of
issuer notes with higher priority.
In the event that the issuer security is enforced and the proceeds of that
enforcement (after such proceeds have been distributed) are insufficient, after
payment of all other claims ranking in priority, to pay in full any amount due
on the class B issuer notes and the class C issuer notes under the issuer deed
of charge, the note trustee is required, at the request of Permanent PECOH
Limited, to transfer, for a nominal payment only all of the class B issuer
notes and/or all of the class C issuer notes to Permanent PECOH Limited,
pursuant to the option granted by the note trustee to Permanent PECOH Limited.
The option is granted to acquire all of the class B issuer notes and/or all of
the class C issuer notes, plus accrued interest on them. This is called the
post-enforcement call option. Each class B noteholder and class C 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 issuer notes, it agrees to
be bound in this way.
11. MEETINGS OF NOTEHOLDERS, MODIFICATIONS AND WAIVER
(A) MEETINGS OF NOTEHOLDERS
The issuer trust deed contains provisions for convening meetings of each
series and/or class of noteholders to consider any matter affecting their
interests, including the modification of any provision of the terms and
conditions of the issuer notes or any of the issuer transaction documents.
* In respect of the class A issuer notes, the issuer trust deed
provides that:
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of one series only of the
class A issuer notes shall be deemed to have been duly passed if
passed at a single meeting of the holders of the class A issuer
notes of that series;
224
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of any two or more series of
the class A issuer notes but does not give rise to a conflict of
interest between the holders of those two or more series of the
class A issuer notes, shall be deemed to have been duly passed if
passed at a single meeting of the holders of those two or more
series of the class A issuer notes; and
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of any two or more series of
the class A issuer notes and gives or may give rise to a conflict
of interest between the holders of those two or more series of the
class A issuer notes, shall be deemed to have been duly passed only
if, in lieu of being passed at a single meeting of the holders of
those two or more series of the class A issuer notes, it shall be
duly passed at separate meetings of the holders of those two or
more series of the class A issuer notes.
In the case of a single meeting of the holders of two or more series of the
class A issuer notes which are not all denominated in the same currency, the
principal amount outstanding of any class A issuer note denominated in US
dollars or euro shall be converted into sterling at the relevant issuer dollar
currency exchange rate or the relevant issuer euro currency exchange rate, as
the case may be.
In respect of the class B issuer notes, the issuer trust deed provides that:
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of one series only of the
class B issuer notes shall be deemed to have been duly passed if
passed at a single meeting of the holders of the class B issuer
notes of that series;
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of any two or more series of
the class B issuer notes but does not give rise to a conflict of
interest between the holders of those two or more series of the
class B issuer notes, shall be deemed to have been duly passed if
passed at a single meeting of the holders of those two or more
series of the class B issuer notes; and
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of any two or more series of
the class B issuer notes and gives or may give rise to a conflict
of interest between the holders of those two or more series of the
class B issuer notes, shall be deemed to have been duly passed only
if, in lieu of being passed at a single meeting of the holders of
those two or more series of the class B issuer notes, it shall be
duly passed at separate meetings of the holders of those two or
more series of the class B issuer notes.
In the case of a single meeting of the holders of two or more classes of the
class B issuer notes which are not all denominated in the same currency, the
principal amount outstanding of any class B issuer note denominated in US
dollars or euro shall be converted into sterling at the relevant issuer dollar
currency exchange rate or the relevant issuer euro currency exchange rate, as
the case may be.
In respect of the class C issuer notes, the issuer trust deed provides that:
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of one series only of the
class C issuer notes shall be deemed to have been duly passed if
passed at a single meeting of the holders of the class C issuer
notes of that series;
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of any two or more series of
the class C issuer notes but does not give rise to a conflict of
interest between the holders of those two or more series of the
class C issuer notes, shall be deemed to have been duly passed if
passed at a single meeting of the holders of those two or more
series of the class C issuer notes; and
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of any two or more series of
the class C issuer notes and gives or may give rise to a conflict
of interest between the holders of those two or more series of the
class C
225
issuer notes, shall be deemed to have been duly passed only if, in
lieu of being passed at a single meeting of the holders of those
two or more series of the class C issuer notes, it shall be duly
passed at separate meetings of the holders of those two or more
series of the class C issuer notes.
In the case of a single meeting of the holders of two or more series of the
class C issuer notes which are not all denominated in the same currency, the
principal amount outstanding of any class C issuer note denominated in US
dollars or euro shall be converted into sterling at the relevant issuer dollar
currency exchange rate or the relevant issuer euro currency exchange rate, as
the case may be.
Similar requirements apply in relation to requests in writing from class A
noteholders, class B noteholders and class C noteholders upon which the note
trustee or security trustee is bound to act.
Subject as provided in the following paragraph, the quorum for any meeting
convened to consider an extraordinary resolution will be two or more persons
holding or representing not less than half of the aggregate principal amount
outstanding of the relevant series, class or classes of issuer notes or, at any
adjourned meeting, one or more noteholders or persons representing noteholders
of the relevant series, class or classes of issuer notes, whatever the total
principal amount outstanding of issuer notes so represented.
Subject to section 316(b) of the Trust Indenture Act, certain terms
including the alteration of the amount, rate or timing of payments on the
issuer notes, the currency of payment, the priority of payments or the quorum
or majority required in relation to these terms, require a quorum for passing
an extraordinary resolution of one or more persons holding or representing in
total not less than three quarters of the total principal amount outstanding of
the classes of issuer notes of each series for the time being outstanding or,
at any adjourned meeting, at least one quarter of the total principal amount
outstanding of those classes of issuer notes. These modifications are called
"BASIC TERMS MODIFICATIONS".
No extraordinary resolution of the class B noteholders, except as mentioned
below, shall take effect while any class A issuer notes remain outstanding
unless sanctioned by an extraordinary resolution of the class A noteholders, or
the note trustee (or, as the case may be, the security trustee) is of the
opinion that it would not be materially prejudicial to the interests of the
class A noteholders.
No extraordinary resolution of the class C noteholders, except as mentioned
below, shall take effect while any class A issuer notes or class B issuer notes
remain outstanding unless sanctioned by an extraordinary resolution of the
class A noteholders and/or the class B noteholders (as the case may be), or the
note trustee (or, as the case may be, the security trustee) is of the opinion
that it would not be materially prejudicial to the interests of the class A
noteholders and/or the class B noteholders (as the case may be).
An extraordinary resolution of the class A noteholders to sanction a
modification of or any waiver or authorisation of any breach of the terms and
conditions of the issuer notes or of the issuer transaction documents
(including basic terms modifications) (except as provided below) will not be
effective unless it is also sanctioned by extraordinary resolutions of the
class B noteholders and the class C noteholders or the note trustee (in its
absolute discretion) considers that it will not be materially prejudicial to
the class B noteholders and the class C noteholders. If there are no class A
issuer notes outstanding, an extraordinary resolution of the class B
noteholders to sanction a modification of or any waiver or authorisation of any
breach of the terms and conditions of the issuer notes or of the issuer
transaction documents (including basic terms modifications) (except as provided
below) will not be effective unless it is also sanctioned by an extraordinary
resolution of the class C noteholders or the note trustee (in its absolute
discretion) considers that it will not be materially prejudicial to the
interests of the class C noteholders.
226
(B) MODIFICATIONS AND WAIVER
The note trustee may agree to, or authorise, without the consent of the
noteholders, (1) any modification (including basic terms modifications) of, or
to the waiver or authorisation of any breach or proposed breach of, the terms
and conditions of the issuer notes or any of the issuer transaction documents
which is not, in the sole opinion of the note trustee, materially prejudicial
to the interests of the noteholders (and, for the avoidance of doubt, the note
trustee shall be entitled to assume without further investigation or inquiry,
that such modification, waiver or authorisation will not be materially
prejudicial to the interests of the noteholders (or any series and/or class
thereof) if each of the rating agencies has confirmed in writing that the then
current ratings of the applicable series and/or class or classes of notes would
not be adversely affected by such modification, waiver or authorisation) or (2)
any modification of any of the terms and conditions of the issuer notes or any
of the issuer transaction documents which, in the opinion of the note trustee,
is of a formal, minor or technical nature or is to correct a manifest error.
In the circumstances set out in the issuer deed of charge, the security
trustee will consent to relevant modifications that are requested by Funding 1
or the cash manager to be made to the issuer transaction documents. In those
circumstances, the consent of the note trustee or the noteholders to those
modifications will not be obtained.
The note trustee may also, without the consent of the noteholders, determine
that any issuer note event of default shall not be treated as such. Any of
these modifications, authorisations or waivers will be binding on the
noteholders and, unless the note trustee 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 any series or
class, it shall have regard to the interests of those noteholders as a class.
In particular, the note trustee shall not have regard to, or be liable for, the
consequences of that exercise for individual noteholders resulting from their
being domiciled or resident in or connected with any particular territory. In
connection with any such exercise, 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 AND THE SECURITY TRUSTEE
The note trustee and the security trustee are entitled to be indemnified and
relieved from responsibility in certain circumstances, including provisions
relieving them from taking enforcement proceedings or, in the case of the
security trustee, enforcing the issuer security unless indemnified and/or
secured to their satisfaction.
The note trustee, the security trustee and their related companies are
entitled to enter into business transactions with the issuer, Halifax plc or
related companies of either of them and to act as note trustee and security
trustee, respectively, for the holders of any new notes and/or any other person
who is a party to any transaction document or whose obligations are comprised
in the issuer security or any of their subsidiary or associated companies,
without accounting for any profit resulting from those transactions.
Neither the note trustee nor the security trustee will be responsible for
any loss or liability suffered as a result of any assets in the issuer security
being uninsured or inadequately insured or being held by clearing operations or
their operators or by intermediaries on behalf of the note trustee and/or the
security trustee.
13. REPLACEMENT OF ISSUER NOTES
If any definitive issuer note is lost, stolen, mutilated, defaced or
destroyed, the noteholder can replace it 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 reasonable requests of the issuer, the
registrar and the paying agents as to evidence and indemnity. The noteholder
must surrender any defaced or mutilated issuer notes before replacements will
be issued.
227
If a global issuer note is lost, stolen, mutilated, defaced or destroyed, it
will upon satisfactory evidence become void and the issuer will deliver a
replacement global issuer note duly executed and authenticated to the
registered holder upon surrender of any defaced or mutilated global issuer
note. Replacement of a global issuer note will only be made upon payment of the
expenses for a replacement and compliance with the reasonable requests of the
issuer, the registrar and the paying agents 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 be deemed to have been given
on the fourth day after the date of mailing. In addition, notices shall be
published in the Financial Times and, so long as any of the series 1 issuer
notes, the series 2 issuer notes, or the series 3 issuer notes are outstanding,
The New York Times or, if either newspaper ceases to be published or, if timely
publication therein is not practicable, in another English language newspaper
or newspapers approved by the note trustee with general circulation in the
United Kingdom and the United States. However, a notice will also be treated as
having been duly given if the information contained in that notice appears on
the relevant page of the Reuters screen or other similar service approved by
the note trustee and notified to noteholders. The notice will be deemed given
on the date of first publication or when it first appears on the screen.
While the issuer notes are represented by global issuer notes, notices to
noteholders will be valid if published as described in the previous paragraph
or (at the option of the issuer) if delivered to DTC, in the case of the series
1 issuer notes, series 2 issuer notes, and series 3 issuer notes, or Euroclear
and/or Clearstream, Luxembourg, in the case of the series 4 issuer notes and
series 5 issuer notes;
Any notice delivered to DTC, in the case of the series 1 issuer notes,
series 2 issuer notes and series 3 issuer notes, or Euroclear and/or
Clearstream, Luxembourg, in the case of the series 4 issuer notes, or series 5
issuer notes, will be deemed to be given on the day of such delivery.
The note trustee may approve some other method of giving notice to
noteholders if that method conforms to market practice and the rules of the UK
Listing Authority and if notice of that other method is given to noteholders.
15. GOVERNING LAW
The issuer transaction documents (other than the issuer underwriting
agreement) and the issuer notes will be governed by English law. The courts of
England are to have non-exclusive jurisdiction to settle any disputes which may
arise out of or in connection with the issuer transaction documents (other than
the issuer underwriting agreement) and the issuer notes. The issuer and the
other parties to the issuer transaction documents (other than the issuer
underwriting agreement) irrevocably submit to the non-exclusive jurisdiction of
the courts of England. The issuer underwriting agreement will be governed by
the laws of the State of New York and the issuer and the other parties to the
issuer underwriting agreement irrevocably agree that any state or federal court
in the State of New York will have jurisdiction to hear any dispute arising out
of the issuer underwriting agreement.
228
RATINGS OF THE ISSUER NOTES
The issuer notes are expected, on issue, to be assigned the following
ratings by Moody's, Standard & Poor's and Fitch. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision,
suspension or withdrawal at any time by the assigning rating organisation if,
in its judgement, circumstances (including, without limitation, a reduction in
the credit rating of the Funding 1 swap provider and/or any issuer swap
provider (or, where relevant, the credit support provider of the Funding 1 swap
provider or any of the issuer swap providers), the mortgages trustee GIC
provider and/or the Funding 1 GIC provider) in the future so warrant.
RATING
STANDARD
CLASS OF ISSUER NOTES MOODY'S & POOR'S FITCH
- ------------------------------------------------------ ------- -------- -----
Series 1 class A...................................... P-1 A-1+ F1+
Series 2 class A..................................... Aaa AAA AAA
Series 3 class A..................................... Aaa AAA AAA
Series 4 class A..................................... Aaa AAA AAA
Series 5 class A..................................... Aaa AAA AAA
Series 1 class B..................................... Aa3 AA AA
Series 2 class B..................................... Aa3 AA AA
Series 3 class B..................................... Aa3 AA AA
Series 4 class B..................................... Aa3 AA AA
Series 5 class B..................................... Aa3 AA AA
Series 1 class C..................................... Baa2 BBB BBB
Series 2 class C..................................... Baa2 BBB BBB
Series 3 class C..................................... Baa2 BBB BBB
Series 4 class C..................................... Baa2 BBB BBB
Series 5 class C..................................... Baa2 BBB BBB
The ratings assigned to each class of issuer notes address the likelihood of
full and timely payment to you of all payments of interest on each interest
payment date under those classes of issuer notes. The ratings also address the
likelihood of ultimate payment of principal on the final maturity date of each
class of issuer notes.
Assignment of the expected ratings to the issuer notes of each class will be
a condition to issue of the issuer notes.
229
MATURITY AND PREPAYMENT CONSIDERATIONS
The average lives of the series 1 issuer notes, the series 2 issuer notes
and the series 3 issuer notes cannot be stated, as the actual rate of repayment
of the loans and redemption of the mortgages and a number of other relevant
factors are unknown. However, calculations of the possible average lives of the
series 1 issuer notes, the series 2 issuer notes and the series 3 issuer notes
can be made based on certain assumptions. For example, based on the assumptions
that:
(1) neither the previous issuer security nor the issuer security nor
the Funding 1 security has been enforced;
(2) the seller is not in breach of the terms of the mortgage sale
agreement;
(3) the seller assigns no new loans to the mortgages trustee after the
closing date and the loans are assumed to amortise in accordance
with the assumed constant repayment rate indicated in the table
below (subject to assumption (4) below);
(4) the seller assigns to the mortgages trustee sufficient new loans
and their related security in the period up to but excluding the
interest payment date in December 2008 such that the aggregate
principal amount outstanding of loans in the portfolio at any time
is not less than [GBP]__ or such higher amount as may be required
to be maintained as a result of new issuers providing new term
advances to Funding 1 which Funding 1 uses as consideration for the
assignment of new loans to the trust property;
(5) neither an asset trigger event nor a non-asset trigger event
occurs;
(6) no event occurs that would cause payments on scheduled amortisation
term advances or the pass-through term advances to be deferred
(unless such advances are deferred in accordance with Rule 1 (B) or
(C));
(7) the issuer exercises its option to redeem the issuer notes on the
interest payment date falling in __, Permanent Financing (No. 1)
PLC) refinances its outstanding notes on the interest payment date
falling in June 2007 and Permanent Financing (No. 2) PLC refinances
its outstanding notes on the interest payment date falling in
December 2008 such that the Funding 1 share and the outstanding
trust property does not reduce];
(8) the annualised CPR as at the closing date is assumed to be the same
as the various assumed rates in the table below;
(9) the amount in the cash accumulation ledger at the closing date is
[GBP]__;
[(10) the only term advance in accumulation as at the closing date is the
__ term advance;]
(11) the closing date of the transaction is __; and
(12) the exchange rates used in calculating the approximate average
lives of the notes listed below is [GBP]__ = US$1.00 and [GBP]__ =
[e]1.00,
the approximate average life of the series 1 issuer notes, the series 2
issuer notes and the series 3 issuer notes, at various assumed rates of
repayment of the loans, would be as follows:
POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
LIFE OF THE 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 2 SERIES 2 SERIES 2 SERIES 4
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A
CONSTANT ISSUER ISSUER ISSUER ISSUER ISSUER ISSUER ISSUER
REPAYMENT RATE NOTES NOTES NOTES NOTES NOTES NOTES NOTES
(% PER ANNUM) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS)
- -------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
5%............ __ __ __ __ __ __ __
10%........... __ __ __ __ __ __ __
15%........... __ __ __ __ __ __ __
20%........... __ __ __ __ __ __ __
25%........... __ __ __ __ __ __ __
230
Assumptions (1), (2), (3), (4), (5), (6), (7) and (11) relate to
circumstances which are not predictable. No assurance can be given that the
issuer will be in a position to redeem the issuer notes on the interest payment
date falling in __. If the issuer does not so exercise its option to redeem,
then the average lives of the then outstanding issuer notes would be extended.
The average lives of the issuer notes are subject to factors largely outside
the control of the issuer and consequently no assurance can be given that these
assumptions and estimates will prove in any way to be realistic and they must
therefore be viewed with considerable caution. For more information in relation
to the risks involved in the use of these estimated average lives, see "RISK
FACTORS -- THE YIELD TO MATURITY OF THE ISSUER NOTES MAY BE ADVERSELY AFFECTED
BY PREPAYMENTS OR REDEMPTIONS ON THE LOANS".
231
MATERIAL LEGAL ASPECTS OF THE LOANS
The following discussion is a summary of the material legal aspects of
English residential property loans and mortgages. It is not an exhaustive
analysis of the relevant law.
GENERAL
There are two parties to a mortgage. The first party is the mortgagor, who
is the borrower and homeowner. The mortgagor grants the mortgage over its
property. The second party is the mortgagee, who is the lender. Each loan will
be secured by a mortgage which has a first ranking priority over all other
mortgages secured on the property and over all unsecured creditors of the
borrower. Borrowers may create a subsequent mortgage or other secured interest
over the relevant property without the consent of the seller, though such other
mortgage or interest will rank below the seller's mortgage in priority.
NATURE OF PROPERTY AS SECURITY
There are two forms of title to land in England and Wales: registered and
unregistered. Both systems of title can include both freehold and leasehold
land.
REGISTERED TITLE
Title to registered land is registered at H.M. Land Registry. Each parcel of
land is given a unique title number. Title to the land is established by a land
or (in the case of land which is subject to a mortgage or charge) charge
certificate containing official copies of the entries on the register relating
to that land.
There are four classes of registered title. The most common is title
absolute. A person registered with title absolute owns the land free from all
interests other than those entered on the register, those classified as
overriding interests, those classified as minor interests (as between the
landowner and the beneficiary of those interests only and when the landowner
has notice of those interests) and (in the case of leasehold land) all implied
and express covenants, obligations and liabilities incident to the land.
The land or charge certificate will reveal the present owner of the land,
together with any legal charges and other interests affecting the land.
However, the Land Registration Act 1925 provides that some interests in the
land will bind the land even though they are not capable of registration at
H.M. Land Registry. The land or charge certificate will also contain a plan
indicating the location of the land. However, this plan is not conclusive as to
matters such as the location of boundaries.
UNREGISTERED TITLE
All land in England and Wales is now subject to compulsory registration on
the happening of any of a number of trigger events, which includes the granting
of a first legal mortgage. However, a small proportion of land in England and
Wales (typically where the land has been in the same ownership for a number of
years) is still unregistered. Title to unregistered land is proved by
establishing a chain of documentary evidence to title going back at least 15
years. Where the land is affected by third party rights, some of those rights
can be proved by documentary evidence or by proof of continuous exercise of the
rights for a prescribed period and do not require registration. However, other
rights would have to be registered at the Central Land Charges Registry in
order to be effective against a subsequent purchaser of the land.
TAKING SECURITY OVER LAND
Where land is registered, a mortgagee must register its mortgage at H.M.
Land Registry in order to secure priority over any subsequent mortgagee.
Priority of mortgages over registered land is governed by the date of
registration of the mortgage rather than date of creation. However, a
prospective mortgagee is able to obtain a priority period within which to
register his mortgage. If the mortgagee submits a proper application for
registration during this period, its interest will take priority over any
application for registration of another interest which is received by H.M. Land
Registry during this priority period.
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In the system of unregistered land, the mortgagee protects its interest by
retaining possession of the title deeds to the property. Without the title
deeds to the property, the borrower is unable to establish the necessary chain
of ownership, and is therefore effectively prevented from dealing with its land
without the consent of the mortgagee. Priority of mortgages over unregistered
land is governed first by the possession of title deeds, and in relation to
subsequent mortgages by the registration of a land charge.
THE SELLER AS MORTGAGEE
The sale of the mortgages by the seller to the mortgages trustee will take
effect in equity only. The mortgages trustee will not apply to H.M. Land
Registry or the Central Land Charges Registry to register or record its
equitable interest in the mortgages. The consequences of this are explained in
the section "RISK FACTORS -- THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT
THE MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGES WHICH MAY ADVERSELY
AFFECT PAYMENTS ON THE ISSUER NOTES".
ENFORCEMENT OF MORTGAGES
If a borrower defaults under a loan, the mortgage conditions provide that
all monies under the loan will become immediately due and payable. The seller
or its successors or assigns would then be entitled to recover all outstanding
principal, interest and fees under the covenant of the borrower contained in
the mortgage conditions to pay or repay those amounts. In addition, the seller
or its successors or assigns may enforce its mortgage in relation to the
defaulted loan. Enforcement may occur in a number of ways, including the
following:
* The mortgagee may enter into possession of the property. If it does
so, it does so in its own right and not as agent of the mortgagor,
and so may be personally liable for mismanagement of the property
and to third parties as occupier of the property.
* The mortgagee may lease the property to third parties.
* The mortgagee may foreclose on the property. Under foreclosure
procedures, the mortgagor's title to the property is extinguished
so that the mortgagee becomes the owner of the property. The remedy
is, because of procedural constraints, rarely used.
* The mortgagee may sell the property, subject to various duties to
ensure that the mortgagee exercises proper care in relation to the
sale. This power of sale arises under the Law of Property Act 1925.
The purchaser of a property sold pursuant to a mortgagee's power of
sale becomes the owner of the property.
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UNITED KINGDOM TAXATION
The following section summarises the material UK tax consequences of the
purchase, ownership and disposition of the issuer notes based on current law
and practice in the UK. Allen & Overy, 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 1 and the issuer,
respectively, to UK tax counsel that the profit in Funding 1's profit and loss
account will not exceed 0.01 per cent. of the Funding 1 available revenue
receipts and that the profit in the issuer's profit and loss account will not
exceed 0.01 per cent. of the interest on the issuer term advances under the
issuer intercompany loan are correct. It further assumes that all payments made
pursuant to the final documentation are calculated on arm's length terms. The
summary does not purport to be a complete analysis of all tax considerations of
the purchase, ownership and disposition of the issuer notes. It relates to the
position of persons who are the absolute beneficial owners of issuer notes and
may not apply to certain classes of persons such as dealers and persons
connected with the issuer. Noteholders who may be subject to tax in a
jurisdiction other than the UK or who may be unsure as to their tax position
should seek their own professional advice.
TAXATION OF US RESIDENTS
As discussed in more detail under "-- WITHHOLDING TAX" below, UK tax counsel
is of the opinion that no UK withholding tax will be required in relation to
interest payments on the issuer notes provided that the issuer notes are listed
on a recognised stock exchange, which includes the London Stock Exchange. If
the issuer notes cease to be listed on the London Stock Exchange, an amount
must be withheld on account of UK income tax at the lower rate (currently 20%),
subject to any direction to the contrary from the Inland Revenue in respect of
such relief as may be available pursuant to the provisions of an applicable
double taxation treaty.
Residents of the US are generally not subject to tax in the UK on payments
on the issuer notes under the terms of the double taxation treaty between the
US and the UK (the "TREATY"), subject to completion of administrative
formalities, except where the issuer notes are effectively connected with a
permanent establishment or a fixed base of the noteholder situated in the UK or
the noteholder is exempt from tax in respect of income on the issuer notes in
the US and the noteholder sells or makes a contract to sell the holding from
which such income is derived within three months of the date on which the
noteholder acquired the holding. A new double taxation treaty (the "NEW
TREATY") has been negotiated between the UK and the US and instruments of
ratification were exchanged on 31st March 2003 and the New Treaty entered into
force on that date. UK tax counsel is of the opinion that the above description
of the treatment of residents of the US under the Treaty will also apply under
the New Treaty provided that the amounts paid on the issuer notes do not exceed
the return on comparable debt instruments. To the extent that the amounts paid
do exceed such a return, the UK may tax the excess in accordance with UK
domestic law.
Subject to the opinions set out in the preceding paragraphs, UK tax counsel
is of the opinion that, as discussed in more detail under "-- DIRECT ASSESSMENT
OF NON-UK RESIDENT HOLDERS OF ISSUER NOTES TO UK TAX ON INTEREST" below, a
noteholder who is resident in the US for US tax purposes and who is not
resident in the UK for UK tax purposes will not be subject to UK tax in respect
of any payments on the issuer notes unless they are held by or for a trade,
profession or vocation carried on by him through a branch or agency or 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 issuer 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 issuer notes are attributable.
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It is the opinion of UK tax counsel that, as discussed in more detail below
under "-- UK TAXATION OF FUNDING 1 AND THE ISSUER", Funding 1 and the issuer
will generally be subject to UK corporation tax, currently at a rate of 30 per
cent., on the profit reflected in their respective profit and loss accounts as
increased by the amounts of any non-deductible expenses or losses.
It is the opinion of UK tax counsel that, as discussed in more detail below
under "-- UK TAXATION OF THE MORTGAGES TRUSTEE", the mortgages trustee will
have no liability to UK tax in relation to amounts which it receives on behalf
of Funding 1 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 issuer notes, the parties to the transaction, or any aspects of
the transaction.
WITHHOLDING TAX
There will be no UK withholding tax in relation to interest payments on the
issuer notes provided that, so far as concerns deduction by the issuer or its
paying agents, the issuer notes are listed on a "RECOGNISED STOCK EXCHANGE", as
defined in Section 841 of the Income and Corporation Taxes Act 1988 ("ICTA").
(The London Stock Exchange is currently a recognised stock exchange for this
purpose.) The Inland Revenue is instead able to obtain information about
persons to whom or, in certain circumstances, for whose benefit interest is
paid. If the issuer 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 per cent.) 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 persons (including companies within the charge to
UK corporation tax) and in the circumstances specified in Section 349A to 349D
of the Income and Corporation Taxes Act 1988.
Noteholders who are individuals may wish to note that the Inland Revenue has
power to obtain information (including the name and address of the beneficial
owner of the interest) from any person in the UK who either pays interest to,
or receives interest for the benefit of, an individual. Information so obtained
may, in certain circumstances, be exchanged by the Inland Revenue with the tax
authorities of other jurisdictions.
DIRECT ASSESSMENT OF NON-UK RESIDENT HOLDERS OF ISSUER NOTES TO UK TAX ON
INTEREST
The issuer notes have a UK source. Accordingly, payments on the issuer notes
will in principle be within the charge to UK tax even if paid without
withholding or deduction. However, it is the opinion of UK tax counsel that
(other than where the provisions of the New Treaty apply to allow certain
interest paid to residents of the US to be taxed in the UK) such payments will
not be chargeable to UK tax in the hands of a noteholder who is not resident
for tax purposes in the UK unless such holder carries on a trade, profession or
vocation in the UK through a UK branch or agency through a permanent
establishment for those noteholders with accounting periods beginning on or
after 1st January, 2003, in connection with which the payments are received or
to which the issuer notes are attributable, in which case (subject to
exemptions for interest received by certain categories of agent such as some
brokers and investment managers) tax may be levied on the UK branch or agency.
TAXATION OF RETURNS: COMPANIES WITHIN THE CHARGE TO UK CORPORATION TAX
In general, noteholders who are within the charge to UK corporation tax
(other than authorised unit trusts) will normally be subject to tax on all
profits and gains, including interest and profit and gains attributable to
currency regulations, arising on or in connection with the issuer notes under
the loan relationship rules. Any such profits and gains will generally fall to
be calculated in accordance with the statutory accounting treatment of the
issuer notes in the hands of the relevant noteholder, and will generally be
charged to tax as income in respect of each accounting period to which they are
allocated, in accordance with that accounting treatment. Relief may be
available in respect of losses or for related expenses on a similar basis.
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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 or through a
permanent establishment in connection with which interest on the issuer notes
is received or to which the issuer notes are attributable will generally be
liable to UK tax on the amount of any interest received in respect of the
issuer notes. As the series 1 issuer notes, series 2 issuer notes and series 3
issuer notes are denominated in US dollars and the series 4 issuer notes,
series 54 class B issuer notes and series 54 class C issuer notes are
denominated in euro, they will not constitute "qualifying corporate bonds"
within the meaning of Section 117 of the Taxation of Chargeable Gains Act 1992.
Accordingly, a disposal of any of these issuer notes by such noteholders as
described above 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 5 issuer 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 issuer notes by such noteholders as described above is
not expected to give rise to a chargeable gain or an allowable loss for the
purposes of the UK taxation of chargeable gains.
A disposal of issuer notes by such noteholders as described above may also
give rise to a charge to tax on income in respect of an amount representing
interest accrued on the issuer notes since the preceding payment date. For
issuer notes which constitute variable rate securities, taxation in respect of
such a disposal will be computed on the basis that such amount as the Inland
Revenue considers to be just and reasonable will be treated as accrued income.
However, the transferee of a variable rate security will not be entitled to any
relief on such amount. All of the issuer notes will constitute variable rate
issuer notes for this purpose.
STAMP DUTY AND STAMP DUTY RESERVE TAX
No UK stamp duty or stamp duty reserve tax is payable on the issue or
transfer of the offered global issuer notes or on the issue or transfer of a
note in definitive form.
UK TAXATION OF FUNDING 1 AND THE ISSUER
It is the opinion of UK tax counsel that Funding 1 and the issuer will
generally be subject to UK corporation tax, currently at a rate of 30 per
cent., on the profit reflected in their respective profit and loss accounts as
increased by the amounts of any non-deductible expenses or losses. Examples of
non-deductible expenses and losses include general provisions for bad debts. In
respect of Funding 1, the profit in the profit and loss account will not exceed
0.01 per cent. of the Funding 1 available revenue receipts. In respect of the
issuer, the profit in the profit and loss account will not exceed 0.01 per
cent. of the interest on the issuer term advances under the issuer intercompany
loan. We refer you to "RISK FACTORS -- TAX PAYABLE BY FUNDING 1 OR THE ISSUER
MAY ADVERSELY AFFECT OUR ABILITY TO MAKE PAYMENTS ON THE ISSUER NOTES".
UK TAXATION OF THE MORTGAGES TRUSTEE
It is the opinion of UK tax counsel that the mortgages trustee will have no
liability to UK tax in respect of any income, profit or gain arising under
these arrangements. Accordingly, the mortgages trustee will have no liability
to UK tax in relation to amounts which it receives on behalf of Funding 1 or
the seller under the mortgages trust.
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PROPOSED EU SAVINGS DIRECTIVE
On 3rd June, 2003, the European Council of Economics and Finance Ministers
agreed on proposals under which Member States will be required to provide to
the tax authorities of another Member State details of payments of interest (or
similar income) paid by a person within its jurisdiction to an individual
resident in that other Member State, except that, for a transitional period,
Belgium, Luxembourg and Austria will instead be required to operate a
withholding system in relation to such payments (the ending of such
transitional period being dependent upon the conclusion of certain other
agreements relating to information exchange with certain other countries. The
proposals are anticipated to take effect from 1st January, 2005.
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UNITED STATES FEDERAL INCOME TAXATION
[TO BE REVISED FURTHER IF THE SERIES 1 CLASS A ISSUER NOTES HAVE A TERM OF ONE
YEAR OR LESS]
GENERAL
The following section summarises the material US federal income tax
consequences of the purchase, ownership and disposition of the series 1 issuer
notes, series 2 issuer notes and, series 3 issuer notes (the "US NOTES"). In
general, the summary assumes that a holder acquires the US notes at original
issuance and holds the US notes as capital assets. 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,
without limitation, the following: (i) financial institutions; (ii) insurance
companies; (iii) dealers or traders in stocks, securities, notional principal
contracts or currencies; (iv) tax-exempt entities; (v) regulated investment
companies; (vi) persons that will hold the US notes as part of a "hedging" or
"conversion" transaction or as a position in a "straddle" for US federal income
tax purposes; (vii) persons that own (or are deemed to own) 10 per cent. or
more of the voting shares of the issuer; (viii) persons who hold US notes
through partnerships or other pass-through entities; and (ix) persons that have
a "functional currency" other than the US dollar. In addition, this summary
does not address alternative minimum tax consequences, nor does it 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 Internal Revenue Code of 1986, as amended
(the "CODE"), US Treasury regulations and judicial and administrative
interpretations thereof, in each case as in effect or available on the
effective date of the registration statement. All of the foregoing are subject
to change, and any change may apply retroactively and could affect the tax
consequences described below.
Allen & Overy, 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 1,
MORTGAGES TRUSTEE AND MORTGAGES TRUST", US tax counsel is of the opinion that
the mortgages trustee acting as trustee of the mortgages trust, Funding 1 and
the issuer will not be subject to US federal income tax as a result of their
contemplated activities. As described further under "-- CHARACTERISATION OF THE
US 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 US 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 and there can be no assurance
that the IRS or courts will agree with the conclusions expressed herein.
ACCORDINGLY, INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS 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 HOLDER" means a beneficial
owner of US notes that is for US federal income tax purposes: (i) a citizen or
resident of the United States; (ii) a corporation (or other entity treated as a
corporation) or partnership, created or organised in or under the laws of the
United States or any state thereof (including the District of Columbia); (iii)
any estate the income of which is subject to US federal income tax regardless
of the source of its income; or (iv) any trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more US persons have the authority to control all substantial
decisions of the trust. If a partnership holds US notes, the tax treatment of a
partner will
238
generally depend upon the status of the partner and upon the activities of the
partnership. Partners of partnerships holding US notes should consult their own
tax advisers. A "NON-UNITED STATES HOLDER" is a beneficial owner of US notes
that is not a United States holder.
TAX STATUS OF THE ISSUER, FUNDING 1, MORTGAGES TRUSTEE AND MORTGAGES TRUST
Under the transaction documents, each of the issuer, Funding 1 and the
mortgages trustee acting in its capacity as trustee of the mortgages trust
covenants not to engage in any activities in the United States (directly or
through agents), not to derive any income from sources within the United States
as determined under US federal income tax principles, and not to hold any
property if doing so would cause it to be engaged or deemed to be engaged in a
trade or business within the United States as determined under US federal
income tax principles. US tax counsel is of the opinion that, assuming
compliance with the transaction documents, none of the issuer, Funding 1 or the
mortgages trustee acting in its capacity as trustee of the mortgages trust will
be subject to US federal income tax. See "UNITED STATES FEDERAL INCOME TAXATION
- -- GENERAL" for further information regarding this opinion. No elections will
be made to treat the issuer, Funding 1 or the mortgages trustee or any of their
assets as a REMIC or a FASIT (two types of securitisation vehicles having a
special tax status under the Code).
CHARACTERISATION OF THE US NOTES
Although there is no authority regarding the treatment of instruments that
are substantially similar to the US notes and while it is 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. See "UNITED STATES FEDERAL INCOME TAXATION
- -- GENERAL" for further information regarding this opinion. 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 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 UNITED STATES HOLDERS OF THE US NOTES
QUALIFIED STATED INTEREST AND ORIGINAL ISSUE DISCOUNT.
The issuer intends to treat interest on the US notes as "QUALIFIED STATED
INTEREST" under US 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 as ordinary interest income. 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 class B and class C US notes could be
treated as original issue discount ("OID") because such interest is subject to
deferral in certain limited circumstances. A United States 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 provide that the same prepayment assumptions used to
price a debt instrument be used to calculate OID, as well as to accrue market
discount and amortise premium. Here, prepayment of the mortgage loans is not
expected to alter the scheduled principal payments on the class B and class C
US notes and accordingly, the issuer intends to assume that the class B and
class C 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.
239
As an alternative to the above treatments, United States 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 amortisable
bond premium or acquisition premium, using the constant yield method described
above.
Interest income on the US notes will be treated as foreign source income for
US federal income tax purposes, which may be relevant in calculating a United
States holder's foreign tax credit limitation for US federal income tax
purposes. The limitation on foreign taxes eligible for the US foreign tax
credit is calculated separately with respect to specific classes of income. For
this purpose, the interest on the US notes should generally constitute "passive
income" or, in the case of certain United States holders, "financial services
income".
SALES AND RETIREMENT
In general, a United States holder of a US note will have a basis in such US
note equal to the cost of the US note to such holder, and reduced by any
payments thereon other than payments of stated interest. Upon a sale or
exchange of the US note, a United States holder will generally recognise 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 US
note. Such gain or loss will be long-term capital gain or loss if the United
States holder has held the US note for more than one year at the time of
disposition. If a United States holder's basis in a US note includes accrued
but unpaid OID and the United States holder recognises a loss on the
transaction with respect to such amounts that exceeds certain specified
thresholds, the United States holder may be required specifically to disclose
certain information with respect to the transaction on its tax return under
recently issued tax disclosure regulations. PROSPECTIVE INVESTORS SHOULD
CONSULT THEIR OWN TAX ADVISERS AS TO THE APPLICABILITY OF THESE DISCLOSURE
REGULATIONS AND AS TO THE TREATMENT OF CAPITAL GAINS (WHICH MAY BE TAXED AT
LOWER RATES THAN ORDINARY INCOME FOR TAXPAYERS WHO ARE INDIVIDUALS, TRUSTS OR
ESTATES THAT HOLD THE US NOTES FOR MORE THAN ONE YEAR) AND CAPITAL LOSSES (THE
DEDUCTIBILITY OF WHICH IS SUBJECT TO LIMITATIONS).
TAXATION OF NON-UNITED STATES HOLDERS OF THE US NOTES
Subject to the backup withholding rules discussed below, a Non-United States
holder generally should not be subject to US federal income or withholding tax
on any payments on a US note and gain from the sale, redemption or other
disposition of a US note unless: (i) that payment and/or gain is effectively
connected with the conduct by that Non-United States holder of a trade or
business in the United States; (ii) in the case of any gain realised on the
sale or exchange of a US note by an individual Non-United States holder, that
holder is present in the United States for 183 days or more in the taxable year
of the sale, exchange or retirement and certain other conditions are met; or
(iii) the Non-United States holder is subject to tax pursuant to provisions of
the Code applicable to certain expatriates. NON-UNITED STATES HOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISERS REGARDING THE US FEDERAL INCOME AND OTHER TAX
CONSEQUENCES OF OWNING US NOTES.
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 for all US federal income tax purposes. Prospective
investors should consult their own tax advisers 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 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 class C notes or any
other class of notes were treated as equity, United States 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 United States
holders and certain other factors, might also constitute an interest in a
controlled foreign corporation for such United
240
States holder. This would have certain timing and character consequences for
United States 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 a United States holder were treated as owning an equity interest in a
PFIC, unless a United States holder makes a "QEF ELECTION" or "MARK TO MARKET
ELECTION", a United States holder will be subject to a special tax regime (i)
in respect of gains realized on the sale or other disposition of the relevant
notes, and (ii) in respect of distributions on the relevant 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 notes disposed of during the same taxable
year in which such 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 per cent. 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 US holder will receive "EXCESS DISTRIBUTIONS" as a
result of fluctuations in the rate of USD-LIBOR over the term of US notes. In
general, under PFIC rules, a United States holder will be required to allocate
such excess distributions and any gain realized on a sale of its notes to each
day during the United States holder's holding period for the notes, and will be
taxable at the highest rate of taxation applicable to the notes for the year to
which the excess distribution or gain is allocable (without regard to the
United States holder's other items of income and loss for such taxable year)
(the "DEFERRED TAX"). The deferred tax (other than the tax on amounts allocable
to the year of disposition or receipt of the distribution) will then be
increased by an interest charge computed by reference to the rate generally
applicable to underpayments of tax (which interest charge generally will be a
non-deductible interest expense for individual taxpayers).
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding and information reporting requirements may apply to
certain payments on the US notes and proceeds of the sale or redemption of the
US notes to United States holders. The issuer, its agent, a broker, or any
paying agent, as the case may be, may be required to withhold tax from any
payment that is subject to backup withholding if the United States holder fails
to furnish the United States holder's taxpayer identification number (usually
on IRS Form W-9), to certify that such United States holder is not subject to
backup withholding, or to otherwise comply with the applicable requirements of
the backup withholding rules. Certain United States holders (including, among
others, corporations) are not subject to the backup withholding and information
reporting requirements. Non-United States holders may be required to comply
with applicable certification procedures (usually on IRS Form W-8BEN) to
establish that they are not United States holders in order to avoid the
application of such information reporting requirements and backup withholding.
Payments of principal or interest made to or through a foreign office of a
custodian, nominee or other agent acting on behalf of a beneficial owner of a
US note generally will not be subject to backup withholding. However, if such
custodian, nominee or other agent is (i) a United States person (as defined in
section 7701(a)(30, of the Code), (ii) a controlled foreign corporation (as
defined in section 957(a) of the Code), (iii) a foreign person 50 per cent. or
more of whose gross income is effectively connected with a US trade or business
for a specified three-year period, or (iv) a foreign partnership if (A) at any
time during its tax year, one or more of its partners are United States persons
(as defined in applicable Treasury regulations) who in the aggregate hold more
than 50 per cent. of the income or capital interest in the partnership or (B)
at any time during its taxable year, it is engaged in a US trade or business
(each of (i) through (iv), a "US CONNECTED HOLDER"), such custodian, nominee or
other agent may be subject to certain information reporting requirements with
respect to such payment unless it has in its records documentary evidence that
the beneficial owner is not a United States holder and certain conditions are
met or the beneficial owner otherwise establishes an exemption. Principal and
interest paid by the US office of a custodian, nominee or agent will be subject
to both backup withholding and information reporting unless the beneficial
owner certifies its non-US status under penalties of perjury or otherwise
establishes an exemption. Payments of proceeds on the sale of a US note made to
or through a
241
foreign office of a broker will not be subject to backup withholding. However,
if such broker is a US Connected Holder, information reporting will be required
unless the broker has in its records documentary evidence that the beneficial
owner is not a United States holder and certain conditions are met or the
beneficial owner otherwise establishes an exemption. Payments of proceeds on
the sale of a US note made to or through the US office of a broker will be
subject to backup withholding and information reporting unless the beneficial
owner certifies, under penalties of perjury, that it is not a US holder or
otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the United States
holder's US federal income tax liability, provided that the required
information is furnished to the IRS. HOLDERS OF US NOTES SHOULD CONSULT THEIR
TAX ADVISERS AS TO THEIR QUALIFICATION FOR EXEMPTION FROM BACKUP WITHHOLDING
AND THE PROCEDURE FOR OBTAINING AN EXEMPTION.
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 ADVISERS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF THE
US NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
242
MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSIDERATIONS
TAX STATUS OF THE MORTGAGES TRUSTEE AND THE MORTGAGES TRUST
It is the opinion of Jersey (Channel Islands) tax counsel that the mortgages
trustee is resident in Jersey for taxation purposes and will be liable to
income tax in Jersey at a rate of 20 per cent 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.
243
ERISA CONSIDERATIONS
The US issuer notes are eligible for purchase by employee benefit plans and
other plans subject to the US Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and/or the provisions of Section 4975 of the Code and by
governmental plans that are subject to state, local or other federal law of the
United States that is substantially similar to ERISA or Section 4975 of the
Code, subject to consideration of the issues described in this section. ERISA
imposes certain requirements on "EMPLOYEE BENEFIT PLANS" (as defined in Section
3(3) of ERISA) subject to ERISA, including entities such as collective
investment funds and separate accounts whose underlying assets include the
assets of such plans (collectively, "ERISA PLANS") and on those persons who are
fiduciaries with respect to ERISA Plans. Investments by ERISA Plans are subject
to ERISA's general fiduciary requirements, including the requirements of
investment prudence and diversification and the requirement that an ERISA
Plan's investments be made in accordance with the documents governing the Plan.
The prudence of a particular investment must be determined by the responsible
fiduciary of an ERISA Plan by taking into account the ERISA Plan's particular
circumstances and all of the facts and circumstances of the investment
including, but not limited to, the matters discussed under "RISK FACTORS" and
the fact that in the future there may be no market in which such fiduciary will
be able to sell or otherwise dispose of the US issuer notes.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those plans that
are not subject to ERISA but which are subject to Section 4975 of the Code,
such as individual retirement accounts (together with ERISA Plans, the
"PLANS")) and certain persons (referred to as "PARTIES IN INTEREST" or
"DISQUALIFIED PERSONS") having certain relationships to such Plans, unless a
statutory or administrative exemption is applicable to the transaction. A party
in interest or disqualified person who engages in a prohibited transaction may
be subject to excise taxes and other penalties and liabilities under ERISA and
the Code.
The seller, the issuer, the servicer, the mortgages trustee, Funding 1 or
any other party to the transactions contemplated by the transaction documents
may be parties in interest or disqualified persons with respect to many Plans.
Prohibited transactions within the meaning of Section 406 of ERISA or Section
4975 of the Code may arise if any of the US issuer notes is acquired or held by
a Plan with respect to which the issuer, the servicer, the mortgages trustee,
Funding 1 or any other party to such transactions is a party in interest or a
disqualified person. Certain exemptions from the prohibited transaction
provisions of Section 406 of ERISA and Section 4975 of the Code may be
applicable, however, depending in part on the type of Plan fiduciary making the
decision to acquire any such issuer notes and the circumstances under which
such decision is made. Included among these exemptions are Prohibited
Transaction Class Exemption ("PTCE") 91-38 (relating to investments by bank
collective investment funds), PTCE 84-14 (relating to transactions effected by
a "QUALIFIED PROFESSIONAL ASSET MANAGER"), PTCE 95-60 (relating to transactions
involving insurance company general accounts), PTCE 90-1 (relating to
investments by insurance company pooled separate accounts) and PTCE 96-23
(relating to transactions determined by in-house asset managers). There can be
no assurance that any of these class exemptions or any other exemption will be
available with respect to any particular transaction involving any such issuer
notes.
Each purchaser and subsequent transferee of any US issuer note will be
deemed by such purchase or acquisition of any such note to have represented and
warranted, on each day from the date on which the purchaser or transferee
acquires such note through and including the date on which the purchaser or
transferee disposes of such note, either that (A) it is not a Plan or an entity
whose underlying assets include the assets of any Plan or a governmental plan
which is subject to any federal, state or local law of the United States that
is substantially similar to the provisions of section 406 of ERISA or section
4975 of the Code or (B) its purchase, holding and disposition of such note will
not result in a prohibited transaction under section 406 of ERISA or section
4975 of the Code (or, in the case of a governmental plan, any substantially
similar federal, state or local law of the United States) for which an
exemption is not available.
244
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 1 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 US issuer notes, such plan assets would include an
undivided interest in the assets held by the issuer and transactions by the
issuer would be subject to the fiduciary responsibility provisions of Title I
of ERISA and the prohibited transaction provisions of ERISA and Section 4975 of
the Code.
Any insurance company proposing to purchase any of the US issuer notes using
the assets of its general account should consider the extent to which such
investment would be subject to the requirements of ERISA in light of the US
Supreme Court's decision in John Hancock Mutual Life Insurance Co. v. Harris
Trust and Savings Bank and under any subsequent guidance that may become
available relating to that decision. In particular, such an insurance company
should consider the retroactive and prospective exemptive relief granted by the
Department of Labor for transactions involving insurance company general
accounts in PTCE 95-60, 60 Fed. Reg. 35925 (July 12, 1995), the enactment of
Section 401(c) of ERISA by the Small Business Job Protection Act of 1996
(including, without limitation, the expiration of any relief granted
thereunder) and the Insurance Company General Account Regulations, 65 Fed. Reg.
No. 3 (5th January, 2000) (to be codified at 29 C.F.R. pt. 2550) that became
generally applicable on 5th July, 2001.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold any of the US issuer
notes should determine whether, under the documents and instruments governing
the Plan, an investment in such issuer notes is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. Any Plan proposing to invest in
such issuer notes (including any governmental plan) should consult with its
counsel to confirm that such investment will not result in a non-exempt
prohibited transaction and will satisfy the other requirements of ERISA and the
Code (or, in the case of a governmental plan, any substantially similar state,
local or other federal law).
The sale of any US issuer notes to a Plan is in no respect a representation
by the seller, the issuer, the servicer, the mortgages trustee, Funding 1 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.
245
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES
The issuer is a UK public limited company incorporated with limited
liability in England and Wales. Any final and conclusive judgment of any United
States federal or state court having jurisdiction recognised by England or
Wales in respect of an obligation of the issuer in respect of the issuer notes
which is for a fixed sum of money and which has not been stayed or satisfied in
full, would be enforceable by action against the issuer in the courts of
England and Wales without a re-examination of the merits of the issues
determined by the proceedings in that United States federal or state court, as
applicable, unless:
* the proceedings in that United States federal or state court, as
applicable, involved a denial of the principles of natural or
substantial justice;
* the judgment is contrary to the public policy of England or Wales;
* the judgment was obtained by fraud or duress or was based on a
clear mistake of fact;
* the judgment is of a public nature (for example, a penal or revenue
judgment);
* there has been a prior judgment in another court between the same
parties concerning the same issues as are dealt with in the
judgment of the United States federal or state court, as
applicable;
* enforcement would breach section 5 of the Protection of Trading
Interests Act 1980; or
* enforcement proceedings are not instituted within six years after
the date of the judgment.
A judgment by a court may be given in some cases only in sterling. The
issuer expressly submits to the non-exclusive jurisdiction of the courts of
England for the purpose of any suit, action or proceedings arising out of this
offering.
All of the directors and executive officers of the issuer reside outside the
United States. Substantially all or a substantial portion of the assets of all
or many of those persons are located outside the United States. As a result, it
may not be possible for holders of the issuer notes to effect service of
process within the United States upon those persons or to enforce against them
judgments obtained in United States courts predicated upon the civil liability
provisions of federal securities laws of the United States. Based on the
restrictions referred to in this section, there is doubt as to the
enforceability in England and Wales, in original actions or in actions for
enforcement of judgments of United States courts, of civil liabilities
predicated upon the federal securities laws of the United States.
246
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS
No representation is made as to the proper characterisation of the issuer
notes for legal investment purposes, financial institutional regulatory
purposes, or other purposes, or as to the ability of particular investors to
purchase the issuer notes under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of the issuer notes.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent the issuer notes constitute legal investments or are
subject to investment, capital or other restrictions.
EXPERTS
The financial statements of Permanent Funding (No. 1) Limited as of and for
the year ended 31st December, 2002 have been included in this prospectus, in
reliance upon the report of KPMG Audit Plc, independent accountants, as stated
in their report appearing herein, and upon the authority of said firm as
experts in accounting and auditing.
The balance sheet of Permanent Financing (No. 3) PLC as of __ has been
included in this prospectus, in reliance upon the report of KPMG Audit Plc,
independent accountants, as stated in their report appearing herein, and upon
the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The financial statements of Permanent Funding (No. 1) Limited as of and for
the year ended 31st December, 2002 have been included in this prospectus, in
reliance upon the report of KPMG Audit Plc, independent accountants, as stated
in their report appearing herein, and upon the authority of said firm as
experts in accounting and auditing.
An opinion with respect to English law regarding the issuer notes, including
matters relating to the validity of the issuance of the issuer notes, will be
provided to the issuer and the underwriters by Allen & Overy. An opinion with
respect to United States law regarding the issuer notes, including matters of
United States federal income tax law with respect to the series 1 issuer notes,
the series 2 issuer notes and the series 3 issuer notes will be provided to the
issuer and the underwriters by Allen & Overy. Opinions with respect to United
States law will be provided to the underwriters by Sidley Austin Brown & Wood.
247
UNDERWRITING
UNITED STATES
The issuer has agreed to sell, and [__] (the "CLASS A LEAD UNDERWRITERS")
and the other underwriters for the series 1 class A issuer notes, the series 2
class A issuer notes and the series 3issuer notes listed in the following table
(the "CLASS A UNDERWRITERS") have agreed to purchase, the principal amount of
those issuer notes listed in such table (also called the "CLASS A OFFERED
ISSUER NOTES"). The issuer has agreed to sell and [__] (the "CLASS B/C LEAD
UNDERWRITERS" and, together with the class A lead underwriters, the "LEAD
UNDERWRITERS") have agreed to purchase, the principal amount of the series [1]
class B issuer notes, the series 1 class C issuer notes, the series 2 class B
issuer notes, series 2 class C issuer notes the series 3 class B issuer notes
and the series 3 class C issuer notes listed in the following tables (also
called the "CLASS B/C OFFERED ISSUER NOTES" and, together with the class A
offered issuer notes, the "OFFERED ISSUER NOTES"). The terms of these purchases
are governed by an underwriting agreement among the issuer and the lead
underwriters.
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
THE SERIES THE SERIES THE SERIES
1 CLASS A 2 CLASS A 3 CLASS A
UNDERWRITERS ISSUER NOTES ISSUER NOTES ISSUER NOTES
- -------------------------------------- ------------ ------------ ------------
Credit Suisse First Boston LLC........ __ __ __
__.................................... __ __ __
__.................................... __ __ __
__.................................... __ __ __
Salomon Smith Barney Inc.............. __ __ __
------------ ------------ ------------
UBS................................... __ __ __
------------ ------------ ------------
Total................................. __ __ __
------------ ------------ ------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
THE SERIES 1 THE SERIES 2 THE SERIES 3
CLASS B CLASS B CLASS B
UNDERWRITERS ISSUER NOTES ISSUER NOTES ISSUER NOTES
- -------------------------------------- ------------ ------------ ------------
__.................................... __ __ __
__.................................... __ __ __
------------ ------------ ------------
Total................................. __ __ __
------------ ------------ ------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
THE SERIES THE SERIES THE SERIES
1 CLASS C 2 CLASS C 3 CLASS C
UNDERWRITERS ISSUER NOTES ISSUER NOTES ISSUER NOTES
- -------------------------------------- ------------ ------------ ------------
__.................................... US$__ __ __
__.................................... US$__ __ __
------------ ------------ ------------
Total................................. US$__ US$__ __
------------ ------------ ------------
248
[The class A underwriters or affiliates of certain of the class A
underwriters have also agreed to pay and subscribe for the series 3 class A
issuer notes and the series 5 class A issuer notes and the class B/C lead
underwriters or affiliates of certain of the class B/C lead underwriters have
also agreed to pay and subscribe for the the series 4 class A issuer notes, the
series 4 class B issuer notes, the series 4 class C issuer notes, the series 5
class B issuer notes and the series 5 class C issuer notes, none of which are
being offered pursuant to this prospectus, on the closing date.
The issuer has agreed to pay to the underwriters of the series 1 class A
issuer notes a selling commission of __ per cent. of the aggregate principal
amount of the series 1 class A issuer notes and a management and underwriting
fee of __ per cent. of the aggregate principal amount of the series 1 class A
issuer notes. The issuer has also agreed to pay to the underwriters of the
series 1 class B issuer notes a selling commission of __ per cent. of the
aggregate principal amount of the series 1 class B issuer notes and a
management and underwriting fee of __ per cent. of the aggregate principal
amount of the series 1 class B issuer notes. The issuer has also agreed to pay
to the underwriters of the series 1 class C issuer notes a selling commission
of __ per cent. of the aggregate principal amount of the series 1 class C
issuer notes and a management and underwriting fee of __ per cent. of the
aggregate principal amount of the series 1 class C issuer notes.
The issuer has agreed to pay to the underwriters of the series 2 class A
issuer notes a selling commission of __ per cent. of the aggregate principal
amount of the series 2 class A issuer notes and a management and underwriting
fee of __ per cent. of the aggregate principal amount of the series 2 class A
issuer notes. The issuer has also agreed to pay to the underwriters of the
series 2 class B issuer notes a selling commission of __ per cent. of the
aggregate principal amount of the series 2 class B issuer notes and a
management and underwriting fee of __ per cent. of the aggregate principal
amount of the series 2 class B issuer notes. The issuer has also agreed to pay
the underwriters of the series 2 class C issuer notes a selling commission of
__ per cent. of the aggregate principal amount of the series 2 class C issuer
notes and a management and underwriting fee of __ per cent. of the aggregate
principal amount of the series 2 class C issuer notes.
The issuer has also agreed to pay to the underwriters of the series 3 class
A issuer notes a selling commission of __ per cent. of the aggregate principal
amount of the series 4 class A issuer notes and a management and underwriting
fee of __ per cent. of the aggregate principal amount of the series 4 class A
issuer notes. The issuer has also agreed to pay to the underwriters of the
series 3 class B issuer notes a selling commission of __ per cent. of the
aggregate principal amount of the series 3 class B issuer notes and a
management and underwriting fee of __ per cent. of the aggregate principal
amount of the series 3 class B issuer notes. The issuer has also agreed to pay
the underwriters of the series 3 class C issuer notes a selling commission of
__ per cent. of the aggregate principal amount of the series 3 class C issuer
notes and a management and underwriting fee of __ per cent. of the aggregate
principal amount of the series 3 class C issuer notes.
In the event that an underwriter fails to purchase the issuer notes
allocated to it in accordance with the terms of the issuer underwriting
agreement, the issuer underwriting agreement provides that in certain
circumstances the issuer underwriting agreement may be terminated.
The class A lead underwriters have advised the issuer that the class A
underwriters propose initially to offer the series 1 class A issuer notes to
the public at the public offering price stated on the cover page of this
prospectus, and to some dealers at that price, less a concession up to __ per
cent. for each series 1 class A issuer note. The class A underwriters may
allow, and those dealers may re-allow, concessions up to __ per cent. of the
principal balance of the series 1 class A issuer notes to some brokers and
dealers.
The class B/C lead underwriters have advised the issuer that they propose
initially to offer the series 1 class B issuer notes and the series 1 class C
issuer notes to the public at the public offering price stated on the cover
page of this prospectus, and to some dealers at that price, less a concession
up to __ per cent. for each series 1 class B issuer note and up to __ per cent.
for each series 1 class C issuer note. The class B/C lead underwriters may
allow, and those dealers may
249
re-allow, concessions up to __ per cent. of the principal balance of the series
1 class B issuer notes, and up to __ per cent. of the principal balance of the
series 1 class C issuer notes, to some brokers and dealers.
The class A lead underwriters have advised the issuer that the class A
underwriters propose initially to offer the series 2 class A issuer notes to
the public at the public offering price stated on the cover page of this
prospectus, and to some dealers at that price, less a concession up to __ per
cent. for each series 2 class A issuer note. The class A underwriters may
allow, and those dealers may re-allow, concessions up to __ per cent. of the
principal balance of the series 2 class A issuer notes to some brokers and
dealers.
The class B/C lead underwriters have advised the issuer that they propose
initially to offer the series 2 class B issuer notes and the series 2 class C
issuer notes to the public at the public offering price stated on the cover
page of this prospectus, and to some dealers at that price, less a concession
up to __ per cent. for each series 2 class B issuer note and up to __ per cent.
for each series 2 class C issuer note. The class B/C lead underwriters may
allow, and those dealers may re-allow, concessions up to __ per cent. of the
principal balance of the series 2 class B issuer notes and up to __ per cent.
of the principal balance of the series 2 class C issuer notes, to some brokers
and dealers.
The class A lead underwriters have advised the issuer that the class A
underwriters propose initially to offer the series 4 class A issuer notes to
the public at the public offering price stated on the cover page of this
prospectus, and to some dealers at that price, less a concession up to __ per
cent. for each series 4 class A issuer note. The class A underwriters may
allow, and those dealers may re-allow, concessions up to __ per cent. of the
principal balance of the series 4 class A issuer notes to some brokers and
dealers.
The class B/C lead underwriters have advised the issuer that they propose
initially to offer the series 3 class B issuer notes and the series 3 class C
issuer notes to the public at the public offering price stated on the cover
page of this prospectus, and to some dealers at that price, less a concession
up to __ per cent. for each series 3 class B issuer note and up to __ per cent.
for each series 3 class C issuer note. The class B/C lead underwriters may
allow, and those dealers may re-allow, concessions up to __ per cent. of the
principal balance of the series 3 class B issuer notes and up to __ per cent.
of the principal balance of the series 3 class C issuer notes, to some brokers
and dealers.
The management and underwriting fees and selling commissions that the issuer
has agreed to pay to the underwriters will be paid to the underwriters on
behalf of the issuer by Funding 1 from the proceeds of the third start-up loan.
After the initial offering, the underwriters may change the public offering
price and any other selling terms.
Additional offering expenses are estimated to be US$__, a certain portion of
which will be paid by the underwriters and the seller on behalf of the issuer.
The issuer and Halifax have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the United States Securities
Act of 1933, as amended.
The underwriters may engage in over-allotment transactions, also known as
short sales, short covering transactions, stabilising transactions and penalty
bids for the offered issuer notes under Regulation M under the United States
Securities Exchange Act of 1934, as amended.
* Short sales involve the sale by the underwriters of more offered
issuer notes than they are required to purchase in the offering.
This type of short sale is commonly referred to as a "naked" short
sale due to the fact that the underwriters do not have an option to
purchase these additional offered issuer notes in the offering. The
underwriters must close out any naked short position by entering
into short covering transactions as described below. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the
offered issuer notes in the open market after pricing that could
adversely affect investors who purchase in the offering.
250
* Short covering transactions involve purchases of the offered issuer
notes in the open market after the distribution has been completed
in order to cover naked short positions.
* Stabilising transactions permit bids to purchase the offered issuer
notes so long as the stabilising bids do not exceed a specified
maximum.
* Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the offered issuer notes
originally sold by that syndicate member are purchased in a short
covering transaction.
Similar to other purchase transactions, these transactions may have the
effect of raising or maintaining the market price of the offered issuer notes
or preventing or retarding a decline in the market price of the offered issuer
notes. As a result, these transactions may cause the prices of the offered
issuer notes to be higher than they would otherwise be in the absence of those
transactions. Neither the issuer nor any of the underwriters represent that any
underwriter will engage in any of these transactions or that these
transactions, once begun, will not be discontinued without notice at any time.
The offered issuer notes will be registered under the United States
Securities Act of 1933, as amended.
The offered issuer notes will not be offered or sold via the internet, e-
mail or through similar electronic channels except that certain underwriters
may deliver copies of this prospectus via e-mail to persons who have given, and
not withdrawn, their prior consent to receive copies of this prospectus in that
format.
UNITED KINGDOM
Each class A underwriter (with respect to the class A offered issuer notes
only) and each class B/C lead underwriter (with respect to the class B/C
offered issuer notes only) will represent and agree that:
* in relation to any offered issuer notes which have a maturity of
one year or more and which are to be admitted to the official list
maintained by the UK Listing Authority, it has not offered or sold,
and will not offer or sell, offered issuer notes to persons in the
United Kingdom prior to admission of such offered issuer notes to
listing in accordance with Part VI of the FSMA except to persons
whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for
the purposes of their businesses, or otherwise in circumstances
which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995, as amended, or the FSMA;
* it has complied and will comply with all applicable provisions of
the FSMA with respect to anything done by it in relation to the
offered issuer notes in, from or otherwise involving the United
Kingdom; and
* 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 activities (within the meaning
of section 21 of the FSMA) received by it in connection with the
issue or sale of any offered issuer notes in circumstances in which
section 21 (1) of the FSMA does not apply to the issuer.
THE NETHERLANDS
Each relevant underwriter acknowledges that the series 1 issuer notes, the
series 2 issuer notes and the series 3 issuer notes may not be placed, offered
or distributed to investors in The Netherlands at any time.
GENERAL
The offered issuer notes are a new issue of securities, and there is
currently no established trading market for the offered issuer notes. The class
A underwriters have advised us that they intend to make a market in the class A
offered issuer notes and the class B/C underwriters have
251
advised us that they intend to make a market in the class B/C offered issuer
notes, but they are not obligated to do so. The underwriters may discontinue
any market making in the offered issuer notes at any time in their sole
discretion. Accordingly, we cannot assure you that a liquid trading market will
develop for the offered issuer notes.
Certain of the underwriters and their affiliates perform various financial
advisory, investment banking and commercial banking services from time to time
for us and our affiliates.
252
REPORTS TO NOTEHOLDERS
The issuer cash manager will prepare quarterly and annual reports that will
contain information about the issuer notes. The financial information contained
in the reports will not be prepared in accordance with generally accepted
accounting principles of any jurisdiction. Unless and until definitive issuer
notes are issued, the reports will be sent to the holders of the global issuer
notes. No reports will be sent to investors by the issuer cash manager.
Beneficial owners of the issuer notes will be entitled to receive from the
servicer on a monthly basis a report containing information about the loans in
the mortgages trust and certain other data if they have furnished the servicer
with the beneficial ownership certification described in the servicing
agreement.
WHERE INVESTORS CAN FIND MORE INFORMATION
The issuer has filed a registration statement for the offered issuer notes
with the SEC. This prospectus is part of the registration statement, but the
registration statement includes additional information.
The cash manager and/or the servicer will file with the SEC all required
periodic and special SEC reports and other information about the offered issuer
notes.
Investors may read and copy any reports, statements or other information
filed with the SEC at the SEC's public reference room in Washington, D.C.
Investors may request copies of these documents, upon payment of a duplicating
fee, by writing to the SEC. Investors should call the SEC at 1 800 732 0330 for
further information on the operation of the public reference room. SEC filings
are also available to the public on the SEC's Internet site at http://
www.sec.gov.
MARKET-MAKING
This prospectus may be used by (i) Credit Suisse First Boston LLC, UBS
Securities LLC and Salomon Smith Barney for offers and sales related to market-
making transactions in the class A offered issuer notes and (ii) [__] for
offers and sales related to market-making transactions in the class B/C offered
issuer notes. [__] 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. None of [__] has any obligation to make a market in such offered
notes, and any market-making may be discontinued at any time without notice.
[__] are among the underwriters participating in the initial distribution of
the offered notes.
[AFFILIATIONS]
253
LISTING AND GENERAL INFORMATION
Application has been made to the Financial Services Authority in its
capacity as competent authority under the Financial Services and Markets Act
2000, as amended (the "UK LISTING AUTHORITY") for the offered issuer notes to
be admitted to the official list (the "OFFICIAL LIST") maintained by the UK
Listing Authority and to the London Stock Exchange plc (the "LONDON STOCK
EXCHANGE") for those offered issuer notes to be admitted to trading on the
London Stock Exchange's market for listed securities. Admission to the Official
List together with admission to the London Stock Exchange's market for listed
securities constitute official listing on the London Stock Exchange. It is
expected that listing of the issuer notes on the Official List of the UK
Listing Authority and the admission to trading of those issuer notes on the
London Stock Exchange will be granted on or about __, 2003 subject only to the
issue of the global issuer notes. Prior to listing, however, dealings will be
permitted by the London Stock Exchange in accordance with its rules.
Transactions will normally be effected for settlement, in the case of the
series 1 issuer notes, the series 2 issuer notes and the series 3issuer notes,
in dollars, in the case of the series 4 issuer notes, the series 5 class B
issuer notes and the series 45 class C issuer notes in euro and in the case of
the series 5 class A issuer notes in sterling, and for delivery on the third
working day after the date of the transaction.
The issuer and directors of the issuer accept responsibility for the
information contained in this prospectus. To the best of the knowledge and
belief of the issuer and 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 directors of the issuer
accept responsibility accordingly.
None of the issuer, Funding 1, Holdings, the post-enforcement call option
holder or the mortgages trustee is or has been involved since its incorporation
in any legal or arbitration proceedings which may have, or have had since its
incorporation, a significant effect upon the financial position of the issuer,
Funding 1, Holdings, the post-enforcement call option holder or the mortgages
trustee (as the case may be) nor, so far as the issuer, Funding 1, Holdings,
the post-enforcement call option holder or the mortgages trustee (respectively)
is aware, are any such litigation or arbitration proceedings pending or
threatened.
No statutory or non-statutory accounts within the meaning of the Companies
Act 1985 in respect of any financial year of the issuer have been prepared. So
long as the issuer notes are listed on the Official List of the UK Listing
Authority and are trading on the London Stock Exchange, the most recently
published audited annual accounts of the issuer from time to time shall be
available at the specified office of the principal paying agent in London. The
issuer does not publish interim accounts.
The latest statutory accounts of Funding 1 have been prepared and were drawn
up to 31st December, 2002. So long as the issuer notes are listed on the
Official List of the UK Listing Authority and are trading on the London Stock
Exchange, the most recently published audited annual accounts of Funding 1 from
time to time shall be available at the specified office of the principal paying
agent in London. Funding 1 does not normally publish interim accounts.
Since the date of its incorporation, the issuer has not entered into any
contracts or arrangements not being in the ordinary course of business other
than the issuer underwriting agreement and the issuer subscription agreement.
Since __, 2003 (being the date of incorporation of the issuer), [31st
December, 2002] (being the date of the most recent audited accounts of Funding
1), 9th August, 2002 (being the date of incorporation of Holdings and the post-
enforcement call option holder) and 13th May, 2002 (being the date of
incorporation of the mortgages trustee), there has been (1) no material adverse
change in the financial position or prospects of the issuer, Funding 1,
Holdings, the post-enforcement call option holder or the mortgages trustee and
(2) no significant change in the financial or trading position of the issuer,
Funding 1, Holdings, the post-enforcement call option holder or the mortgages
trustee.
254
The issue of the issuer notes will be authorised pursuant to a resolution of
the board of directors of the issuer passed on or about __, 2003.
The offered issuer notes have been accepted for clearance through DTC,
Clearstream, Luxembourg and Euroclear under the following CUSIP numbers and
ISINs:
CLASS OF ISSUER NOTES CUSIP ISIN
- ------------------------------------------------------------------- ----- ----
Series 1 class A................................................... __ __
Series 1 class B................................................... __ __
Series 1 class C................................................... __ __
Series 2 class A................................................... __ __
Series 2 class B................................................... __ __
Series 2 class C................................................... __ __
Series 3 class A................................................... __ __
Series 3 class B................................................... __ __
Series 3 class C................................................... __ __
Copies of the following documents may be inspected at the offices of Allen &
Overy at One New Change, London EC4M 9QQ during usual business hours, on any
weekday (Saturdays and public holidays excepted) for 14 days from the date of
this prospectus:
(A) the Memorandum and Articles of Association of each of the issuer,
Funding 1, Holdings, the mortgages trustee and the post-enforcement
call option holder;
(B) the balance sheet of the issuer as at __, 2003 and the accountants'
report thereon;
(C) the balance sheet of Funding 1 as at [__], the related statements
of income, comprehensive loss, changes in stockholder's deficit and
cash flows for the year to [__] and the accountants' report
thereon;
(D) prior to the closing date, drafts (subject to minor amendment) or
copies, and after the closing date, copies of the following
documents (the "ISSUER TRANSACTION DOCUMENTS"):
* the issuer underwriting agreement;
* the issuer subscription agreement;
* the issuer intercompany loan agreement;
* the mortgages trust deed (as amended and restated);
* the mortgage sale agreement (as amended and restated);
* the issuer deed of charge;
* the Funding 1 deed of charge (as amended);
* the Funding 1 liquidity facility agreement (as amended and
restated);
* the issuer dollar currency swap agreements and confirmations;
* the issuer euro currency swap agreements and confirmations;
* the Funding 1 swap agreement (as amended and restated);
* the issuer trust deed;
* the issuer paying agent and agent bank agreement;
* the servicing agreement (as amended and restated);
* the cash management agreement;
* the issuer cash management agreement;
* the Funding 1 guaranteed investment contract;
* the mortgages trustee guaranteed investment contract;
* the issuer post-enforcement call option agreement;
* the bank account agreement;
255
* the issuer bank account agreement;
* the master definitions and construction schedule (including the
amended and restated master definitions and construction
schedule and the issuer master definitions and construction
schedule);
* the third start-up loan agreement;
* the mortgages trustee corporate services agreement;
* the Funding 1 corporate services agreement; and
* the issuer corporate services agreement;
(E) auditor's consent letter;
(F) the opinion of Allen & Overy as to validity;
(G) the opinion of Allen & Overy as to UK tax matters; and
(H) the opinion of Allen & Overy as to US tax matters.
256
GLOSSARY
Principal terms used in this prospectus are defined as follows:
"$", "US$", "US DOLLARS" and
"DOLLARS"
the lawful currency for the time being of the United States
of America
"[e]", "EURO" and "EURO"
the single currency introduced at the third stage of European
Economic and Monetary Union pursuant to the Treaty
establishing the European Communities, as amended from time
to time
"[GBP]", "POUNDS" and "STERLING"
the lawful currency for the time being of the United Kingdom
of Great Britain and Northern Ireland
"AA PRINCIPAL DEFICIENCY SUB-
LEDGER"
one of three sub-ledgers on the principal deficiency ledger
which specifically records any principal deficiency in
respect of any term AA advances
"AAA PRINCIPAL DEFICIENCY SUB-
LEDGER"
one of three sub-ledgers on the principal deficiency ledger
which specifically records any principal deficiency in
respect of any term AAA advances
"ACCOUNT BANK"
Bank of Scotland situated at 116 Wellington Street, Leeds LS1
4LT
"ACCRUED INTEREST"
in respect of a given date, the interest which has accrued
from the last regular payment date up to that date, but which
is not currently payable
"ADJUSTED RESERVE FUND LEVEL"
the sum of:
(a) the amount standing to the credit of the reserve fund;
and
(b) the amount (if any) then outstanding in respect of item
(B) of the relevant Funding 1 pre-enforcement principal
priority of payments
"ADDITIONAL LOANS"
the loans to be assigned by the seller to the mortgages
trustee on the closing date pursuant to the mortgage sale
agreement
"AGENT BANK"
[Citibank, N.A. at 5 Carmelite Street, London EC4Y 0PA]
"ALTERNATIVE INSURANCE
REQUIREMENTS"
Requirements which vary the insurance provisions of the
mortgage conditions
"ANTICIPATED CASH ACCUMULATION
PERIOD"
the anticipated number of months required to accumulate
sufficient principal receipts to pay the relevant
accumulation amount, as described further in "THE MORTGAGES
TRUST -- CASH MANAGEMENT OF TRUST PROPERTY -- PRINCIPAL
RECEIPTS"
"ARREARS OF INTEREST"
in respect of a given date, interest, and expenses which are
due and payable and remain unpaid on that date
"ASSET TRIGGER EVENT"
the occurrence of an amount being debited to the AAA
principal deficiency sub-ledger
"ASSIGNMENT DATE"
Means the date on which new loans are assigned by the sellor
to the portfolio
"AUTHORISED INVESTMENTS"
Means:
(a) sterling gilt-edged securities; and
(b) sterling demand or time deposits, certificates of
deposit and short-term debt obligations (including
commercial paper) provided that in all cases such
investments have a maturity date of 90 days or less and
mature on or before the next following interest payment
date and the short-
257
term unsecured, unguaranteed and unsubordinated debt
obligations of the issuing or guaranteeing entity or the
entity with which the demand or time deposits are made
(being an authorised person under the FSMA) are rated at
least equal to either A-1+ by Standard & Poor's, P-1 by
Moody's and F1+ by Fitch or their equivalents by three
other internationally recognised rating agencies
"BANK ACCOUNT AGREEMENT"
the agreement entered into on 14th June, 2002 between the
account bank, the mortgages trustee and Funding 1 (as
amended, supplemented and/or novated from time to time),
which governs the operation of the mortgages trustee GIC
account, the Funding 1 GIC account and the Funding 1
transaction account
"BASIC TERMS MODIFICATION"
the modification of terms, including altering the amount,
rate or timing of payments on the issuer notes, the currency
of payment, the priority of payments or the quorum or
majority required in relation to these terms
"BBB PRINCIPAL DEFICIENCY SUB-
LEDGER"
one of three sub-ledgers on the principal deficiency ledger
which specifically records any principal deficiency in
respect of any term BBB advances
"BENEFICIARIES"
both Funding 1 and the seller together as beneficiaries of
the mortgages trust
"BOOKING FEE"
a fee payable by the borrower in respect of applications for
certain types of loans
"BORROWER"
in relation to a loan, the individual or individuals
specified as such in the relevant mortgage together with the
individual or individuals (if any) from time to time assuming
an obligation to repay such loan or any part of it
"BULLET ACCUMULATION LIABILITY"
means on any Funding 1 interest payment date prior to any
payment under item (C) of the priority of payments described
in "CASHFLOWS -- REPAYMENTS OF TERM ADVANCES OF EACH SERIES
PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO THE
SERVICE ON FUNDING 1 OF AN INTERCOMPANY LOAN ACCELERATION
NOTICE OR THE SERVICE ON EACH ISSUER OF A NOTE ACCELERATION
NOTICE", the aggregate of each relevant accumulation amount
at that time of each bullet term advance which is within a
cash accumulation period
"BULLET ACCUMULATION SHORTFALL"
means at any time that the cash accumulation ledger amount is
less than the bullet accumulation liability
"BULLET TERM ADVANCE"
any term advance which is scheduled to be repaid in full on
one Funding 1 interest payment date. Issuer bullet term
advances will be deemed to be pass-through term advances if:
(a) a trigger event occurs;
(b) the issuer security is enforced; or
(c) the Funding 1 security is enforced
"BUSINESS DAY"
a day that is a London business day, a New York business day
and a TARGET business day
"CALCULATION DATE"
the first day of each month or, if not a London business day,
the next succeeding London business day and any other day on
which Funding 1 acquires a further interest in the trust
property
258
"CALCULATION PERIOD"
the period from (and including) one calculation date, to (but
excluding) the next calculation date and in respect of the
first calculation date, the period from (and including) the
closing date to (but excluding) the first calculation date
"CALENDAR YEAR"
a year from the beginning of 1st January to the end of
31st December
"CAPITALISED"
means, in respect of a fee or other amount, added to the
principal balance of a loan
"CAPITALISED INTEREST"
if a borrower takes a payment holiday (as permitted under the
terms of the loan), then the outstanding principal balance of
the loan will increase by the amount of interest that would
have been paid on the relevant loan if not for such payment
holiday
"CASH ACCUMULATION ADVANCE"
a bullet term advance or scheduled amortisation instalment
which is within a cash accumulation period
"CASH ACCUMULATION LEDGER"
a ledger maintained by the cash manager to record the amount
accumulated by Funding 1 from time to time to pay the
relevant accumulation amounts
"CASH ACCUMULATION LEDGER
AMOUNT"
means at any time the amount standing to the credit of the
cash accumulation ledger at that time immediately prior to
any drawing to be applied on that interest payment date and
prior to any payment under item (F) of the priority of
payments described in "CASHFLOWS -- REPAYMENT OF TERM
ADVANCES OF EACH SERIES PRIOR TO THE OCCURRENCE OF A TRIGGER
EVENT AND PRIOR TO THE SERVICE ON FUNDING 1 OF AN
INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH
ISSUER OF A NOTE ACCELERATION NOTICE"
"CASH ACCUMULATION LIABILITY"
means on any Funding 1 interest payment date prior to any
payment under item (C) of the priority of payments described
in "CASHFLOWS -- REPAYMENT OF TERM ADVANCES OF EACH SERIES
PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO THE
SERVICE ON FUNDING 1 OF AN INTERCOMPANY LOAN ACCELERATION
NOTICE OR THE SERVICE ON EACH ISSUER OF A NOTE ACCELERATION
NOTICE", the sum of:
(1) the bullet accumulation liability at that time; and
(2) the aggregate of each relevant accumulation amount at
that time of each scheduled amortisation instalment
which is within a cash accumulation period
"CASH ACCUMULATION PERIOD"
the period of time estimated to be the number of months prior
to the relevant Funding 1 interest payment date of a relevant
accumulation amount necessary for Funding 1 to accumulate
sufficient principal receipts so that the relevant class of
notes will be redeemed in full, as described further in "THE
MORTGAGES TRUST -- CASH MANAGEMENT OF TRUST PROPERTY --
PRINCIPAL RECEIPTS"
"CASH ACCUMULATION SHORTFALL"
means at any time that the cash accumulation ledger amount is
less than the cash accumulation liability
"CASH MANAGEMENT AGREEMENT"
the cash management agreement entered into on 14th June, 2002
between the cash manager, the mortgages trustee, Funding 1
and the security trustee, (as amended, supplemented and/or
novated from time to time), as described further in "CASH
MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING 1"
259
"CASH MANAGER"
Halifax acting, pursuant to the cash management agreement, as
agent for the mortgages trustee, Funding 1 and the security
trustee, inter alia, to manage all cash transactions and
maintain certain ledgers on behalf of the mortgages trustee,
Funding 1 and the security trustee
"CASHBACK"
the agreement by the seller to pay an amount to the relevant
borrower on the completion of the relevant loan
"CLASS A ISSUER NOTES"
the series 1 class A issuer notes, the series 2 class A
issuer notes, the series 3 class A issuer notes, the series 4
class A issuer notes and the series 5 class A issuer notes
"CLASS B ISSUER NOTES"
the series 1 class B issuer notes, the series 2 class B
issuer notes, the series 3 class B issuer notes, the series 4
class B issuer notes and the series 5 class B issuer notes
"CLASS C ISSUER NOTES"
the series 1 class C issuer notes, the series 2 class C
issuer notes, the series 3 class C issuer notes, the series 4
class C issuer notes and the series 5 class C issuer notes
"CLASS A LEAD UNDERWRITERS"
[__]
"CLASS B/C LEAD UNDERWRITERS"
[__]
"CLASS A OFFERED ISSUER NOTES"
the series 1 class A notes, the series 2 class A notes and
the series 3 class A notes
"CLASS B/C OFFERED ISSUER
NOTES"
the series 1 class B notes, the series 1 class C notes, the
series 2 class B notes, the series 2 class C notes, the
series 3 class B notes and the series 3 class C notes
"CLASS A PREVIOUS NOTES"
the series 1 class A previous notes, the series 2 class A
previous notes, the series 3 class A previous notes, the
series 4 class A previous notes and the series 5 class A
previous notes
"CLASS B PREVIOUS NOTES"
the series 1 class B previous notes, the series 2 class B
previous notes, the series 3 class B previous notes, the
series 4 class B previous notes and the series 5 class B
previous notes
"CLASS C PREVIOUS NOTES"
The series 1 class C previous notes, the series 2 class C
previous notes, the series 3 class C previous notes, the
series 4 class C previous notes and the series 5 class C
previous notes
"CLASS A UNDERWRITERS"
the class A lead underwriters, __
"CLEARING AGENCY"
an agency registered under the provisions of section 17A of
the United States Securities Exchange Act of 1934
"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 __
"CML"
Council of Mortgage Lenders
"COLLECTION ACCOUNT"
the collection account in the name of the servicer which is
from time to time used for the purpose of collecting,
directly or indirectly, monies due in respect of the loans
and/or the related security forming part of the trust
property
"CODE"
United States Internal Revenue Code of 1986
"COMMON DEPOSITARY"
[Citibank, N.A. at 5 Carmelite Street, London EC4Y 0PA]
"CORE TERMS"
the main subject matter of the contract
260
"CORPORATE SERVICES PROVIDER"
(a) in respect of Funding 1, Holdings, the post- enforcement
call option holder and the issuer, means Structured
Finance Management Limited or such other person or
persons for the time being acting as corporate services
provider to (i) Funding 1, Holdings and the post-
enforcement call option holder under the Funding 1
corporate services agreement and (ii) the issuer under
the issuer corporate services agreement; and
(b) in respect of the mortgages trustee, means SFM Offshore
Limited or such other person or persons for the time
being acting as corporate services provider to the
mortgages trustee under the mortgages trustee corporate
services agreement
"CPR"
on any calculation date means the annualised principal
repayment rate of all the loans comprised in the trust
property during the previous calculation period calculated as
follows:
1 -- ((1 -- R) ^ (12))
where "R" equals the result (expressed as a percentage) of
the total principal receipts received during the period of
one month (or, if shorter, from and including the closing
date) ending on that calculation date divided by the
aggregate outstanding principal balance of the loans
comprised in the trust property as at the first day of that
period
"CRYSTALLISE"
when a floating charge becomes a fixed charge
"CURRENT NOTES"
the previous notes and the issuer notes
"CURRENT SWAP AGREEMENTS"
the issuer swap agreements and the previous swap agreements
"CURRENT SWAP EXCLUDED
TERMINATION AMOUNT"
in relation to a current swap agreement an amount equal
to:
(a) the amount of any termination payment due and payable to
the relevant current swap provider as a result of a
current swap provider default or to the relevant issuer
swap provider following an issuer swap provider
downgrade termination event;
Less
(b) the amount, if any, received by the issuer from a
replacement swap provider upon entry by the issuer into
an agreement with such replacement swap provider to
replace such current swap agreement which has terminated
as a result of such current swap provider default or
following the occurrence of such issuer swap provider
downgrade termination event
"CURRENT SWAP PROVIDER DEFAULT"
the occurrence of an event of default (as defined in the
relevant current swap agreement) where the relevant current
swap provider is the defaulting party (as defined in the
relevant swap agreement)
"CURRENT SWAP PROVIDERS"
the issuer swap providers and the previous swap providers
"DTC"
The Depository Trust Company
"DISTRIBUTION DATE"
means the date which is two London business days after each
calculation date, being the date that the mortgages trustee
will distribute principal and revenue receipts to Funding 1
and the seller
261
"DUE AND PAYABLE"
an issuer term advance shall become due and payable on the
earlier to occur of:
(1) the date being:
* in relation to the issuer series 1 term AAA
advance, the Funding 1 interest payment date
falling in September 2004;
* in relation to the issuer series 2 term AAA
advance, the Funding 1 interest payment date
falling in December 2006;
* in relation to the issuer series 3 term AAA
advance, the scheduled amortisation instalment
payable on the Funding 1 interest payment date
falling in __ and the scheduled amortisation
instalment payable on the Funding 1 interest
payment date falling in __;
* in relation to the issuer series 4 term AAA
advance, the scheduled amortisation instalment
payable on the Funding 1 interest payment date
falling in __ and the scheduled amortisation
instalment payable on the Funding 1 interest
payment date falling in __;
* in relation to the issuer series 5 term AAA
advance, the Funding 1 interest payment date
falling on or after __;
* in relation to the issuer series 1 term AA
advance, the Funding 1 interest payment date
falling ON OR AFTER the date on which the issuer
series 1 term AAA advance has been fully repaid;
* in relation to the issuer series 2 term AA
advance, the Funding 1 interest payment date
falling ON OR AFTER the date on which the issuer
series 2 term AAA advance has been fully repaid;
* in relation to the issuer series 3 term AA
advance, the Funding 1 interest payment date
falling ON OR AFTER the date on which the issuer
series 3 term AAA advance has been fully repaid;
* in relation to the issuer series 4 term AA
advance, the Funding 1 interest payment date
falling ON OR AFTER the date on which the issuer
series 4 term AAA advance has been fully repaid;
* in relation to the issuer series 5 term AA
advance, the Funding 1 interest payment date
falling ON OR AFTER the date on which the issuer
series 5 term AAA advance has been fully repaid;
* in relation to the issuer series 1 term BBB
advance, the Funding 1 interest payment date
falling ON OR AFTER the date on which the issuer
series 1 term AA advance has been fully repaid;
* in relation to the issuer series 2 term BBB
advance, the Funding 1 interest payment date
falling ON OR AFTER the date on which the issuer
series 2 term AA advance has been fully repaid;
262
* in relation to the issuer series 3 term BBB
advance, the Funding 1 interest payment date
falling ON OR AFTER the date on which the issuer
series 3 term AA advance has been fully repaid;
* in relation to the issuer series 4 term BBB
advance, the Funding 1 interest payment date
falling ON OR AFTER the date on which the issuer
series 4 term AA advance has been fully repaid;
and
* in relation to the issuer series 5 term BBB
advance, the Funding 1 interest payment date
falling ON OR AFTER the date on which the issuer
series 5 term AA advance has been fully repaid;
(2) the date upon which a trigger event occurs;
(3) the date upon which a note acceleration notice is served
on the issuer under the issuer deed of charge;
(4) the date upon which an intercompany loan acceleration
notice is served on Funding 1 under the Funding 1 deed
of charge; and
(5) the date upon which a step-up date occurs in relation to
the relevant issuer term advance.
In each case, when an issuer term advance becomes due and
payable, it shall continue to be due and payable until it is
fully repaid. If there are insufficient funds available to
repay an issuer term advance on a Funding 1 interest payment
date upon which that issuer term advance is due and payable,
then the shortfall will be repaid on subsequent Funding 1
interest payment dates from Funding 1 available principal
receipts until that issuer term advance is fully repaid
"EARLY REPAYMENT FEE"
any fee which a borrower is required to pay in the event that
he or she is in default or his or her loan becomes repayable
for any other mandatory reason or he or she repays all or any
part of the relevant loan before a specified date
"ELIGIBLE LIQUIDITY FACILITY
PRINCIPAL REPAYMENTS"
(a) prior to the occurrence of a trigger event:
(i) repayments of principal which are then due and
payable in respect of the original bullet term
advances; and
(ii) repayments of principal in respect of original
scheduled amortisation term advances on their
respective final maturity dates only; and
(b) on or after the occurrence of a non-asset trigger event
but prior to the occurrence of an asset trigger event,
repayments of principal in respect of original bullet
term advances and original scheduled term amortisation
term advances on their respective final maturity dates
only,
in each case prior to the service of an intercompany loan
acceleration notice on Funding 1 and taking into account any
allocation of principal to meet any deficiency in Funding 1's
available revenue receipts.
263
Following the occurrence of an asset trigger event, the
liquidity facility will not be available to repay principal
in respect of original bullet term advances or original
scheduled amortisation term advances
"ELIGIBLE RESERVE FUND PRINCIPAL
REPAYMENTS"
(a) prior to the occurrence of a trigger event:
(i) repayments of principal which are then due and
payable in respect of the original bullet term
advances; and
(ii) repayments of principal in respect of original
scheduled amortisation term advances on their
respective final maturity dates only; and
(b) on or after the occurrence of a non-asset trigger event
or an asset trigger event, repayments of principal in
respect of original bullet term advances and original
scheduled amortisation term advances on their respective
final maturity dates only,
in each case prior to the service of an intercompany loan
acceleration notice on Funding 1
"EQUIVALENT NET ISSUE PROCEEDS"
in relation to notes issued by a relevant issuer, means the
net proceeds in sterling of such notes (in each case where
the relevant class of notes is denominated in US dollars or
euro after making appropriate currency exchanges under the
relevant swaps)
"ERISA"
the US Employee Retirement Income Security Act of 1974. See
further "ERISA CONSIDERATIONS"
"EURIBOR"
EURIBOR will be determined by the agent bank on the following
basis:
(1) on the applicable interest determination date applicable
to the series 4 issuer notes, the series 5 class B
issuer notes, and the series 5 class C notes, the agent
bank will calculate the arithmetic mean, rounded upwards
to five decimal places, of the offered quotations to
leading banks for euro deposits for the relevant period
(or, in the case of the first interest period, a linear
interpolation of such rates for [three-month] euro
deposits).
This will be determined by reference to the display as
quoted on the Moneyline Telerate Screen No. 248. If the
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 3 issuer
notes the series 4 class b issuer notes, and the series
4 class C issuer notes;
(2) if, on any such interest determination date, the screen
rate is unavailable, the agent bank will:
264
* request the principal London office of each of the
reference banks to provide the agent bank with its
offered quotation to prime banks for euro deposits
of the equivalent amount, and for the relevant
period, in the Eurozone inter-bank market as at or
about 11.00 a.m. (Brussels time) ; and
* calculate the arithmetic mean, rounded upwards to
five decimal places, of those quotations;
(3) if, on any such interest determination date, the screen
rate is unavailable and only two or three of the
reference banks provide offered quotations, the relevant
rate for that interest period will be the arithmetic
mean of the quotations as calculated in (2); and
(4) if, on any such interest determination date, fewer than
two reference banks provide quotations, the agent bank
will consult with the note trustee and the issuer for
the purpose of agreeing a total of two banks to provide
such quotations and the relevant rate for that interest
period will be the arithmetic mean of the quotations as
calculated in (2). If no such banks are agreed then the
relevant rate for that interest period will be the rate
in effect for the last preceding interest period for
which (1) or (2) was applicable
"EUROCLEAR"
Euroclear Bank S.A./N.V., as operator of the Euroclear System
"FINAL MATURITY DATE"
in respect of the series 1 class A issuer notes means the
interest payment date falling in September 2004;
in respect of the series 2 class A issuer notes means the
interest payment date falling in September 2007;
in respect of the series 3 class A issuer notes means the
interest payment date falling in __;
in respect of the series 4 class A issuer notes means the
interest payment date falling in __;
in respect of the series 5 class A issuer notes means the
interest payment date falling in __;
in respect of the series 1 class B issuer notes means the
interest payment date falling in June 2042;
in respect of the series 2 class B issuer notes means the
interest payment date falling in June 2042;
in respect of the series 3 class B issuer notes means the
interest payment date falling in June 2042;
in respect of the series 4 class B issuer notes means the
interest payment date falling in June 2042;
in respect of the series 5 class B issuer notes means the
interest payment date falling in June 2042;
in respect of the series 1 class C issuer notes means the
interest payment date falling in June 2042;
in respect of the series 2 class C issuer notes means the
interest payment date falling in June 2042;
in respect of the series 3 class C issuer notes means the
interest payment date falling in June 2042;
265
in respect of the series 4 class C issuer notes means the
interest payment date falling in June 2042; and
in respect of the series 5 class C issuer notes means the
interest payment date falling in June 2042
"FINAL REPAYMENT DATE"
in respect of the issuer intercompany loan means the interest
payment date falling in June 2042
"FIRST AMENDED AND RESTATED
FUNDING 1 LIQUIDITY FACILITY"
means the first amended and restated Funding 1 liquidity
facility in the amount of [GBP]47,500,000 made available
under and upon the terms of the Funding 1 liquidity facility
agreement, as amended and restated on the closing date
"FIRST DEED OF ACCESSION"
means the deed of accession entered into by, amongst others,
Funding 1 and Permanent Financing (No. 2) PLC on 6th March,
2003
"FIRST ISSUER"
Permanent Financing (No. 1) PLC
"FIRST START-UP LOAN"
the loan made by the start-up loan provider to Funding 1
under the first start-up loan agreement which was used in
part to fund the reserve fund
"FIRST START-UP LOAN AGREEMENT"
the agreement entered into on 14th June, 2002 between the
start-up loan provider and Funding 1 under which the start-up
loan was made by the first start-up loan provider to Funding
1
"FIRST START-UP LOAN PROVIDER"
Halifax, in its capacity as provider of the first start-up
loan under the first start-up loan agreement
"FITCH"
Fitch Ratings Ltd. and any successor to its ratings business
"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 LOAN"
a type of loan product that typically incorporates features
that give the borrower options to, among other things, make
further drawings on the loan account and/or to overpay or
underpay interest and principal in a given month
"FLOATING CHARGE"
a form of charge which is not attached to specific assets but
which "FLOATS" over a class of them and which allows the
chargor to deal with those assets in the every day course of
its business, up until the point that the floating security
is enforced, at which point it crystallises into a fixed
security
"FSA"
the Financial Services Authority
"FSMA"
the Financial Services and Markets Act 2000
"FUNDING 1"
Permanent Funding (No. 1) Limited
"FUNDING 2"
Permanent Funding (No. 2) PLC
"FUNDING 1 AVAILABLE PRINCIPAL
RECEIPTS"
an amount equal to the sum of:
(a) all Funding 1 principal receipts received by Funding 1
during the interest period ending on the relevant
Funding 1 interest payment date;
(b) all other Funding 1 principal receipts standing to the
credit of the cash accumulation ledger which are to be
applied on the next Funding 1 interest payment date to
repay a bullet term advance and/ or, subject to Rule 1
of the Funding 1 pre-enforcement principal priority of
266
payments, a scheduled amortisation instalment or to make
a payment under items (A) or (B) of the Funding 1
pre-enforcement principal priority of payments and, if
such Funding 1 interest payment date occurs on or after
a trigger event, the remainder of such receipts standing
to the credit of the cash accumulation ledger;
(c) the amount (if any) credited to the principal deficiency
ledger pursuant to items (G), (I) and (K) in "--
DISTRIBUTION OF FUNDING 1 AVAILABLE REVENUE RECEIPTS
PRIOR TO THE SERVICE OF AN INTERCOMPANY LOAN
ACCELERATION NOTICE ON FUNDING 1" on the relevant
Funding 1 interest payment date;
(d) in so far as available for and needed to make eligible
liquidity facility principal repayments, any amounts
available to be drawn under the Funding 1 liquidity
facility (but less any amounts applied or to be applied
on the relevant date in payment of interest and other
revenue expenses as set out in items (A) to (F) and (H)
and (J) (inclusive) of the Funding 1 pre-enforcement
revenue priority of payments plus any amounts which will
be repaid to the Funding 1 liquidity facility provider
under item (A) of the relevant priority of payments
(relating to the allocation of Funding 1 available
principal receipts) on the next Funding 1 interest
payment date (i.e. occurring at the end of such period
of four business days) to the extent that such repayment
is available to be redrawn on that Funding 1 interest
payment date); and
(e) in so far as available for and needed, to make eligible
reserve fund principal repayments, the amount that would
then be standing to the credit of the reserve ledger
(but less any amounts applied or to be applied on the
relevant date in payment of interest and other revenue
expenses as set out in items (A) to (L) (inclusive) of
the Funding 1 pre-enforcement revenue priority of
payments plus any amounts which will be credited to the
reserve ledger under item (B) of the relevant priority
of payments (relating to the allocation of Funding 1
available principal receipts) on the next Funding 1
interest payment date (i.e. occurring at the end of such
period of four business days),
less
(f) the amount to be applied on the relevant Funding 1
interest payment date to pay items (A) to (F)
(inclusive), (H) and (J) of the Funding 1
pre-enforcement revenue priority of payments
"FUNDING 1 AVAILABLE REVENUE
RECEIPTS"
an amount equal to the sum of:
(a) all mortgages trust available revenue receipts
distributed to Funding 1 during the interest period
ending on the immediately following Funding 1 interest
payment date;
(b) any amount paid by the seller to Funding 1 in
consideration of the seller acquiring part of the
Funding 1 share of the trust property;
267
(c) other net income of Funding 1 including all amounts of
interest received on amounts standing to the credit of
the Funding 1 GIC account, the Funding 1 transaction
account and/or authorised investments and/or amounts
received by Funding 1 under the Funding 1 swap agreement
(other than any early termination amount received by
Funding 1 under the Funding 1 swap agreement), in each
case to be received on or prior to the immediately
following Funding 1 interest payment date; and
(d) the amount standing to the credit of the reserve ledger
"FUNDING 1 CORPORATE SERVICES
AGREEMENT"
an agreement entered into on 14th June, 2002 between
Holdings, Funding 1, the post-enforcement call option holder,
Halifax, the corporate services provider, the share trustee
and the security trustee (as amended, supplemented and/or
novated from time to time) which governs the provision of
corporate services by the corporate services provider to
Funding 1, Holdings and the post-enforcement call option
holder
"FUNDING 1 DEED OF CHARGE"
the deed of charge entered into on 14th June, 2002 between
Funding 1, the previous issuers, the corporate services
provider, the account bank, the Funding 1 GIC provider, the
security trustee, the seller, the first start-up loan
provider, the second start-up loan provider, the cash manager
and the Funding 1 swap provider as amended and/or restated
from time to time and acceded to by the issuer and the start-
up loan provider in respect of the third start-up loan on the
closing date
"FUNDING 1 GIC ACCOUNT"
the account of Funding 1 held at Bank of Scotland at
116 Wellington Street, Leeds LS1 4LT. Amounts deposited to
the credit of the Funding 1 GIC account will receive a rate
of interest determined in accordance with the Funding 1
guaranteed investment contract
"FUNDING 1 GIC PROVIDER"
Bank of Scotland
"FUNDING 1 GUARANTEED
INVESTMENT CONTRACT"
the guaranteed investment contract entered into on 14th June,
2002 between Funding 1 and the Funding 1 GIC provider under
which the Funding 1 GIC provider agrees to pay Funding 1 a
guaranteed rate of interest on the balance of the Funding 1
GIC account, as described further in "CREDIT STRUCTURE --
MORTGAGES TRUSTEE GIC ACCOUNT/FUNDING 1 GIC ACCOUNT"
"FUNDING 1 INTEREST PAYMENT
DATE"
in relation to the issuer term advances, the 10th day of
September, December, March and June in each year
"FUNDING 1 LIQUIDITY FACILITY
AGREEMENT"
the liquidity facility agreement entered into on 14th June,
2002 as amended and restated on or about the closing date and
made between Funding 1 and the Funding 1 liquidity facility
provider in relation to the provision of a liquidity facility
in a total amount of [GBP]__ to Funding 1 (as the same may be
further amended, restated, varied or supplemented from time
to time), as described further in "CREDIT STRUCTURE --
FUNDING 1 LIQUIDITY FACILITY"
"FUNDING 1 LIQUIDITY FACILITY
PROVIDER"
__
"FUNDING 1 LIQUIDITY SHORTFALL"
where there are insufficient amounts to make the payments
specified in "CREDIT STRUCTURE -- FUNDING 1 LIQUIDITY
FACILITY -- GENERAL DESCRIPTION"
268
"FUNDING 1 LIQUIDITY FACILITY
STAND-BY ACCOUNT"
the designated bank account of Funding 1 into which the
undrawn amounts of the Funding 1 liquidity facility will be
deposited if the Funding 1 liquidity facility provider does
not extend the Funding 1 liquidity facility commitment period
or if the rating of the Funding 1 liquidity facility provider
falls below the requisite ratings as described in "CREDIT
STRUCTURE -- FUNDING 1 LIQUIDITY FACILITY"
"FUNDING 1 LIQUIDITY
SUBORDINATED AMOUNTS"
the sum of (i) any additional amounts due to any withholding
taxes and increased costs on the provision of the Funding 1
liquidity facility and (ii) any additional costs incurred by
the Funding 1 liquidity facility provider to comply with the
requirements of the Bank of England, the Financial Services
Authority and/or the European Central Bank and/or changes to
the capital adequacy rules applicable to the Funding 1
liquidity facility provider and Funding 1
"FUNDING 1 POST-ENFORCEMENT
PRIORITY OF PAYMENTS"
the order in which, following the enforcement of the Funding
1 security, the security trustee will apply the amounts
received following enforcement of the Funding 1 security, as
set out in "SECURITY FOR FUNDING 1'S OBLIGATIONS" and
"CASHFLOWS -- DISTRIBUTION OF FUNDING 1 PRINCIPAL RECEIPTS
AND FUNDING 1 REVENUE RECEIPTS FOLLOWING THE SERVICE OF AN
INTERCOMPANY LOAN ACCELERATION NOTICE ON FUNDING 1"
"FUNDING 1 PRE-ENFORCEMENT
PRINCIPAL PRIORITY OF PAYMENTS"
the order in which, prior to enforcement of the Funding 1
security, the cash manager will apply the Funding 1 available
principal receipts on each Funding 1 interest payment date,
as set out in "SECURITY FOR FUNDING 1'S OBLIGATIONS" and
"CASHFLOWS -- DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL
RECEIPTS"
"FUNDING 1 PRE-ENFORCEMENT
REVENUE PRIORITY OF PAYMENTS"
the order in which, prior to enforcement of the Funding 1
security, the cash manager will apply the Funding 1 available
revenue receipts on each Funding 1 interest payment date, as
set out in "SECURITY FOR FUNDING 1'S OBLIGATIONS" and
"CASHFLOWS -- DISTRIBUTION OF FUNDING 1 AVAILABLE REVENUE
RECEIPTS PRIOR TO THE SERVICE OF AN INTERCOMPANY LOAN
ACCELERATION NOTICE ON FUNDING 1"
"FUNDING 1 PRINCIPAL LEDGER"
a ledger maintained by the cash manager to record the amount
of principal receipts received by Funding 1 from the
mortgages trustee on each distribution date
"FUNDING 1 PRINCIPAL RECEIPTS"
the principal receipts paid by the mortgages trustee to
Funding 1 on each distribution date
"FUNDING 1 REVENUE LEDGER"
a ledger maintained by the cash manager to record all amounts
received by Funding 1 from the mortgages trustee on each
distribution date other than principal receipts, together
with interest received by Funding 1 on its authorised
investments or pursuant to the bank account agreement
"FUNDING 1 SECURED CREDITORS"
the security trustee, the Funding 1 swap provider, the
Funding 1 liquidity facility provider, the cash manager, the
account bank, the seller, the corporate services provider,
each start-up loan provider, the Funding 1 GIC Provider, the
previous issuers, the issuer and any other entity that
accedes to the terms of the Funding 1 deed of charge from
time to time
"FUNDING 1 SECURITY"
security created by Funding 1 pursuant to the Funding 1 deed
of charge in favour of the Funding 1 secured creditors
269
"FUNDING 1 SHARE"
the Funding 1 share of the trust property from time to time,
as calculated on each calculation date
"FUNDING 1 SHARE PERCENTAGE"
the Funding 1 share percentage of the trust property from
time to time as calculated on each calculation date
"FUNDING 1 SHARE/SELLER SHARE
LEDGER"
the ledger of such name maintained by the cash manager
pursuant to the cash management agreement to record the
Funding 1 share, the Funding 1 share percentage, the seller
share and seller share percentage of the trust property
"FUNDING 1 STAND-BY DRAWING"
the amount which is equal to the undrawn commitment under the
Funding 1 liquidity facility agreement
"FUNDING 1 SWAP"
the swap documented under the Funding 1 swap agreement which
enables Funding 1 to hedge against the possible variance
between the mortgages trustee variable base rate payable on
the variable rate loans, the fixed rates of interest payable
on the fixed rate loans and the rates of interest payable on
the tracker rate loans and a LIBOR based rate for three-month
sterling deposits, as described further in "THE SWAP
AGREEMENTS -- THE FUNDING 1 SWAP"
"FUNDING 1 SWAP AGREEMENT"
the ISDA master agreement and schedule thereto entered into
on 14th June, 2002 between Funding 1, the Funding 1 swap
provider and the security trustee and any confirmation
documented thereunder from time to time between Funding 1,
the Funding 1 swap provider and the security trustee (as each
of the same may be amended, restated, novated or supplemented
from time to time)
"FUNDING 1 SWAP EXCLUDED
TERMINATION AMOUNT"
in relation to the Funding 1 swap agreement an amount equal
to:
(a) the amount of any termination payment due and payable to
the Funding 1 swap provider as a result of a Funding 1
swap provider default or to the Funding 1 swap provider
following a Funding 1 swap provider downgrade
termination event;
Less
(b) the amount, if any, received by Funding 1 from a
replacement swap provider upon entry by Funding 1 into
an agreement with such replacement swap provider to
replace the Funding 1 swap agreement which has
terminated as a result of such Funding 1 swap provider
default or following the occurrence of such Funding 1
swap provider downgrade termination event
"FUNDING 1 SWAP PROVIDER"
Halifax, pursuant to the Funding 1 swap agreement
"FUNDING 1 SWAP PROVIDER
DEFAULT"
the occurrence of an event of default under the Funding 1
swap agreement where the Funding 1 swap provider is the
defaulting party (as defined in the Funding 1 swap agreement)
"FUNDING 1 SWAP PROVIDER
DOWNGRADE TERMINATION EVENT"
means the occurrence of an additional termination event
following the failure by the Funding 1 swap provider to
comply with the requirements of the ratings downgrade
provisions set out in the Funding 1 swap agreement
"FUNDING 1 TRANSACTION
ACCOUNT"
the account in the name of Funding 1 maintained with the
account bank pursuant to the bank account agreement or such
additional or replacement account as may for the time being
be in place
270
"FURTHER ADVANCE"
an advance made following a request from an existing borrower
for a further amount to be lent to him or her under his or
her mortgage, where Halifax has a discretion as to whether to
accept that request
"GLOBAL ISSUER NOTES"
the issuer notes in global form
"HALIFAX"
Halifax plc (see "HALIFAX PLC")
"HIGH LOAN-TO-VALUE FEE"
a fee incurred by a borrower as a result of taking out a loan
with an LTV ratio in excess of a certain percentage specified
in the offer
"HIGHER VARIABLE RATE LOANS"
loans subject to an interest rate at a margin above HVR 1,
HVR 2 or the mortgages trustee variable base rate, as
applicable
"HOLDINGS"
Permanent Holdings Limited
"HVR 1"
the variable mortgage rate set by the seller which applies to
certain loans beneficially owned by the seller on the
seller's residential mortgage book
"HVR 2"
the second variable base rate that was made available to
borrowers between 1st March, 2001 and 1st February, 2002
"ICTA"
the UK Income and Corporation Taxes Act 1988
"IN ARREARS"
in respect of a mortgage account, occurs when one or more
monthly payments in respect of a mortgage account have become
due and unpaid by a borrower
"INDUSTRY CPR"
a constant prepayment rate which is calculated by dividing
the amount of mortgages repaid in a quarter by the quarterly
balance of mortgages outstanding for building societies in
the UK
"INITIAL CLOSING DATE"
14th June, 2002
"INITIAL FUNDING 1 LIQUIDITY
FACILITY"
means the initial facility in the amount of [GBP]60,000,000
made available under and upon the terms of the Funding 1
liquidity facility agreement entered into on the initial
closing date
"INITIAL LOANS"
the loans assigned by the seller to the mortgages trustee on
14th June, 2002 pursuant to the terms of the mortgage sale
agreement
"INSOLVENCY EVENT"
in respect of the seller, the servicer, the cash manager or
the issuer cash manager (each, for the purposes of this
definition, a "RELEVANT ENTITY") means:
(a) an order is made or an effective resolution passed for
the winding up of the relevant entity;
(b) the relevant entity ceases or threatens to cease to
carry on its business or stops payment or threatens to
stop payment of its debts or is deemed unable to pay its
debts within the meaning of section 123(a), (b), (c) or
(d) of the Insolvency Act 1986 (as amended) or becomes
unable to pay its debts as they fall due or the value of
its assets falls to less than the amounts of its
liabilities (taking into account, for both these
purposes, contingent and prospective liabilities) or
otherwise becomes insolvent; or
(c) proceedings (including, but not limited to, presentation
of a petition for an administration order, the filing of
documents with the court for the appointment of an
administrator or the service of a notice of intention to
appoint an administrator) are initiated against the
relevant
271
entity under any applicable liquidation, administration,
reorganisation (other than a reorganisation where the
relevant entity is solvent) or other similar laws, save
where such proceedings are being contested in good
faith; or 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 the
appointment of an administrator takes effect; or a
distress, execution or diligence or other process is
enforced upon the whole or any substantial part of the
undertaking or assets of the relevant entity and in any
of the foregoing cases it is not discharged within 15
London business days; or if the relevant entity
initiates or consents to judicial proceedings relating
to itself under any applicable liquidation,
administration, insolvency, reorganisation or other
similar laws or makes a conveyance or assignment for the
benefit of its creditors generally or takes steps with a
view to obtaining a moratorium in respect of any
indebtedness
"INTERCOMPANY LOAN
ACCELERATION NOTICE"
a previous intercompany loan acceleration notice, an issuer
intercompany loan acceleration notice and/or (as the context
may require) an acceleration notice served by the security
trustee on Funding 1 following an intercompany loan event of
default under any new intercompany loan agreement
"INTERCOMPANY LOAN
AGREEMENTS"
the previous intercompany loan agreements, the issuer
intercompany loan agreement and all new intercompany loan
agreements
"INTERCOMPANY LOAN LEDGER"
a ledger maintained by the cash manager to record payments of
interest and repayments of principal made on each of the
current term advances and any new term advances under any
intercompany loans
"INTERCOMPANY LOANS"
the previous intercompany loans, the issuer intercompany loan
and all new intercompany loans, each an "INTERCOMPANY LOAN"
"INTEREST DETERMINATION DATE"
(a) in respect of the series 1 class A issuer notes, the
series 2 issuer notes, and the series 4 class A issuer
notes, means the date which is two London business days
before the first day of the interest period for which
the rate will apply;
(b) in respect of the series 3 issuer notes, the series 4
class B issuer notes and the series 4 class C issuer
notes means the date which is two TARGET business days
before the first day of the interest period for which
the rate will apply;
(c) in respect of the series 5 issuer notes means the first
day of the interest period for which the rate will
apply; and
(d) in respect of the issuer term advances, means, in
respect of the first interest period, the closing date
and, in respect of subsequent interest periods, the
first day of the interest period for which the rate will
apply
272
"INTEREST PAYMENT DATE"
(a) in relation to the series 1 class A issuer notes, the
10th day of each consecutive month in each year up to
and including the earliest of (i) the interest payment
date in September 2004, (ii) the occurrence of a trigger
event or (iii) enforcement of the issuer security, and
thereafter the 10th day of September, December, March
and June in each year; and
(b) in all other cases, the 10th day of September, December,
March and June in each year,
or, in each of the preceding cases, if such day is not a
business day, the next succeeding business day
"INTEREST PERIOD"
means:
(a) in relation to the series 1 class A issuer notes, the
period from (and including) an interest payment date (or
in respect of the first interest period, the closing
date) to (but excluding) the next following (or first)
interest payment date, except that prior to the
applicable interest payment date falling in September
2004, if a trigger event occurs or the issuer security
is enforced, then the interest period for the series 1
class A issuer notes (in respect of the first such
interest period) will be the period from (and including)
the last interest payment date to have occurred to (but
excluding) the 10th day of the then next to occur of
September, December, March and June and thereafter will
be the period from (and including) such interest payment
date to (but excluding) the next following 10th day of
September, December, March and June, provided that the
interest period ending in September 2004 shall extend to
the applicable interest payment date falling in
September 2004;
(b) in all other cases is the period from (and including)
the applicable interest payment date (or in respect of
the first interest period, the closing date) to (but
excluding) the next following applicable interest
payment date
"INVESTMENT PLAN"
in respect of an interest-only loan, a repayment mechanism
selected by the borrower to ensure that there are sufficient
funds to redeem the full principal of a mortgage loan at
maturity
"ISA"
an individual savings account within the Individual Savings
Account Regulations 1998 (as amended) and which shelters
investments in the account from income tax and capital gains
tax
"ISSUER ACCOUNT BANK"
Bank of Scotland situated at 116 Wellington Street, Leeds
LS1 4LT
"ISSUER BANK ACCOUNT
AGREEMENT"
the agreement to be entered into on the closing date between
the issuer account bank, the issuer, the issuer cash manager
and the security trustee (as the same may be amended,
restated, varied or supplemented from time to time) which
governs the operation of the issuer transaction account
"ISSUER BULLET TERM ADVANCES"
the issuer series 1 term AAA advance and the issuer series 2
term AAA advance
273
"ISSUER CASH MANAGEMENT
AGREEMENT"
the issuer cash management agreement to be entered into on
the closing date between the issuer cash manager, the issuer
and the security trustee (as the same may be amended,
restated, novated or supplemented from time to time), as
described further in "CASH MANAGEMENT FOR THE ISSUER"
"ISSUER CASH MANAGER"
Halifax acting, pursuant to the issuer cash management
agreement, as agent for the issuer and the security trustee
to manage all cash transactions and maintain certain ledgers
on behalf of the issuer
"ISSUER CORPORATE SERVICES
AGREEMENT"
an agreement to be entered into on the closing date between
Holdings, the issuer, Halifax, the corporate services
provider, the share trustee and the security trustee, which
governs the provision of corporate services by the corporate
services provider to the issuer (as amended, restated,
supplemented and/or novated from time to time)
"ISSUER DEED OF CHARGE"
the deed of charge to be entered into on the closing date
between, amongst others, the issuer and the security trustee,
under which the issuer charges the issuer security in favour
of the security trustee for the benefit of the issuer secured
creditors, as described further in "SECURITY FOR THE ISSUER'S
OBLIGATIONS"
"ISSUER DOLLAR CURRENCY
EXCHANGE RATE"
the rate at which dollars are converted to sterling or, as
the case may be, sterling is converted to dollars under the
relevant issuer dollar currency swap or, if there is no
relevant issuer dollar currency swap agreement in effect at
such time, the "spot" rate at which dollars are converted
into sterling or, as the case may be, sterling is converted
into dollars on the foreign exchange markets
"ISSUER DOLLAR CURRENCY SWAP
AGREEMENTS"
collectively, the ISDA master agreements, schedules and
confirmations relating to the issuer dollar currency swaps to
be entered into on or before the closing date between the
issuer, the relevant issuer dollar currency swap provider and
the security trustee (as amended, restated, supplemented and/
or novated from time to time)
"ISSUER DOLLAR CURRENCY SWAP
PROVIDERS"
the series 1 issuer swap provider, the series 2 issuer swap
provider and the series 3 issuer swap provider or any one of
them, as the case may be
"ISSUER DOLLAR CURRENCY SWAPS"
the sterling-dollar currency swaps which enable the issuer to
receive and pay amounts under the issuer intercompany loan in
sterling and to receive and pay amounts under the series 1
issuer notes, the series 2 issuer notes and the series 3
issuer notes in dollars, as described further in "THE SWAP
AGREEMENTS -- THE ISSUER DOLLAR CURRENCY SWAPS AND THE ISSUER
EURO CURRENCY SWAPS"
"ISSUER EURO CURRENCY EXCHANGE
RATE"
the rate at which euro is converted to sterling or, as the
case may be, sterling is converted to euro under the issuer
euro currency swap or, if there is no issuer euro currency
swap agreement in effect at such time, the "spot" rate at
which euro are converted into sterling or, as the case may
be, sterling is converted into euro on the foreign exchange
markets
"ISSUER EURO CURRENCY SWAP
AGREEMENTS"
collectively, the ISDA master agreements, schedules and
confirmation relating to the issuer euro currency swaps to be
entered into on or before the closing date between the
issuer, the
274
relevant issuer euro currency swap provider and the security
trustee (as amended, restated, supplemented and/or novated
from time to time)
"ISSUER EURO CURRENCY SWAP
PROVIDERS"
the series 4 issuer swap provider and the series 5 issuer
swap provider (in respect of the series 5 class B issuer
notes and the series 5 class C issuer notes) or any one of
them as the case may be
"ISSUER EURO CURRENCY SWAPS"
the sterling-euro currency swaps which enable the issuer to
receive and pay amounts under the issuer intercompany loan in
sterling and to receive and pay amounts under the series 4
issuer notes, the series 5 class B issuer notes and the
series 5 class C issuer notes in euro, as described further
in "THE SWAP AGREEMENTS -- THE ISSUER DOLLAR CURRENCY SWAPS
AND THE ISSUER EURO CURRENCY SWAPS"
"ISSUER INTERCOMPANY LOAN"
the loan of the issuer term advances made by the issuer to
Funding 1 on the closing date under the issuer intercompany
loan agreement
"ISSUER INTERCOMPANY LOAN
AGREEMENT"
the issuer intercompany loan agreement to be entered into on
the closing date between Funding 1, the issuer and the
security trustee
"ISSUER INTERCOMPANY LOAN
ACCELERATION NOTICE"
an acceleration notice served by the security trustee in
relation to the enforcement of the Funding 1 security
following an issuer intercompany loan event of default under
the issuer intercompany loan
"ISSUER INTERCOMPANY LOAN
EVENT OF DEFAULT"
an event of default under the issuer intercompany loan
agreement
"ISSUER NOTE ACCELERATION
NOTICE"
an acceleration notice served by the note trustee in relation
to the enforcement of the issuer security following an issuer
note event of default under the issuer notes
"ISSUER NOTE EVENT OF DEFAULT"
an event of default under the provisions of number 9 of the
issuer notes where the issuer is the defaulting party
"ISSUER NOTES"
Includes all of the class A issuer notes, the class B issuer
notes and the class C issuer notes
"ISSUER PAYING AGENT AND AGENT
BANK AGREEMENT"
the agreement to be entered into on the closing date which
sets out the appointment of the paying agents, the registrar,
the transfer agent and the agent bank for the issuer notes
(as amended, restated, supplemented and/or novated from time
to time)
"ISSUER POST-ENFORCEMENT CALL
OPTION AGREEMENT"
the agreement to be entered into on the closing date under
which the note trustee agrees on behalf of the holders of the
class B issuer notes and the class C issuer notes, that
following enforcement of the issuer security, the post-
enforcement call option holder may call for the class B
issuer notes and the class C issuer notes (as amended,
restated, supplemented and/or novated from time to time)
"ISSUER POST-ENFORCEMENT
PRIORITY OF PAYMENTS"
the order in which, following enforcement of the issuer
security, the security trustee will apply the amounts
received following enforcement of the issuer security, as set
out in "SECURITY FOR THE ISSUER'S OBLIGATIONS" and "CASHFLOWS
-- DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS AND ISSUER
REVENUE RECEIPTS FOLLOWING THE
275
service of a note acceleration notice on the issuer and the
service of an intercompany loan acceleration notice on Funding
1"
"ISSUER PRE-ENFORCEMENT
PRINCIPAL PRIORITY OF PAYMENTS"
the order in which, prior to enforcement of the issuer
security, the issuer cash manager will apply the issuer
principal receipts on each interest payment date, as set out
in "CASHFLOWS -- DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS
PRIOR TO THE SERVICE OF A NOTE ACCELERATION NOTICE ON THE
ISSUER"
"ISSUER PRE-ENFORCEMENT
REVENUE PRIORITY OF PAYMENTS"
the order in which, prior to enforcement of the issuer
security, the issuer cash manager will apply the issuer
revenue receipts on each interest payment date, as set out in
"CASHFLOWS -- DISTRIBUTION OF ISSUER REVENUE RECEIPTS PRIOR
TO THE SERVICE OF A NOTE ACCELERATION NOTICE ON THE ISSUER"
"ISSUER PRINCIPAL RECEIPTS"
an amount equal to the sum of all principal amounts repaid by
Funding 1 to the issuer under the issuer intercompany loan
"ISSUER REVENUE RECEIPTS"
an amount equal to the sum of:
(a) interest paid by Funding 1 on the relevant Funding 1
interest payment date in respect of the issuer term
advances under the issuer intercompany loan;
(b) fees to be paid by Funding 1 on the relevant date under
the terms of the issuer intercompany loan agreement;
(c) interest payable on issuer bank accounts and authorised
investments which will be received on or before the
relevant date; and
(d) other net income of the issuer including amounts
received or to be received under the issuer swap
agreements on or before the relevant date (without
double counting)
"ISSUER SECURED CREDITOR"
the security trustee, the issuer noteholders, the issuer swap
providers, the note trustee, the issuer account bank, the
paying agents, the registrar, the transfer agent, the agent
bank, the corporate services provider under the issuer
corporate services agreement and the issuer cash manager
"ISSUER SECURITY"
security created by the issuer pursuant to the issuer deed of
charge in favour of the issuer secured creditors
"ISSUER SUBSCRIPTION
AGREEMENT"
the agreement to be entered into on or about the date of this
prospectus between the managers and the issuer relating to
the sale of the series 4 issuer notes and the series 5 issuer
notes
"ISSUER SWAP AGREEMENTS"
The issuer dollar currency swap agreements and the issuer
euro currency swap agreements
"ISSUER SWAPS"
The issuer dollar currency swaps and the issuer euro currency
swaps
"ISSUER SWAP PROVIDERS"
The issuer dollar currency swap providers and the issuer euro
currency swap providers or any of them as the context
requires
"ISSUER SWAP PROVIDER DEFAULT"
as the context may require, the occurrence of an event of
default under an issuer dollar currency swap (as defined in
the relevant issuer dollar currency swap agreement) where the
issuer dollar currency swap provider is the defaulting party
(as defined in the relevant issuer dollar currency swap
agreement) and/or the occurrence of an event of default under
the issuer euro currency swap (as defined in the relevant
issuer euro currency swap
276
agreement) where the issuer euro currency swap provider is the
defaulting party (as defined in the relevant issuer euro
currency swap agreement)
"ISSUER SWAP EXCLUDED
TERMINATION AMOUNT"
in relation to an issuer swap agreement an amount equal to:
(a) the amount of any termination payment due and payable to
the relevant issuer swap provider as a result of an
issuer swap provider default or to the relevant issuer
swap provider following an issuer swap provider
downgrade termination event;
Less
(b) the amount, if any, received by the issuer from a
replacement swap provider upon entry by the issuer into
an agreement with such replacement swap provider to
replace such issuer swap agreement which has terminated
as a result of such issuer swap provider default or
following the occurrence of such issuer swap provider
downgrade termination event
"ISSUER SWAP PROVIDER
DOWNGRADE TERMINATION EVENT"
means the occurrence of an additional termination event
following the failure by an issuer swap provider to comply
with the requirements of the ratings downgrade provisions set
out in the relevant issuer swap agreement
"ISSUER TERM AA ADVANCES"
the advances made by the issuer to Funding 1 under the issuer
intercompany loan agreement from the proceeds of issue of the
series 1 class B issuer notes, the series 2 class B issuer
notes, the series 3 class B issuer notes, the series 4 class
B issuer notes and the series 5 class B issuer notes
"ISSUER TERM AAA ADVANCES"
the advances made by the issuer to Funding 1 under the issuer
intercompany loan agreement from the proceeds of issue of the
series 1 class A issuer notes, the series 2 class A issuer
notes, the series 3 class A issuer notes, the series 4 class
A issuer notes and the series 5 class A issuer notes
"ISSUER TERM ADVANCES"
the divisions into which the advance to Funding 1 under the
issuer intercompany loan will be split, being the issuer
series 1 term AAA advance, the issuer series 2 term AAA
advance, the issuer series 3 term AAA advance, the issuer
series 4 term AAA advance, the issuer series 5 term AAA
advance, the issuer series 1 term AA advance, the issuer
series 2 term AA advance, the issuer series 3 term AA
advance, the issuer series 4 term AA advance, the issuer
series 5 term AA advance, the issuer series 1 term BBB
advance, the issuer series 2 term BBB advance, the issuer
series 3 term BBB advance, the issuer series 4 term BBB
advance and the issuer series 5 term BBB advance
"ISSUER TERM BBB ADVANCES"
the advances made by the issuer to Funding 1 under the issuer
intercompany loan agreement from the proceeds of issue of the
series 1 class C issuer notes, the series 2 class C issuer
notes, the series 3 class C issuer notes, the series 4 class
C issuer notes and the series 5 class C issuer notes
"ISSUER TRANSACTION DOCUMENTS"
the documents listed in paragraph (D) in "LISTING AND GENERAL
INFORMATION"
277
"ISSUER TRUST DEED"
the principal agreement to be entered into on the closing
date governing the issuer notes, as further described in
"DESCRIPTION OF THE ISSUER TRUST DEED"
"ISSUER UNDERWRITING
AGREEMENT"
the agreement to be entered into on or about the date of this
prospectus between the lead underwriters and the issuer
relating to the sale of the series 1 issuer notes, the series
2 issuer notes and the series 3 issuer notes
"LENDING CRITERIA"
the criteria applicable to the granting of an offer of a
mortgage to a borrower, as may be amended from time to time
and as further described in "THE LOANS -- CHARACTERISTICS OF
THE LOANS -- LENDING CRITERIA"
"LIBOR" or "STERLING LIBOR"
the London Interbank Offered Rate for sterling deposits, as
determined by the agent bank on the following basis:
(1) on the applicable interest determination date, the agent
bank will determine the arithmetic mean, rounded upwards
to five decimal places, of the offered quotations to
leading banks in the London inter-bank market for
sterling deposits for the relevant period (or, in the
case of the first interest period, the linear
interpolation of the arithmetic mean of such offered
quotations for [three-month and four-month] sterling
deposits (rounded upwards, if necessary, to five decimal
places)).
This will be determined by reference to the display as
quoted on the Moneyline Telerate Screen No. 3750. If the
Telerate Screen No. 3750 stops providing these
quotations, the replacement service for the purposes of
displaying this information will be used. If the
replacement service stops displaying the information,
another page as determined by the issuer with the
approval of the note trustee will be used.
In each of these cases, the determination will be made
as at or about 11.00 a.m., London time, on that date.
This is called the screen rate for LIBOR or sterling
LIBOR;
(2) if, on any such interest determination date, the screen
rate is unavailable, the agent bank will:
* request the principal London office of each of the
reference banks to provide the agent bank with its
offered quotation to leading banks for sterling
deposits of the equivalent amount, and for 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 such interest determination date, the screen
rate is unavailable and only two or three of the
reference banks provide offered quotations, the relevant
rate for that interest period will be the arithmetic
mean of the quotations as calculated in (2); and
(4) if, on any such interest determination date, fewer than
two reference banks provide quotations, the agent bank
will consult with the note trustee and the issuer for
the
278
purpose of agreeing a total of two banks to pro vide
such quotations and the relevant rate for that interest
period will be the arithmetic mean of the quotations as
calculated in (2). If no such banks are agreed then the
relevant rate for that interest period will be the rate
in effect for the last preceding interest period for
which (1) or (2) was applicable.
See also the definitions of EURIBOR and USD-LIBOR
"LOAN"
each loan referenced by its loan identifier number and
comprising the aggregate of all principal sums, interest,
costs, charges, expenses and other monies (including all
further advances) due or owing with respect to that loan
under the relevant mortgage conditions by a borrower on the
security of a mortgage from time to time outstanding or, as
the context may require, the borrower's obligations in
respect of the same
"LONDON BUSINESS DAY"
a day (other than a Saturday or Sunday) on which banks are
generally open for business in London
"LOSSES"
the realised losses experienced on the loans in the portfolio
"LOSS AMOUNT"
means the amount of any costs, expenses, losses or other
claims suffered or incurred by, as applicable, the mortgages
trustee and/or Funding 1 in connection with any recovery of
interest on the loans to which the seller, the mortgages
trustee or Funding 1 was not entitled or could not enforce as
a result of any determination by any court or other competent
authority or any ombudsman in respect of any loan and its
related security that:
* any term which relates to the recovery of interest under
the standard documentation applicable to that loan and
its related security is unfair; or
* the interest payable under loan is to be set by
reference to the Halifax variable base rate (and not
that of the seller's successors or assigns or those
deriving title from them); or
* the variable margin above the Bank of England repo rate
under any tracker rate loan must be set by the seller;
or
* the interest payable under any loan is to be set by
reference to an interest rate other than that set or
purported to be set by either the servicer or the
mortgages trustee as a result of the seller having more
than one variable mortgage rate
"LOSSES LEDGER"
the ledger of such name created and maintained by the cash
manager pursuant to the cash management agreement to record
the losses on the portfolio
"LTV RATIO" or "LOAN-TO-VALUE
RATIO"
the ratio of the outstanding balance of a loan to the value
of the mortgaged property securing that loan
"LTV TEST"
a test which assigns a credit enhancement value to each loan
in the portfolio based on its current loan-to-value ratio and
the amount of mortgage indemnity cover on that loan. The
weighted average credit enhancement value for the portfolio
is then determined
"MANAGERS"
__
279
"MASTER DEFINITIONS AND
CONSTRUCTION SCHEDULE"
together, the amended and restated master definitions and
construction schedule and the issuer master definitions and
construction schedule, which are schedules of definitions
used in the issuer transaction documents
"MIG POLICIES"
mortgage indemnity guarantee policies
"MINIMUM RATE LOANS"
loans subject to a minimum rate of interest
"MINIMUM SELLER SHARE"
an amount included in the current seller share which is
calculated in accordance with the mortgages trust deed and
which, as at the closing date, will be approximately [GBP]__
"MOODY'S"
Moody's Investors Service Limited and any successor to its
ratings business
"MORTGAGE ACCOUNT"
all loans secured on the same property will be incorporated
in the same mortgage account
"MORTGAGE CONDITIONS"
the terms and conditions applicable to the loans as contained
in the seller's "MORTGAGE CONDITIONS" booklet applicable from
time to time
"MORTGAGE RELATED SECURITIES"
as defined in the US Secondary Mortgage Markets Enhancement
Act 1984, as amended
"MORTGAGE SALE AGREEMENT"
the mortgage sale agreement entered into on 14th June, 2002
and made between the seller, the mortgages trustee, Funding 1
and the security trustee in relation to the assignment of the
portfolio to the mortgages trustee as amended and/or restated
from time to time and as further described in "ASSIGNMENT OF
THE LOANS AND THEIR RELATED SECURITY"
"MORTGAGE TERMS"
all the terms and conditions applicable to a loan, including
without limitation the applicable mortgage conditions and
offer conditions
"MORTGAGES TRUST"
the bare trust of the trust property held by the mortgages
trustee as to both capital and income on trust absolutely for
Funding 1 (as to the Funding 1 share) and the seller (as to
the seller share), so that each has an undivided beneficial
interest in the trust property
"MORTGAGES TRUST AVAILABLE
PRINCIPAL RECEIPTS"
the amount that will be standing to the credit of the
principal ledger on the relevant calculation date as
described further in "THE MORTGAGES TRUST"
"MORTGAGES TRUST AVAILABLE
REVENUE RECEIPTS"
an amount equal to the sum of:
(a) revenue receipts on the loans (but excluding principal
receipts); and
(b) interest payable to the mortgages trustee on the
mortgages trustee GIC account; less
(c) third party amounts
as described further in "THE MORTGAGES TRUST"
"MORTGAGES TRUST DEED"
the mortgages trust deed made by the mortgages trustee,
Funding 1 and the seller on 13th June, 2002, as amended and/
or restated from time to time and as further described in
"THE MORTGAGES TRUST"
"MORTGAGES TRUST PRINCIPAL
PRIORITY OF PAYMENTS"
the order in which the cash manager applies principal
receipts on the loans on each distribution date to each of
Funding 1 and the seller, depending on whether a trigger
event has occurred, as set out in "THE MORTGAGES TRUST"
280
"MORTGAGES TRUST 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"
Permanent Mortgages Trustee Limited
"MORTGAGES TRUSTEE ACCOUNT"
the mortgages trustee GIC account
"MORTGAGES TRUSTEE CORPORATE
SERVICES AGREEMENT"
the agreement entered into on 14th June, 2002 between the
corporate services provider, the mortgages trustee and the
security trustee, which governs the provision of corporate
services by the corporate services provider to the mortgages
trustee
"MORTGAGES TRUSTEE GIC
ACCOUNT"
the account in the name of the mortgages trustee maintained
with the account bank pursuant to the terms of the bank
account agreement and the mortgages trustee guaranteed
investment contract or such additional or replacement account
as may for the time being be in place
"MORTGAGES TRUSTEE GIC
PROVIDER"
Bank of Scotland at 116 Wellington Street, Leeds LS1 4LT
"MORTGAGES TRUSTEE GUARANTEED
INVESTMENT CONTRACT"
the guaranteed investment contract entered into on 14th June,
2002 between the mortgages trustee and the mortgages trustee
GIC provider under which the mortgages trustee GIC provider
agrees to pay the mortgages trustee a guaranteed rate of
interest on the balance of the mortgages trustee GIC account
(as the same may be amended, restated, varied or supplemented
from time to time), as described further in "CREDIT STRUCTURE
-- MORTGAGES TRUSTEE GIC ACCOUNT/FUNDING 1 GIC ACCOUNT"
"MORTGAGES TRUSTEE VARIABLE
BASE RATE"
the variable base rates which apply to the variable rate
loans in the portfolio as set, other than in limited
circumstances, by the servicer, as described further in "THE
SERVICING AGREEMENT"
"NEW FUNDING 1 SWAP" and
"NEW FUNDING 1 SWAP
PROVIDER"
a new Funding 1 swap to be entered into by Funding 1, a new
Funding 1 swap provider and the security trustee when Funding
1 enters into a new intercompany loan agreement
"NEW FUNDING 1 SWAP
AGREEMENT"
a new Funding 1 swap agreement, documenting the new .Funding 1
swap, between Funding 1, a new Funding 1 swap provider and
the security trustee
"NEW INTERCOMPANY LOAN" and
"NEW INTERCOMPANY LOAN
AGREEMENT"
a loan of a new issuer term advance made by a new issuer to
Funding 1 under a new intercompany loan agreement entered
into by Funding 1 with a new issuer
"NEW ISSUE"
the issue of new notes to investors by a new issuer to fund a
new intercompany loan
"NEW ISSUER"
a new wholly-owned subsidiary of Holdings that is not
established as at the closing date and which, if established,
will make a new intercompany loan to Funding 1
"NEW LOANS"
loans, other than the current loans, which the seller may
assign, from time to time after the closing date, to the
mortgages trustee pursuant to the terms of the mortgage sale
agreement
"NEW NOTES"
an issue of notes by a new issuer
"NEW RELATED SECURITY"
the security for the new loans which the seller may assign to
the mortgages trustee pursuant to the mortgage sale agreement
"NEW START-UP LOAN" and "NEW
START-UP LOAN PROVIDER"
a new start-up loan to be made available to Funding 1 by a
new start-up loan provider when Funding 1 enters into a new
intercompany loan agreement
281
"NEW START-UP LOAN AGREEMENT"
a new start-up loan agreement to be entered into by a new
start-up loan provider, Funding 1 and the security trustee
"NEW TERM AA ADVANCES"
term advances to be advanced to Funding 1 by new issuers
under new intercompany loan agreements from the proceeds of
issues of new notes with a term advance rating of AA
"NEW TERM AAA ADVANCES"
term advances to be advanced to Funding 1 by new issuers
under new intercompany loan agreements from the proceeds of
issues of new notes with a term advance rating of AAA
"NEW TERM ADVANCES"
term advances to be advanced to Funding 1 by new issuers
under a new intercompany loan agreement
"NEW TERM BBB ADVANCES"
term advances to be advanced to Funding 1 by new issuers
under new intercompany loan agreements from the proceeds of
issues of new notes with a term advance rating of BBB
"NEW YORK BUSINESS DAY"
means a day (other than a Saturday or a Sunday) on which
banks are generally open in the city of New York
"NON-ASSET TRIGGER EVENT"
this will occur on a calculation date if:
(a) an insolvency event occurs in relation to the seller on
or about that calculation date;
(b) the role of the seller as servicer under the servicing
agreement is terminated and a new servicer is not
appointed within 60 days;
(c) as at the calculation date immediately preceding that
calculation date the seller share is equal to or less
than the minimum seller share; or
(d) on any calculation date, the aggregate outstanding
principal balance of loans comprising the trust property
at that date during the period from and including the
closing date to but excluding the interest payment date
in __ is less than [GBP]__
"NORMAL CALCULATION DATE"
the first day (or, if not a London business day, the next
succeeding London business day) of each month
"NOTE ACCELERATION NOTICE"
an issuer note acceleration notice and/or (as the context may
require) an acceleration notice served on a new issuer
following an event of default by the new issuer under the new
issuer notes
"NOTEHOLDERS"
the holders of issuer notes, or any of them as the context
requires
"NOTE PRINCIPAL PAYMENT"
the amount of each principal payment payable on each note
"NOTE TRUSTEE"
The Bank of New York, One Canada Square, London E14 5AL
"OFFER CONDITIONS"
the terms and conditions applicable to a specific loan as set
out in the relevant offer letter to the borrower
"OFFERED ISSUER NOTES"
the class A offered issuer notes and the class B/C offered
issuer notes
"ORIGINAL BULLET TERM ADVANCE"
a term advance which at any time has been a bullet term
advance(even if such term advance has subsequently become a
pass-through advance)
"ORIGINAL PASS-THROUGH TERM
ADVANCE"
a term advance which at the time it was advanced was a pass-
through term advance
282
"ORIGINAL SCHEDULED
AMORTISATION INSTALMENT"
that part of a term advance which at any time has been a
scheduled amortisation instalment (even if that part of that
term advance has subsequently become a pass-through term
advance)
"ORIGINAL SCHEDULED
AMORTISATION TERM ADVANCE"
a term advance which at any time has been a scheduled
amortisation term advance (even if such term advance has
subsequently become a pass-through term advance)
"OUTSTANDING AMOUNT"
following enforcement of a loan, the amount outstanding on
the payment of that loan after deducting money received under
the applicable mortgage indemnity guarantee policy
"OVERPAYMENT"
a payment made by a borrower in an amount greater than the
monthly payment then due on the loan
"PASS-THROUGH REPAYMENT
RESTRICTIONS"
means at any time on a Funding 1 interest payment date no
amount may be applied in repayment of any pass-through term
advance unless:
(1) the sum of the cash accumulation ledger amount and the
amount of Funding 1 available principal receipts after
the application of items (A) and (B) and before item (C)
of the priority of payments described in "CASHFLOWS --
REPAYMENT OF TERM ADVANCES OF EACH SERIES PRIOR TO THE
OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO THE SERVICE
ON FUNDING 1 OF AN INTERCOMPANY LOAN ACCELERATION NOTICE
OR THE SERVICE ON EACH ISSUER OF A NOTE ACCELERATION
NOTICE",
is greater than or equal to,
(2) the sum of the cash accumulation liability and the
aggregate amount of all original pass-through term
advances which are due and payable as at that time
"PASS-THROUGH TERM ADVANCE"
means a term advance which has no scheduled repayment date
other than the final repayment date. On the closing date, the
pass-through term advances are the issuer series 5 term AAA
advance, the issuer term AA advances, the issuer term BBB
advances, the previous series 5 term AAA advance, the previous
term AA advances, the previous term BBB advances made by
Permanent Financing (No. 2) PLC, the previous series 4A2 term
AAA advance, the previous term AA advances and the previous
term BBB advances made by Permanent Financing (No.1) PLC. If
a trigger event occurs or the Funding 1 security or issuer
security is enforced, then the bullet term advances (other
than the issuer series 1 term AAA advance and the previous
series 1 term AAA advances) and the scheduled amortisation
term advances will be deemed to be pass-through term advances
"PAYING AGENTS"
the principal paying agent and the US paying agent
"PAYMENT HOLIDAY"
a period during which a borrower may suspend payments under a
mortgage loan without penalty
"PERMITTED REDEMPTION DATES"
in respect of any class of issuer notes, the interest payment
date on which those notes may be redeemed by the issuer
pursuant to the terms and conditions of the issuer notes (as
further described in "TERMS AND CONDITIONS OF THE OFFERED
ISSUER NOTES")
"PORTFOLIO"
at any time the loans and their related security assigned to
the mortgages trustee and held by the mortgages trustee on
trust for the beneficiaries
283
"POST ENFORCEMENT CALL OPTION"
means the call option granted to Permanent PECOH Limited in
respect of the class B issuer notes and the class C issuer
notes under the issuer post-enforcement call option agreement
"POST-ENFORCEMENT CALL OPTION
HOLDER"
Permanent PECOH Limited
"PREVIOUS CLOSING DATES"
in respect of Permanent Financing (No. 1) PLC 14th June, 2002
and in respect of Permanent Financing (No. 2) PLC 6th March,
2003
"PREVIOUS INTERCOMPANY LOAN
AGREEMENT"
the previous intercompany loan agreement entered into on each
previous closing date between Funding 1, the relevant
previous issuer and security trustee
"PREVIOUS INTERCOMPANY LOANS"
the loan of the previous term advances made by the previous
issuers to Funding 1 each under the previous intercompany
loan agreements
"PREVIOUS INTERCOMPANY LOAN
ACCELERATION NOTICE"
an acceleration notice served by the security trustee on
Funding 1 following an intercompany loan event of default
under the previous intercompany loan agreement
"PREVIOUS INTERCOMPANY LOAN
EVENT OF DEFAULT"
an event of default under a previous intercompany loan
"PREVIOUS ISSUER ACCOUNT BANK"
Bank of Scotland situated at 110 Wellington Street, Leeds
LS1 4LT
"PREVIOUS ISSUERS"
Permanent Financing (No. 1) PLC and Permanent Financing
(No. 2) PLC
"PREVIOUS ISSUES"
the issue of the previous notes by each previous issuer
"PREVIOUS NOTEHOLDERS"
the holders of previous notes, or any of them as the context
requires
"PREVIOUS NOTES"
includes all of the class A previous notes, the class B
previous notes, and the class C previous notes
"PREVIOUS SERIES 1 TERM AAA
ADVANCE"
the series 1 term AAA advance made by each theprevious
issuers to Funding 1 under the applicable previous
intercompany loan agreement
"PREVIOUS SERIES 2 TERM AAA
ADVANCE"
the series 2 term AAA advance made by each the previous
issuers to Funding 1 under the applicable previous
intercompany loan agreement
"PREVIOUS SERIES 3 TERM AAA
ADVANCE"
the series 3 term AAA advance made by each the previous
issuers to Funding 1 under the applicable previous
intercompany loan agreement
"PREVIOUS SERIES 4A1 TERM AAA
ADVANCE"
the series 4A1 term advance made by the Permanent Financing
(No. 1) PLC to Funding 1 under its previous intercompany loan
agreement
"PREVIOUS SERIES 4A2 TERM AAA
ADVANCE"
the series 4A2 term advance made by the Permanent Financing
(No. 1) PLC to Funding 1 under its previous intercompany loan
agreement
"PREVIOUS SERIES 4 TERM AAA
ADVANCE"
The series 4 term AAA advance made by Permanent Financing
(No. 2) PLC to Funding 1 under its previous intercompany loan
agreement
"PREVIOUS SERIES 5 TERM AAA
ADVANCE"
The series 5 term advance made by Permanent Financing (No. 2)
PLC to Funding 1 under its previous intercompany loan
agreement
284
"PREVIOUS START-UP LOAN
AGREEMENTS"
the first start-up loan agreement and the second start-up
loan agreement
"PREVIOUS START-UP LOANS
PROVIDER"
the start-up loan provider
"PREVIOUS SWAP AGREEMENTS"
the swap agreements entered into between each of the previous
issuers and the previous swap providers in relation to the
previous swaps
"PREVIOUS SWAP PROVIDERS"
Credit Suisse First Boston International, JPMorgan Chase
Bank, Banque AIG, CDC IXIS Capital Markets, JP Morgan Chase
Bank and Banque AIG and American International Group, Inc. or
any of them as the context requires
"PREVIOUS SWAPS"
the dollar currency swaps and euro currency swap entered into
by Permanent Financing (No. 1) PLC under the previous swap
agreements and the dollar currency swaps and euro currency
swap entered into by Permanent Financing (No. 2) PLC under
the previous swap agreements
"PREVIOUS TERM AA ADVANCES"
the advance made by the previous issuers to Funding 1 under
previous intercompany loan agreements from the proceeds of
issue of the series 1 class B previous notes, the series 2
class B previous notes, the series 3 class B previous notes,
the series 4 class B previous notes and the series 5 class B
previous notes
"PREVIOUS TERM AAA ADVANCES"
the advance made by the previous issuers to Funding 1 under
the previous intercompany loan agreements from the proceeds
of issue of the series 1 class A previous notes, the series 2
class A previous notes, the series 3 class A previous notes,
the series 4 class A previous notes and the series 5 class A
previous notes
"PREVIOUS TERM ADVANCES"
the term advances made under the previous intercompany loans,
funded from the proceeds of the previous notes, as described
in "DESCRIPTION OF THE PREVIOUS ISSUER, THE PREVIOUS NOTES
AND THE PREVIOUS INTERCOMPANY LOAN"
"PREVIOUS TERM BBB ADVANCES"
the advance made by the previous issuers to Funding 1 under
the previous intercompany loan agreements from the proceeds
of issue of its series 1 class C previous notes, the series 2
class C previous notes, the series 3 class C previous notes,
the series 4 class C previous notes and the series 5 class C
previous notes
"PRINCIPAL DEFICIENCY LEDGER"
the ledger of such name maintained by the cash manager,
comprising on the closing date three sub-ledgers, the AAA
principal deficiency sub-ledger, the AA principal deficiency
sub-ledger and the BBB principal deficiency sub-ledger and
which records any deficiency of principal (following a loss
on a loan or the application of principal receipts to meet
any deficiency in Funding 1 available revenue receipts) in
respect of payments due under an intercompany loan
"PRINCIPAL LEDGER"
the ledger of such name maintained by the cash manager on
behalf of the mortgages trustee pursuant to the cash
management agreement to record principal receipts on the
loans and payments of principal from the mortgages trustee
GIC account to Funding 1 and the seller on each distribution
date. Together the principal ledger and the revenue ledger
reflect the aggregate of all amounts of cash standing to the
credit of the mortgages trustee GIC account
"PRINCIPAL PAYING AGENT"
[Citibank, N.A. at 5 Carmelite Street, London EC4Y 0PA]
285
"PRINCIPAL RECEIPTS"
all principal amounts received from borrowers in respect of
the loans or otherwise paid or recovered in respect of the
loans and their related security representing monthly
repayments of principal, prepayments of principal, redemption
proceeds and amounts recovered on enforcement representing
principal and prepayments on the loans made by borrowers (but
excluding principal received or treated as received in
respect of a loan subsequent to the completion of enforcement
procedures and certain early repayment fees)
"PRODUCT SWITCH"
a variation to the financial terms and conditions of a loan
other than:
(a) any variation agreed with a borrower to control or
manage arrears on the loan;
(b) any variation to the interest rate as a result of
borrowers switching from HVR 1 to HVR 2;
(c) any variation in the maturity date of the loan unless,
while the issuer intercompany loan is outstanding, it is
extended beyond June 2040;
(d) any variation imposed by statute; or
(e) any variation in the frequency with which the interest
payable in respect of the loan is charged
"PURPOSE-BUILT"
in respect of a residential dwelling, built or made for such
a residential purpose (as opposed to converted)
"QUARTERLY CPR"
on any date means the average of the three most recent CPRs
"RATING"
rating assigned by the rating agencies to the current notes
or new notes
"RATING AGENCIES"
each of Moody's, Standard & Poor's and Fitch
"REASONABLE, PRUDENT MORTGAGE
LENDER"
a reasonably prudent prime residential mortgage lender
lending to borrowers in England & Wales who generally satisfy
the lending criteria of traditional sources of residential
mortgage capital
"RECEIVER"
a receiver appointed by the relevant security trustee
pursuant to the issuer deed of charge and/or the Funding 1
deed of charge
"REFERENCE BANKS"
at the closing date, the London office of each of the
following banks: [ABN AMRO Bank N.V., Barclays Bank PLC,
Citibank, N.A. and The Royal Bank of Scotland plc]
"REGISTRAR"
[Citibank, N.A. at 5 Carmelite Street, London, EC4Y 0PA]
"REINSTATEMENT"
in relation to a property that has been damaged, repairing or
rebuilding that property to the condition that it was in
prior to the occurrence of the damage
"RELATED SECURITY"
in relation to a loan, the security for the repayment of that
loan including the relevant mortgage and all other matters
applicable thereto acquired as part of the portfolio assigned
to the mortgages trustee
"RELEVANT ACCUMULATION AMOUNT"
the amount of funds to be accumulated over a cash
accumulation period in order to repay a bullet term advance
or a scheduled amortisation instalment on its scheduled
repayment date (as further described on page 136 of the
prospectus)
"RELEVANT ISSUERS"
the previous issuer, the issuer and any new issuers, as
applicable
286
"RELEVANT SHARE CALCULATION
DATE"
means the calculation date at the start of the most recent
completed calculation period
"RESERVE FUND"
at any time the amount standing to the credit of the reserve
ledger at that time, which may be used in certain
circumstances by Funding 1 to meet any deficit in revenue or
to repay amounts of principal, as described further in
"CREDIT STRUCTURE -- RESERVE FUND"
"RESERVE FUND REQUIRED AMOUNT"
an amount equal to [GBP]__
"RESERVE FUND THRESHOLD"
the lesser of:
(a) the reserve fund required amount, and
(b) the highest amount which the adjusted reserve fund level
has been since the first Funding 1 interest payment date
upon which interest is due and payable in respect to
term advances made upon the closing date relating to the
then most recent issue of notes
"RESERVE LEDGER"
a ledger maintained by the cash manager to record the amount
credited to the reserve fund from the proceeds of a portion
of the first start-up loan, and subsequent withdrawals and
deposits in respect of the reserve fund
"REVENUE LEDGER"
the ledger(s) of such name created and maintained by the cash
manager on behalf of the mortgages trustee pursuant to the
cash management agreement to record revenue receipts on the
loans and interest from the mortgages trustee GIC account and
payments of revenue receipts from the mortgages trustee GIC
account to Funding 1 and the seller on each distribution
date. The revenue ledger and the principal ledger together
reflect the aggregate of all amounts of cash standing to the
credit of the mortgages trustee GIC account
"REVENUE RECEIPTS"
amounts received by the mortgages trustee in the mortgages
trustee GIC account in respect of the loans other than
principal receipts and third party amounts
"SCHEDULED AMORTISATION
INSTALMENT"
that part of a scheduled amortisation term advance which is
payable on each of the scheduled repayment dates of that term
advance. (a) In respect of the issuer series 3 term AAA
advance, two equal scheduled amortisation instalments of __
which are payable on the scheduled repayment dates falling in
__ and __ (b) in respect of the issuer series 4 advance, two
equal scheduled repayment dues falling in __ and __, and (c)
in respect of the previous series 3 AAA advance made by
Permanent Financing (No. 2) PLC, the sum of [GBP]__ due on
such scheduled repayment dates of the previous series 3 term
AAA advance
"SCHEDULED AMORTISATION
REPAYMENT RESTRICTIONS"
means at any time on a Funding 1 interest payment date:
(1) where there is not a bullet accumulation shortfall at
that time, the total amount withdrawn from the cash
accumulation ledger on that Funding 1 interest payment
date for repayment of the relevant scheduled
amortisation instalments shall not exceed the cash
accumulation ledger amount less the bullet accumulation
liability at that time; and
287
(2) where there is a bullet accumulation shortfall at that
time:
(a) no amount may be withdrawn from the cash
accumulation ledger on that Funding 1 interest
payment date to be applied in repayment of the
relevant scheduled amortisation instalments; and
(b) no amount may be applied in repayment of the
relevant scheduled amortisation instalments
unless:
(i) the sum of the cash accumulation ledger
amount and the amount of Funding 1
available principal receipts after the
application of items (A) and (B)
and before (C) of the priority of payments
described in "CASHFLOWS -- REPAYMENT OF TERM
ADVANCES OF EACH SERIES PRIOR TO THE
OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO
THE SERVICE ON FUNDING 1 OF AN INTERCOMPANY
LOAN ACCELERATION NOTICE OR THE SERVICE ON
EACH ISSUER OF A NOTE ACCELERATION NOTICE"
is greater than or equal to
(ii) the sum of the bullet accumulation liability
and the aggregate amount of scheduled
amortisation instalments which are due and
payable as at that time
"SCHEDULED AMORTISATION TERM
ADVANCE"
means the issuer series 3 term AAA advance, the issuer series
4 term AAA advance and the previous series 1 term AAA advance
made by Permanent Financing (No. 2) PLC and any term advance
which is referred to as such in relevant prospectus relating
to any new issuer. Scheduled amortisation term advances will
be deemed to be pass-through term advances if:
(a) a trigger event occurs;
(b) the Funding 1 security is enforced; or
(c) the issuer security is enforced
"SCHEDULED REDEMPTION DATES"
(a) in respect of the series 1 class A issuer notes, the
interest payment date in September 2004;
(b) in respect of the series 2 class A issuer notes, the
interest payment date in December 2006; and
(c) in respect of the series 3 class A issuer notes, the
interest payment dates in __ and September 2008
"SCHEDULED REPAYMENT DATES"
(a) in respect of the issuer series 1 term AAA advance, the
interest payment date in September 2004;
(b) in respect of the issuer series 2 term AAA advance, the
interest payment date in December 2006;
(c) in respect of the issuer series 3 term AAA advance, the
interest payment dates in __ and __;
(d) in respect of the issuer series 4 term AAA advance, the
interest payment dates in __ and __
(e) in respect of the previous series 1 term AAA advance
made by Permanent Financing (No. 1) PLC, the interest
payment date in June 2003;
288
(f) in respect of the previous series 2 term AAA advance
made by Permanent Financing (No. 1) PLC, the interest
payment date in June 2005;
(g) in respect of the previous series 3 term AAA advance
made by Permanent Financing (No. 1) PLC, the interest
payment date in December 2005;
(h) in respect of the previous series 4 A1 term AAA advance
made by Permanent Financing (No. 1) PLC, the interest
payment date in June 2007;
(i) in respect of the previous series 1 term AAA advance
made by Permanent Financing (No. 2) PLC, the interest
payment date in March 2004;
(j) in respect of the previous series 2 term AAA advance
made by Permanent Financing (No. 2) PLC, the interest
payment date in September 2005;
(k) in respect of the previous series 3 term AAA advance
made by Permanent Financing (No. 1) PLC, the interest
payment date in March 2006;
(l) in respect of the series 4 tem AAA advance, made by
Permanent Financing (No. 2) PLC the interest payment
date in December 2007;
(m) in respect of any new term advance which is intended to
be a scheduled amortisation term advance, the scheduled
repayment dates for those scheduled amortisation term
advances
(n) in respect of any new term advance which is intended to
be a bullet term advance, the scheduled repayment date
of that bullet term advance; and
"SEC"
The United States Securities and Exchange Commission
"SECOND AMENDED AND RESTATED
FUNDING 1 LIQUIDITY AGREEMENT"
__
"SECOND ISSUER CLOSING DATE"
6th March, 2003
"SECOND DEED OF ACCESSION"
Means the second deed of accession to the Funding 1 deed of
charge dated on or about the closing date
"SECOND START-UP LOAN"
The loan made by the start-up loan provider to Funding 1
under the second start-up loan agreement
"SECOND START-UP LOAN
AGREEMENT"
the agreement entered into on 6th March, 2003 between the
start up loan provider and Funding 1 under which the second
start-up loan was made by the start-up loan provider to
Funding 1
"SECOND START UP LOAN PROVIDER"
Halifax plc, in its capacity as provider of the second start-
up loan under the second start-up loan agreement
"SECURITY TRUSTEE"
The Bank of New York
"SELLER"
Halifax plc
"SELLER'S POLICY"
the originating, underwriting, administration, arrears and
enforcement policy applied by the seller from time to time to
loans and their related security owned solely by the seller
"SELLER SHARE"
the seller share of the trust property from time to time as
calculated on each calculation date
289
"SELLER SHARE PERCENTAGE"
the seller share percentage of the trust property from time
to time as calculated on each calculation date
"SEMI-DETACHED"
a house joined to another house on one side only
"SENIOR EXPENSES"
amounts ranking in priority to interest due on the term
advances
"SERIES 1 CLASS A ISSUER NOTES"
the [$1,250,000,000] series 1 class A floating rate issuer
notes due September 2004
"SERIES 2 CLASS A ISSUER NOTES"
the [$1,250,000,000] series 2 class A floating rate issuer
notes due September 2008
"SERIES 3 CLASS A ISSUER NOTES"
the [$750,000,000] series 3 class A floating rate issuer
notes due September 2010
"SERIES 4 CLASS A ISSUER NOTES"
the [[e]1,000,000,000] series 4 class A floating rate issuer
notes due December 2042
"SERIES 5 CLASS A ISSUER NOTES"
the [[GBP]500,000,000] series 5 class A floating rate issuer
notes due June 2042
"SERIES 1 CLASS B ISSUER NOTES"
the $[__] series 1 class B floating rate issuer notes due
June 2042
"SERIES 2 CLASS B ISSUER NOTES"
the $[__] series 2 class B floating rate issuer notes due
June 2042
"SERIES 3 CLASS B ISSUER NOTES"
the $[__] series 3 class B floating rate issuer notes due
June 2042
"SERIES 4 CLASS B ISSUER NOTES"
the $[__] series 4 class B floating rate issuer notes due
June 2042
"SERIES 5 CLASS B ISSUER NOTES"
The [e][__] series 5 class B floating rate issuer notes due
June 2042
"SERIES 1 CLASS C ISSUER NOTES"
the $[__] series 1 class C floating rate issuer notes due
June 2042
"SERIES 2 CLASS C ISSUER NOTES"
the $[__] series 2 class C floating rate issuer notes due
June 2042
"SERIES 3 CLASS C ISSUER NOTES"
the $[__] series 3 class C floating rate issuer notes due
June 2042
"SERIES 4 CLASS C ISSUER NOTES"
the [e][__] series 4 class C floating rate issuer notes due
June 2042
"SERIES 5 CLASS C ISSUER NOTES"
the [e][__] series 5 class C floating rate issuer notes due
June 2042
"SERIES 1 CLASS A PREVIOUS
ISSUER NOTES"
the series 1 class A previous notes issued by the previous
issuers]
"SERIES 2 CLASS A PREVIOUS
ISSUER NOTES"
the series 2 class A previous notes issued by the previous
issuers
"SERIES 3 CLASS A PREVIOUS
ISSUER NOTES"
the series 3 class A previous notes issued by the previous
issuers
"SERIES 4 CLASS A PREVIOUS
ISSUER NOTES"
the series 4 class A previous notes issued by the previous
issuers
"SERIES 5 CLASS A PREVIOUS
ISSUER NOTES"
the series 5 class A previous notesissued by Permanent
Financing (No. 2) PLC
"SERIES 1 CLASS B PREVIOUS
ISSUER NOTES"
the series 1 class B previous notes issued by the previous
issuers
"SERIES 2 CLASS B PREVIOUS
ISSUER NOTES"
the series 2 class B previous notes issued by the previous
issuers
"SERIES 3 CLASS B PREVIOUS
ISSUER NOTES"
the series 3 class B previous notes issued by the previous
issuers
"SERIES 4 CLASS B PREVIOUS
ISSUER NOTES"
the series 4 class B previous notes issued by the previous
issuers
"SERIES 5 CLASS B PREVIOUS
ISSUER NOTES"
the series 5 class B previous notes issued by Permanent
Financing (No. 2) PLC
290
"SERIES 1 CLASS C PREVIOUS
ISSUER NOTES"
the series 1 class C previous notes issued by the previous
issuers
"SERIES 2 CLASS C PREVIOUS
ISSUER NOTES"
the series 2 class C previous notes issued by the previous
issuers
"SERIES 3 CLASS C PREVIOUS
ISSUER NOTES"
the series 3 class C previous notes issued by the previous
issuers
"SERIES 4 CLASS C PREVIOUS
ISSUER NOTES"
the series 4 class C previous notes issued by the previous
issuers
"SERIES 5 CLASS C PREVIOUS
ISSUER NOTES"
the series 5 class C previous notes issued by Permanent
Financing (No. 2) PLC
"SERIES 4 CLASS A1 PREVIOUS
NOTES"
the [e]750,000,000 series 4 class A1 fixed-floating rate
notes due June 2009 issued by the Permanent Financing (No. 1)
PLC on 14th June, 2002
"SERIES 4 CLASS A2 PREVIOUS
NOTES"
the [GBP]1,000,000,000 series 4 class A2 floating rate notes
due June 2042 issued by the Permanent Financing (No. 1) PLC
on 14th June, 2002
"SERIES 1 CLASS A ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 1 class A issuer notes
"SERIES 2 CLASS A ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 2 class A issuer notes
"SERIES 3 CLASS A ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 3 class A issuer notes
"SERIES 4 CLASS A ISSUER SWAP"
the issuer euro currency swap entered into in relation to the
series 4 class A issuer notes
"SERIES 1 CLASS B ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 1 class B issuer notes
"SERIES 2 CLASS B ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 2 class B issuer notes
"SERIES 3 CLASS B ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 3 class B issuer notes
"SERIES 4 CLASS B ISSUER SWAP"
the issuer euro currency swap entered into in relation to the
series 4 class B issuer notes
"SERIES 5 CLASS B ISSUER SWAP"
the issuer euro currency swap entered into in relation to the
series 5 class B issuer notes
"SERIES 1 CLASS C ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 1 class C issuer notes
"SERIES 2 CLASS C ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 2 class C issuer notes
"SERIES 3 CLASS C ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 3 class C issuer notes
"SERIES 4 CLASS C ISSUER SWAP"
the issuer euro currency swap entered into in relation to the
series 4 class C issuer notes
"SERIES 5 CLASS C ISSUER SWAP"
The issuer euro currency swap entered into in relation to the
series 5 class C issuer notes
["SERIES 1 ISSUER SWAP
PROVIDER"
__, or such other swap provider appointed from time to time
in relation to the series 1 issuer notes]
["SERIES 2 ISSUER SWAP
PROVIDER"
__, or such other swap provider appointed from time to time
in relation to the series 2 issuer notes]
291
["SERIES 3 ISSUER SWAP
PROVIDER"
__, or such other swap provider appointed from time to time
in relation to the series 3 issuer notes]
["SERIES 4 ISSUER SWAP
PROVIDER"
__, or such other swap provider appointed from time to time
in relation to the series 4 issuer notes]
["SERIES 5 ISSUER CLASS B SWAP
PROVIDER"
__, or such other swap provider appointed from time to time
in relation to the series 5 class B issuer notes]
["SERIES 5 ISSUER CLASS C SWAP
PROVIDER"
__, or such other swap provider appointed from time to time
in relation to the series 5 class C issuer notes]
"SERIES 1 ISSUER NOTES"
the series 1 class A issuer notes, the series 1 class B
issuer notes and the series 1 class C issuer notes
"SERIES 2 ISSUER NOTES"
the series 2 class A issuer notes, the series 2 class B
issuer notes and the series 2 class C issuer notes
"SERIES 3 ISSUER NOTES"
the series 3 class A issuer notes, the series 3 class B
issuer notes and the series 3 class C issuer notes
"SERIES 4 ISSUER NOTES"
the series 4 class A issuer notes, the series 4 class B
issuer notes and the series 4 class C issuer notes
"SERIES 5 ISSUER NOTES"
the series 5 class A issuer notes, the series 5 class B
issuer notes and the series 5 class C issuer notes
"SERVICER"
Halifax or such other person as may from time to time be
appointed as servicer of the portfolio pursuant to the
servicing agreement
"SERVICING AGREEMENT"
the agreement entered into on 14th June, 2002 (as amended,
restated, varied and supplemented from time to time) between
the servicer, the mortgages trustee, the security trustee and
Funding 1 under which the servicer agrees to administer the
loans and their related security comprised in the portfolio,
as described further in "THE SERVICING AGREEMENT"
"SHORTFALL"
the deficiency of Funding 1 available income receipts on a
Funding 1 interest payment date over the amounts due by
Funding 1 under the Funding 1 pre-enforcement revenue
priority of payments
"SPECIFIED MINIMUM RATE"
the rate specified in the offer conditions
"STANDARD & POOR'S"
Standard & Poor's Rating Services, a division of The McGraw-
Hill Companies, Inc. and any successor to its ratings
business
"START-UP LOANS"
the first start-up loan, the second start-up loan, the third
start-up loan and any new start-up loan
"START-UP LOAN AGREEMENTS"
the first start-up loan agreement, the second start-up loan
agreement, the third start-up loan agreement and all new
start-up loan agreements
"START UP LOAN PROVIDER"
Halifax plc, in its capacity as provider of the first start-
up loan and the second start-up loan
"STEP-UP DATE"
Means in relation to the term advances, the Funding 1
interest payment date on which the interest rate on the
relevant term advances under any intercompany loan increases
by a pre-determined amount, and in relation to the notes, the
Funding 1 interest payment date on which the interest rate on
the relevant notes increases by a pre-determined amount
"SWAP EARLY TERMINATION EVENT"
a circumstance in which a swap agreement can be terminated
prior to its scheduled termination date
292
"SWAP AGREEMENTS"
the Funding 1 swap agreement and the issuer swap agreements
and a "SWAP AGREEMENT" means any one of them
"SWAP PROVIDERS"
the Funding 1 swap provider, the issuer dollar currency swap
providers and the issuer euro currency swap providers and a
"SWAP PROVIDER" means any one of them
"TARGET BUSINESS DAY"
a day on which the Trans-European Automated Real-time Gross
settlement Express Transfer (TARGET) System is open
"TERM AA ADVANCES"
the previous term AA advances, the issuer term AA advances
and any new term AA advance made by a new issuer to Funding 1
that has a term advance rating of "AA" or its equivalent
"TERM AAA ADVANCES"
the previous term AAA advances, the issuer term AAA advances
and any new term AAA advance made by a new issuer to Funding
1 that has a term advance rating of "AAA" or its equivalent
"TERM ADVANCES"
the term AAA advances, the term AA advances and the term BBB
advances outstanding from time to time
"TERM BBB ADVANCES"
the previous term BBB advances, the issuer term BBB advances
and any new term BBB advance made by a new issuer to Funding
1 that has a term advance rating of "BBB" or its equivalent
"TERM ADVANCE RATING"
the designated rating assigned to a term advance which
corresponds to the rating of the class of notes when first
issued to provide funds for that term advance so that, for
example, any term AAA advance has a term advance rating of
"AAA" to reflect the ratings of AAA/Aaa/AAA then assigned to
the corresponding notes
"TERRACED"
a house in a row of houses built in one block in a uniform
style
"THIRD PARTY AMOUNTS"
includes:
(a) amounts under a direct debit which are repaid to the
bank making the payment if such bank is unable to recoup
that amount itself from its customer's account;
(b) payments by borrowers of any fees and other charges
which are due to the seller; or
(c) recoveries in respect of amounts deducted from loans as
described in paragraphs (1) to (4) in "THE MORTGAGES
TRUST -- FUNDING 1 SHARE OF TRUST PROPERTY", which shall
belong to and be paid to Funding 1 and/or the seller as
described therein
"THIRD START-UP LOAN"
the loan made by the start-up loan provider to Funding 1
under the third start-up loan agreement
"THIRD START-UP LOAN AGREEMENT"
the agreement to be entered into on the closing date between
the start-up loan provider and Funding 1 under which the
third start-up loan will be made by the start-up loan
provider to Funding 1
"THIRD START-UP LOAN PROVIDER"
Halifax plc, in its capacity as provider of the third start-
up loan under the third start-up loan agreement
"TRACKER RATE LOAN"
a loan where interest is linked to a variable interest rate
other than the variable base rates. The rate on tracker rate
loans is currently set at a margin by reference to rates set
by the Bank of England
"TRACKER RATE"
the rate of interest applicable to a tracker rate loan
(before applying any cap or minimum rate)
"TRANSACTION DOCUMENTS"
the issuer transaction documents and other documents relating
to the issuer notes, the previous intercompany loan agreement
the previous start-up loan agreements, the previous swap
293
agreements, other documents relating to the issue of previous
notes by the previous issuers and any new intercompany loan
agreements, new start-up loan agreements, new swap agreements,
new Funding 1 swap agreements and other documents relating to
issues of new notes by new issuers
"TRANSFER AGENT"
[Citibank, N.A. at 5 Carmelite Street, London EC4Y 0PA]
"TRIGGER EVENT"
an asset trigger event and/or a non-asset trigger event
"TRUST PROPERTY"
includes:
(a) the sum of [GBP]100 settled by SFM Corporate Services
Limited on trust on the date of the mortgage trust deed;
(b) the portfolio of loans and their related security
assigned to the mortgages trustee by the seller;
(c) any new loans and their related security assigned to the
mortgages trustee by the seller after the closing date;
(d) any increase in the outstanding principal balance of a
loan due to a borrower taking payment holidays or making
underpayments under a loan or a borrower making a
drawing under any flexible loan;
(e) any interest and principal paid by borrowers on their
loans;
(f) any other amounts received under the loans and related
security (excluding third party amounts);
(g) rights under the insurance policies that are assigned to
the mortgages trustee or which the mortgages trustee has
the benefit of; and
(h) amounts on deposit and interest earned on such amounts
in the mortgages trustee GIC account;
less
(i) any actual losses in relation to the loans and any
actual reductions occurring in respect of the loans as
described in paragraph (1) in "THE MORTGAGES TRUST --
FUNDING 1 SHARE OF TRUST PROPERTY"; AND
(j) distributions of principal made from time to time to the
beneficiaries of the mortgages trust
"UNDERPAYMENT"
a payment made by a borrower in an amount less than the
monthly payment then due on the loan being a sum not
exceeding the aggregate of any previous overpayments
"UK LISTING AUTHORITY"
the Financial Services Authority in its capacity as competent
authority under part VI of the FSMA
"UNDERWRITERS"
the class A underwriters and the class B/C lead underwriters
"UNITED STATES HOLDER"
a beneficial owner of US notes who is for US federal income
tax purposes
(a) a citizen or resident of the United States;
(b) a corporation (or other entity treated as a corporation)
or partnership created or organised in or under the laws
of the United States or any state thereof (including the
District of Columbia);
(c) any estate, the income of which is subject to US federal
income tax regardless of the source of its income; or
294
(d) any trust if: (i) a court within the United States is
able to exercise primary supervision over the
administration of the trust; and (ii) one or more US
persons have the authority to control all substantial
decisions of the trust
"US PAYING AGENT"
[Citibank, N.A. at 14th Floor, Zone 3, 111 Wall Street, New
York, New York 10043]
"US TAX COUNSEL"
Allen & Overy
"USD-LIBOR"
the London Interbank Offered Rate for dollar deposits, as
determined by the agent bank on the following basis:
(1) on the applicable interest determination date applicable
to the series 1 class A issuer notes, the series 1 class
B issuer notes, the series 1 class C issuer notes, the
series 2 class A issuer notes, the series 2 class B
issuer notes, the series 2 class C issuer notes, the
series 3 class A issuer notes the series 3 class B
issuer notes and the series 3 Class C issuer notes, the
agent bank will determine the arithmetic mean, rounded
upwards to five decimal places, of the offered
quotations to leading banks for US dollar deposits for
the relevant period. [the USD-LIBOR for the first
interest period shall be (in the case of the series 1
class A issuer notes) the linear interpolation of the
arithmetic mean of such offered quotations for one-month
and two-month US dollar deposits and (in all other
cases)] the linear interpolation of the arithmetic mean
of such offered quotations for three-month and
four-month US dollar deposits (rounded upwards, if
necessary, to five decimal places).
This will be determined by reference to the display as
quoted on the Moneyline Telerate Screen No. 3750. If the
Telerate Screen No. 3750 stops providing these
quotations, the replacement service for the purposes of
displaying this information will be used. If the
replacement service stops displaying the information,
another page as determined by the issuer with the
approval of the note trustee will be used.
In each of these cases, the determination will be made
as at or about 11.00 a.m., London time, on that date.
This is called the screen rate for the series 1 class A
issuer notes, the series 1 class B issuer notes, the
series 1 class C issuer notes, the series 2 class A
issuer notes, the series 2 class B issuer notes, the
series 2 class C issuer notes, the series 3 class A
issuer notes, the series 3 class B issuer notes and the
series 3 class C issuer notes;
(2) if, on any such interest determination date, the screen
rate is unavailable, the agent bank will:
* request the principal London office of each of the
reference banks to provide the agent bank with its
offered quotation to leading banks for US dollar
deposits of the equivalent amount and for the
relevant period, in the London inter-bank market
as at or about 11.00 a.m. (London time) ; and
295
* calculate the arithmetic mean, rounded upwards to
five decimal places, of those quotations;
(3) if, on any such interest determination date, the screen
rate is unavailable and only two or three of the
reference banks provide offered quotations, the relevant
rate for that interest period will be the arithmetic
mean of the quotations as calculated in (2); and
(4) if, on any such interest determination date, fewer than
two reference banks provide quotations, the agent bank
will consult with the note trustee and the issuer for
the purpose of agreeing a total of two banks to provide
such quotations and the relevant rate for that interest
period will be the arithmetic mean of the quotations as
calculated in (2). If no such banks are agreed then the
relevant rate for that interest period will be the rate
in effect for the last preceding interest period for
which (1) or (2) was applicable
"VALUATION"
a methodology for determining the value of a property which
would meet the standards of a reasonable, prudent mortgage
lender (as referred to under "THE SERVICING AGREEMENT --
UNDERTAKINGS BY THE SERVICER" )
"VALUATION FEE"
a fee incurred by borrowers as a result of the seller or
servicer obtaining a valuation of the property.
"VARIABLE BASE RATES"
HVR 1, HVR 2 or the mortgages trustee variable base rate, as
applicable
"VARIABLE MORTGAGE RATE"
the rate of interest which determines the amount of interest
payable each month on a variable rate loan
"VARIABLE RATE LOAN"
a loan where the interest rate payable by the borrower varies
in accordance with a specified variable mortgage rate
"VAT"
value added tax
"WAFF"
weighted average repossession frequency
"WALS"
weighted average loss severity
"WE" and "US"
the issuer
"WITHHOLDING TAX"
a tax levied under UK law, as further described in "UNITED
KINGDOM TAXATION -- WITHHOLDING TAX"
296
ANNEX A
[TO BE UPDATED]
QUARTER __ TO __
DATE OF REPORT
- ----------------------------------------------------------------------- -------
MORTGAGES
Number of Mortgages in Pool............................................ __
Current Principal Balance.............................................. [GBP]__
Opening Trust Assets................................................... [GBP]__
Total.................................................................. [GBP]__
Cash Accumulation Ledger Balance (Total Requirement)................... [GBP]__
Funding Share.......................................................... [GBP]__
Funding Share Percentage............................................... __
Seller Share........................................................... [GBP]__
Seller Share Percentage................................................ __
Minimum Seller Share (Amount).......................................... [GBP]__
Minimum Seller Share (% of Total)...................................... __
ARREARS ANALYSIS OF NON REPOSSESSED MORTGAGES
NUMBER PRINCIPAL ARREARS % BY PRINCIPAL
- ----------------- ------ --------- ------------ ---------
Less than 1 month................... __ [GBP]__ [GBP]__ __
1 -- 2 months....................... __ [GBP]__ [GBP]__ __
2 -- 3 months....................... __ [GBP]__ [GBP]__ __
3 -- 6 months....................... __ [GBP]__ [GBP]__ __
6 -- 12 months...................... __ [GBP]__ [GBP]__ __
12 months +......................... __ [GBP]__* [GBP]__ __
Total............................... __ [GBP]__ [GBP]__ __
AMOUNT IN
PROPERTIES IN POSSESSION NUMBER BALANCE ARREARS
- ---------------------------------------------------- ------ ------- ---------
Total............................................... __ [GBP]__ [GBP]__
====== ======= =========
PROPERTIES IN POSSESSION
- --------------------------------------------------------------------- ---
Number Brought Forward.............................................. __
Repossessed......................................................... __
Sold................................................................ __
Number Carried Forward.............................................. __
Average Time from Possession to Sale in days........................ __
Average Arrears at Sale............................................. __
MIG Claims submitted................................................ __
MIG Claims Outstanding.............................................. __
Average Time from Claim to Payment in days.......................... __
- ----------
Note: The arrears analysis and repossession information is as at the end of the
report month
SUBSTITUTION NUMBER PRINCIPAL
- ------------------------------------------- ------ ---------
Substituted this period (this month)...................... __ __
Substituted to date (since 14th June, 2002)............... __ __
====== =========
297
CPR ANALYSIS MONTHLY ANNUALISED
- ----------------------------------------------------------- ------- ----------
(includes redemptions and repurchases)
Current 1 Month CPR Rate................................... __ __
Previous 3 Month CPR Rate.................................. __ __
Previous 12 Month CPR Rate................................. __ __
- ----------
Note: The annualised CPRs are expressed as a percentage of the outstanding
balance at the beginning of the report month.
Weighted Average Seasoning in Months (by value)............................ __
Average Loan Size.......................................................... __
Weighted Average Current HPI LTV (by value)................................ __
Weighted Average Current LTV (by value).................................... __
YIELD NET OF FUNDING SWAP OVER 3 MONTH STERLING LIBOR
Current Month.............................................................. __
EXCESS SPREAD
Current Month.............................................................. __
December 2002.............................................................. __
PRODUCT BREAKDOWN
Fixed Rate %............................................................... __
Tracker Rate %............................................................. __
Other Variable Rate %...................................................... __
LTV LEVELS BREAKDOWN** NUMBER VALUE % OF TOTAL
- ----------------------------------------------------- ------ ----- ----------
0-30%................................................ __ __ __
30-35%............................................... __ __ __
35-40%............................................... __ __ __
40-45%............................................... __ __ __
45-50%............................................... __ __ __
50-55%............................................... __ __ __
55-60%............................................... __ __ __
60-65%............................................... __ __ __
65-70%............................................... __ __ __
70-75%............................................... __ __ __
75-80%............................................... __ __ __
80-85%............................................... __ __ __
85-90%............................................... __ __ __
90-95%............................................... __ __ __
95-100%.............................................. __ __ __
100% +............................................... __ __ __
------ ----- ----------
Totals............................................... __ __ __
====== ===== ==========
- ----------
**Using Latest Valuation
298
HPI LTV LEVELS BREAKDOWN** NUMBER VALUE % OF TOTAL
- ----------------------------------------------------- ------ ----- ----------
0-30%................................................ __ __ __
30-35%............................................... __ __ __
35-40%............................................... __ __ __
40-45%............................................... __ __ __
45-50%............................................... __ __ __
50-55%............................................... __ __ __
55-60%............................................... __ __ __
60-65%............................................... __ __ __
65-70%............................................... __ __ __
70-75%............................................... __ __ __
75-80%............................................... __ __ __
80-85%............................................... __ __ __
85-90%............................................... __ __ __
90-95%............................................... __ __ __
95-100%.............................................. __ __ __
100% +............................................... __ __ __
------ ----- ----------
Totals............................................... __ __ __
====== ===== ==========
- ----------
** Using Latest Valuation Adjusted for changes in the HPI index
Current HVR1 Rate............................................ 5.75%
Effective Date of Change..................................... 6th October, 2001
Current HVR2 Rate............................................ 5.00%
Effective Date of Change..................................... 6th October, 2001
NOTES RATING (S&P/ REFERENCE
PERMANENT FINANCING NO. 1 MOODY'S/FITCH) OUTSTANDING RATE MARGIN
- -------------------------------- -------------- ----------- --------- ------
Series 1 Class A................ P-1/A-1/F1 __ __ __
Series 1 Class B................ Aa3/AA/AA __ __ __
Series 1 Class C................ Baa2/BBB/BBB __ __ __
Series 2 Class A................ Aaa/AAA/AAA __ __ __
Series 2 Class B................ Aa3/AA/AA __ __ __
Series 2 Class C................ Baa2/BBB/BBB __ __ __
Series 3 Class A................ Aaa/AAA/AAA __ __ __
Series 3 Class B................ Aa3/AA/AA __ __ __
Series 3 Class C................ Baa2/BBB/BBB __ __ __
Series 4 Class A1............... Aaa/AAA/AAA __ __ __
Series 4 Class A2............... Aaa/AAA/AAA __ __ __
Series 4 Class B................ Aa3/AA/AA __ __ __
Series 4 Class C................ Baa2/BBB/BBB __ __ __
First Reserve Fund Requirement............................................. __
Balance brought forward.................................................... __
Drawings this period....................................................... __
Top-up this period*........................................................ __
Current Balance............................................................ __
Liquidity Facility Available Amount........................................ __
Balance brought forward.................................................... __
Drawings this period....................................................... __
Liquidity Repaid this period............................................... __
Closing balance for period................................................. __
- ----------
* Top-ups, only occur at the end of each quarter.
299
TRIGGER EVENTS:
Non-asset trigger events:
The Seller suffers an Insolvency Event.
The role of the Seller as Servicer is terminated and a new servicer is not
appointed within 60 days.
The current Seller's Share at any time is equal to or less than the Minimum
Seller Share.
The outstanding principal balance of the trust property is less than
[GBP]lbn to __, and __ to June 2007.
Asset trigger events:
There has been a debit to the AAA Principal Deficiency Sub-Ledger.
300
INDEX OF APPENDICES
The following appendices contain the text of the auditors' reports on each
of the issuer and Funding 1, received by the directors of the issuer and
Funding 1 respectively from the auditors to the issuer and Funding 1, being, in
each case, KPMG Audit Plc. The information contained in the appendices
constitutes an integral part of the prospectus. The balance sheet attached as
appendix B does not comprise the statutory accounts of the issuer. No statutory
accounts have been prepared or delivered to the Registrar of Companies in
England and Wales on behalf of the issuer since its incorporation. The latest
statutory accounts of Funding 1 have been prepared and were drawn up to 31st
December, 2002. The accounting reference date for each of the issuer and
Funding 1 will be the last day of December and the next statutory accounts for
each of the issuer and Funding 1 will be drawn up to 31st December, 2003 and
annually on the last day of December thereafter.
During the period from incorporation on 20th December, 2002 until the date
of this prospectus, the issuer had not traded, and did not have any receipts or
payments apart from the subscriptions of share capital referred to in "THE
ISSUER". Consequently, during this period, the issuer has neither made a profit
nor loss and no profit and loss account nor cashflow statement has been
prepared.
INDEX OF APPENDICES
- -------------------
Appendix A......... Independent auditors' report for Permanent Financing (No. 3) PLC
Appendix B......... Balance sheet as at __, 2003 of Permanent Financing (No. 3) PLC
Appendix C......... Notes to the balance sheet of Permanent Financing (No. 3) PLC
Appendix D......... Independent auditors' report for Permanent Funding (No. 1) Limited
Appendix E......... Financial Statements as at and for the period ended 31st December, 2002
of Permanent Funding (No. 1) Limited
Appendix F......... Notes to Financial Statements of Permanent Funding (No. 1) Limited
301
APPENDIX A
PERMANENT FINANCING (NO. 3) PLC
(A WHOLLY-OWNED SUBSIDIARY OF PERMANENT HOLDINGS LIMITED)
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF:
PERMANENT FINANCING (NO. 3) PLC
We have audited the accompanying balance sheet of Permanent Financing (No.
3) PLC ("THE COMPANY" and a wholly-owned subsidiary of Permanent Holdings
Limited) as of __, 2003. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free from material misstatement. An audit includes examining, on a
test basis, evidence supporting amounts and disclosures in the balance sheet.
An audit includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly in all material respects
the financial position of the Company as of __, 2003 in conformity with
accounting principles generally accepted in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Application of accounting principles generally
accepted in the United States of America would have affected stockholders'
equity as of __, 2003 to the extent described in Note 5 of the Notes to the
Balance Sheet.
KPMG Audit Plc
Leeds, England
__, 2003
302
APPENDIX B
PERMANENT FINANCING (NO. 3) PLC
(A WHOLLY-OWNED SUBSIDIARY OF PERMANENT HOLDINGS LIMITED)
Balance Sheet as at __, 2003
NOTE [GBP]
---- ---------
ASSETS
Cash and cash equivalents.................................................. 12,501.50
---------
12,501.50
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Common Stock (authorised 50,000 shares, [GBP]1.00 par value, issued and
outstanding 50,000 shares comprising 2 fully paid and 49,998 partly paid to
25 pence each)............................................................. 12,501.50
---------
Total liabilities and stockholders' equity................................. 12,501.50
=========
See "NOTES TO THE BALANCE SHEET" (Appendix C)
303
APPENDIX C
PERMANENT FINANCING (NO. 3) PLC
(A WHOLLY-OWNED SUBSIDIARY OF PERMANENT HOLDINGS LIMITED)
NOTES TO THE BALANCE SHEET
1. ACCOUNTING POLICIES
(1) The financial information has been prepared under the historical
cost convention and in accordance with accounting principles
generally accepted in the United Kingdom ("UK GAAP").
(2) The financial statements of the Company have been prepared in
pounds sterling ([GBP]), the currency of the United Kingdom, which
is the Company's operating currency.
2. NATURE OF OPERATIONS
The Company was incorporated in England and Wales on __, 2003. The principal
purpose of the Company is to issue asset backed floating and fixed rate notes
and enter into all financial arrangements in that connection. The Company has
not had any trading activity to date.
3. SHARE CAPITAL
The Company was incorporated with authorised capital of [GBP]50,000
comprising 50,000 ordinary shares of [GBP]1 each.
On incorporation, 2 subscriber shares were fully paid up and on __, 2003,
49,998 ordinary shares were partly paid to 25 pence.
4. ULTIMATE HOLDING COMPANY
The ultimate holding company of the Company is SFM Corporate Services
Limited, a company registered in England and Wales. SFM Corporate Services
Limited holds all of the beneficial interest in the issued shares of Permanent
Holdings Limited, a company registered in England and Wales (which, in turn,
holds all of the beneficial interest in the issued shares of the Company) on a
discretionary trust for charitable purposes.
5. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES OF AMERICA
The accompanying balance sheet was prepared in accordance with accounting
principles generally accepted in the United Kingdom. In so far as the
accounting principles adopted by the Company in the preparation of the
accompanying balance sheet, there are no differences from accounting principles
generally accepted in the United States of America.
304
APPENDIX D
[TO BE UPDATED]
PERMANENT FUNDING (NO. 1) LIMITED
AUDITORS REPORT
INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF
PERMANENT FUNDING (NO. 1) LIMITED
We have audited the accompanying balance sheet of Permanent Funding (No. 1)
Limited (the "COMPANY" and a wholly-owned subsidiary of Permanent Holdings
Limited) as of 31 December 2002 and the related profit and loss account and
cash flow statement for the period 14 June 2002 (commencement of operations) to
31 December 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit of the
financial statements provides a reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly in
all material respects the financial position of the Company as of 31 December
2002, and the results of its operations and its cash flows for the period 14
June 2002 to 31 December 2002, in conformity with accounting principles
generally accepted in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Application of accounting principles generally
accepted in the United States of America would have affected stockholders'
equity as of 31 December 2002 and net income for the period 14 June 2002 to 31
December 2002 to the extent described in Note 19 of the Notes to the financial
statements.
KPMG Audit Plc
Chartered Accountants
Registered Auditors
Date: __, 2003
1 The Embankment
Neville Street
Leeds
LS1 4DW
305
APPENDIX E
PERMANENT FUNDING (NO 1) LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE PERIOD 14 JUNE (COMMENCEMENT OF OPERATIONS)
TO 31 DECEMBER 2002
NOTE 2002
---- -----------
[GBP]
Interest receivable and similar income....................... 3 101,595,155
Interest payable and similar charges......................... 4 (94,411,957)
-----------
NET INTEREST INCOME.......................................... 7,183,198
Operating expenses........................................... 5 (7,173,038)
-----------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION................ 10,160
Tax on profit on ordinary activities......................... 6 (1,930)
-----------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION................. 7,15 8,230
===========
The Company had no recognised gains or losses in the period other than the
profit for the financial period shown above.
The profit shown above is derived from continuing operations.
Notes 1 to 19 form part of the financial statements.
PERMANENT FUNDING (NO 1) LIMITED
BALANCE SHEET
AS AT 31 DECEMBER 2002
NOTE 2002
---- --------------
[GBP]
CURRENT ASSETS
Debtors -- amounts falling due within one year............ 9 514,434,650
Cash at bank and in hand.................................. 11 242,952,114
--------------
........................................................... 757,386,764
CREDITORS: amounts falling due within one year............ 12 (673,449,486)
NET CURRENT ASSETS........................................ 83,937,278
--------------
DEBTORS: amounts falling due after one year............... 10 2,968,961,579
CREDITORS: amounts falling due after one year............. 13 (3,052,890,626)
--------------
NET ASSETS................................................ 8,231
==============
CAPITAL AND RESERVES
Called up share capital................................... 14 1
Profit and loss account................................... 8,230
--------------
EQUITY SHAREHOLDER'S FUNDS................................ 15 8,231
==============
- ----------
Notes 1 to 19 form part of the financial statements.
306
PERMANENT FUNDING (NO 1) LIMITED
CASH FLOW STATEMENT
FOR THE PERIOD 14 JUNE TO 31 DECEMBER 2002
NOTE 2002
----------- --------------
[GBP]
NET CASH INFLOW FROM OPERATING ACTIVITIES.......................... 16 145,453,012
Returns on investments and servicing of finance
Interest received on mortgage portfolio............................ 98,178,973
Bank interest received............................................. 3,416,182
Swap and loan interest paid........................................ (83,559,585)
--------------
18,035,570
==============
TAXATION
UK corporation tax................................................. ---
--------------
---
==============
ACQUISITIONS OF SUBSIDIARY UNDERTAKING
Subscription of share capital in subsidiary undertaking............ ---
--------------
---
==============
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of beneficial interest in mortgage portfolio held on trust (3,478,576,310)
==============
FINANCING
Share capital...................................................... ---
Intercompany loan.................................................. 3,478,576,310
Start-up loan...................................................... 79,463,532
--------------
3,558,039,842
==============
INCREASE IN CASH IN THE PERIOD..................................... 3,703,492,854
==============
- ----------
Notes 1 to 19 form part of the financial statements.
307
APPENDIX F
PERMANENT FUNDING (NO 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD 14 JUNE TO 31 DECEMBER 2002
1 GENERAL INFORMATION
The Company was incorporated in England and Wales on 9 August 2001 as Alnery
No. 2225 Limited. The Company's name was changed to Permanent Funding (No 1)
Limited on 21st March 2002 and commenced operations on 14 June 2002.
The principal activity of the Company is to acquire a beneficial interest in
a mortgage portfolio and enter all financial arrangements in that connection.
No future changes in activity are envisaged.
The Company invests in beneficial interests in the assets of Permanent
Mortgages Trustee Limited ("THE TRUST"), which assets comprise mortgage loans
secured on residential property in England and Wales originated by Halifax plc.
The Company receives a share of income from the Trust in proportion to its
share of the total mortgage assets of the Trust.
During the year the Company purchased beneficial interests in the assets of
the Trust of [GBP]3.5 billion on 14 June 2002. This purchase was financed by
loans from Permanent Financing (No 1) plc. Permanent Financing (No 1) plc is a
group undertaking.
Permanent Funding (No 1) Limited is a wholly owned subsidiary of Permanent
Holdings Limited, a company registered in England and Wales. The directors
report and financial statements of Permanent Funding (No 1) Limited are
included in the consolidated accounts of Permanent Holdings Limited as at 31
December 2002.
ACCOUNTING POLICIES
The following accounting policies have been applied consistently in dealing
with items which are considered material in relation to the Company's accounts.
BASIS OF PREPARATION
The non-statutory financial statements have been prepared in accordance with
applicable accounting standards generally accepted in the United Kingdom ("UK
GAAP"), and have been drawn up under the historical cost convention and on a
going concern basis. These principals differ in certain significant respects
from generally accepted accounting principles in the United States ("US GAAP").
Application of US GAAP would have affected net income and shareholder's funds
as described in note 19 to the financial information.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingencies at the balance sheet date and the
reported amounts of revenues and expenses in the reporting period. Actual
results may differ from the estimates used in the financial statements.
INTEREST
Interest receivable is calculated on an accruals basis.
BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO
The beneficial interest in the mortgage portfolio is recorded at cost less
provision for bad and doubtful debt recoveries.
PROVISION FOR BAD AND DOUBTFUL DEBTS
Provisions are made to reduce the carrying value of the beneficial interest
in the mortgage portfolio to reflect the amount of the underlying mortgage
loans and advances, within the Trust, likely to be recoverable. Specific
provision is made where the property is in possession or where
308
the account is in arrears and it is considered likely that the property will be
taken into possession. A general provision, to cover advances that are latently
bad or doubtful, but not yet identified as such, is also maintained.
DEFERRED CONSIDERATION
Under the terms of the securitisation the Company retains the right to 0.01%
of interest receivable on the beneficial interest in the mortgage portfolio (on
a UK GAAP basis). Profits in excess of 0.01% accrue to Halifax plc, the
originator of the underlying mortgages, and accordingly a creditor (deferred
consideration) for amounts payable to Halifax plc has been recognised at the
period end. The payments of deferred consideration are strictly governed by the
priority of payments which set out how cash can be utilised. Where adjustments
have been made to profits on application of US GAAP (note 19), no associated
deferred consideration debtor has been reflected.
DEFERRED EXPENDITURE
Issue costs in respect of the loan finance have been deferred and are being
charged to the profit and loss account over a five-year period, being the
estimated average life of the underlying loans.
MORTGAGE LOAN PREMIUM
A loan premium has been recognised for the difference between the cost of
the beneficial interest in the mortgage portfolio and its fair value. This
premium is charged to the profit and loss account in accordance with the
redemption of the beneficial interest in the mortgage portfolio.
DERIVATIVES
Transactions are undertaken in derivative financial instruments
("DERIVATIVES") which include interest rate swaps. Derivatives are entered into
for the purpose of eliminating risk from potential movements in interest rates
inherent in the Company's non-trading assets and liabilities. Non-trading
assets and liabilities are those intended for use on a continuing basis in the
activities of the Company.A derivative is designated as non-trading where there
is an offset between the effects of potential movements in market rates of the
derivative and the designated asset or liability being hedged. Non-trading
derivatives are reviewed regularly for their effectiveness as hedges. Non-
trading derivatives are accounted for on an accruals basis, consistent with the
asset or liability being hedged. Income and expense on non-trading derivatives
are recognised as they accrue over the life of the instruments as an adjustment
to interest receivable or payable.
The cost of interest rate swaps and currency swaps which are used to hedge
on balance sheet assets and liabilities are included in the interest payable on
the loans.
VALUE ADDED TAX
Value added tax is not recoverable by the Company and is included with its
related cost.
TAXATION
The charge for taxation takes into account all timing differences in the
accounting and taxation treatment of certain items.
In the current year, the Company implemented FRS 19, "DEFERRED TAX".
Deferred tax is recognised, without discounting, in respect of all timing
differences between the treatment of certain items for taxation and accounting
purposes which have arisen but not reversed out by the balance sheet date,
except as otherwise required by FRS 19. Deferred tax assets are only recognised
when it is more likely than not that the asset will be recoverable in the
foreseeable future out of suitable taxable profits from which the timing
differences and tax losses can be deducted.
309
3 INTEREST RECEIVABLE AND SIMILAR INCOME
2002
-----------
[GBP]
Income from beneficial interest in mortgage portfolio.............. 98,178,973
Bank interest...................................................... 3,416,182
-----------
101,595,155
===========
4 INTEREST PAYABLE AND SIMILAR CHARGES
2002
----------
[GBP]
Interest on loans from Group undertaking............................ 81,594,486
Swap interest....................................................... 11,285,334
Start up loan interest.............................................. 1,532,137
----------
94,411,957
==========
5 PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
2002
---------
[GBP]
Profit on ordinary activities before taxation is
stated after charging:
Auditors remuneration including expenses for audit work.............. 7,000
Provisions for bad and doubtful debts................................ __
---------
Deferred consideration............................................... 4,465,515
=========
Auditors remuneration for non audit work of [GBP]249,560 is included in the
deferred costs and amortised over the estimated life of the beneficial interest
in trust which is five years.
310
6 TAX ON ORDINARY ACTIVITIES
2002
------
[GBP]
THE MOVEMENT ON DEFERRED TAX WAS AS FOLLOWS:
Balance brought forward................................................ ---
Current year charge.................................................... ---
------
Balance carried forward................................................ ---
======
DEFERRED TAXATION COMPRISES
General provisions..................................................... ---
------
---
======
TAX ON PROFIT ON ORDINARY ACTIVITIES
The charge for the period based on a corporation tax
rate of 19% comprises:
U K corporation tax.................................................... 1,930
Deferred tax........................................................... ---
------
1,930
======
FACTORS AFFECTING THE CURRENT TAX CHARGE FOR THE PERIOD:
The tax assessed for the period is lower than the standard rate
of corporation tax in the UK of 30% the differences
are explained below:
Profit on ordinary activities before taxation.......................... 10,160
------
Profit on ordinary activities multiplied by the standard rate
of corporation tax in the UK........................................... 3,048
EFFECTS OF:
Small companies rate................................................... (1,118)
------
1,930
======
7 PROFIT AND LOSS ACCOUNT
2002
-----
[GBP]
At incorporation......................................................... ---
Transfer to reserves..................................................... 8,230
-----
At 31 December........................................................... 8,230
=====
8 BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO
PROVISION FOR
BAD AND
DOUBTFUL
MORTGAGES DEBTS PREMIUM TOTAL
------------- ------------- --------- -------------
[GBP] [GBP] [GBP] [GBP]
Acquired at 14 June 2002.. 3,478,576,310 (8,009,803) 8,009,803 3,478,576,310
Net movement in the period --- --- --- ---
------------- ------------- --------- -------------
At 31 December............ 3,478,576,310 (8,009,803) 8,009,803 3,478,576,310
============= ============= ========= =============
311
The mortgage portfolio in which the Company holds a beneficial interest is
held on trust for the Company and the originator of the mortgage loans by
Permanent Mortgages Trustee Limited. The mortgage loans are secured on
residential property in England and Wales.
The loans were advanced to Permanent Funding (No 1) Limited on 14 June 2002
and amounted to [GBP]3,478,576,310. Permanent Funding (No 1) Limited is a
wholly owned subsidiary of Permanent Holdings Limited, the parent company of
Permanent Financing (No 1) plc.
Mortgages in the pool have to fulfil certain criteria. If they fail to do so
they are removed from the pool and the pool is replenished. When the mortgage
pool was created there were no accounts in arrears and therefore no specific
loss provision was required. There were no specific provisions held at 31
December 2002. A general provision to cover advances that are latently bad or
doubtful but not yet identified as such was allocated to the pool. A premium
was also paid for the mortgages in a like amount.
9 DEBTORS -- AMOUNTS FALLING DUE WITHIN ONE YEAR
2002
-----------
[GBP]
Beneficial interest in mortgage portfolio (note 8)................. 509,614,731
Amount owed from Group undertaking................................. 1
Deferred expenditure............................................... 4,816,626
Other debtors...................................................... 3,292
-----------
514,434,650
===========
10 DEBTORS -- AMOUNTS FALLING DUE AFTER ONE YEAR
2002
-------------
[GBP]
Beneficial interest in mortgage portfolio (note 8)............... 2,968,961,579
=============
11 CASH AT BANK AND IN HAND
The Company holds deposits at banks which pay interest based on LIBOR.
The deposit account held by Permanent Funding (No 1) Limited is placed with
the provider of a guaranteed investment contract. Withdrawals from this account
are restricted by detailed priority of payments set out in the transaction
agreements. The Company earns a variable rate of interest of 0.25 percent per
annum below LIBOR for three-month sterling deposits, which is recorded as
interest income in the profit and loss account.
12 CREDITORS AMOUNTS FALLING DUE WITHIN ONE YEAR
2002
-----------
[GBP]
Interest payable on the loans...................................... 8,775,233
Swap interest payable.............................................. 1,918,769
Interest on loan account payable................................... 158,370
Fees payable to Halifax plc........................................ 252,554
Amount owed to Trustee............................................. 152,697,614
Loans from Group undertakings...................................... 509,614,731
Accruals........................................................... 30,285
Taxation........................................................... 1,930
-----------
673,449,486
===========
312
13 CREDITORS AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
2002
-------------
[GBP]
Loans from Group undertakings................................... 2,968,961,579
Start up loans.................................................. 79,463,532
Deferred consideration.......................................... 4,465,515
-------------
3,052,890,626
=============
The amounts are repayable as follows:
2002
-------------
[GBP]
Due 2 -- 5 years................................................. 509,614,731
Due over 5 years................................................. 2,543,275,895
-------------
3,052,890,626
=============
Interest payable on the loans from Group undertakings and the start up loan
is based on LIBOR.
Amounts due over 5 years are paid when cash is available after other
commitments have been fulfilled, in order of priority.
14 SHARE CAPITAL
2002
-----
[GBP]
AUTHORISED
100 ordinary shares of [GBP]1 each....................................... 100
-----
100
=====
ISSUED SHARE CAPITAL
1 ordinary share of [GBP]1 each.......................................... 1
-----
1
=====
15 RECONCILIATION OF MOVEMENTS IN SHAREHOLDER'S FUNDS
2002
-----
[GBP]
Opening shareholder's funds.............................................. ---
Share capital called up in the period.................................... 1
Transfer to reserves..................................................... 8,230
-----
Closing shareholder's funds.............................................. 8,231
=====
313
16 RECONCILIATION OF OPERATING PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION TO
NET CASH INFLOW FROM OPERATING ACTIVITIES
2002
------------
[GBP]
Profit before tax................................................. 10,160
Interest received................................................. (101,595,155)
Interest paid..................................................... 83,559,585
Increase in debtors............................................... (4,819,918)
Increase in creditors............................................. 168,298,340
------------
Net cash inflow from operating activities......................... 145,453,012
============
17 RELATED PARTY DISCLOSURE
Under FRS 8 "RELATED PARTIES", the Company is exempt from the requirements
to disclose transactions with other companies within the Permanent Holdings
Limited group. The following information is provided to facilitate further
understanding of the [Company's] trading relationships.
The Company is a special purpose company controlled by its Board of
Directors, which comprises three Directors. Two of the Company's three
directors are provided by SFM Directors Limited and SFM Directors (No. 2)
Limited, the third director is an employee of HBOS plc (the parent undertaking
of Halifax plc, the mortgage loan administrator). The Company pays a corporate
services fee to SFM Directors Limited in connection with its provision of
corporate management service. The fees payable to these directors for providing
their services are immaterial in the context of these financial statements and
of the individual directors.
During the period, the Company undertook the following transactions (set out
below) with companies within the Permanent Holdings Limited group, the Trust
and Halifax plc, the mortgage administrator.
The Company pays cash management and mortgage loan administration servicing
fees to Halifax plc in connection with its provision of services defined under
the securitisation agreement.
Halifax plc have provided the Company with a start-up loan and are the
counterparty to interest rate swap arrangements, on which there is an
associated interest expense.
314
PERMANENT PERMANENT
PERMANENT MORTGAGES FINANCING
HOLDINGS LTD TRUSTEE (NO 1) PLC HALIFAX PLC
------------ ------------- ------------- -----------
[GBP] [GBP] [GBP] [GBP]
INTEREST RECEIVABLE AND SIMILAR
INCOME:
Income from beneficial interest
in
mortgage portfolio........... 98,178,973
INTEREST PAYABLE AND SIMILAR
CHARGES:
Interest on loans from Group
undertaking.................. 81,594,486
Swap interest.................. 11,285,334
Start up loan interest......... 1,532,137
Bank interest.................. 1,841,726
OPERATING EXPENSES:
Deferred consideration......... 4,465,515
Administration and cash
management services.......... 1,610 1,805 2,063,320
CURRENT ASSETS:
Debtors -- amounts falling due
within one year.............. 1
Beneficial interest in mortgage
portfolio.................... 509,614,731
Cash at bank and in hand....... 182,767,247
Debtors -- amounts falling due
after one year
Beneficial interest in mortgage
portfolio.................... 2,968,961,579
CREDITORS AMOUNTS FALLING DUE
WITHIN ONE YEAR:
Interest payable............... 8,775,233 158,370
Swap interest payable.......... 1,918,769
Fees payable to Halifax plc.... 252,554
Amount owed to Trustee......... 152,697,614
Loans from Group undertakings.. 509,614,731
CREDITORS AMOUNTS FALLING DUE
AFTER ONE YEAR:
Loans from Group undertakings.. 2,968,961,579
Start up loans................. 79,463,532
Deferred consideration......... 4,465,515
All transactions outlined above are conducted on an arm's length basis.
18 ULTIMATE PARENT UNDERTAKING
The Company's immediate parent undertaking is Permanent Holdings Limited, a
company registered in England and Wales and incorporated in Great Britain.
Copies of the consolidated accounts of Permanent Holdings Limited may be
obtained from Blackwell House, Guildhall Yard, London, EC2V 5AE.
The ultimate parent undertaking is SFM Corporate Services Limited.
The management, operations, accounting and financial reporting functions of
the Company are performed by Halifax plc. Copies of the accounts may be
obtained from The Mound, Edinburgh, EH1 1YZ.
315
19 SUPPLEMENTARY US GAAP INFORMATION
(A) SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK AND US GAAP
U.K. GAAP U.S. GAAP
DERIVATIVES DERIVATIVES
Under UK GAAP where interest rate derivatives Financial Accounting Standards Board SFAS No 133, "ACCOUNTING
are deemed to be effective economic hedges the FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" (SFAS No.
underlying assets and liabilities are recorded in the 133) as amended by SFAS No. 138, "ACCOUNTING FOR CERTAIN
balance sheet at cost (or net realisable value if DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, AN
lower). Changes in the fair value of instruments used AMENDMENT OF SFAS NO. 133", establishes accounting and
as hedges are not recognised in the financial reporting standards for derivative financial instruments,
statements until the hedged position matures including certain derivatives used for hedging activities and
derivatives embedded in other contracts. SFAS No. 133
requires all derivatives to be recognised on the balance
sheet at fair value. The recognition of the changes in the
fair value of a derivative depends upon its intended use.
Derivatives that do not qualify for hedging treatment under
SFAS No. 133 must be adjusted to fair value through earnings.
For fair value hedges that qualify under SFAS No 133, the
changes in fair values of the derivatives will be recognised
in earnings together with the change in fair value of the
hedged item attributable to the risk being hedged. For cash
flow hedges that qualify under SFAS No. 133, the changes in
the fair value of the derivatives will be recognised in other
comprehensive income until the hedged item affects earnings.
For all hedging activities, the ineffective portion of a
derivative's change in fair value will be immediately
recognised in earnings. The Company has adopted SFAS No. 133
with effect from inception.
Under SFAS No. 133 there is a requirement for contemporaneous
hedge documentation before it is possible to qualify for
hedging treatment. In the absence of such documentation it is
necessary to record changes in the fair value of the
derivatives in the income statement. As such documentation is
not in place, the interest rate swaps do not qualify as
hedges for US GAAP.
BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO
Under UK GAAP an initial loan premium was Under US GAAP no such loan premium was recognised as all
recognised on acquisition of the beneficial interest provisions for loan losses have been charged to the income
in the mortgage portfolio, representing the difference statement in the period.
between the cost of the beneficial interest in the
mortgage portfolio and the fair value of this asset
(after taking account of credit losses inherent in the
portfolio at the date of acquisition)
316
CASH FLOW CASH FLOW
Under UK GAAP, cash flows are presented for Under US GAAP, cash flows are reported as operating,
operating activities, returns on and servicing of investing and financing activities. Cash flows from taxation
finance, taxation paid, capital expenditure, and returns and servicing of finance would, with the
acquisitions, dividends paid and financing exception of ordinary dividends paid, be included as
activities. Under UK GAAP, cash includes cash in operating activities. The payment of dividends would be
hand and cash on deposit, net of bank overdrafts included under financing activities. Cash and cash
equivalents would include cash and short-term investments
with original maturities of three months or less.
LEGALLY RESTRICTED CASH LEGALLY RESTRICTED CASH
Under UK GAAP there is no concept of restricted Under US GAAP where cash can only be used to meet certain
cash and all cash balances are disclosed as "CASH specific liabilities and is not available to be used with
AT BANK" on the face of the balance sheet discretion, it is disclosed as "RESTRICTED CASH" on the face
of the Balance Sheet. All of the Company's cash would be
disclosed as Restricted Cash under US GAAP as there are
clearly defined restrictions on the use of such cash.
DEFERRED TAX DEFERRED TAX
Deferred tax is recognised, without discounting, As provided by SFAS No. 109 "ACCOUNTING FOR INCOME TAXES",
in respect of all timing differences between the deferred tax liabilities and assets are recognised in respect
treatment of certain items for taxation and of all temporary differences. A valuation allowance is raised
accounting purposes which have arisen but not against any deferred tax asset where it is more likely than
reversed out by the balance sheet date, not that the asset, or part thereof, will not be realised.
except as otherwise required by FRS 19. Deferred tax
assets are only recognised when it is more likely
than not that the asset will be recoverable in the
foreseeable future out of suitable taxable profits
from which the timing differences and tax
losses can be deducted.
(B) UK TO US GAAP RECONCILIATION
The following table summarises the adjustments to the profit attributable to
ordinary shareholders and shareholder's funds which would result from the
application of US GAAP instead of UK GAAP where applicable:
NET INCOME 2002
------------
[GBP]
Profit attributable to shareholder (UK GAAP)...................... 8,230
Unrealised loss on derivatives (i)................................. (23,393,629)
Provision for loan losses.......................................... (8,009,803)
Deferred taxation on reconciling items at 19%,
net of valuation allowance (ii)................................... ---
------------
Total US adjustments (net)......................................... (31,403,432)
------------
Net income/ (loss) attributable to shareholder (US GAAP)........... (31,395,202)
============
317
SHAREHOLDER'S FUNDS 2002
------------
[GBP]
Shareholder's funds (UK GAAP)..................................... 8,231
Unrealised loss on derivatives..................................... (23,393,629)
Provision for loan losses.......................................... (8,009,803)
Deferred tax asset, net of valuation allowance.................... ---
------------
Total US GAAP adjustment (net)..................................... (31,403,432)
------------
Shareholder's equity/ (deficit) (US GAAP).......................... (31,395,201)
============
(C) CASH FLOW STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2002
Set out below, for illustrative purposes, are summary consolidated cash
flows under US GAAP:
2002
---------------
[GBP]
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/ (loss) before tax................................................ (31,393,272)
Provision for loan losses.................................................... 8,009,803
Increase in accrued interest receivable...................................... ---
Increase in other assets..................................................... (4,819,919)
Increase in accrued interest payable......................................... 10,852,372
Increase in other liabilities................................................ 180,839,597
Adjustments to reconcile net profit to cash provided by operating activities: 194,881,853
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................... 163,488,581
NET CASH USED IN INVESTING ACTIVITIES........................................ (3,478,576,310)
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................... 3,558,039,842
CHANGE IN CASH AND CASH EQUIVALENTS.......................................... 242,952,114
Cash and cash equivalents at the beginning of period -- restricted cash...... ---
Cash and cash equivalents at end of period -- restricted cash................ 242,952,114
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for taxation..................................... ---
Cash paid during the period for interest..................................... 83,559,585
(I) UNREALISED LOSS ON DERIVATIVES
The income received by the Company on its beneficial interest in the
mortgage portfolio is based on the variable and fixed rates of interest charged
by Halifax plc on the related portfolio of mortgages held in trust by Permanent
Mortgages Trustee Limited. The Company has entered into interest rate swaps to
convert this income into a LIBOR based cash flow to match the interest payable
on the loan from Permanent Financing (No 1) plc. These swaps are amortising
swaps with a maximum life of 40 years, in line with the underlying mortgages.
At 31 December 2002, the fair value of the swaps not recognised under UK
GAAP was calculated by discounting the expected future cash flows and was
estimated to be (23.4m. The total nominal value of the swaps was (3,748.6m.
318
(II) TAXATION
2002
-----------
[GBP]
Current tax........................................................ 1,930
Gross deferred tax asset........................................... 5,966,652
Less: valuation allowance........................................... (5,966,652)
-----------
---
-----------
Net deferred tax asset............................................. 1,930
===========
The deferred tax asset comprises the deferred tax effect of the recognition
of the loss on the swap and provision for loan losses in the US GAAP income
statement. In assessing the realisability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realised. The ultimate realisation of deferred tax
assets is dependent on the future generation of future taxable income during
the periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in making
this assessment. Taxable income for the period ended 31 December 2002 was
[GBP]10,160. Based upon this level of historical taxable income and projections
for future taxable income, management believes that it will not realise the
benefits of the deferred tax arising on the loss on the swap nor the provision
for loan losses.
(III) SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Credit risk exists in relation to a number of counterparties of the Company,
whereby economic or other conditions may lead these counterparties to default
on accounts owed to the Company or breach existing contractual relationships.
Key concentrations of credit risk to the Company are in respect of the
beneficial interest in the mortgage portfolio and Halifax plc (the mortgage
loan administrator and interest rate swap provider).
The beneficial interest in the mortgage portfolio comprises an interest in
the mortgage loans originated by Halifax plc and held by the Trust. These
mortgage loans are secured on residential properties.
Halifax plc is a registered UK Bank and accordingly subject to supervision
by the Financial Services Authority.
319
ISSUER
PERMANENT FINANCING (NO. 3) PLC
Blackwell House
Guildhall Yard
London EC2V 5AE
SERVICER
HALIFAX PLC
Trinity Road
Halifax
West Yorkshire
HX1 2RG
AGENT BANK, PRINCIPAL PAYING AGENT, US PAYING AGENT
REGISTRAR AND TRANSFER AGENT
CITIBANK, N.A. CITIBANK, N.A.
5 Carmelite Street 14th Floor, Zone 3
London EC4Y 0PA 111 Wall Street
New York, New York 10043
NOTE TRUSTEE
THE BANK OF NEW YORK
One Canada Square
London E14 5AL
SECURITY TRUSTEE
THE BANK OF NEW YORK
One Canada Square
London E14 5AL
LEGAL ADVISERS TO LEGAL ADVISERS TO THE NOTE TRUSTEE
THE UNDERWRITERS AND THE SECURITY TRUSTEE
as to English law and US law as to English law and US law
SIDLEY AUSTIN BROWN & WOOD SIDLEY AUSTIN BROWN & WOOD
1 Threadneedle Street Princes Court
London EC2R 8AW 7 Princes Street
London EC2R 8AQ
LEGAL ADVISERS TO THE ISSUER AND LEGAL ADVISERS TO THE MORTGAGES
THE SERVICER TRUSTEE
as to English law and US law as to Jersey law
ALLEN & OVERY MOURANT DU FEU & JEUNE
One New Change 22 Grenville Street
London EC4M 9QQ St. Helier Jersey JE4 8PX
AUTHORISED ADVISER
__
Through and including __, 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.
PERMANENT FINANCING (NO. 3) PLC
$[1,250,000,000] SERIES 1 CLASS A FLOATING RATE ISSUER NOTES DUE [SEPTEMBER
2004]
$[__] SERIES 1 CLASS B FLOATING RATE ISSUER NOTES DUE JUNE 2042
$[__] SERIES 1 CLASS C FLOATING RATE ISSUER NOTES DUE JUNE 2042
$[1,250,000,000] SERIES 2 CLASS A FLOATING RATE ISSUER NOTES DUE [DECEMBER
2008]
$[__] SERIES 2 CLASS B FLOATING RATE ISSUER NOTES DUE JUNE 2042
$[__] SERIES 2 CLASS C FLOATING RATE ISSUER NOTES DUE JUNE 2042
$[750,000,000] SERIES 3 FLOATING RATE ISSUER NOTES DUE __
$[__] SERIES 3 CLASS B FLOATING RATE ISSUER NOTES DUE JUNE 2042
$[__] SERIES 3 CLASS C FLOATING RATE ISSUER NOTES DUE JUNE 2042
----------------------
PRELIMINARY PROSPECTUS
----------------------
ARRANGERS
__ __
CREDIT SUISSE FIRST BOSTON __ __ __
__ UBS
__ CITIBANK
Preliminary prospectus dated __
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 31.OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Following are the estimated expenses* (expressed in US dollars based on an
exchange rate of US$1.00=GB{pound-sterling}{circle}), 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................................... $[262,925]
Fees and expenses of qualification under state securities laws (including legal fees). ${circle}**
Printing and engraving expenses....................................................... ${circle}**
Legal fees and expenses............................................................... ${circle}**
Accounting fees and expenses.......................................................... ${circle}**
Trustee's fees and expenses........................................................... ${circle}**
Rating agency fees.................................................................... ${circle}**
Miscellaneous......................................................................... ${circle}**
Total................................................................................. ${circle}**
- ----------------
* All amounts except the SEC registration fee are estimates.
** To be provided by amendment.
ITEM 32.SALES TO SPECIAL PARTIES
Not applicable.
ITEM 33.RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 34.INDEMNIFICATION OF DIRECTORS AND OFFICERS
PERMANENT FINANCING (NO. 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.
PERMANENT FUNDING (NO. 1) LIMITED ("FUNDING 1")
Subject to the provisions of the Companies Act 1985, the laws which govern
the organization of Funding 1 provide for every director or other officer or
auditor of Funding 1 to be indemnified out of the assets of Funding 1 against
any liability incurred by him in defending any proceedings, whether civil or
criminal, in which judgment is given in his favor or in which he is acquitted
or in connection with any application in which relief is granted to him by the
court from liability for negligence, default, breach of duty or breach of trust
in relation to the affairs of Funding 1.
PERMANENT MORTGAGES TRUSTEE LIMITED (THE "MORTGAGES TRUSTEE")
Subject to the provisions of the Companies (Jersey) Law 1991, the laws
which govern the organization of the mortgages trustee provide for every
director or other officer or auditor of the mortgages trustee to be indemnified
out of the assets of the mortgages trustee 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 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 Permanent Financing (No. 3) PLC and
Permanent Funding (No. 1) Limited are filed as part of this registration
statement. There are no additional schedules to the financial statements.
(B)EXHIBITS:
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ----------- ------------------------------------------------------------------------------------------ ---------------------------
1.1 Form of Underwriting Agreement(3)
3.1.1 Memorandum and Articles of Association of Permanent Financing (No. 3) PLC(3)
3.1.2 Memorandum and Articles of Association of Permanent Funding (No. 1) Limited(1)
3.1.3 Memorandum and Articles of Association of Permanent Mortgages Trustee Limited(1)
4.1 Form of Intercompany Loan Terms and Conditions(1) and Form of Loan Confirmation(3)
4.2 Form of Mortgages Trust Deed(3)
4.3 Form of Amended and Restated Mortgage Sale Agreement(3)
4.4 Form of Deed of Charge of Permanent Financing (No. 3) PLC(3)
4.5 Deed of Accession to the Amended and Restated Deed of Charge of Permanent Funding (No. 1)
Limited(3)
4.6 Form of Issuer Trust Deed(3)
4.7 Form of Issuer Paying Agent and Agent Bank Agreement(3)
4.8 Form of Amended and Restated Cash Management Agreement(1)
4.9 Form of Issuer Cash Management Agreement(3)
4.10 Form of Amended and Restated Servicing Agreement(3)
4.11 Form of Post-Enforcement Call Option Agreement(3)
5.1 Opinion of Allen & Overy as to validity(3)
8.1 Opinion of Allen & Overy as to US tax matters(3)
8.2 Opinion of Allen & Overy as to UK tax matters(3)
10.1 Form of Funding 1 Liquidity Facility Agreement(3)
10.2.1 Form of series 1/2/3/4/5B/5C Dollar Currency Swap Agreement(3)
10.3 Form of Amended and Restated Funding 1 Swap Agreement(2)
10.4 Form of Third Start-up Loan Agreement(3)
10.5.1 Form of Amended and Restated Master Definitions and Construction Schedule(3)
10.5.2 Form of Issuer Master Definitions and Construction Schedule(3)
10.6.1 Form of Issuer Corporate Services Agreement(3)
10.6.2 Form of Mortgages Trustee Corporate Services Agreement(1)
10.6.3 Form of Funding 1 Corporate Services Agreement(1)
23.1 Consent of Allen & Overy (included in Exhibits 5.1, 8.1 and 8.2)(3)
23.2 Consent of auditors(3)
24.1 Power of Attorney (included on signature page)
25.1 Statement of Eligibility of Trustee (Form T-1)(3)
- ---------------
(1) Incorporated by reference from the Form S-11 filed by Permanent Financing
(No. 1) PLC (File No. 333-88874) which became effective on June 11, 2002.
(2) Incorporated by reference from the Form S-11 filed by Permanent Financing
(No. 2) PLC (File No. 333-102040) which became effective on February 26,
2003.
(3) 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 defence of
any action, suit or proceeding) is asserted against any of the
registrants by such director, officer or controlling person in
connection with the securities being registered, the relevant
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
B. Each of the undersigned registrants hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has
duly caused this registration statement or amendment thereto to be signed
on its behalf by the undersigned, thereunto duly authorised, in the city of
London, on September 25, 2003.
PERMANENT FINANCING (NO. 3) PLC
By:/s/ James G S Macdonald
----------------------------
Name: SFM Directors Limited by
its authorized person
James G S Macdonald for
and on its behalf
Title: Director
PERMANENT FUNDING (NO. 1) LIMITED
By:/s/ James G S Macdonald
----------------------------
Name: SFM Directors Limited by
its authorized person James
G S Macdonald for and on its
behalf
Title: Director
PERMANENT MORTGAGES TRUSTEE LIMITED
By:/s/ David Balai
----------------------------
Name: David Balai
Title: Director
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
David Balai, Gavin Parker and Malcolm Ryan, and each of them severally, his
true and lawful attorneys-in-fact and agents with power of substitution and
resubstitution for and in his name, place and stead, in any and all capacities,
to sign any and all amendments, including post-effective amendments, and
supplements to this registration statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they or he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
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 below.
PERMANENT FINANCING (NO. 3) PLC
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------ --------
By: /s/ James G S Macdonald Director 09/25/03
---------------------------------------
Name: SFM Directors Limited by its authorized
person James G S Macdonald for and on
its behalf
By: /s/ Jonathan E Keighley Director 09/25/03
---------------------------------------
Name: SFM Directors No. 2 Limited by its
authorized person Jonathan E Keighley
for and on its behalf
By: /s/ David Balai Director 09/25/03
---------------------------------------
Name: David Balai
PERMANENT FUNDING (NO. 1) LIMITED
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------ --------
By: /s/ James G S Macdonald Director 09/25/03
---------------------------------------
Name: SFM Directors Limited by its authorized
person James G S Macdonald for and on
its behalf
By: /s/ Jonathan E Keighley Director 09/25/03
---------------------------------------
Name: SFM Directors No. 2 Limited by its
authorized person Jonathan E Keighley
for and on its behalf
By: /s/ David Balai Director 09/25/03
---------------------------------------
Name: David Balai
PERMANENT MORTGAGES TRUSTEE LIMITED
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------ --------
By: /s/ Michael George Best Director 09/23/03
---------------------------------------
Name: Michael George Best
By: /s/ Peter John Richardson Director 09/23/03
---------------------------------------
Name: Peter John Richardson
By: /s/ David Balai Director 09/22/03
---------------------------------------
Name: David Balai
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
PERMANENT FINANCING (NO. 3) PLC
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Permanent Financing (No.
3) PLC, has signed this registration statement or amendment thereto in New
York, New York on September 24, 2003.
By: /s/ Jill Kranz
---------------------------------------
Name: Jill Kranz
---------------------------------------
Office: CT Corporation System
---------------------------------------
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
PERMANENT FUNDING (NO. 1) LIMITED
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Permanent Funding (No.
1) Limited, has signed this registration statement or amendment thereto in New
York, New York on September 24, 2003.
By: /s/ Jill Kranz
---------------------------------------
Name: Jill Kranz
---------------------------------------
Office: CT Corporation System
---------------------------------------
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
PERMANENT MORTGAGES TRUSTEE LIMITED
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Permanent Mortgages
Trustee Limited, has signed this registration statement or amendment thereto in
New York, New York on September 24, 2003.
By: /s/ Jill Kranz
---------------------------------------
Name: Jill Kranz
---------------------------------------
Office: CT Corporation System
---------------------------------------