NO. 333 - {circle}
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 2004
______________________________________
______________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________________
FORM S-11
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
_______________________
PERMANENT FINANCING (NO. 4) 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 N. Bart Capeci, Esq. Robert Torch, 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 AMOUNT BEING PROPOSED PROPOSED AMOUNT OF
REGISTERED MAXIMUM MAXIMUM REGISTRATION
OFFERING AGGREGATE FEE (3)
PRICE OFFERING PRICE
PER UNIT (1) (1)
- ----------------------------------------------------------- ----------------- ----------- --------------- -------------
$[1,250,000,000] series 1 class A floating rate notes due $[1,250,000,000] 100% $[1,250,000,000] $[101,125.00]
[2005]
$[37,500,000] series 1 class B floating rate notes due 2042 $[37,500,000] 100% $[37,500,000] $[3,033.75]
$[37,500,000] series 1 class M floating rate notes due 2042 $[37,500,000] 100% $[37,500,000] $[3,033.75]
$[{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 $[1,250,000,000] 100% $[1,250,000,000] $[101,125.00]
[2009]
$[25,000,000] series 2 class B floating rate notes due 2042 $[25,000,000] 100% $[25,000,000] $[2,022.50]
$[25,000,000] series 2 class M floating rate notes due 2042 $[25,000,000] 100% $[25,000,000] $[2,022.50.]
$[25,000,000] series 2 class C floating rate notes due 2042 $[25,000,000] 100% $[25,000,000] $[2,022.50]
$[1,250,000,000] series 3 class A floating rate notes due $[1,250,000,000] 100% $[1,250,000,000] $[101,125.00]
[2033]
$[25,000,000] series 3 class B floating rate notes due 2042 $[25,000,000] 100% $[25,000,000] $[2,022.50]
$[25,000,000] series 3 class M floating rate notes due 2042 $[25,000,000] 100% $[25,000,000] $[2,022.50]
$[25,000,000] series 3 class C floating rate notes due 2042 $[25,000,000] 100% $[25,000,000] $[2,022.50]
Series 1 term AAA advance (2)
Series 1 term AA advance (2)
Series 1 term A advance (2)
Series 1 term BBB advance (2)
Series 2 term AAA advance (2)
Series 2 term AA advance (2)
Series 2 term A advance (2)
Series 2 term BBB advance (2)
Series 3 term AAA advance (2)
Series 3 term AA advance (2)
Series 3 term A advance (2)
Series 3 term BBB 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. 4) 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. 4) 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 $[321,577.50].
_______________
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.
The information in this prospectus is not complete and may be amended. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION AND AMENDMENT
PRELIMINARY PROSPECTUS
PERMANENT FINANCING (NO. 4) PLC
(incorporated in England and Wales with limited liability, registered number
4988201)
HALIFAX PLC
SELLER, SERVICER AND CASH MANAGER
PRINCIPAL
PRICE AMOUNT OF
TO ISSUER
PUBLIC NOTES AND
PER PROCEEDS TO SCHEDULED
ISSUER ISSUER REDEMPTION FINAL MATURITY
CLASS INTEREST RATE NOTE PER CLASS DATES DATE
series 1 class A __% margin below 100% $[1,250,000,000] [March 2005] [March 2005]
one-month USD-LIBOR
series 1 class B __% margin above 100% [$37,500,000] --- June 2042
three-month USD-LIBOR
series 1 class M __% margin above 100% [$37,500,000] --- June 2042
three-month USD-LIBOR
series 1 class C __%margin above 100% $[__] --- June 2042
three-month USD-LIBOR
series 2 class A __% margin above 100% $[1,250,000,000] [March 2007] [March 2009]
three-month USD-LIBOR
series 2 class B __%margin above 100% $[25,000,000] --- June 2042
three-month USD-LIBOR
series 2 class M __%margin above 100% $[25,000,000] --- June 2042
three-month USD-LIBOR
series 2 class C __% margin above 100% $[25,000,000] --- June 2042
three-month USD-LIBOR
series 3 class A __% margin above 100% $[1,250,000,000] [December 2008 [September 2033]
three-month USD-LIBOR and March 2009]
series 3 class B __% margin above 100% $[25,000,000] --- June 2042
three-month USD-LIBOR
series 3 class M __% margin above 100% $[25,000,000] --- June 2042
three-month USD-LIBOR
series 3 class C __% margin above 100% $[25,000,000] --- June 2042
three-month USD-LIBOR
* The principal asset from which Permanent Financing (No. 4) 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, Wales and Scotland.
The transaction documents are governed by English law (other than
the issuer underwriting agreement, which is governed by New York
law, the mortgages trustee corporate services agreement, which is
governed by Jersey law, certain aspects of the mortgage sale
agreement relating to the Scottish loans and their related
security, which are governed by Scots law and the Scottish
declarations of trust, which are governed by Scots law).
* Permanent Holdings Limited, the parent of Permanent Financing (No.
4) PLC and Permanent Funding (No. 1) Limited, is also the parent of
the previous issuers, Permanent Financing (No. 1) PLC, Permanent
Financing (No. 2) PLC and Permanent Financing (No. 3) PLC, which
have issued the previous notes as referred to in this document.
Among others, Permanent Financing (No. 4) PLC, 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 36 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 (the London Stock Exchange) for
each class of issuer notes to be admitted to trading on the London Stock
Exchange's market for listed securities.
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
CITIGROUP
JOINT LEAD UNDERWRITERS FOR THE SERIES 1, SERIES 2 AND SERIES 3 CLASS A ISSUER
NOTES
CITIGROUP MORGAN STANLEY UBS WARBURG
JOINT LEAD UNDERWRITERS FOR THE SERIES 1, SERIES 2 AND SERIES 3 CLASS B, CLASS
M AND
CLASS C ISSUER NOTES
CITIGROUP UBS WARBURG
Preliminary Prospectus dated __, 2004
1
Subject to conditions described further in this 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 __, 2004.
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 rate 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................................................................................. 5
SUMMARY OF PROSPECTUS......................................................................... 6
RISK FACTORS.................................................................................. 36
US DOLLAR PRESENTATION........................................................................ 63
THE ISSUER.................................................................................... 64
USE OF PROCEEDS............................................................................... 66
HALIFAX PLC................................................................................... 67
FUNDING 1..................................................................................... 68
THE MORTGAGES TRUSTEE......................................................................... 72
HOLDINGS...................................................................................... 74
PERMANENT PECOH LIMITED....................................................................... 76
THE ISSUER SWAP PROVIDERS..................................................................... 77
THE FUNDING 1 LIQUIDITY FACILITY PROVIDER..................................................... 78
DESCRIPTION OF THE PREVIOUS ISSUERS AND THE PREVIOUS NOTES AND THE PREVIOUS INTERCOMPANY LOANS 79
THE LOANS..................................................................................... 85
THE SERVICER.................................................................................. 106
THE SERVICING AGREEMENT....................................................................... 111
SALE OF THE LOANS AND THEIR RELATED SECURITY.................................................. 115
THE MORTGAGES TRUST........................................................................... 122
THE ISSUER INTERCOMPANY LOAN AGREEMENT........................................................ 134
SECURITY FOR FUNDING 1'S OBLIGATIONS.......................................................... 140
SECURITY FOR THE ISSUER'S OBLIGATIONS......................................................... 146
CASHFLOWS..................................................................................... 152
CREDIT STRUCTURE.............................................................................. 178
THE SWAP AGREEMENTS........................................................................... 188
CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING 1....................................... 193
CASH MANAGEMENT FOR THE ISSUER................................................................ 196
DESCRIPTION OF THE ISSUER TRUST DEED.......................................................... 198
THE ISSUER NOTES AND THE GLOBAL ISSUER NOTES.................................................. 200
TERMS AND CONDITIONS OF THE OFFERED ISSUER NOTES.............................................. 205
RATINGS OF THE ISSUER NOTES................................................................... 222
MATURITY AND PREPAYMENT CONSIDERATIONS........................................................ 223
MATERIAL LEGAL ASPECTS OF THE LOANS........................................................... 226
UNITED KINGDOM TAXATION....................................................................... 230
EU SAVINGS DIRECTIVE.......................................................................... 233
UNITED STATES FEDERAL INCOME TAXATION......................................................... 234
MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSIDERATIONS.......................................... 238
ERISA CONSIDERATIONS.......................................................................... 239
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES......................................... 241
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS................................................. 242
EXPERTS....................................................................................... 242
LEGAL MATTERS................................................................................. 242
UNDERWRITING.................................................................................. 243
REPORTS TO NOTEHOLDERS........................................................................ 248
WHERE INVESTORS CAN FIND MORE INFORMATION..................................................... 248
MARKET-MAKING................................................................................. 248
3
AFFILIATIONS.................................................................................. 248
LISTING AND GENERAL INFORMATION............................................................... 249
GLOSSARY...................................................................................... 252
ANNEX A....................................................................................... 293
INDEX OF APPENDICES........................................................................... 299
APPENDIX A.................................................................................... 300
APPENDIX B.................................................................................... 301
APPENDIX C.................................................................................... 302
APPENDIX D.................................................................................... 303
APPENDIX E.................................................................................... 304
APPENDIX F.................................................................................... __
4
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 "[E]", "EURO" or "EURO" are to the single currency introduced
at the third stage of European Economic and Monetary Union pursuant to the
Treaty establishing the European Communities, as amended from time to time.
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. 4) PLC, the "PREVIOUS NOTES" are the notes issued by each of Permanent
Financing (No. 1) PLC, Permanent Financing (No. 2) PLC and Permanent Financing
(No. 3) PLC, the "CURRENT NOTES" are the notes issued by Permanent Financing
(No. 1) PLC, Permanent Financing (No. 2) PLC, Permanent Financing (No. 3) PLC
and Permanent Financing (No. 4) 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.
5
SUMMARY OF PROSPECTUS
The information on pages 6 to 35 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 sold
the loans in the portfolio and their related security to the
mortgages trustee pursuant to the mortgage sale agreement. These
sales are further described in "SALE 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, Wales and Scotland.
(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.
(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 remaining interest receipts on the loans to
the seller. The mortgages trustee allocates 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 allocates principal receipts on the loans
between the seller and Funding 1 in amounts 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 loans (together with their
related security) sold to the mortgages trustee on the closing date
thereby increasing the Funding 1 share of the trust property.
Subsequently, on Funding 1 interest payment dates, 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 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 on the closing date.
6
(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.
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 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, Permanent
Financing (No. 2) PLC and Permanent Financing (No. 3) 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, 6th March, 2003 and 25th
November, 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 issuer notes offered by this prospectus, the issuer will
also issue the series 4 class A1 issuer notes, the series 4 class A2 issuer
notes (together, the "SERIES 4 CLASS A ISSUER NOTES"), the series 4 class B
issuer notes, the series 4 class M issuer notes, the series 4 class C issuer
notes, the series 5 class A issuer notes, the series 5 class B issuer notes,
the series 5 class M issuer notes, and the 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, class M 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
SERIES OF ISSUER NOTES
------------------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 1
CLASS A CLASS B CLASS M CLASS C
------------------------ ------------------------ ------------------------ ------------------------
Principal amount: $__ $__ $__ $__
Credit enhancement: Subordination of the Subordination of the Subordination of the The reserve funds
class B issuer notes, class M issuer notes class C issuer notes
the class M issuer notes and the class C issuer and the reserve funds
and the class C issuer notes, and the reserve
notes, and the reserve funds
funds
Interest rate: [One-month USD- Three-month USD- Three-month USD- Three-month USD-
LIBOR -- margin] LIBOR + margin LIBOR + margin LIBOR + margin
Margin: __% p.a. __% p.a. __% p.a. __% p.a.
Until interest N/A __ __ __
payment date falling
in:
And thereafter: N/A __% p.a. __% p.a. __% p.a.
Scheduled [March 2005] N/A N/A N/A
redemption date(s):
Interest accrual Actual/360 Actual/360 Actual/360 Actual/360
method:
Interest payment For the series 1 class A issuer notes, monthly in arrear on the interest payment date falling in each
dates: consecutive month. For the other series 1 issuer notes, quarterly in arrear on the interest payment
dates falling in March, June, September and December of each year. If a trigger event occurs or the
issuer security is enforced prior to the interest payment date falling in [March 2005], 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 March, June, September and December of each year.
First interest __ __ __ __
payment date:
Final maturity date: [March 2005] June 2042 June 2042 June 2042
Tax treatment: Debt for United States Debt for United States Debt for United States Debt for United States
federal income tax federal income tax federal income tax federal income tax
purposes, subject to the purposes, subject to the purposes, subject to the purposes, subject to the
considerations considerations considerations considerations
contained in "UNITED contained in "UNITED contained in "UNITED contained in "UNITED
STATES FEDERAL INCOME STATES FEDERAL INCOME STATES FEDERAL INCOME STATES FEDERAL INCOME
TAXATION" TAXATION" TAXATION" TAXATION"
ERISA eligible: Yes, subject to the Yes, subject to the Yes, subject to the Yes, subject to the
considerations in considerations in considerations in considerations in
"ERISA "ERISA "ERISA "ERISA
CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS"
Listing: UK Listing Authority UK Listing Authority UK Listing Authority UK Listing Authority
and London Stock and London Stock and London Stock and London Stock
Exchange Exchange Exchange Exchange
ISIN: __ __ __ __
Common code: __ __ __ __
CUSIP number: __ __ __ __
Expected ratings A-1+/P-1/F1+ AA/Aa3/AA A+/A1/A+ BBB/Baa2/BBB
(S&P/Moody's/
Fitch):
10
SERIES OF ISSUER NOTES
------------------------------------------------------------------------------------------------------
SERIES 2 SERIES 2 SERIES 2 SERIES 2
CLASS A CLASS B CLASS M CLASS C
------------------------ ------------------------ ------------------------ ------------------------
Principal amount: $__ $__ $__ $__
Credit enhancement: Subordination of the Subordination of the Subordination of the The reserve funds
class B issuer notes, class M issuer notes class C issuer notes
the class M issuer notes and the class C issuer and the reserve funds
and the class C issuer notes, and the reserve
notes, and the reserve funds
funds
Interest rate: Three-month USD- Three-month USD- Three-month USD- Three-month USD-
LIBOR + margin LIBOR + margin LIBOR + margin LIBOR + margin
Margin: __% p.a. __% p.a. __% p.a. __% p.a.
Until interest __ __ __ __
payment date falling
in:
And thereafter: __% p.a. __% p.a. __% p.a. __% p.a.
Scheduled [March 2007] N/A N/A N/A
redemption date(s):
Interest accrual Actual/360 Actual/360 Actual/360 Actual/360
method:
Interest payment For the series 2 issuer notes, quarterly in arrear on the interest payment dates falling in March,
dates: June, September and December of each year.
First interest __ __ __ __
payment date:
Final maturity date: [March 2009] June 2042 June 2042 June 2042
Tax treatment: Debt for United States Debt for United States Debt for United States Debt for United States
federal income tax federal income tax federal income tax federal income tax
purposes, subject to the purposes, subject to the purposes, subject to the purposes, subject to the
considerations considerations considerations considerations
contained in "UNITED contained in "UNITED contained in "UNITED contained in "UNITED
STATES FEDERAL INCOME STATES FEDERAL INCOME STATES FEDERAL INCOME STATES FEDERAL INCOME
TAXATION" TAXATION" TAXATION" TAXATION"
ERISA eligible: Yes, subject to the Yes, subject to the Yes, subject to the Yes, subject to the
considerations in considerations in considerations in considerations in
"ERISA "ERISA "ERISA "ERISA
CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS"
Listing: UK Listing Authority UK Listing Authority UK Listing Authority UK Listing Authority
and London Stock and London Stock and London Stock and London Stock
Exchange Exchange Exchange Exchange
ISIN: __ __ __ __
Common code: __ __ __ __
CUSIP number: __ __ __ __
Expected ratings AAA/Aaa/AAA AA/Aa3/AA A+/A1/A+ BBB/Baa2/BBB
(S&P/Moody's/
Fitch):
11
SERIES OF ISSUER NOTES
------------------------------------------------------------------------------------------------------
SERIES 3 SERIES 3 SERIES 3 SERIES 3
CLASS A CLASS B CLASS M CLASS C
------------------------ ------------------------ ------------------------ ------------------------
Principal amount: $__ $__ $__ $__
Credit enhancement: Subordination of the Subordination of the Subordination of the The reserve funds
class B issuer notes, class M issuer notes class C issuer notes
the class M issuer notes and the class C issuer and the reserve funds
and the class C issuer notes, and the reserve
notes, and the reserve funds
funds
Interest rate: Three-month USD- Three-month USD- Three-month USD- Three-month USD-
LIBOR + margin LIBOR + margin LIBOR + margin LIBOR + margin
Margin: __% p.a. __% p.a. __% p.a. __% p.a.
Until interest __ __ __ __
payment date falling
in:
And thereafter: __% p.a. __% p.a. __% p.a. __% p.a.
Scheduled [December 2008 and N/A N/A N/A
redemption date(s): March 2009]
Interest accrual Actual/360 Actual/360 Actual/360 Actual/360
method:
Interest payment For the series 3 issuer notes, quarterly in arrear on the interest payment dates falling in March,
dates: June, September and December of each year.
First interest __ __ __ __
payment date:
Final maturity date: [September 2033] June 2042 June 2042 June 2042
Tax treatment: Debt for United States Debt for United States Debt for United States Debt for United States
federal income tax federal income tax federal income tax federal income tax
purposes, subject to the purposes, subject to the purposes, subject to the purposes, subject to the
considerations considerations considerations considerations
contained in "UNITED contained in "UNITED contained in "UNITED contained in "UNITED
STATES FEDERAL INCOME STATES FEDERAL INCOME STATES FEDERAL INCOME STATES FEDERAL INCOME
TAXATION" TAXATION" TAXATION" TAXATION"
ERISA eligible: Yes, subject to the Yes, subject to the Yes, subject to the Yes, subject to the
considerations in considerations in considerations in considerations in
"ERISA "ERISA "ERISA "ERISA
CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS"
Listing: UK Listing Authority UK Listing Authority UK Listing Authority UK Listing Authority
and London Stock and London Stock and London Stock and London Stock
Exchange Exchange Exchange Exchange
ISIN: __ __ __ __
Common code: __ __ __ __
CUSIP number: __ __ __ __
Expected ratings AAA/Aaa/AAA AA/Aa3/AA A+/A1/A+ BBB/Baa2/BBB
(S&P/Moody's/
Fitch):
12
SERIES OF ISSUER NOTES
-------------------------------------------------------------------------------------------------------
SERIES 4 SERIES 4 SERIES 4 SERIES 4 SERIES 4
CLASS A1 CLASS A2 CLASS B CLASS M CLASS C
------------------- ------------------- ------------------- ------------------- -------------------
Principal amount: [e]__ [GBP]__ [e]__ [e]__ [e]__
Credit enhancement: Subordination of Subordination of Subordination of Subordination of The reserve funds
the class B issuer the class B issuer the class M issuer the class C issuer
notes, the class M notes, the class M notes and the notes and the
issuer notes and issuer notes and class C issuer reserve funds
the class C issuer the class C issuer notes, and the
notes, and the notes, and the reserve funds
reserve funds reserve funds
Interest rate: Three-month Three-month Three-month Three-month Three-month
EURIBOR + Sterling LIBOR + EURIBOR + EURIBOR + EURIBOR +
margin margin margin margin margin
Margin: __% p.a. __% p.a. __% p.a. __% p.a. __% p.a.
Until interest payment __ __ __ __ __
date falling in:
And thereafter: __% p.a. __% p.a. __% p.a. __% p.a. __% p.a.
Scheduled redemption __ __ N/A N/A N/A
date(s):
Interest accrual method: Actual/360 Actual/365 Actual/360 Actual/360 Actual/360
Interest payment dates: For the series 4 issuer notes, quarterly in arrear on the interest payment dates falling in March,
June, September and December of each year.
First interest payment __ __ __ __ __
date:
Final maturity date: June 2042 June 2042 June 2042 June 2042 June 2042
Tax treatment: N/A (These issuer N/A (These issuer N/A (These issuer N/A (These issuer N/A (These issuer
notes are not being notes are not being notes are not being notes are not being notes are not being
offered or sold in offered or sold in offered or sold in offered or sold in offered or sold in
the United States) the United States) the United States) the United States) the United States)
ERISA eligible: N/A (These issuer N/A (These issuer N/A (These issuer N/A (These issuer N/A (These issuer
notes are not being notes are not being notes are not being notes are not being notes are not being
offered or sold in offered or sold in offered or sold in offered or sold in offered or sold in
the United States) the United States) the United States) the United States) the United States)
Listing: UK Listing UK Listing UK Listing UK Listing UK Listing
Authority and Authority and Authority and Authority and Authority and
London Stock London Stock London Stock London Stock London Stock
Exchange Exchange Exchange Exchange Exchange
ISIN: __ __ __ __ __
Common code: __ __ __ __ __
CUSIP number: N/A N/A N/A N/A N/A
Expected ratings AAA/Aaa/AAA AAA/Aaa/AAA AA/Aa3/AA A+/A1/A+ BBB/Baa2/BBB
(S&P/Moody's/Fitch):
13
SERIES OF ISSUER NOTES
------------------------------------------------------------------------------------------------
SERIES 5 SERIES 5 SERIES 5 SERIES 5
CLASS A CLASS B CLASS M CLASS C
------------------------ ---------------------- ---------------------- ----------------------
Principal amount: [e]__ [e]__ [e]__ [e]__
Credit enhancement: Subordination of the Subordination of the Subordination of the The reserve funds
class B issuer notes, class M issuer notes class C issuer notes
the class M issuer notes and the class C issuer and the reserve funds
and the class C issuer notes, and the reserve
notes, and the reserve funds
funds
Interest rate: __% p.a. until interest Three-month EURIBOR Three-month EURIBOR Three-month EURIBOR
payment date falling in + margin + margin + margin
__, and thereafter __
Margin: N/A __% p.a. __% p.a. __% p.a.
Until interest [N/A] __ __ __
payment date falling
in:
And thereafter: N/A __% p.a. __% p.a. __% p.a.
Scheduled N/A N/A N/A N/A
redemption date(s):
Interest accrual __ Actual/360 Actual/360 Actual/360
method:
Interest payment For the series 5 class A class issuer notes, annually in arrear on the interest payment date
dates: falling in December of each year and for the other series 5 issuer notes, quarterly in arrear on
the interest payment dates falling in March, June, September and December of each year. If a
trigger event occurs or the issuer security is enforced prior to the interest payment date in
__, interest and principal due and payable on the series 5 class A issuer notes will be payable
quarterly in arrear on the interest payment dates falling in March, June, September and December
of each year. After the interest payment date falling in __, interest and principal on the
series 5 class A issuer notes will be payable quarterly in arrear on the interest payment dates
falling in March, June, September and December of each year.
First interest __ __ __ __
payment date:
Final maturity date: June 2042 June 2042 June 2042 June 2042
Tax treatment: N/A (These issuer N/A (These issuer N/A (These issuer N/A (These issuer
notes are not being 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 offered or sold in the
United States) United States) United States) United States)
ERISA eligible: N/A (These issuer N/A (These issuer N/A (These issuer N/A (These issuer
notes are not being 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 offered or sold in the
United States) United States) United States) United States)
Listing: UK Listing Authority UK Listing Authority UK Listing Authority UK Listing Authority
and London Stock and London Stock and London Stock and London Stock
Exchange Exchange Exchange Exchange
ISIN: __ __ __ __
Common code: __ __ __ __
CUSIP number: N/A N/A N/A N/A
Expected ratings AAA/Aaa/AAA AA/Aa3/AA A+/A1/A+ BBB/Baa2/BBB
(S&P/Moody's/
Fitch):
THE ISSUER
Permanent Financing (No. 4) 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.
14
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.
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 part of the initial consideration payable
to the seller for loans (together with their related security) sold to the
mortgages trustee on the closing date, thereby increasing the Funding 1 share
of the trust property. 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) 113 235 7511.
The seller originated all of the loans in the portfolio according to the
lending criteria applicable at the time of origination and has sold those loans
to the mortgages trustee under the mortgage sale agreement.
Although the loans have been sold 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 sold 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 $__ floating rate series 1 class A issuer notes due [March
2005];
* the $__ floating rate series 1 class B issuer notes due June 2042;
* the $__ floating rate series 1 class M issuer notes due June 2042;
15
* the $__ floating rate series 1 class C issuer notes due June 2042;
* the $__ floating rate series 2 class A issuer notes due [March
2009];
* the $__ floating rate series 2 class B issuer notes due June 2042;
* the $__ floating rate series 2 class M issuer notes due June 2042;
* the $__ floating rate series 2 class C issuer notes due June 2042;
* the $__ floating rate series 3 class A issuer notes due [September
2033];
* the $__ floating rate series 3 class B issuer notes due June 2042;
* the $__ floating rate series 3 class M 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 [e]__ floating rate series 4 class A1 issuer notes due June
2042;
* the [GBP]__ floating rate series 4 class A2 issuer notes due June
2042;
* the [e]__ floating rate series 4 class B issuer notes due June
2042;
* the [e]__ floating rate series 4 class M issuer notes due June
2042;
* the [e]__ floating rate series 4 class C issuer notes due June
2042;
* the [e]__ fixed-floating rate series 5 class A issuer notes due
June 2042;
* the [e]__ floating rate series 5 class B issuer notes due June
2042;
* the [e]__ floating rate series 5 class M 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, the
series 1 class M 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, the class M issuer notes and the
class C issuer notes are to be construed in an analogous manner.
The series 4 class A1 issuer notes and the series 4 class A2 issuer notes
together are referred to as the series 4 class A issuer notes.
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 relevant issuer swaps). The issuer intercompany
loan will consist of separate issuer term advances. There will be a total of 21
issuer term advances -- an issuer series 1 term AAA advance, an issuer series 1
term AA advance, an issuer series 1 term A advance, an issuer series 1 term BBB
advance, an issuer series 2 term AAA advance, an issuer series 2 term AA
advance, an issuer series 2 term A advance, an issuer series 2 term BBB advance,
an issuer series 3 term AAA advance, an issuer series 3 term AA advance, an
issuer series 3 term A advance, an issuer series 3 term BBB advance, an issuer
series 4A1 term AAA advance, an issuer series 4A2 term AAA advance, an issuer
series 4 term AA advance, an issuer series 4 term A advance, an issuer series 4
term BBB advance, an issuer series 5 term AAA advance, an issuer series 5 term
AA advance, an issuer series 5 term A 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
16
AA advances to Funding 1, the proceeds of the different series of
class M issuer notes will be used to make the corresponding issuer term A
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 (as well as certain payments under
the series 1 class A issuer swap and series 2 class A issuer swap described in
the last paragraph under "THE SWAP AGREEMENTS -- THE ISSUER CURRENCY SWAPS"),
the class B issuer notes from payments made by Funding 1 under the
corresponding issuer term AA advances, the class M issuer notes from payments
made by Funding 1 under the corresponding issuer term A 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 relevant issuer currency 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 the mortgages trustee receives on
the loans and the related security and (b) the allocation of monies among 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, the class M issuer notes of any series and the
class C issuer notes of any series. Payments of interest and principal on the
class B issuer notes of each series will rank ahead of payments of interest and
principal on the class M issuer notes of any series and the class C issuer
notes of any series. Payments of interest and principal on the class M 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 M issuer notes of each
series rank equally (but subject to the permitted redemption dates of each
series of class M 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 or in
part on the interest payment date falling in [March 2005] (as
described in "- SCHEDULED REDEMPTION");
* the series 1 class B issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 1 class A issuer notes have
been redeemed in full;
* the series 1 class M issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 1 class B issuer notes have
been redeemed in full;
17
* 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 M 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 [March 2007] (as described in "-- SCHEDULED
REDEMPTION");
* the series 2 class B issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 2 class A issuer notes have
been redeemed in full;
* the series 2 class M issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 2 class B issuer notes have
been redeemed in full;
* the series 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 M 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 [December 2008] (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;
* the series 3 class M issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 3 class B issuer notes have
been redeemed in full;
* the series 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 M issuer notes have
been redeemed in full;
* the series 4 class A1 issuer notes will be redeemed according to
the series 4 class A1 redemption schedule starting on or after the
interest payment date falling in [June 2009] (as described in "-
SCHEDULED REDEMPTION");
* the series 4 class A2 issuer notes will be redeemed according to
the series 4 class A2 redemption schedule starting on or after the
interest payment date falling in [June 2009] (as described in "-
SCHEDULED REDEMPTION");
* 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 M issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 4 class B issuer notes have
been redeemed in full;
* 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 M 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;
* the series 5 class M issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 5 class B issuer notes have
been redeemed in full; and
18
* 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 M 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, the series 1
class M 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, the class M 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, the class
M issuer notes and the class C issuer notes; payments of principal on the class
B issuer notes will rank ahead of payments of principal on the class M issuer
notes and the class C issuer notes; and payments of principal on the class M
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 [March 2005] and the series 2 class A issuer
notes in full on the interest payment date falling in [March 2009]. 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 repayment
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". 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, the series 4 class A1 issuer notes
and the series 4 class A2 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 on the interest
payment dates falling in __ and __ in respect of the series 4 class A issuer
notes. 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 each scheduled
repayment date of the issuer series 4 AAA term advances 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 insufficient
funds on the first relevant scheduled repayment 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, as applicable), then the shortfall shall be due and payable on the
subsequent interest payment dates.
SCHEDULED
REDEMPTION DATES AMOUNT
- ------------------------------ ---------------- -------
__ and $__
series 3 class A issuer notes. __ $__
__ and [e]__
series 4 class A1 issuer notes __ [e]__
__ and [GBP]__
series 4 class A2 issuer notes __ [GBP]__
19
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 AND/OR THE SERIES 4 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:
* if at any time it would become unlawful for the issuer to make,
fund or to allow to remain outstanding a term advance made by it
under the issuer intercompany loan agreement and the issuer
requires Funding 1 to repay the issuer term advances; or
* 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), 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 __, 2004.
20
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
reference to a variable base rate from time to time;
* loans which track a variable rate of interest other than a variable
rate set by the seller or the servicer (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 sold 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 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 sold to the mortgages trustee will be required to comply with
specified criteria (see "SALE OF THE LOANS AND THEIR RELATED SECURITY -- SALE
OF NEW LOANS AND THEIR RELATED SECURITY TO THE MORTGAGES TRUSTEE"). Any new
loans sold 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.
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 either first legal charges over freehold or leasehold
properties located in England or Wales or first ranking standard securities
over heritable or long leasehold properties located in Scotland.
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
21
will not alter, and the respective percentage shares of the seller and Funding 1
in the trust property will alter accordingly.
SALE OF THE LOANS
On 14th June, 2002, the seller sold the initial loans and on subsequent
dates has sold 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 sell 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 may be applied to fund the sale of the new loans and their related
security to the mortgages trustee, or to comply with the seller's obligations
under the mortgage sale agreement as described under "SALE OF THE LOANS AND
THEIR RELATED SECURITY -- SALE 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 sold 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 sold to the
mortgages trustee if those new loans comply with the warranties set out in the
mortgage sale agreement.
When new loans are sold 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".
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 "SALE 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 sells 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
22
* 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 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 based on the aggregate outstanding
principal balance of the loans constituting the trust property on the London
business day immediately before that calculation date to take effect from the
next distribution date to take into account:
* any principal payments on the loans to be distributed to Funding 1
and/or the seller on the distribution date (a principal payment
made to a beneficiary reduces that beneficiary's share of the trust
property);
* losses sustained on the loans since the last calculation date;
* any drawings under flexible loans (if any) since the last
calculation date (these will be funded by the seller and the
seller's share of the trust property will increase accordingly);
* an amount (if any) equal to any consideration to be paid by Funding
1 to the seller on the relevant calculation date for an increase in
Funding 1's share of the trust property (which may happen when
Funding 1 receives additional funds under a new intercompany loan
from a new issuer);
* any acquisition of trust property by the seller on 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
Funding 1 receives a payment from the seller of the amount
outstanding under an intercompany loan); and
* an amount (if any) equal to any consideration to be paid by Funding
1 to the seller in relation to the sale of any new loans to the
mortgages trustee which increases the total size of Funding 1's
share of the trust property.
Adjustments to the trust property may also occur if borrowers make
overpayments or 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 until the
Funding 1 share of the trust property is zero); 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 until the Funding 1
share of the trust property is zero).
23
For more information on the mortgages trust, cash accumulation periods 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 use the proceeds of this
issuer intercompany loan to pay part of the initial consideration payable to
the seller for loans (together with their related security) sold to the
mortgages trustee on the closing date.
As described in "-- THE ISSUER NOTES -- RELATIONSHIP BETWEEN THE ISSUER
NOTES AND THE ISSUER INTERCOMPANY LOAN", the issuer intercompany loan will be
split into separate term advances to match the underlying series and classes of
issuer notes: the issuer term AAA advances, matching the issue of the class A
issuer notes of each series; the issuer term AA advances, matching the issue of
the class B issuer notes of each series; the issuer term A advances, matching
the issue of the class M 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 A advances reflect the rating
expected to be assigned to the class M issuer notes by the rating agencies on
the closing date (being A+ by Standard & Poor's, A1 by Moody's and A+ 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 and (to the
extent of any shortfall in amounts received from Funding 1 under the
intercompany loan) from payments made by the series 1 issuer swap provider or,
as applicable, the series 2 issuer swap provider, in respect of the series 1
class A issuer notes and the series 2 class A issuer notes only on the
respective final maturity dates thereof. 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 on the Funding 1
interest payment date falling in [March 2005]=;
* 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 A 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 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 A advance has been
fully repaid;
* repay the issuer series 2 term AAA advance on the Funding 1
interest payment date falling in [March 2007], 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;
24
* 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 A 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 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 A 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 [December 2008] and in an amount equal to
the scheduled amortisation instalment due on the Funding 1 interest
payment date falling in [March 2009], 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;
* 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 A 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 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 A advance has been
fully repaid;
* repay the issuer series 4A1 term AAA advance in an amount equal to
the scheduled amortisation instalment due on the Funding 1 interest
payment date falling in [June 2009] and in an amount equal to the
scheduled amortisation instalment due on the Funding 1 interest
payment date falling in[September 2009], 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 4A1 term AAA advance is fully repaid;
* repay the issuer series 4A2 term AAA advance in an amount equal to
the scheduled amortisation instalment due on the Funding 1 interest
payment date falling in [June 2009] and in an amount equal to the
scheduled amortisation instalment due on the Funding 1 interest
payment date falling in[September 2009], 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 4A2 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 A 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 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 A 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 __ until the issuer series 5 term AAA
advance has been fully repaid;
25
* 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;
* repay the issuer series 5 term A 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; 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 A 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]__
Issuer series 4A1 term AAA advance __ and [GBP]__
__ [GBP]__
Issuer series 4A2 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 --
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 the issuer intercompany loan are limited. In
particular, it will not be an event of default in respect of the issuer
intercompany loan if Funding 1 does not repay amounts due in respect of the
issuer 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".
26
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 funds) 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 A 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, the term A
advances and the term AA advances will be 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, the A 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 general reserve fund level is less than the general
reserve fund threshold; or
(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 A advances are outstanding or, in
respect of the term A advances, any term AA advances are outstanding (whether
or not any such term advances are then due and payable). Any deferral of the
principal amounts due on the term BBB advances, the term A 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, the issuer term A 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.
27
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".
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 Funding 1 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. On 25th November,
2003, Funding 1 entered into a second deed of accession to the Funding 1 deed
of charge pursuant to which Permanent Financing (No. 3) 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 fourth start-up loan agreement, Funding 1 will
on the closing date enter into a third Funding 1 deed of accession to the
Funding 1 deed of charge with us, the fourth start-up loan provider and with
Funding 1's other secured creditors. Together, the deed of charge, the first
deed of accession, the second deed of accession and the third 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 their respective 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 each 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 __ issuer notes is __ and its registered office is at __. The issuer
swap provider for the series __ issuer notes is __, whose registered office is
at __. The issuer swap provider for the series __ issuer notes is __ and its
registered office is at __. The issuer swap provider for the series __ issuer
notes is __ and its registered office is at __. 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,
which is an ISDA master agreement (including a schedule and a confirmation)
with Funding 1 and the security trustee. The Funding 1 swap agreement will be
amended and restated on the closing date. 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
28
swap provider 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.
SWAP AGREEMENTS
Borrowers will make payments under the loans in sterling. Some of the loans
in the portfolio carry variable rates of interest based on a variable base
rate, 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. On 25th November, 2003
the swap agreement was further amended and restated in relation to the previous
issue by Permanent Financing (No. 3) 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 in order to adjust the margins that will be applied to the three-month
LIBOR rate by reference to which amounts payable by the Funding 1 swap provider
(if any) will be calculated.]
[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 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, respectively.
Similarly, to enable us to make payments on the interest payment dates in
respect of each of the series 4 class A1 issuer notes, the series 4 class B
issuer notes, the series 4 class M issuer notes, the series 4 class C issuer
notes and the series 5 issuer notes in euro we will enter into the issuer euro
currency swap agreements with the issuer euro currency swap providers 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 series 4 class A1 issuer notes, the
series 4 class B issuer notes, the series 4 class M issuer notes, the series 4
class C issuer notes and the series 5 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 class A1 issuer notes, the series 4 class B issuer
notes, the series 4 class M issuer notes, the series 4 class C issuer notes and
the series 5 issuer notes, respectively.
Pursuant to the terms of the series 1 class A issuer swap and the series 2
class A issuer swap, the series 1 issuer swap provider and the series 2 issuer
swap provider have agreed, respectively, that, subject to the satisfaction of
the CPR swap conditions (the "CPR SWAP CONDITIONS") described in "THE SWAP
AGREEMENTS -- THE ISSUER CURRENCY SWAPS", if on the final maturity date of the
series 1 class A issuer notes or, as applicable, the series 2 class A issuer
notes, there is a shortfall in the amount required to repay in full the
principal amount outstanding of those notes, then the series 1 issuer swap
provider or, as applicable, the
29
series 2 issuer swap provider will pay to the issuer an amount equal to the
shortfall. Thereafter, the issuer shall pay to the series 1 issuer swap provider
or, as applicable, the series 2 issuer swap provider, all principal amounts
received by the issuer from Funding 1 in respect of the series 1 term AAA
advance or, as applicable, the series 2 term AAA advance.
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, the class M 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, all of the class M issuer notes and/or all of the
class C issuer notes, as the case may be. The class B noteholders, the class M
noteholders and the class C noteholders will be bound by the terms of the class
B issuer notes, the class M 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, the class M 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, the class M 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, the class M noteholders and/or the
class C noteholders of the class B issuer notes, the class M 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, the class M issuer notes
and/or the class C issuer notes that such class B noteholders, class M
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 A1 issuer notes, the series 4 class A2 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 M issuer notes are expected to be assigned an A+
rating by Standard & Poor's, an A1 rating by Moody's and an A+ 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 for each
class of the issuer notes to be admitted to trading on the London Stock
Exchange's market for listed securities.
30
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;
* Permanent Financing (No. 2) PLC, on 6th March, 2003; and
* Permanent Financing (No. 3) PLC, on 25th November, 2003.
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 sold
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, 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 general
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
equally with, ahead of or after each other, primarily depending on the relative
term advance rating of each such term advance. The rating of a term advance
will be the rating assigned by the rating agencies to the corresponding 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 term advances with the highest term advance
rating and thereafter on the term advances with the next highest term advance
rating, and so on down to the term advances with the lowest term advance
rating. 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, the issuer term A 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.
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
31
term advances under any intercompany loan, including the issuer
intercompany loan, provided that the quarterly CPR is greater than 15 per cent.
and there is no cash accumulation shortfall at that time.
If Funding 1 enters into a new intercompany loan agreement, it will also, if
required, enter into a new Funding 1 swap with either the Funding 1 swap
provider or a new Funding 1 swap provider and (in either case) with 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 general 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 an entity, 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 listed
on a "RECOGNISED STOCK EXCHANGE" 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 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, and (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;
* 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
32
* 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) these series of 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 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 date
year of the aggregate amounts payable to
outstanding principal Funding 1 by the
amount of the trust property mortgages trustee
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 date
amount outstanding
of the notes
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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
Permanent Financing (No. 3) Estimated 0.025 per Ahead of all Each interest payment date
PLC cash management fee cent. per year of the outstanding previous
principal amount notes of Permanent
outstanding of the Financing (No. 3)
applicable previous PLC
intercompany loan
Corporate expenses of Estimated [GBP]5,200 Ahead of all Each interest
Permanent Financing (No. 3) each year outstanding previous payment date
PLC notes of Permanent
Financing (No. 3)
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
Corporate expenses of Estimated [GBP]1,750 Ahead of all revenue Each distribution date
mortgages trustee each year amounts payable to
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 0.08 per cent. of Ahead of all issuer Each Funding 1
Funding 1 liquidity facility undrawn amount term advances interest payment date
under Funding 1
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 date
paying agents)
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Each of the fees set out in the preceding table is, where applicable,
inclusive of value added tax, which is currently assessed at 17.5 per cent. The
fees will be subject to adjustment if the applicable rate of value added tax
changes.
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, the managers, the underwriters, 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. Funding 1 has entered into the Funding 1 liquidity facility, but
that is available (subject to satisfying certain conditions precedent) only to
pay certain amounts due and payable on the term advances made by Permanent
Financing (No.1) PLC, Permanent Financing (No.2) PLC and Permanent Financing
(No.3) PLC. However, in the event that the seller suffers certain ratings
downgrades, Funding 1 will be required to fund the liquidity reserve fund,
though there can be no assurance that Funding 1 will have sufficient resources
to do so at such time, and Funding 1 may draw money from the liquidity reserve
fund (See "CREDIT STRUCTURE -- LIQUIDITY RESERVE FUND"), to the extent it has
been funded, to pay amounts due to the issuer. Furthermore, to the extent that
on the final maturity date of the series 1 class A issuer notes or the series 2
class A issuer notes, the issuer has not received sufficient moneys from
Funding 1 in respect of the corresponding term AAA advances to repay the
principal amount outstanding of those notes in full, then, subject to the
satisfaction of the CPR swap conditions, the issuer will be entitled to receive
a payment from the series 1 issuer swap provider or, as applicable, the series
2 issuer swap provider, in an amount equal to the shortfall, which it shall
apply to repay those classes of notes.
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 general reserve fund (as
described in "CREDIT STRUCTURE -- GENERAL RESERVE FUND");
* the amount of funds credited to the liquidity reserve fund as
described in "CREDIT STRUCTURE -- LIQUIDITY RESERVE FUND"); and
* the allocation of funds between the issuer term advances, the
previous term advances and any new term advances (as described in
"CASHFLOWS").
According to the terms of the mortgages trust deed, the mortgages trustee is
obliged to pay to Funding 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
36
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, THE ISSUER TERM A ADVANCES
AND THE ISSUER TERM BBB ADVANCES WILL BE EXTINGUISHED, WHICH WOULD CAUSE A LOSS
ON ANY CLASS B ISSUER NOTES, ANY CLASS M 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, the issuer term A
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, the
issuer term A 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, the issuer term A 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, the class M issuer notes or the class C issuer notes
outstanding.
ENFORCEMENT OF THE ISSUER SECURITY IS THE ONLY REMEDY FOR A DEFAULT IN THE
ISSUER'S OBLIGATIONS, AND THE PROCEEDS OF THAT ENFORCEMENT MAY NOT BE ENOUGH TO
MAKE PAYMENTS ON THE ISSUER NOTES
The only remedy for recovering amounts on the issuer notes is through the
enforcement of the issuer security. We have no recourse to the assets of
Funding 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:
37
* 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, the
series 1 class M 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, the series 2 class M 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, the class M 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, the class M 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, the class M 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 M issuer notes and 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 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 an error established as such to the satisfaction
of the security trustee or is of a formal, minor or technical
nature.
38
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 intercompany loan terms and
conditions, 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 sale of new types of loans or mortgages to the mortgages
trustee;
(v) changes to be made to the general reserve fund required amount, the
liquidity reserve fund required amount and/or the manner in which
the reserve funds are 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 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 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 written
response (affirmative or negative) is given within 10 business days after the
written 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, THE HOLDERS OF CLASS M 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, the class M noteholders and/or the class C
noteholders on the other hand;
* the note trustee is to have regard only to the interests of the
class B noteholders in the event of a conflict between the
interests of the class B noteholders on the one hand and the class
M noteholders and/or the class C noteholders on the other hand; and
* the note trustee is to have regard only to the interests of the
class M noteholders in the event of a conflict between the
interests of the class M noteholders on the one hand and the class
C noteholders on the other hand.
39
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, THE HOLDERS OF EACH SERIES OF THE CLASS M 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, the interests of the class M
noteholders of one series of the issuer notes conflicts with the interests of
the class M 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, each series of the
class M 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 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.
40
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 required (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:
* pay the seller in relation to the initial consideration for new
loans and their related security to be sold to the mortgages
trustee;
* pay the seller for a portion of the seller share of the trust
property, 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 (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 general reserve fund.
The 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
sale 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:
41
* 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) sold to
the mortgages trustee on 14th June, 2002 which comprised Funding 1's original
share of the trust property. Funding 1 used most of the proceeds of the
previous intercompany loan from Permanent Financing (No. 2) PLC to pay the
seller for loans (together with their related security) sold to the mortgages
trustee on 6th March, 2003. Funding 1 used most of the proceeds of the previous
intercompany loan from Permanent Financing (No. 3) PLC to pay consideration to
the seller for an increase in Funding 1's share in the mortgages trust on 25th
November, 2003.
The 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 issues were 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
SECURITY TRUSTEE, 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 general 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. (The Funding 1 liquidity facility is not available to make
payments on the issuer term advances, but rather is available only to pay
certain amounts due on the term advances made by Permanent Financing (No. 1)
PLC, Permanent Financing (No. 2) PLC and Permanent Financing (No. 3) PLC.)
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 required (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.
42
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 has or 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 SOLD 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 sold to the mortgages trustee will
have the same characteristics as the loans in the portfolio as at the closing
date. In particular, new loans may have different payment characteristics than
the loans in the portfolio as at the closing date. The ultimate effect of this
could be to delay or reduce the payments you receive on the issuer notes.
However, any new loans will be required to meet the conditions described in
"SALE 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 and/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, the
issuer term A 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, the class M 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 issue r bullet term
advances or, where applicable, scheduled amortisation instalments) it is unable
to make a drawing on the reserve funds 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 da tes 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, there will be a variation in the yield to maturity of
the relevant class of issuer notes.
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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 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 representations and warranties in the mortgage
sale agreement, then the payment received by the mortgages trustee will have
the same effect as a prepayment of all of the loans under that 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 SOLD 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 sale
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
sold 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, licensed conveyancer or (in
Scotland) qualified conveyancer to conduct a full investigation of the title to
a property in all cases. Where the borrower is remortgaging there will be a
limited investigation to carry out some but not all of the searches and
investigations which would normally be carried out 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
44
principal, such as changes in the national or international economic climate,
regional economic or housing conditions, changes in tax laws, interest rates,
inflation, the availability of financing, yields on alternative investments,
political developments and government 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 (although in limited circumstances we may also be
entitled to receive payments under the series 1 class A issuer swap and the
series 2 class A issuer swap, for a description of which see "-- 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" below). 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 redempt ion 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, after making requisite
payments to the Funding 1 liquidity facility provider, repaying amounts
outstanding under the extendable bullet term advances following the date that
the relevant corresponding class of notes used to fund those extendable bullet
term advances has been fully redeemed and replenishing the reserve funds,
Funding 1 will repay:
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;
then, the term A advances in respect of the issuer intercompany loan and
any new intercompany loans, until each of those term A 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.
45
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, after making requisite payments to
the Funding 1 liquidity facility provider and to replenish the reserve funds,
Funding 1 will repay:
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;
then, the term A advances in respect of the issuer intercompany loan and
any new intercompany loans, until each of those term A 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 sold 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 "SALE OF LOANS AND
THEIR RELATED SECURITY -- SALE OF NEW LOANS AND THEIR RELATED SECURITY TO THE
MORTGAGES TRUSTEE" in paragraphs (A) to (P). From and including that date to
but excluding the date when those
46
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. 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, the class M issuer notes and the class C issuer
notes are subordinated in right of payment of interest to the class A issuer
notes. The class M issuer notes and the class C issuer notes are subordinated
in right of payment of interest to the class B issuer notes. The class C issuer
notes are subordinated in right of payment of interest to the class M 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
and so on for each class of each series of issuer notes.
Accordingly, there is no assurance that these subordination rules will
protect the holders of class A issuer notes, the holders of class B issuer
notes or the holders of class M issuer notes from all risk of loss.
PRINCIPAL PAYMENTS ON THE [ORIGINAL PASS-THROUGH] NOTES WILL BE DEFERRED IN
SOME CIRCUMSTANCES
Principal repayments on the issuer term AA advances, the issuer term A
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,
the A 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
47
* the adjusted general reserve fund level is less than the general
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, issuer term A 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 A advances will not be
entitled to principal repayments until the relevant circumstances as described
above have been remedied or otherwise cease to exist. Also, if any term A
advance remains outstanding (whether or not such term A 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 M issuer
notes of all series and 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 of previous series of issuer notes, then the unpaid
series of issuer notes will be adversely affected.
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.
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 CLASS A1 ISSUER
NOTES, THE SERIES 4 CLASS B ISSUER NOTES, THE SERIES 4 CLASS M ISSUER NOTES,
THE SERIES 4 CLASS C ISSUER NOTES, THE SERIES 5 CLASS A ISSUER NOTES, THE
SERIES 5 CLASS B ISSUER NOTES, THE SERIES 5 CLASS M 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 class A1 issuer
notes, series 4 class B issuer notes, series 4 class M issuer notes, series 4
class C issuer notes and the series 5 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:
48
* our currency exchange rate exposure, including the interest rate
exposure connected with that currency exposure;
* 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; and
* prior to the earliest to occur of (i) the interest payment date
falling in __ in respect of the series 5 class A issuer notes, (ii)
the occurrence of a trigger event and (iii) enforcement of the
issuer security, the difference in periodicity between quarterly
Funding 1 interest payment dates and the annual interest payment
dates in relation to the series 5 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 class A1 issuer notes, the series 4 class B issuer notes, the series 4
class M issuer notes, the series 4 class C issuer notes and the series 5 issuer
notes with the issuer euro currency swap providers (see "THE SWAP AGREEMENTS --
THE ISSUER CURRENCY SWAPS").
If we fail to make timely payments of amounts due under an issuer currency
swap, then we will have defaulted under that issuer currency swap. Each issuer
currency swap provider is obliged only to make payments under an issuer
currency swap if and for so long as we make payments under the same. If an
issuer currency 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 currency swap (which are the same dates as the
interest payment dates in respect of the issuer notes), we will be exposed to
changes in US dollar/sterling or euro/sterling currency exchange rates and in
the associated interest rates on these currencies. Unless a replacement issuer
currency swap is entered into, we may have insufficient funds to make payments
due on the issuer notes of any class and any series that are then outstanding.
[The __ issuer swap guarantor will be obliged to gross up payments made by
it to the issuer if withholding taxes are imposed on payments under the __
issuer swap guarantee. However, the __ issuer swap guarantee provides that, if
the __ issuer swap guarantor is required to gross up a payment under the __
issuer swap guarantee in respect of a relevant issuer currency swap, it may
terminate the relevant issuer currency swap. If it does terminate the relevant
issuer currency swap, 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 currency swap is entered into, we
may have insufficient funds to make payments due on the issuer notes of any
class and any series that are then outstanding.]
THE DIFFERENCE IN TIMING BETWEEN OUR OBLIGATIONS AND THE OBLIGATIONS OF THE
SERIES 5 CLASS A ISSUER SWAP PROVIDER COULD ADVERSELY AFFECT PAYMENTS ON THE
ISSUER NOTES
To the extent that it has funds available, on each quarterly Funding 1
interest payment date Funding 1 will pay to us interest and, if applicable,
principal due on the issuer series 5 term AAA advance. On each quarterly
interest payment date in relation to our obligations under the series 5 class A
issuer swap, we will pay the interest received from Funding 1 to the series 5
class A issuer swap provider. The series 5 class A issuer swap provider will
not be obliged to make any corresponding swap payments to us until the interest
payment date in respect of the series 5 class A issuer notes. This interest
payment date occurs annually up to and including the earliest to occur of (i)
the interest payment date falling in __ in respect of the series 5 class A
issuer notes, (ii) the occurrence of a trigger event and (iii) enforcement of
the issuer security, and quarterly on and following the interest payment date
occurring immediately thereafter. Therefore, under the series 5 class A issuer
swap, the date on which the series 5 class A issuer swap provider pays amounts
due to us may be as long as nine months after a date on which we pay amounts
due to it.
If the series 5 class A issuer swap provider does not meet its payment
obligations to us under the series 5 class A issuer swap on any annual interest
payment date and does not make a termination payment that has become due from
it to us, we may have a larger shortfall in funds with which to make interest
payments on the issuer notes than if its payment obligations were quarterly and
therefore coincidental with our payment obligations under the series 5 class A
issuer swap. Hence, the difference in timing between our obligations and the
obligations of the series 5 class A issuer swap provider under the series 5
class A issuer swap may affect our ability to make payments on the issuer notes
of any class and any series.
49
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 make
a termination payment to the relevant issuer swap provider. The amount of the
termination payment will be based on the cost of entering into a replacement
issuer swap. Under the issuer intercompany loan agreement, Funding 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 if and for so long as Funding 1 makes
payments under the same. If the
50
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 make 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 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. In
particular, if Funding 1 has not paid all amounts due and payable to the issuer
in respect of the issuer series 1 term AAA advance or the issuer series 2 term
AAA advance on or prior to the final repayment date of those term advances,
then the issuer will rely upon the series 1 issuer swap provider or, as
applicable, the series 2 issuer swap provider, to pay it, subject to the
satisfaction of the CPR swap conditions, an amount equal to the relevant
shortfall. The issuer will apply that payment from the relevant issuer swap
provider to repay the series 1 class A issuer notes or, as applicable, the
series 2 class A issuer notes. If the series 1 issuer swap provider or, as
applicable, the series 2 issuer swap provider were to fail to make the relevant
payment to the issuer on the final maturity date of those notes, then an issuer
note event of default will occur.
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 funds) 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 A advances. When the amount
recorded on the principal deficiency ledger exceeds
51
the principal amount outstanding on the term A advances, Funding 1 will use
principal receipts that would have been applied to repay the term AA advances to
pay those amounts. 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 funds. 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 revenue 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, the issuer term A advances and the issuer term AA
advances;
* there may be insufficient funds to repay the principal due and
payable on any of the issuer term BBB advances, the issuer term A
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, the
term A advances and term AA advances;
* if the amount of principal deficiencies exceeds the principal
amount outstanding of any of the term advances (and the principal
deficiencies cannot be covered by the other income of Funding 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 M issuer
notes, the class B issuer notes and the class A issuer notes, as
the case may be; and/or
* we may be unable to pay, in full or at all, interest due on your
issuer notes.
For more information on 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.
52
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 sold to the
mortgages trustee or (b) in the case of each new loan, is materially untrue on
the date that new loan is sold 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.
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 __,
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 ensuring 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 funds 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 English mortgages
will take effect in equity only. The sale by the seller to the mortgages
trustee of the Scottish mortgages on the closing date will be given effect by a
Scottish declaration of trust by the seller (and any sale of Scottish mortgages
in the future will be given effect by further Scottish declarations of trust)
by which the beneficial interest in the Scottish mortgages will be transferred
to the mortgages trustee. In each case this means that legal title to the loans
in the trust property remains with the seller, but the mortgages trustee has
all the other rights and benefits relating to ownership of each loan and its
related security (which rights and benefits are subject to the trust in favour
of the beneficiaries). The mortgages trustee has the right to demand that the
seller give it legal title to the loans and the related security in the
circumstances described in "SALE 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 sale of the English mortgages 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 English mortgages
or take any steps to complete or perfect its title to the Scottish mortgages.
For more information on the Scottish mortgages see "THE LOANS -- SCOTTISH
LOANS" and "MATERIAL LEGAL ASPECTS OF THE LOANS -- SCOTTISH LOANS".
Because the mortgages trustee has not obtained legal title to the loans or
their related security, there are risks, as follows:
* firstly, if the seller wrongly sold a loan to another person which
has already been sold to the mortgages trustee, and that person
acted in good faith and did not have notice of the interests of
53
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.
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 (such as, for example,
set-off rights associated with borrowers holding deposits with the seller) and
further rights of independent set-off would cease to accrue from that date and
no new rights of independent set-off could be asserted following that notice.
Set-off rights arising under transaction set-off (which are set-off claims
arising out of a transaction connected with the loan) will not be affected by
that notice.
SET-OFF RISKS IN RELATION TO FLEXIBLE LOANS AND DELAYED CASHBACKS MAY ADVERSELY
AFFECT THE FUNDS AVAILABLE TO THE ISSUER TO REPAY THE ISSUER NOTES
As described in "-- THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE
MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGES WHICH MAY ADVERSELY
AFFECT PAYMENTS ON THE ISSUER NOTES", the seller has made, and in the future
may make, an equitable assignment of the mortgages, or in the case of Scottish
mortgages a transfer of the beneficial interest in the Scottish mortgages, to
the mortgages trustee, with legal title being retained by the seller.
Therefore, the rights of the mortgages trustee may be subject to the direct
rights of the borrowers against the seller, including rights of set-off
existing prior to notification to the borrowers of the sale 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
54
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.
Further there may be circumstances in which:
* a borrower may seek to argue that certain drawings under flexible
loans are unenforceable by virtue of non-compliance with the
Consumer Credit Act 1974 ("CCA"); or
* certain drawings may rank behind liens created by a borrower after
the date upon which the borrower entered into its mortgage with the
seller.
The minimum seller share has been sized in an amount expected to cover 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 or that payments may not be made when due.
IF THE SERVICER IS REMOVED, THERE IS NO GUARANTEE THAT A SUBSTITUTE SERVICER
WOULD BE FOUND, WHICH COULD DELAY COLLECTION OF PAYMENTS ON THE 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 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") is being brought
into effect in stages. The first stage (known as "N2") came into effect on 1st
December, 2001. The FSA has announced that the rules relating to the regulation
of mortgages will come into effect on 31st October, 2004 (the date known as
"N(M)").
FSMA applies to any "regulated activity". H.M. Treasury has made the
Financial Services and Markets Act 2000 (Regulated Activities) Order 2001
specifying that entering into and (in certain circumstances) administering a
"regulated mortgage contract" are regulated activities (although the provisions
specifying as
55
such will not come into force until N(M)). 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 (and that such provisions
will also not come into force until N(M)).
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 or (in Scotland) a first ranking standard security on land
(other than timeshare accommodation) in the UK, and (c) at least 40 per cent. 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 and 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 placed on authorised persons in respect of regulated
mortgage activities. In May 2003, the FSA published a further consultation on
conduct of business rules.]
On 15th October, 2003, the FSA published the Mortgages: Conduct of Business
Sourcebook ("MCOB"). MCOB provides rules and guidance in respect of conduct of
business requirements for authorised 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. MCOB comes into force on N(M).
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 by October 2004), then any loan
or further advance originated or varied bilaterally after this time, other than
a regulated mortgage contract under the FSMA or an exempt agreement under the
CCA, will be regulated by the CCA. Such loan or further advance will have to
comply with requirements as to form and content of the credit agreement and, if
it does not comply, will be unenforceable
56
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.
The FSA has stated in Consultation Paper 146 (Chapter 4, paragraph 4.24)
that to avoid dual regulation once the new regulatory regime applies, all
mortgages regulated by the FSA will not be covered by the CCA. This carve-out
only affects mortgages entered into after the new regulatory regime is
effective (i.e. (N(M)). Before that date, the CCA will continue to be the
relevant legislation.
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.
However, UK lenders generally are not in a position to begin to provide an ESIS
to consumers until N(M). 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
euro 20,000 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.
57
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 or (in Scotland) interdict a business from
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
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.
DECISIONS OF THE OMBUDSMAN COULD LEAD TO SOME TERMS OF THE LOANS BEING VARIED,
WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
Under FSMA, the Financial Ombudsman Service is required to make decisions
on, among other things, complaints relating to the terms in agreements on the
basis of what, in the Ombudsman's opinion, would be fair and reasonable in all
circumstances of the case, taking into account, among other things, law and
guidance. Complaints brought before the Financial Ombudsman Service for
consideration must be decided on a case-by-case basis, with reference to the
particular facts of any individual case. Each case would first be adjudicated
by an adjudicator. Either party to the case may appeal against the
adjudication. In the event of an appeal, the case proceeds to a final decision
by the Ombudsman.
In January 2002, the Ombudsman made a determination on the seller's appeal
to an earlier decision by an adjudicator at the Financial Ombudsman Service
concerning a case involving HVR 1 and HVR 2. In March 2001, two joint borrowers
with a capped rate loan originated when Halifax offered only a single standard
variable base rate contacted Halifax and requested that their loan be linked to
HVR 2. Halifax informed the borrowers that, because they were still in their
product period, they could either transfer to HVR
58
2 when their product period expired or transfer to HVR 2 immediately and pay the
applicable early repayment fee. The borrowers complained to the Financial
Ombudsman Service and, on 29th January, 2002, on appeal by Halifax, the
Ombudsman determined in the borrowers' favour and recommended that Halifax
recalculate the borrowers' mortgage by reference to HVR 2 from the date when
Halifax should have granted their request in March 2001, refund any overpayments
and pay [GBP]150 for any inconvenience caused. HVR 2 was withdrawn and ceased to
be available to new borrowers with effect from 1st February, 2002.
The Ombudsman's decision only applies to the two borrowers and their
particular circumstances, though other borrowers may also complain to the
Ombudsman. In March 2002, Halifax announced that borrowers under loans who were
in similar circumstances and who had asked to be transferred to HVR 2 when it
was available would be invited to make a product switch to HVR 2 and to obtain
a refund for all overpayments of interest since the date they had asked to be
transferred. For each of those loans, the borrowers would also receive [GBP]150
for any inconvenience caused. The borrowers under loans who requested to be
transferred after HVR 2 was withdrawn and before the announcement in March 2002
were not offered a switch or a refund, though Halifax has given or will give
each of these customers an ex gratia payment of [GBP]100.
Since then, further decisions by the Ombudsman in similar cases have
confirmed that affected borrowers were only entitled to a refund of
overpayments of interest from the date when they asked to be transferred to HVR
2 and not from the date when HVR 2 first became available, and also that
affected borrowers were not entitled to apply to be transferred to HVR 2 after
it was withdrawn.
The seller does not believe that any Ombudsman's decision to date or any
other decision by any competent authority in the future (in respect of the
seller's two variable base rates, HVR 1 and HVR 2) would affect the yield on
the loans in such a way as to have a material adverse effect on our ability to
meet our obligations on the issuer notes.
As regards other borrowers, in the event that a decision (in respect of the
seller's variable base rate) by the Ombudsman or any other competent authority
finds that a borrower's loan should be linked to HVR 2, then that borrower may
set-off the overpaid sum against the amount owing under his or her loan if the
seller does not reimburse that borrower. Any such non-recovery, claim or set-
off ultimately may adversely affect our ability to make payments on the issuer
notes, as described in "-- 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" above.
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 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
59
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 and (in relation to the Scottish
loans) Scots law in effect as at the date of this prospectus. We cannot provide
assurance as to the impact of any possible change to English or Scots law or
administrative practice in the United Kingdom after the date of this
prospectus.
INSOLVENCY ACT 2000
Significant changes to the UK 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 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) a
party has incurred or when the agreement was entered into was expected to incur
a debt of at least [GBP]10 million under the arrangement and (b) the
arrangement 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 exception. 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 corporate insolvency law. In particular the
reforms restrict the right of the holder of a floating charge created after
15th September, 2003 to appoint an administrative receiver (unless an exception
applies) and instead gives primacy to collective insolvency procedures (in
particular, administration).
The holder of a floating charge created before 15th September, 2003 over the
whole or substantially the whole of the assets of a company (such as the
security trustee under the Funding 1 deed of charge) retains the ability to
block the appointment of an administrator by appointing an administrative
receiver, who will primarily act in the interests of the floating charge
holder.
60
The Insolvency Act contains provisions which continue to allow for 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 is 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), 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. In addition, as the
provisions of the Enterprise Act have never been considered judicially, no
assurance can be given as to whether the Enterprise Act could have a
detrimental effect on the transaction described in this prospectus or on the
interests of noteholders.
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 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.
In addition to the introduction of a prohibition on the appointment of an
administrative receiver as set out above, section 176A of the Insolvency Act
provides that in relation to floating charges created after 15th September,
2003 any receiver (including an administrative receiver), liquidator or
administrator of a company is required to make a "prescribed part" of the
company's "net property" available for the satisfaction of unsecured debts in
priority to the claims of the floating charge holder. The company's "net
property" is defined as the amount of the chargor's property which would be
available for satisfaction of debts due to the holder(s) of any debentures
secured by a floating charge and so refers to any floating charge realisations
less any amounts payable to the preferential creditors or in respect of the
expenses of the liquidation or administration. The "prescribed part" is defined
in The Insolvency Act 1986 (Prescribed Part) Order 2003 (SI 2003/2097) to be an
amount equal to 50 per cent. of the first [GBP]10,000 of floating charge
realisations plus 20 per cent. of the floating charge realisations thereafter,
provided that such amount may not exceed [GBP]600,000.
This obligation does not apply if the net property is less than a prescribed
minimum and the relevant officeholder is of the view that the cost of making a
distribution to unsecured creditors would be disproportionate to the benefits.
The relevant officeholder may also apply to court for an order that the
provisions of section 176A of the Insolvency Act should not apply on the basis
that the cost of making a distribution would be disproportionate to the
benefits.
Floating charge realisations upon the enforcement of the issuer security may
be reduced by the operation of these "ring fencing" provisions.
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:
61
* 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 2004,
with a view to allowing for implementation at the end of 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. 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.
62
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]__ = 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 __, 2004. Use of this rate does not mean that 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,
__ ----------------------------------------------
2004 2003 2002 2001 2000 1999
------ ------ ------ ------ ------ ------
Last(1)..... __ 1.6860 1.6100 1.4546 1.4930 1.6182
Average(2).. __ 1.6203 1.5038 1.4407 1.5160 1.6177
High........ __ 1.6999 1.6100 1.5038 1.6537 1.6746
Low......... __ 1.5502 1.4082 1.3727 1.3977 1.5485
- ------------
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
63
THE ISSUER
INTRODUCTION
The issuer was incorporated in England and Wales on 8th December, 2003
(registered number 4988201) 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, the issuer term A 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 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 purpose
Guildhall Yard companies
London EC2V 5AE
SFM Directors (No. 2) Limited Blackwell House Director of special purpose
Guildhall Yard 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 issuer is:
SFM Corporate Services Limited
Blackwell House
Guildhall Yard
London EC2V 5AE
64
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 __, 2004:
AS AT __, 2004
[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
49,998 ordinary shares each one quarter paid 12,500
--------------
12,502
==============
The issuer has no loan capital, term loans, other borrowings or indebtedness
or contingent liabilities or guarantees as at __, 2004.
There has been no material change in the capitalisation, indebtedness,
guarantees or contingent liabilities of the issuer since __, 2004.
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.
65
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 fourth 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 paid by the seller on the issuer's behalf, see
"UNDERWRITING".
66
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. The seller was
incorporated in England and Wales with registered number 02367076 on 31st
March, 1989. 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. Upon completion of the
transfer, Halifax Building Society ceased to exist. On 4th December, 1996 the
seller changed its name to Halifax plc and re-registered as a public limited
company. The UK Banking Act 1987 was repealed when section 19 of the FSMA was
brought into force on 1st December, 2001. The seller is now authorised as
required under the FSMA. 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 subsidiary 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 total consolidated assets of [GBP]__ million at 31st December, 2003
and [GBP]__ million at 31st December, 2002. HBOS's consolidated profit on
ordinary activities before tax for the year ended 31st December, 2003 was
[GBP]__ million and for the year ended 31st December, 2002 was [GBP]__ million.
The seller had total consolidated assets of [GBP]__ million at 31st
December, 2003 and of [GBP]141,218 million at 31st December, 2002. The seller's
consolidated profit on ordinary activities before tax for the year ended 31st
December, 2003 was [GBP]__ million and for the year ended 31st December, 2002
was [GBP]1,187 million.
MORTGAGE BUSINESS
The total consolidated value of the seller's mortgage loans and advances
secured on residential properties as at 31st December, 2003 was approximately
[GBP]__ billion (for 2002 this figure was [GBP]122.1 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.
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
67
mortgage repayment insurance. In these instances, the insurance continues to be
underwritten by Halifax Insurance Ireland Limited.
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, those incidental to the authorisation of the issuer
transaction documents referred to in this prospectus to which it is or will be
a party, applying for a standard licence under the Consumer Credit Act 1974 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 purpose
Guildhall Yard companies
London EC2V 5AE
SFM Directors (No. 2) Limited Blackwell House Director of special purpose
Guildhall Yard 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 Funding 1 is:
SFM Corporate Services Limited
Blackwell House
Guildhall Yard
London EC2V 5AE
68
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
==============
69
The following table shows the indebtedness of Funding 1 as at 31st December,
2003, all of which is secured and unguaranteed and relates to the previous
issues:
TERM ADVANCES MADE BY PERMANENT FINANCING (NO. 1) PLC
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:
principal......................................... [GBP]64,200,000
unpaid interest................................... [GBP]2,713,571
------------------
TERM ADVANCES MADE BY PERMANENT FINANCING (NO. 2) PLC
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:
principal......................................... 67,159,278
unpaid interest................................... 689,004
------------------
TERM ADVANCES MADE BY PERMANENT FINANCING (NO. 3) PLC
series 1 term AAA advance due December 2004.......... [GBP]658,500,000
series 1 term AA advance due June 2042............... [GBP]22,900,000
series 1 term BBB advance due June 2042.............. [GBP]22,900,000
series 2 term AAA advance due September 2010......... [GBP]1,018,000,000
series 2 term AA advance due June 2042............... [GBP]35,400,000
series 2 term BBB advance due June 2042.............. [GBP]35,400,000
series 3 term AAA advance due September 2033......... [GBP]898,250,000
series 3 term AA advance due June 2042............... [GBP]31,200,000
series 3 term BBB advance due June 2042.............. [GBP]31,200,000
series 4A1 term AAA advance due September 2033....... [GBP]482,750,000
series 4A2 term AAA advance due September 2033....... [GBP]750,000,000
series 4 term AA advance due June 2042............... [GBP]42,850,000
series 4 term BBB advance due June 2042.............. [GBP]42,850,000
series 5 term AAA advance due June 2042.............. [GBP]400,000,000
series 5 term AA advance due June 2042............... [GBP]13,900,000
series 5 term BBB advance due June 2042.............. [GBP]13,900,000
third start-up loan:
principal......................................... [GBP]30,000,000
unpaid interest................................... [GBP]__
------------------
Total................................................ [GBP]__
==================
70
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 31st December, 2003.
There has been no material change in the capitalisation, indebtedness or
contingent liabilities or guarantees of Funding 1 since 31st December, 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 issuers pursuant to the previous intercompany loan agreements and
this will be increased by the issuer term advances made to it by the issuer
pursuant to the issuer intercompany loan agreement.
Funding 1's principal source of liquidity is earnings on its interest in the
trust property, the reserve funds and (in respect of the previous term advances
only) the Funding 1 liquidity facility.
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.
71
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, Wales and Scotland;
* invest in, buy, sell and otherwise acquire and dispose of mortgage
loans, advances, other similar investments and all forms of
security;
* carry on business as a money lender, financier and investor;
* undertake and carry on all kinds of loan, financial and other
operations; and
* act as trustee in respect of carrying on any of these 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 registering as a data user
under the Data Protection (Jersey) Law 1987 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.
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
72
The company secretary of the mortgages trustee is:
SFM Offshore Limited
47 Esplanade
St Helier
Jersey
JE1 0BD
73
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.
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.
74
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
75
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
76
THE ISSUER SWAP PROVIDERS
[TO BE INCLUDED ONCE SWAP PROVIDERS ARE KNOWN]
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.
77
THE FUNDING 1 LIQUIDITY FACILITY PROVIDER
JPMorgan Chase Bank is the Funding 1 liquidity facility provider and is a
wholly owned bank subsidiary of J.P. Morgan Chase & Co., a Delaware corporation
whose principal office is located in New York, New York. JPMorgan Chase Bank is
a commercial bank offering a wide range of banking services to its customers
both domestically and internationally. Its business is subject to examination
and regulation by Federal and New York State banking authorities. As of __,
2003, JPMorgan Chase Bank had total assets of $l billion, total net loans of $l
billion, total deposits of $l billion, and total stockholder's equity of $l
billion. As of 31st December, 2002, JPMorgan Chase Bank had total assets of
$622.4 billion, total net loans of $180.6 billion, total deposits of $300.6
billion, and total stockholder's equity of $35.5 billion.
Additional information, including the most recent Form 10-K for the year
ended 31st December, __ of J.P. Morgan Chase & Co., the 2002 Annual Report of
J.P. Morgan Chase & Co. and additional annual, quarterly and current reports
filed with the Securities and Exchange Commission by J.P. Morgan Chase & Co.,
as they become available, may be obtained without charge by each person to whom
this prospectus is delivered upon the written request of any such person to the
Office of the Secretary, J.P. Morgan Chase & Co., 270 Park Avenue, New York,
New York 10017.
The information contained in the preceding two paragraphs relates to and has
been obtained from JPMorgan Chase Bank. This data has been taken from the
Consolidated Reports of Condition and Income filed with the Board of Governors
of the U.S. Federal Reserve System compiled in accordance with regulatory
accounting principles. Save for the information contained in the preceding two
paragraphs, JPMorgan Chase Bank has not been involved in the preparation of,
and does not accept responsibility for, this prospectus as a whole. The
delivery of this prospectus shall not create any implication that there has
been no change in the affairs of JPMorgan Chase Bank since the date hereof, or
that the information contained or referred to in the preceding two paragraphs
is correct as of any time subsequent to its date.
78
DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS
The previous issuers, Permanent Financing (No. 1) PLC, Permanent Financing
(No. 2) PLC and Permanent Financing (No. 3) 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. Each previous issuer
has 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
that remain outstanding. 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 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.
79
SERIES OF PREVIOUS NOTES ISSUED BY
PERMANENT FINANCING (NO. 1) PLC
SERIES 2 SERIES 2 SERIES 2 SERIES 3 SERIES 3 SERIES 3
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------------- ----------- ------------ -------------- ----------- ------------
Initial principal amount:.............. $750,000,000 $26,000,000 $26,000,000 $1,100,000,000 $38,500,000 $38,500,000
Interest rate:......................... 4.20% p.a. Three-month Three-month Three-month Three-month Three-month
USD-LIBOR + USD-LIBOR + USD-LIBOR + USD-LIBOR + USD-LIBOR +
margin margin margin margin margin
Margin:................................ N/A 0.28% p.a. 1.18% p.a. 0.125% p.a. 0.30% p.a. 1.20% p.a.
Until interest payment date falling in: June 2005 June 2007 June 2007 N/A June 2007 June 2007
And thereafter:........................ Three-month 0.56% p.a. 2.18% p.a. N/A 0.60% p.a. 2.20% p.a.
USD-LIBOR +
0.16%
Initial interest periods:.............. Semi-annually Quarterly Quarterly Quarterly Quarterly Quarterly
Alternative interest periods:.......... Quarterly N/A N/A N/A N/A N/A
Issuance date:......................... June 2002 June 2002 June 2002 June 2002 June 2002 June 2002
Scheduled redemption date(s):.......... June 2005 N/A N/A December 2005 N/A N/A
Final maturity date:................... June 2007 June 2042 June 2042 December 2007 June 2042 June 2042
Ratings as at 14th June, 2002 AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB
(S&P/Moody's/Fitch):.................
Ratings as at __, 2004 __ __ __ __ __ __
(S&P/ Moody's/Fitch):
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
Interest rate:......................... 5.10 p.a. until Three-month Three-month Three-month
the interest sterling LIBOR + sterling LIBOR + sterling LIBOR +
payment date in margin margin margin
June 2007 and
then three-month
EURIBOR +
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
(S&P/Moody's/Fitch):.................
Ratings as at __, 2004 __ __ __ __
(S&P/ Moody's/Fitch):
80
SERIES OF PREVIOUS NOTES ISSUED BY
PERMANENT FINANCING (NO. 2) PLC
SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2 SERIES 2 SERIES 3
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A
-------------- ------------- ------------- -------------- ------------- ------------- ----------------
Initial principal $1,000,000,000 $34,000,000 $34,000,000 $1,750,000,000 $61,000,000 $61,000,000 [e]1,250,000,000
amount:.............
Interest rate:...... One-month Three-month Three-month Three-month Three-month Three-month Three-month
USD-LIBOR -- USD-LIBOR + USD-LIBOR + USD-LIBOR + USD-LIBOR + USD-LIBOR + EURIBOR +
margin margin margin margin margin margin margin
Margin:............. 0.04% 0.23% p.a. 1.25% p.a. 0.15% p.a. 0.33% p.a. 1.45% p.a. 0.23% p.a.
Until interest N/A December 2008 December 2008 N/A December 2008 December 2008 December 2008
payment date
falling in:.........
And thereafter:..... N/A 0.46% p.a. 2.25% p.a. N/A 0.66% p.a. 2.45% p.a. 0.46% p.a.
Initial interest Monthly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly
periods:............
Alternative interest Quarterly N/A N/A Quarterly N/A N/A N/A
periods:............
Issuance date:...... March 2003 March 2003 March 2003 March 2003 March 2003 March 2003 March 2003
Scheduled March 2004 N/A N/A September 2005 N/A N/A March 2006 and
redemption June 2006
date(s):............
Final maturity March 2004 June 2042 June 2042 September 2007 June 2042 June 2042 December 2032
date:...............
Ratings as at 6th A-1+/P-1/F1+ AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA
March, 2003
(S&P/Moody's/
Fitch):.............
Ratings as at __, __ __ __ __ __ __ __
2004 (S&P/
Moody's/Fitch):.....
SERIES 3 SERIES 3 SERIES 4 SERIES 4 SERIES 4 SERIES 5 SERIES 5
CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B
------------- ------------- -------------- ------------- ------------- ---------------- ---------------
Initial principal [e]43,500,000 [e]43,500,000 $1,750,000,000 [e]56,500,000 [e]56,500,000 [GBP]750,000,000 [GBP]26,000,000
amount:.............
Interest rate:...... Three-month Three-month Three-month Three-month Three-month Three-month Three-month
EURIBOR + EURIBOR + USD-LIBOR + EURIBOR + EURIBOR + sterling LIBOR sterling LIBOR
margin margin margin margin margin + margin + margin
Margin:............. 0.43% p.a. 1.45% p.a. 0.22% p.a. 0.45% p.a. 1.45% p.a. 0.25% p.a. 0.45% p.a.
Until interest December 2008 December 2008 N/A December 2008 December 2008 December 2008 December 2008
payment date
falling in:.........
And thereafter:..... 0.86% p.a. 2.45% p.a. N/A 0.90% p.a. 2.45% p.a. 0.50% p.a. 0.90% P.A.
Initial interest Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly
periods:............
Alternative interest N/A N/A N/A N/A N/A N/A N/A
periods:............
Issuance date:...... March 2003 March 2003 March 2003 March 2003 March 2003 March 2003 March 2003
Scheduled N/A N/A December 2007 N/A N/A N/A N/A
redemption
date(s):............
Final maturity June 2042 June 2042 December 2009 June 2042 June 2042 June 2042 June 2042
date:...............
Ratings as at 6th AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA
March, 2003
(S&P/Moody's/
Fitch):.............
Ratings as at __, __ __ __ __ __ __ __
2004 (S&P/
Moody's/Fitch):.....
SERIES 5
CLASS C
---------------
Initial principal [GBP]26,000,000
amount:.............
Interest rate:...... Three-month
sterling LIBOR
+ margin
Margin:............. 1.45% p.a.
Until interest December 2008
payment date
falling in:.........
And thereafter:..... 2.45% p.a.
Initial interest Quarterly
periods:............
Alternative interest N/A
periods:............
Issuance date:...... March 2003
Scheduled N/A
redemption
date(s):............
Final maturity June 2042
date:...............
Ratings as at 6th BBB/Baa2/BBB
March, 2003
(S&P/Moody's/
Fitch):.............
Ratings as at __, __
2004 (S&P/
Moody's/Fitch):.....
81
SERIES OF PREVIOUS NOTES ISSUED BY
PERMANENT FINANCING (NO. 3) PLC
SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2 SERIES 2
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
-------------- ------------- ------------- -------------- ------------- -------------
Initial principal amount:.... $1,100,000,000 $38,000,000 $38,000,000 $1,700,000,000 $59,000,000 $59,000,000
Interest rate:............... One-month Three-month Three-month Three-month Three-month Three-month
USD-LIBOR -- USD-LIBOR + USD-LIBOR + USD-LIBOR + USD-LIBOR + USD-LIBOR +
margin margin margin margin margin margin
Margin:...................... 0.04% p.a. 0.18% p.a. 0.95% p.a. 0.11% p.a. 0.25% p.a. 1.05% p.a.
Until interest payment date N/A December 2010 December 2010 N/A December 2010 December 2010
falling in:..................
And thereafter:.............. N/A 0.36% p.a. 1.90% p.a. N/A 0.50% p.a. 2.05% p.a.
Initial interest periods:.... Monthly Quarterly Quarterly Quarterly Quarterly Quarterly
Alternative interest periods: Quarterly N/A N/A N/A N/A N/A
Issuance date:............... November 2003 November 2003 November 2003 November 2003 November 2003 November 2003
Scheduled redemption December 2004 N/A N/A September 2006 N/A N/A
date(s):.....................
Final maturity date:......... December 2004 June 2042 June 2042 September 2010 June 2042 June 2042
Ratings as at 25th A-1+/P-1/F1+ AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB
November, 2003
(S&P/Moody's/Fitch):.........
Ratings as at __, 2004 __ __ __ __ __ __
(S&P/Moody's/Fitch):.........
SERIES 3 SERIES 3 SERIES 3 SERIES 4 SERIES 4 SERIES 4
CLASS A CLASS B CLASS C CLASS A1 CLASS A2 CLASS B
-------------- ------------- ------------- -------------- ---------------- -------------
Initial principal amount:.... $1,500,000,000 $52,000,000 $52,000,000 [e]700,000,000 [GBP]750,000,000 [e]62,000,000
Interest rate:............... Three-month Three-month Three-month Three-month Three-month Three-month
USD-LIBOR + USD-LIBOR + USD-LIBOR + EURIBOR + Sterling LIBOR + EURIBOR +
margin margin margin margin margin margin
Margin:...................... 0.18% p.a. 0.35% p.a. 1.15% p.a. 0.19% p.a. 0.19% p.a. 0.39% p.a.
Until interest payment date December 2010 December 2010 December 2010 December 2010 December 2010 December 2010
falling in:..................
And thereafter:.............. 0.36% p.a. 0.70% p.a. 2.15% p.a. 0.38% p.a. 0.38% p.a. 0.78% p.a.
Initial interest periods:.... Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly
Alternative interest periods: N/A N/A N/A N/A N/A N/A
Issuance date:............... November 2003 November 2003 November 2003 November 2003 November 2003 November 2003
Scheduled redemption June 2008 and N/A N/A March 2009 and March 2009 and N/A
date(s):..................... September 2008 June 2009 June 2009
Final maturity date:......... September 2033 June 2042 June 2042 September 2033 September 2033 June 2042
Ratings as at 25th AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AAA/Aaa/AAA AA/Aa3/AA
November, 2003
(S&P/Moody's/Fitch):.........
Ratings as at __, 2004 __ __ __ __ __ __
(S&P/Moody's/Fitch):.........
SERIES 4 SERIES 5 SERIES 5 SERIES 5
CLASS C CLASS A CLASS B CLASS C
------------- ---------------- ------------- -------------
Initial principal amount:.... [e]62,000,000 [GBP]400,000,000 [e]20,000,000 [e]20,000,000
Interest rate:............... Three-month 5.521% p.a. Three-month Three-month
EURIBOR + EURIBOR + EURIBOR +
margin margin margin
Margin:...................... 1.18% p.a. N/A 0.45% p.a. 1.23% p.a.
Until interest payment date December 2010 December 2010 December 2010 December 2010
falling in:..................
And thereafter:.............. 2.18% p.a. Three-month 0.90% p.a. 2.23% p.a.
sterling LIBOR +
margin of
0.434% p.a.
Initial interest periods:.... Quarterly Annually Quarterly Quarterly
Alternative interest periods: N/A Quarterly N/A N/A
Issuance date:............... November 2003 November 2003 November 2003 November 2003
Scheduled redemption N/A N/A N/A N/A
date(s):.....................
Final maturity date:......... June 2042 June 2042 June 2042 June 2042
Ratings as at 25th BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB
November, 2003
(S&P/Moody's/Fitch):.........
Ratings as at __, 2004 __ __ __ __
(S&P/Moody's/Fitch):.........
82
Each previous issuer issued its previous notes to the previous noteholders
and entered into a previous intercompany loan with 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 (and their related
security) sold by the seller to the mortgages trustee. Funding 1 used most of
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)
sold by the seller to the mortgages trustee. Funding 1 used most of the
proceeds of the previous intercompany loan from Permanent Financing (No. 3) PLC
to pay consideration to the seller for an increase in Funding 1's share in the
mortgages trust.
Each of the previous issuers' obligations to pay, principal and interest on
its previous notes are funded primarily from the payments of principal and
interest received by it from Funding 1 under its previous intercompany loan.
Each previous issuers 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.
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, which are set out in the following tables. Together these
advances are referred to in this prospectus as the previous term advances:
PREVIOUS TERM ADVANCES OF PERMANENT FINANCING (NO. 1) PLC
INITIAL STEPPED-UP PRINCIPAL
DESIGNATED INTEREST RATE INTEREST RATE AMOUNT
TERM PER ANNUM PER ANNUM SCHEDULED FINAL OUTSTANDING
ADVANCE (LIBOR (LIBOR REPAYMENT REPAYMENT AS AT
SERIES NAME RATING PLUS/MINUS) STEP-UP DATE PLUS/MINUS) DATE DATE __, 2004
- ----------- ---------- ------------- ------------ ------------- ------------- ------------- -----------
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 nil
Series 1... BBB +1.13060% June 2007 +2.39060% N/A June 2042 nil
Series 2... AAA +0.16834% N/A N/A June 2005 June 2007 [GBP]__
Series 2... AA +0.29420% June 2007 +0.83420% N/A June 2042 [GBP]__
Series 2... BBB +1.26850% June 2007 +2.52850% N/A June 2042 [GBP]__
Series 3... AAA +0.12810% N/A N/A December 2005 December 2007 [GBP]__
Series 3... AA +0.33100% June 2007 +0.89100% N/A June 2042 [GBP]__
Series 3... BBB +1.27940% June 2007 +2.53940% N/A June 2042 [GBP]__
Series 4A1. AAA +0.22000% N/A N/A June 2007 June 2009 [GBP]__
Series 4A2. AAA +0.18000% June 2007 +0.36000% N/A June 2042 [GBP]__
Series 4... AA +0.30000% June 2007 +0.60000% N/A June 2042 [GBP]__
Series 4... BBB +1.20000% June 2007 +2.20000% N/A June 2042 [GBP]__
-----------
Total...... [GBP]__
===========
PREVIOUS TERM ADVANCES OF PERMANENT FINANCING (NO. 2) PLC
INITIAL STEPPED-UP PRINCIPAL
DESIGNATED INTEREST RATE INTEREST RATE AMOUNT
TERM PER ANNUM PER ANNUM SCHEDULED FINAL OUTSTANDING
ADVANCE (LIBOR (LIBOR REPAYMENT REPAYMENT AS AT
SERIES NAME RATING PLUS/MINUS) STEP-UP DATE PLUS/MINUS) DATE DATE __, 2004
- ----------- ---------- ------------- ------------- ------------- -------------- -------------- -----------
Series 1 AAA -0.04930% N/A N/A March 2004 March 2004 [GBP]__
Series 1 AA +0.25050% December 2008 +0.76100% N/A June 2042 [GBP]__
Series 1 BBB +1.36080% December 2008 +2.62080% N/A June 2042 [GBP]__
Series 2 AAA +0.15830% N/A N/A September 2005 September 2007 [GBP]__
Series 2 AA +0.35660% December 2008 +0.97320% N/A June 2042 [GBP]__
Series 2 BBB +1.55060% December 2008 +2.81060% N/A June 2042 [GBP]__
March 2006 December
Series 3 AAA +0.23310% December 2008 +0.72620% and June 2006 2032 [GBP]__
Series 3 AA +0.44595% December 2008 1.15190% N/A June 2042 [GBP]__
Series 3 BBB +1.55880% December 2008 2.81880% N/A June 2042 [GBP]__
Series 4 AAA +0.22360% N/A N/A December 2007 December 2009 [GBP]__
Series 4 AA +0.48380% December 2008 +1.22760% N/A June 2042 [GBP]__
Series 4 BBB +1.53690% December 2008 +2.79690% N/A June 2042 [GBP]__
Series 5 AAA +0.25% December 2008 +0.50% N/A June 2042 [GBP]__
Series 5 AA +0.45% December 2008 +0.90% N/A June 2042 [GBP]__
Series 5 BBB +1.45% December 2008 +2.45% N/A June 2042 [GBP]__
-----------
Total [GBP]__
===========
83
PREVIOUS TERM ADVANCES OF PERMANENT FINANCING (NO. 3) PLC
INITIAL STEPPED-UP
DESIGNATED INTEREST RATE INTEREST RATE PRINCIPAL
TERM PER ANNUM PER ANNUM SCHEDULED FINAL AMOUNT
ADVANCE (LIBOR (LIBOR REPAYMENT REPAYMENT OUTSTANDING
SERIES NAME RATING PLUS/MINUS) STEP-UP DATE PLUS/MINUS) DATE DATE AS AT __, 2004
- ----------- ---------- ------------- ------------- ------------- -------------- -------------- ------------------
Series 1... AAA -0.04100% N/A N/A December 2004 December 2004 [GBP]658,500,000
Series 1... AA +0.20700% December 2010 +0.66400% N/A June 2042 [GBP]22,900,000
Series 1... BBB +1.09000% December 2010 +2.09000% N/A June 2042 [GBP]22,900,000
Series 2... AAA +0.12800% N/A N/A September 2006 September 2010 [GBP]1,018,000,000
Series 2... AA +0.28500% December 2010 +0.82000% N/A June 2042 [GBP]35,400,000
Series 2... BBB +1.21500% December 2010 +2.21500% N/A June 2042 [GBP]35,400,000
June 2008
and
Series 3... AAA + 0.20613% December 2010 +0.66226% September 2008 September 2033 [GBP]898,250,000
Series 3... AA +0.41184% December 2010 +1.07368% N/A June 2042 [GBP]31,200,000
Series 3... BBB +1.27224% December 2010 +2.27224% N/A June 2042 [GBP]31,200,000
March 2009
and June
Series 4A1. AAA +0.21200% December 2010 +0.67400% 2009 September 2033 [GBP]482,750,000
March 2009
and June
Series 4A2. AAA +0.19000% December 2010 +0.38000% 2009 September 2033 [GBP]750,000,000
Series 4... AA +0.43450% December 2010 +1.11900% N/A June 2042 [GBP]42,850,000
Series 4... BBB +1.30400% December 2010 +2.30400% N/A June 2042 [GBP]42,850,000
Series 5... AAA +0.21700% December 2010 +0.43400% N/A June 2042 [GBP]400,000,000
Series 5... AA +0.51022% December 2010 +1.27044% N/A June 2042 [GBP]13,900,000
Series 5... BBB +1.35876% December 2010 +2.35876% N/A June 2042 [GBP]13,900,000
------------------
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, the series 1 class A previous notes issued by Permanent Financing (No.
2) PLC and the series 1 class A previous notes issued by Permanent Financing
(No. 3) 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, Aaa
by Moody's and AAA by Fitch). The previous term AA advances reflect the rating
assigned to the class B previous notes by the rating agencies (being AA by
Standard & Poor's, Aa3 by Moody's and AA by Fitch) and the previous term BBB
advances reflect the rating assigned to the class C previous notes by the
rating agencies (being BBB by Standard & Poor's, Baa2 by Moody's and BBB by
Fitch).
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 or minus, 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".
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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 sold the initial loans and, on subsequent
dates, the seller has sold further loans, in each case together with their
related security to the mortgages trustee pursuant to the mortgage sale
agreement. On the closing date, Funding 1 will pay the seller for loans
(together with their related security) sold to the mortgages trustee on the
closing date pursuant to the terms of the mortgages trust deed. The loans
making up the trust property after such addition, 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 statistics presented later in this section describe (i) the portfolio of
loans making up the trust property and (ii) the pool of loans, each as at __,
from which the additional loans to be assigned by the seller to the mortgages
trustee on the closing date shall be drawn, in each case together with their
related security, accrued interest and other amounts derived from such loans.
This ensemble described by the statistical information set out later in this
section is called the expected portfolio.
The expected portfolio as at __, for which statistics are presented later in
this section, and the expected portfolio as at the closing date may differ due
to, among other things, amortisation of loans in the portfolio.
Unless otherwise indicated, the description that follows relates to types of
loans that have been or could be sold to the mortgages trustee, either as part
of the portfolio as at the closing date or as a new loan sold to the mortgages
trustee at a later date.
The expected portfolio as at __ comprised __ mortgage accounts having an
aggregate outstanding principal balance of [GBP]__ as at that date. The loans
in the expected portfolio at that date were originated by the seller between
[1st February, 1996 and __]. No loan in the portfolio at that date was
delinquent or non-performing at the time it was sold to the mortgages trustee
and no loan in the expected portfolio which is to be sold to the mortgages
trustee on the closing date will be delinquent or non-performing at the time of
sale.
After the closing date, the seller may sell new loans and their related
security to the mortgages trustee. The seller reserves the right to amend its
lending criteria and to sell 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 expected portfolio as at __ 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 "SALE 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;
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* "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 __, approximately __ per cent. of the loans in the expected portfolio
were repayment loans and approximately __ per cent. were interest-only loans.
As at __, approximately __ per cent. of the loans in the expected 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 approximately __
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 English loans is governed by English law and each of the
Scottish loans is governed by Scots 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 product 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.
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
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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 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. On tracker rate
loans originated beginning in November 2002, Halifax may vary the tracker rate
margin at any time where such variation would be to the borrower's advantage.
Halifax may also vary the margin payable on such loans to the borrower's
disadvantage but 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 __, approximately __ per cent. of the loans in the expected 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.
Following the Ombudsman's determination referred to in "RISK FACTORS --
DECISIONS OF THE OMBUDSMAN COULD LEAD TO SOME TERMS OF THE LOANS BEING
UNENFORCEABLE, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES",
Halifax announced that from 1st February, 2002 all new Halifax mortgage
products would be priced by reference to or revert to HVR 1. HVR 2 continues to
apply to existing mortgages that are linked to HVR 2.
As at __, HVR 1 was __ per cent. per annum, and HVR 2 was __ per cent. per
annum.
[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
sold 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 sold to the mortgages trustee. 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;
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* 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 sold 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.
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
88
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.
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 sold 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 expected portfolio obliges the seller to make
further advances save for retentions and Home Cash Reserve withdrawals.
However, some loans in the expected portfolio may have
89
further advances made on them prior to their being sold 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 sale of new loans to the
mortgages trustee as described in "SALE OF LOANS AND THEIR RELATED SECURITY --
SALE 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 "SALE 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 sales.
Of the loans in the expected 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
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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.
LENDING CRITERIA
Each loan in the expected 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 expected 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 "SALE OF THE LOANS AND THEIR RELATED SECURITY -- SALE
OF NEW LOANS AND THEIR RELATED SECURITY TO THE MORTGAGES TRUSTEE" have been
satisfied. However, the seller retains the right to revise its lending criteria
from time to time, so the criteria applicable to new loans may not be the same
as those currently used. Some of the factors currently used in making a lending
decision are as follows.
(1) Type of property
Properties may be either freehold or the Scottish equivalent or leasehold.
In the case of leasehold properties, 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 40 years for all loans. 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 expected portfolio is 97 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
91
of [GBP]150,000, the permissible LTV ratio decreases as the property value
increases. 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.
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 expected 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
92
adverse credit history (for example, county court judgment,
Scottish court decree for payment, 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.
(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 behavioural 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. The development will encompass account management for
managing facilities such as flexible loans and is planned for delivery during
2004. 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 sold 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
93
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.
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 St Andrew's Insurance.
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 St Andrew's Insurance 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 sale 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 sold 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 he or she has
taken out. Otherwise, the seller will arrange buildings insurance for the
property under its insurance arrangements with St Andrew's Insurance 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.
94
[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 Insurance plc ("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 expected portfolio for
which the underlying mortgages have the benefit of a title insurance policy,
although the expected 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 sale 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 expected 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
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
95
proceeds will be paid by the seller into the mortgages trustee's accounts and
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 EXPECTED PORTFOLIO
The statistical and other information contained in this prospectus has been
compiled by reference to the loans and mortgage accounts in the expected
portfolio as at __. Columns stating percentage amounts may not add up to 100
per cent. due to rounding. A loan will be removed from the expected 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 BALANCE MORTGAGE
FEES AND/OR VALUATION FEES) ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ------------------------------- ----------- ---------- --------- ----------
[GBP]0 -- [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]399,999.99 __ __ __ __
[GBP]400,000 -- [GBP]449,999.99 __ __ __ __
[GBP]450,000 -- [GBP]500,000.00 __ __ __ __
----------- ---------- --------- ----------
Totals __ 100.0 __ 100.0
=========== ========== ========= ==========
The largest mortgage account has an outstanding current balance of [GBP]__
and the smallest mortgage account has an outstanding current balance of
[GBP]__. 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. The seller has not revalued any of the
mortgaged properties since the date of the origination of the related mortgage
loan. Where, however, additional lending has been applied for or advanced on an
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.
96
RANGE OF LTV RATIOS AT AGGREGATE
ORIGINATION (EXCLUDING OUTSTANDING
CAPITALISED HIGH LTV FEES CURRENT NUMBER OF
AND/OR BOOKING FEES AND/OR BALANCE MORTGAGE
VALUATION FEES) ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- -------------------------- ----------- ---------- --------- ----------
0% -- 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%............. __ __ __ __
----------- ---------- --------- ----------
Totals.................... __ 100.0 __ 100.0
=========== ========== ========= ==========
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 __ divided by the
indexed valuation of the property securing that mortgage loan at the same date.
RANGE OF CURRENT LTV RATIOS AGGREGATE
(EXCLUDING ANY OUTSTANDING FEES, OUTSTANDING NUMBER OF
SUCH AS INSURANCE FEES AND/OR CURRENT BALANCE MORTGAGE
HIGH 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.......................... __ 100.0 __ 100.0
=============== ========== ========= ==========
The weighted average current LTV ratio of the mortgage accounts (excluding
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.
97
GEOGRAPHICAL SPREAD
The following table shows the spread of properties throughout England, Wales
and Scotland. No properties are situated outside England, Wales or Scotland.
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... __ __ __ __
Scotland.............. __ __ __ __
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
__ 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................ __ 100.0 __ 100.0
=========== ========== ========= ==========
The weighted average seasoning of loans was __ months. The maximum seasoning
for any loan was __ months and the minimum seasoning for any loan was __
months.
98
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
- ---------------------- ----------- ---------- --------- ----------
<5.................... __ __ __ __
5 to <10.............. __ __ __ __
10 to <15............. __ __ __ __
15 to <20............. __ __ __ __
20 to <25............. __ __ __ __
25 to <30............. __ __ __ __
30 to <35............. __ __ __ __
35 to <40............. __ __ __ __
40 to <41............. __ __ __ __
----------- ---------- --------- ----------
Totals................ __ 100.0 __ 100
=========== ========== ========= ==========
The weighted average remaining term of loans was __ years and the maximum
remaining term was __ years. The minimum remaining term was 0 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......... __ 100.0 __ 100
=========== ========== ========= ==========
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 NUMBER OF
BALANCE MORTGAGE
PROPERTY TYPE ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ------------- ----------- ---------- --------- ----------
Detached..... __ __ __ __
Other........ __ __ __ __
Terraced..... __ __ __ __
Semi-detached __ __ __ __
Unknown...... __ __ __ __
----------- ---------- --------- ----------
Totals....... __ 100.0 __ 100
=========== ========== ========= ==========
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.
99
AGGREGATE
OUTSTANDING
CURRENT NUMBER OF
BALANCE MORTGAGE
FIXED RATE % ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ------------ ----------- ---------- --------- ----------
0 -- 3.99... __ __ __ __
4.00 -- 4.99 __ __ __ __
5.00 -- 5.99 __ __ __ __
6.00 -- 6.99 __ __ __ __
7.00 -- 7.99 __ __ __ __
8.00 -- 8.99 __ __ __ __
----------- ---------- --------- ----------
Totals...... __ 100.0 __ 100
=========== ========== ========= ==========
AGGREGATE
OUTSTANDING
CURRENT NUMBER OF
BALANCE MORTGAGE
YEAR IN WHICH FIXED RATE PERIOD ENDS ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ------------------------------------ ----------- ---------- --------- ----------
2004................................ __ __ __ __
2005................................ __ __ __ __
2006................................ __ __ __ __
2007................................ __ __ __ __
2008................................ __ __ __ __
2009................................ __ __ __ __
2013................................ __ __ __ __
2014................................ __ __ __ __
----------- ---------- --------- ----------
Totals.............................. __ 100.0 __ 100
=========== ========== ========= ==========
- ---------------
CHARACTERISTICS OF UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET
The housing market in the UK is primarily one of owner-occupied housing. At
[31st December, 2002], owner-occupation and privately rented accommodation
accounted for [69.6] per cent. and [9.9] per cent. of the housing stock
respectively, according to the Department of Transport, Local Government, and
the Regions. The remainder were in some form of public/social ownership.
According to the Council of Mortgage Lenders, at [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 [13.4] 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.
INDUSTRY AND CPR RATES
This quarterly industry constant prepayment rate ("INDUSTRY CPR") data was
calculated by dividing the amount of scheduled and unsheduled 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
mortgages loans made by building societies have been between 9.5 per cent. and
14.0 per cent. for approximately __ per cent. of that time.
100
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........ 0 11.5 16 16 4 20.5 1
7.5........ 0 12 20 16.5 2 21 0
8.0........ 4 12.5 13 17 1 21.5 0
8.5........ 1 13 11 17.5 1 22 0
9.0........ 6 13.5 5 18 1 22.5 2
9.5........ 9 14 6 18.5 1
10.0....... 10 14.5 2 19 1
10.5....... 18 15 3 19.5 2
11.0....... 18 15.5 2 20 2
- ----------
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 [21.06] 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
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
101
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......... 13.83 14.66 June 2000 13.87 14.56
September 2000..... 14.89 14.38 December 2000 15.58 14.54
March 2001......... 15.49 14.96 June 2001 17.38 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......... 19.52 20.99 June 2003 20.19 21.06
September 2003..... __ __ December 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
2003.............. __
- ------------------
Source: Council of Mortgage Lenders
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 2002...................... 5.24
1995...................... 3.47
- ------------------
Source: Council of Mortgage Lenders
HOUSE PRICE INDEX
UK residential property prices, as measured by the Nationwide House Price
Index and Halifax 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.
102
The housing market has been through three economic cycles since 1976. The
greatest year-to-year increases in the Housing Indices occurred in the late
1970s and late 1980s with the greatest decrease in the early 1990s.
The Housing Indices have Generally increased since 1996.
NATIONWIDE
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
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
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
103
NATIONWIDE
RETAIL PRICE HOUSE HALIFAX HOUSE
INDEX PRICE INDEX PRICE INDEX
--------------- --------------- ----------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE INDEX CHANGE INDEX CHANGE
- ---------------------------- ----- -------- ----- -------- ------ --------
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)
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
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
104
NATIONWIDE
RETAIL PRICE HOUSE HALIFAX HOUSE
INDEX PRICE INDEX PRICE INDEX
--------------- --------------- ----------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE INDEX CHANGE INDEX CHANGE
- ---------------------------- ----- -------- ----- -------- ------ --------
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.................. 179.9 3.0 239.3 22.9 405.6 20.90
June 2003................... 181.3 2.9 250.1 19.2 419.8 19.97
September 2003.............. _ _ _ _ 434.0 16.80
- ----------
Source: Datastream, Nationwide Building Society and Halifax plc, respectively.
"NA" indicates that the relevant figure is not available.
105
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.
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.
106
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 (other than in Scotland) 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 to
maintain the market value of the property.
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.
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.
It should also be noted in relation to Scottish mortgages that the Mortgage
Rights (Scotland) Act 2001 confers upon the court a discretion (upon
application by the borrower or other specified persons) to suspend the exercise
of the lender's statutory enforcement remedies for such period and to such
extent as the court considers reasonable, having regard, amongst other factors,
to the nature of the default, the applicant's ability to remedy it and the
availability of alternative accommodation. See "MATERIAL LEGAL ASPECTS OF THE
LOANS -- SCOTTISH LOANS").
107
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 were contained in the
expected portfolio as at __ (with the exception of any loans in the portfolio
originated on or after __, 2003). 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, see Annex A.
108
HALIFAX PLC RESIDENTIAL MORTGAGE LOANS1
31ST 31ST 31ST 31ST 31ST 31ST [31ST
JANUARY, JANUARY, JANUARY, JANUARY, JANUARY, JANUARY, JANUARY,
1998 1999 2000 2001 2002 2003 2004]
-------- -------- -------- -------- -------- -------- --------
Outstanding balance ([GBP] millions)................ 65,668.4 68,337.9 71,642.0 76,385.3 84,922.2 89,898.3
Number of loans outstanding (thousands)............. 2,016.1 2,013.3 2,006.3 2,014.8 2,056.0 2,004.3
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 1,917.7
60-89 days in arrears............................... 591.6 647.0 493.4 528.1 456.0 455.5
90-119 days in arrears.............................. 363.6 378.3 280.8 297.2 258.1 250.7
120 or more days in arrears......................... 1,196.6 982.3 731.7 643.8 564.6 559.1
-------- -------- -------- -------- -------- -------- --------
Total outstanding balance of loans in arrears....... 3,710.5 3,995.8 3,153.9 3,151.8 3,057.0 3,183.0
======== ======== ======== ======== ======== ======== ========
Total outstanding balance of loans
90 days or more in arrears
([GBP] millions).................................... 1,560.2 1,360.6 1,012.5 941.0 822.7 809.8
======== ======== ======== ======== ======== ======== ========
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% 0.9008%
======== ======== ======== ======== ======== ======== ========
OUTSTANDING BALANCE OF ARREARS
([GBP] MILLIONS)
30-59 days in arrears............................... 14.9 18.6 14.9 15.8 14.2 13.7
60-89 days in arrears............................... 10.8 12.0 8.8 9.8 7.7 6.8
90-119 days in arrears.............................. 9.6 10.4 7.1 8.0 6.4 5.6
120 or more days in arrears......................... 95.6 74.4 52.2 44.0 35.1 30.7
-------- -------- -------- -------- -------- -------- --------
Total balance of arrears............................ 130.9 115.4 83.0 77.6 63.4 56.8
======== ======== ======== ======== ======== ======== ========
Total balance of loans 90 days or more in
arrears ([GBP] millions)............................ 105.2 84.8 59.3 52.0 41.5 36.3
======== ======== ======== ======== ======== ======== ========
Total balance of loans 90 days or more in
arrears as % of the outstanding balance............. 0.1602% 0.1241% 0.0828% 0.0681% 0.0489% 0.0404%
======== ======== ======== ======== ======== ======== ========
NUMBER OF LOANS OUTSTANDING IN ARREARS (THOUSANDS)
30-59 days in arrears............................... 41.8 51.3 42.5 40.6 39.0 36.0
60-89 days in arrears............................... 15.5 16.5 12.7 13.0 11.1 9.5
90-119 days in arrears.............................. 9.4 9.5 7.1 7.5 6.5 5.5
120 or more days in arrears......................... 28.3 23.2 17.8 16.1 14.2 13.1
-------- -------- -------- -------- -------- -------- --------
Total number of loans outstanding in arrears........ 95.0 100.5 80.1 77.2 70.8 64.1
======== ======== ======== ======== ======== ======== ========
Total number of loans outstanding 90 days or more in
arrears (thousands)................................. 37.7 32.7 24.9 23.6 20.7 18.6
======== ======== ======== ======== ======== ======== ========
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% 0.9280%
======== ======== ======== ======== ======== ======== ========
Amount of loan losses ([GBP] millions).............. 63.7 48.3 38.5 21.3 14.9 8.7 __
Loan losses as % of total outstanding balance....... 0.0970% 0.0707% 0.0537% 0.0279% 0.0175% 0.0097% __%
- ------------
(1) This table includes mortgage loans from Northern Ireland as well as
England, Wales and Scotland. The seller's arrears experience for the loans
from Northern Ireland does not differ materially from its experience for
the loans from England, Wales and Scotland.
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 was __
109
per cent. of the book as at [30th June, 2003] (compared with 31st January, 2003:
0.9008 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.
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THE SERVICING AGREEMENT
The following section contains a summary of the material terms of the
servicing agreement. The summary does not purport to be complete and is subject
to the provisions of the servicing agreement, a form of which has been filed as
an exhibit to the registration statement of which this prospectus is a part.
INTRODUCTION
On 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 the security trustee 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 sold 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;
(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.
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In particular, the servicer shall determine on each Funding 1
interest payment date, having regard to the aggregate of:
(A) the revenue 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 funds,
whether Funding 1 would receive an amount of revenue 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 such determination, of the amount of the shortfall
and the mortgages trustee variable base rate and/or 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,
including (but not limited to), documents relating to the discharge
of mortgages comprised in the portfolio.
(E) To keep records and accounts on behalf of the mortgages trustee in
relation to the loans.
(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 their auditors)
and the security trustee and any other person nominated by the
beneficiaries with access to the title deeds and other records
relating to the administration of the loans and mortgages.
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(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 an administration fee of 0.05 per cent. per annum
(inclusive of VAT) on the aggregate amount of the trust property as at the
close of business on 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 the earlier of becoming aware of the default and receipt of
written notice from Funding 1, the mortgages trustee and the
security trustee requiring the default to be remedied;
* the servicer fails to comply with any of its other covenants or
obligations under the servicing agreement which in the opinion of
the security trustee is materially prejudicial to Funding 1, the
previous issuers, the issuer and/or any new issuers and the holders
of any notes 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.
Subject to the fulfilment of a number of conditions (including the
appointment of a substitute servicer), the servicer may voluntarily resign by
giving not less than 12 months' notice to the mortgages trustee and the
beneficiaries. The substitute servicer is required to have 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.
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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, the mortgages trustee 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 under the servicing agreement or any other transaction document 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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SALE 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 sold 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 or assignation (as
appropriate) of the loans and their related security 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.
SALE OF FURTHER LOANS AND THEIR RELATED SECURITY TO THE MORTGAGES TRUSTEE ON
THE SALE DATES
Under the mortgage sale agreement, on 14th June, 2002, the seller
transferred by way of an equitable assignment to the mortgages trustee the
initial loans, together with their related security. On subsequent dates, the
seller has sold further loans (together with their related security) to the
mortgages trustee pursuant to the mortgage sale agreement. On the closing date,
the seller will sell the additional loans and their related security to the
mortgages trustee. Full legal assignment or assignation (as appropriate) 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 relevant
sale, 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 (except
in relation to fees payable to the mortgages trustee for the work undertaken by
it as trustee of the trusts created by the mortgages trust deed), upon receipt
and identification by the servicer, the mortgages trustee will return to the
seller.
SALE OF NEW LOANS AND THEIR RELATED SECURITY TO THE MORTGAGES TRUSTEE
The mortgage sale agreement provides that the seller may sell 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 sold 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.
The consideration for the sale 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
115
* 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 sale 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 sale date ("SALE DATE"):
(A) no event of default under the transaction documents shall have
occurred which is continuing as at the relevant sale 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 sale 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 sale 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 sale of new loans to the mortgages
trustee;
(E) as at the relevant sale 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 the loans in the mortgages trust;
(F) except where Funding 1 pays amounts to the mortgages trustee in
consideration of new loans to be sold 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 must 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 sale of new loans on the relevant sale 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 sale 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 of the loans in the mortgages trust together with the
yield of the new loans to be sold to the mortgages trustee on the
relevant sale date is at least 0.50 per cent. greater than
sterling-LIBOR for three-month sterling deposits as at the previous
interest payment date, 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 sale date;
(I) the sale of new loans on the relevant sale 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 sale 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.;
(J) the sale of new loans on the relevant sale 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 sterling-LIBOR plus
0.50 per cent. as at the relevant sale date and have more than 2
years remaining on their incentive period accounting for more than
15 per cent. of the aggregate outstanding principal balance of
loans comprised in the trust property;
(K) the sale of the new loans on the relevant sale 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 sale of new loans may occur, if, as at the relevant sale date,
the step-up date in respect of any note issued after 1st January,
2003 and still outstanding has been reached and such note has not
116
been redeemed in full. For the avoidance of doubt, this prohibition
on the sale of new loans to the mortgages trustee shall remain in
effect only for so long as any such note remains outstanding and,
upon its redemption, the sale of new loans to the mortgages trustee
may be resumed in accordance with the terms of the mortgage sale
agreement;
(M) as at the sale date the adjusted general reserve fund is equal to
or greater than the general reserve fund threshold;
(N) if the sale of loans would include the sale 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 sold to the mortgages trustee and that such
sale 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 sale date.
On the relevant sale 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 sell 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 __ (or such later date as may be notified by
Funding 1 to the seller) and the occurrence of a trigger event, sufficient new
loans and their related security so that the aggregate outstanding principal
balance of loans in the mortgages trust is not less than [GBP]__ before __ (or
another amount notified by Funding 1 to the seller). However, the seller is not
obliged to sell 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 sale 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 English loans in the portfolio were sold, and any new English loans will
be sold, to the mortgages trustee by way of equitable assignment. Scottish loans
will be sold by the seller to the mortgages trustee by way of declarations of
trust under which the beneficial interest in such Scottish loans will be
transferred to the mortgages trustee. In relation to Scottish loans, references
in this document to the sale of loans are to be read as references to the making
of such declarations of trust. This means that legal title to both English and
Scottish loans and their related security will remain with the seller until
legal assignments or assignations (as appropriate) are delivered by the seller
to the mortgages trustee and notice of such assignments or assignations (as
appropriate) is given by the seller to the borrowers. Legal assignment or
assignation (as appropriate) of the loans and their related security (including,
where appropriate, their registration or recording in the relevant property
register) to the mortgages trustee will be deferred and will only take place in
the limited circumstances described below. See "RISK FACTORS -- THERE MAY BE
RISKS ASSOCIATED WITH THE FACT THAT THE MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO
THE MORTGAGES WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES".
Legal assignment or assignation (as appropriate) of the loans and their
related security to the mortgages trustee will be completed on the 20th London
business day after the earliest to occur 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 to perfect the mortgages trustee's legal
title to the mortgages, 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;
117
(C) it being rendered necessary by law to take actions to perfect legal
title to the mortgages;
(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 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 perfection by serving notice on 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, licensed conveyancers or (in
Scotland) qualified 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 sale date that the loan (together
with its related security) is sold 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 closing date was made not
earlier than 1st February, 1996 and not later than __;
* the final maturity date of each loan is no later than June 2040;
* no loan has an outstanding principal balance of more than
[GBP]500,000;
* prior to the making of each advance under a loan, the lending
criteria and all preconditions to the making of any loan were
satisfied in all material respects subject only to exceptions as
would be acceptable to a reasonable, prudent mortgage lender;
* other than with respect to monthly payments, no borrower is or has,
since the date of the relevant mortgage, been in material breach of
any obligation owed in respect of the relevant loan or under the
related security and accordingly no steps have been taken by the
seller to enforce any related security;
* the total amount of arrears of interest or principal, together with
any fees, commissions and premiums payable at the same time as that
interest payment or principal repayment, on any loan is not on the
relevant sale date in respect of any loan, nor has been during the
12 months
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immediately preceding the relevant sale 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 or (in Scotland) standard security over the
relevant property, and subject only in certain appropriate cases to
applications for registrations at H.M. Land Registry or Registrars
of Scotland;
* all of the properties are in England, Wales or Scotland;
* 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, licensed conveyancer or (in Scotland) qualified
conveyancer;
* prior to the taking of each mortgage (other than a remortgage), the
seller instructed its solicitor, licensed conveyancer or (in
Scotland) qualified 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 to the
relevant solicitor, licensed conveyancer or qualified conveyancer
as are set out in the case of English loans 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) and, in the case of Scottish
loans, the CML's Lenders' Handbook for Scotland (or, for Scottish
mortgages taken before the CML's Lenders' Handbook for Scotland was
adopted in 2000, 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;
* the seller has, since the making of each loan, kept or procured the
keeping of full and proper accounts, books and records showing
clearly all transactions, payments, receipts, proceedings and
notices relating to such loan; and
* there are no authorisations, approvals, licences or consents
required as appropriate for the seller to enter into or to perform
the obligations under the mortgage sale agreement or to make the
mortgage sale agreement legal, valid, binding and enforceable.
If new types of loans are to be sold 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.
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REPURCHASE OF LOANS UNDER A MORTGAGE ACCOUNT
Under the mortgage sale agreement, if a loan does not materially comply on
the sale 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.
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 "-- SALE 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;
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* 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, Wales and Scotland who generally satisfy the lending criteria of
traditional sources of residential mortgage capital.
GOVERNING LAW
The mortgage sale agreement, other than certain aspects of it relating to
Scottish loans and their related security which are governed by Scots law, is
governed by English law.
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THE MORTGAGES TRUST
The following section contains a summary of the material terms of the
mortgages trust deed. The summary does not purport to be complete and is
subject to the provisions of the mortgages trust deed, a form of which has been
filed as an exhibit to the registration statement of which this prospectus is a
part.
GENERAL LEGAL STRUCTURE
The mortgages trust is a trust formed under English law with the mortgages
trustee as trustee for the benefit of the seller and Funding 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 may 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 sold to the
mortgages trustee by the seller;
* any new loans and their related security sold 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 sold 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.
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.
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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 sold to the mortgages
trustee (as will happen on the closing date);
* if Funding 1 acquires part of the seller's share of the trust
property from the seller (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
* 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;
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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 sold to the mortgages
trustee on 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 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,
* 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:
(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
representations and 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
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(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, 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.
MINIMUM SELLER SHARE
The seller's share of the trust property includes an amount known as the
"MINIMUM SELLER SHARE". As at the closing date, the minimum seller share will be
approximately [GBP]__, 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 sale 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.
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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:
(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
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any principal amount due under any intercompany loan and/or
items (J) and (K) 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:
* 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, 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.
127
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:
SCHEDULED RELEVANT
REPAYMENT ACCUMULATION
CASH ACCUMULATION ADVANCE DATE AMOUNT
- ---------------------------------------------------------------- --------------- ------------------
ADVANCES MADE BY THE ISSUER
Series 1 term AAA advance __ [GBP]__
Series 2 term AAA advance __ [GBP]__
Series 3 term AAA advance __ [GBP]__
Series 4A1 term AAA advance -- first scheduled amortisation __ [GBP]__
Series 4A1 term AAA advance -- second scheduled amortisation __ [GBP]__
Series 4A2 term AAA advance -- first scheduled amortisation __ [GBP]__
Series 4A2 term AAA advance -- second scheduled amortisation __ [GBP]__
ADVANCES MADE BY PERMANENT FINANCING (NO. 3) PLC
Series 1 term AAA advance December 2004 [GBP]658,500,000
Series 2 term AAA advance September 2006 [GBP]1,018,000,000
Series 3 term AAA advance -- first scheduled amortisation June 2008 [GBP]449,125,000
instalment
Series 3 term AAA advance -- second scheduled amortisation September 2008 [GBP]449,125,000
instalment
Series 4A1 term AAA advance -- first scheduled amortisation March 2009 [GBP]241,375,000
instalment
Series 4A1 term AAA advance -- second scheduled amortisation June 2009 [GBP]241,375,000
instalment
Series 4A2 term AAA advance -- first scheduled amortisation March 2009 [GBP]375,000,000
instalment
Series 4A2 term AAA advance -- second scheduled amortisation June 2009 [GBP]375,000,000
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 March 2006 [GBP]427,187,500
amortisation instalment
Previous series 3 term AAA advance -- second scheduled June 2006 [GBP]427,187,500
amortisation instalment
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 principal
the relevant amount of that
prospectus bullet term
advance
Any scheduled amortisation instalment in respect of a new issuer as indicated in the principal
the relevant amount of that
prospectus scheduled
amortisation
instalment
Definitions:
"CASH ACCUMULATION PERIOD" means the period beginning on the earlier of:
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* 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 original 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:
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 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. Each of the issuer series 3 term AAA advance, the
issuer series 4A1 term AAA advance and the issuer series 4A2 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), (B) and (C) 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
relevant issuer having the cash accumulation requirement);
* 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.
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"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 (D)
to (G) (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 of term advances pursuant to
Rule (1) or deferral of extendable bullet term advances
pursuant to Rule (4), each as 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 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 sold 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).
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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;
(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, the series 3 class A issuer
notes and the series 4 class A issuer notes may not be repaid in full by their
respective final maturity dates. See "RISK FACTORS -- THE YIELD TO MATURITY OF
THE ISSUER NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENTS OR REDEMPTIONS ON THE
LOANS".
LOSSES
All losses arising on the loans 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.
131
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".
ADDITIONS TO TRUST PROPERTY
The trust property may be increased from time to time by the sale 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 sale of new loans and their related security to the
mortgages trustee, see "SALE 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).
Funding 1 will be permitted to do this only if it meets a number of conditions,
including:
* that on the relevant calculation 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 calculation 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 calculation date.
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
132
* 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.
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.
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THE ISSUER INTERCOMPANY LOAN AGREEMENT
The following section contains a summary of the material terms of the issuer
intercompany loan agreement. The summary does not purport to be complete and is
subject to the provisions of the issuer intercompany loan agreement, a form of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
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 class A1
issuer notes, the series 4 class B issuer notes, the series 4 class M issuer
notes, the series 4 class C issuer notes and the series 5 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 sale of loans to the mortgages trustee.
The issuer intercompany loan will be split into 21 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 FINAL REPAYMENT
SERIES NAME RATING ISSUER NOTES (IF ANY) ADVANCE DATE
- ----------- ------------ ------------- ------------- ----------------- ---------------
series 1... AAA class A class 1A [GBP]__ June 2005*
series 1... AA class B class 1B [GBP]__ June 2042
series 1... A class M class 1M [GBP]__ June 2042
series 1... BBB class C class 1C [GBP]__ June 2042
series 2... AAA class A class 2A [GBP]__ June 2009*
series 2... AA class B class 2B [GBP]__ June 2042
series 2... A class M class 2M [GBP]__ June 2042
series 2... BBB class C class 2C [GBP]__ June 2042
series 3... AAA class A class 3A [GBP]__ __
series 3... AA class B class 3B [GBP]__ June 2042
series 3... A class M class 3M [GBP]__ June 2042
series 3... BBB class C class 3C [GBP]__ June 2042
series 4... AAA class A1 class 4A1 [GBP]__ June 2042
series 4... AAA class A2 N/A [GBP]__ June 2042
series 4... AA class B class 4B [GBP]__ June 2042
series 4... A class M class 4M [GBP]__ June 2042
series 4... BBB class C class 4C [GBP]__ June 2042
series 5... AAA class A class 5A [GBP]__ June 2042
series 5... AA class B class 5B [GBP]__ June 2042
series 5... A class M class 5M [GBP]__ June 2042
series 5... BBB class C class 5C [GBP]__ June 2042
Total:..... [GBP]__
- ------------
* Or, if the CPR swap conditions are satisfied and as a result thereof the
series 1 class A issuer swap provider or series 2 class A issuer swap
provider, as applicable, has paid the amounts owing by it to the issuer under
the series 1 class A issuer swap or series 2 class A issuer swap,
respectively, then June 2042.
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 A advances
134
reflect the rating expected to be assigned to the class M 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 ad vance ratings of the
issuer term advances under the issuer intercompany loan.
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 advances 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 A advances in an aggregate principal amount of
[GBP]__, which shall be funded by the issue of the class M issuer
notes on the closing date, and which shall consist of the issuer
series 1 term A advance in the amount of [GBP]__, the issuer series
2 term A advance in the amount of [GBP]__, the issuer series 3 term
A advance in the amount of [GBP]__, the issuer series 4 term A
advance in the amount of [GBP]__ and the issuer series 5 term A
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 issuer term advances will be used
by Funding 1 on the closing date, among other things, to pay the seller the
consideration due for loans (together with their related security) sold to the
mortgages trustee on the closing date, thereby increasing the Funding 1 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, the issuer term A 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 it.
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.
135
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 or
minus, 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:
DESIGNATED STEPPED-UP
TERM ADVANCE INITIAL INTEREST DRAWN INTEREST INTEREST RATE
SERIES NAME RATING RATE PER ANNUM RATE PER ANNUM STEP-UP DATE PER ANNUM
- ----------- ------------ ---------------- --------------- ------------ --------------
series 1... AAA LIBOR minus __% LIBOR minus __% __ N/A
series 1... AA LIBOR plus __% N/A __ LIBOR plus __%
series 1... BBB LIBOR plus __% N/A __ LIBOR plus __%
series 2... AAA LIBOR plus __% LIBOR plus __% __ N/A
series 2... AA LIBOR plus __% N/A __ LIBOR plus __%
series 2... BBB LIBOR plus __% N/A __ LIBOR plus __%
series 3... AAA LIBOR plus __% N/A __ LIBOR plus __%
series 3... AA LIBOR plus __% N/A __ LIBOR plus __%
series 3... BBB LIBOR plus __% N/A __ LIBOR plus __%
series 4A1. AAA LIBOR plus __% N/A __ LIBOR plus __%
series 4A2. AAA LIBOR plus __% N/A __ LIBOR plus __%
series 4... AA LIBOR plus __% N/A __ LIBOR plus __%
series 4... BBB LIBOR plus __% N/A __ LIBOR plus __%
series 5... AAA LIBOR plus __% N/A __ LIBOR plus __%
series 5... AA LIBOR plus __% N/A __ LIBOR plus __%
series 5... BBB LIBOR plus __% N/A __ LIBOR plus __%
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
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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 drawn interest rate indicated in relation to an issuer term advance in
the above table shall apply to each extendable bullet term advance for each
interest period relating to that extendable bullet term advance, from but
excluding the date when the corresponding class of notes has been fully
redeemed if amounts remain outstanding under the extendable bullet 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 June, 2004. 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, payments on the issuer series 3 term AAA advance, the issuer
series 4 term AAA advances, the issuer series 5 term AAA advance, the issuer
term AA advances, the issuer term A advances and/or the issuer term BBB
advances 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, the issuer term A 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");
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* 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 sold 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 general 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.
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 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
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AAA advances will rank ahead of payments of interest and principal due and
payable to the issuer, any previous issuer and any new issuer on the term AA
advances, the term A advances and the term BBB advances. Similarly, each term AA
advance due and payable will rank equally and proportionately as to payment of
interest and principal due and payable, ahead of payments of interest and
principal due and payable on the term A advances and the term BBB advances.
Also, each term A advance due and payable will rank equally and proportionately
as to payment of interest and principal due and payable, ahead of payments of
interest and principal 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 funds are 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 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 and each current start-up loan provider. Together with the fourth
start-up loan provider and the other secured creditors, we will enter into the
third 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;
* 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
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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 (including all of Funding 1's Scottish
assets) will also be subject to the floating charge.
The Funding 1 deed of charge was created prior to 15th September, 2003.
Accordingly, the prohibition in section 72A of the Insolvency Act on the
appointment of an administrative receiver under floating 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 expenses of any
liquidation or any administration, and the claims of certain preferential
creditors on enforcement of the Funding 1 security. This means that the
expenses of any liquidation or any administration and 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. Section
250 of the Enterprise Act abolishes crown preference in relation to all
insolvencies (and thus reduces the categories of preferential debts that are to
be paid in priority to the debts due to the holder of a floating charge).
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
except in relation to Funding 1's Scottish assets where crystallisation will
occur on the appointment of an administrative receiver or on the commencement
of the winding-up of Funding 1. A crystallised floating charge will rank ahead
of the claims of unsecured creditors but will continue to rank behind the
expenses of any liquidation or any administration and 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 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
141
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 issuers 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:
* 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 have agreed 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
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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 an error established as such to the satisfaction
of the security trustee 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 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 intercompany loan terms and
conditions, 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 sale of new types of loans or mortgages to the mortgages
trustee;
(v) changes to be made to the general reserve fund required amount, the
liquidity reserve fund required amount and/or the manner in which
the reserve funds are funded;
(vi) changes to be made to the definitions of asset trigger event and
non-asset trigger event; and
143
(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 sale 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.
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.
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;
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* 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;
* 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 swap
guarantee,] 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's bank 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 (including all of the issuer's property, assets and
undertaking situated in Scotland or governed by Scots law).
NATURE OF SECURITY -- FIXED CHARGE
The issuer may not deal with those of its assets which are subject to a
fixed charge without the 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
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security is said to "FIX" over those assets which areexpressed 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 (including all of the issuer's
Scottish assets) 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. We expect that an appointment of an administrative receiver by the
security trustee under the issuer deed of charge will not be prohibited by
Section 72A of the Insolvency Act as the appointment will fall within the
exception set out under Section 72B of the Insolvency Act (First Exception:
Capital Markets). Therefore, 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 expenses of any
liquidation or administration and the claims of certain preferential creditors
on enforcement of the issuer security. Section 250 of the Enterprise Act
abolishes Crown Preference in relation to all insolvencies (and thus reduces
the categories of preferential debts that are to be paid in priority to debts
due to the holder of a floating charge) but a new Section 176A of the
Insolvency Act (as inserted by Section 251 of the Enterprise Act) requires a
"prescribed part" (up to a maximum amount of [GBP]600,000) of the floating
charge realisations available for distribution to be set aside to satisfy the
claims of unsecured creditors. This means that the expenses of any liquidation
or administration, the claims of preferential creditors and the beneficiaries
of the prescribed part will be paid out of the proceeds of enforcement of the
floating charge ahead of amounts due to noteholders. The prescribed part will
not be relevant to property subject to a valid fixed security interest or to a
situation in which there are no unsecured creditors.
The floating charge created by the 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 except in relation
to the issuer's Scottish assets where crystallisation will occur on the
appointment of an administrative receiver or on the commencement of the
winding-up of the issuer. A crystallised floating charge will rank ahead of the
claims of unsecured creditors which are in excess of the prescribed part but
will rank behind the expenses of any liquidation or administration, the claims
of preferential creditors and the beneficiaries of the prescribed part 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
class M noteholders of one series and the class M noteholders of another series
or a conflict between the interests of the class C noteholders of one series
and
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the class C noteholders of another series then a resolution directing the
security trustee to take any action must be passed at separate meetings of the
holders of each series of the class A issuer notes or, as applicable, each
series of the class B issuer notes, each series of the class M 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 M issuer notes, or, if the class M 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 M issuer notes, or,
if the class M 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 an error established as such to the satisfaction
of the security trustee 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.
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 intercompany loan terms and
conditions, the bank account agreement and the master definitions and
construction schedule, that are
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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 sale of new types of loans or mortgages to the mortgages
trustee;
(vi) changes to be made to the general reserve fund required amount,
the liquidity reserve fund required amount and/or the manner in
which the reserve funds are 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 sale of new loans to the mortgages trustee,
have been satisfied; and
* in respect of the matters listed in paragraphs (i) to (viii), 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.
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).
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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.
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 M 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;
(iii) 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 and/or the class M noteholders or the action is
sanctioned by extraordinary resolutions of the class A
noteholders and/or the class B noteholders and/or the class
M noteholders, as the case may be; and
(iv) 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;
* 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;
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* 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.
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;
* the amounts standing to the credit of the general reserve ledger
and (if established) the liquidity 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 funds) to pay items (A) to (F), (H), (J) and
(L) 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 to cover any of the amounts described under "FUNDING
1 LIQUIDITY FACILITY -- GENERAL DESCRIPTION" due on such date for which the
Funding 1 liquidity facility is available 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"). The Funding 1
liquidity facility is not available to pay any amounts due on the issuer term
advances.
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 item (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 interest payment date prior to
the service of an intercompany loan acceleration notice on Funding 1, the cash
manager will apply the Funding 1
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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 issuers' 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;
(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 A advances;
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(K) then, towards a credit to the A 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 interest due and payable
on the term BBB advances;
(M) then, towards a credit to the BBB principal deficiency sub-ledger
in an amount sufficient to eliminate any debit on that ledger;
(N) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of any amounts due to the
issuer and 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);
(O) then, towards a credit to the general reserve ledger to the extent
the amount standing to the credit thereof is less than the general
reserve fund required amount, taking into account any net
replenishment of the general reserve fund on that Funding 1
interest payment date from Funding 1 available principal receipts
(see item (B) of the relevant Funding 1 pre-enforcement principal
priority of payments);
(P) then, towards a credit to the liquidity reserve ledger to the
extent the amount standing to the credit thereof is less than the
liquidity reserve fund required amount, taking into account any net
replenishment of the liquidity reserve fund on that Funding 1
interest payment date from Funding 1 available principal receipts
(see item (C) of the relevant Funding 1 pre-enforcement principal
priority of payments);
(Q) 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 (if any) to pay any
current swap excluded termination amount;
* 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;
(R) 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;
(S) then, towards payment of an amount equal to 0.01 per cent. of the
Funding 1 available revenue receipts; and
(T) 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;
* "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;
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* "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 swap
agreement;
* "CURRENT SWAP PROVIDER DOWNGRADE TERMINATION EVENT" means the
occurrence of an additional termination event following the failure
by the second issuer swap provider and/or the third issuer swap
provider [and/or the issuer swap provider] to comply with the
requirements of the ratings downgrade provisions set out in the
relevant 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 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 been 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 following a current swap provider downgrade
termination event;
less
(b) the amount, if any, received by the issuer or a previous issuer
from a replacement swap provider upon entry by the issuer or a
previous issuer (as the case may be) 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 current
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.
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;
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* 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;
* 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 (including any amount received by the issuer
in consideration for entering into a replacement issuer swap
agreement but excluding the return or transfer of any excess swap
collateral (as defined in the glossary) as set out under any of the
issuer swap agreements); and
* any additional amount the issuer receives from any taxing authority
on account of amounts paid to that taxing authority for and on
account of tax by an issuer swap provider under an issuer swap
agreement;
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 item (B) below
or amounts due to the issuer account bank under item (C) below, which shall be
paid when due, on each applicable 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 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;
* 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
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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;
* 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;
* amounts due to the series 4 issuer swap provider in respect of
the series 4 class A1 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 A1 issuer notes;
* interest due and payable on the series 4 class A2 issuer notes;
and
* amounts due to the series 5 issuer swap provider in respect of
the series 5 class A issuer swap (including any termination
payment but excluding any related issuer swap excluded
termination amount) and from amounts received from the series 5
class A issuer swap provider in relation to such swap to pay on
each applicable interest payment date 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
* amounts due to the series 5 class B 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 class B 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 M 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 M issuer notes;
* amounts due to the series 2 issuer swap provider in respect of
the series 2 class M 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 M issuer notes;
* amounts due to the series 3 issuer swap provider in respect of
the series 3 class M 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 M issuer notes;
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* amounts due to the series 4 issuer swap provider in respect of
the series 4 class M 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 M issuer notes; and
* amounts due to the series 5 class M issuer swap provider in
respect of the series 5 class M issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from the
series 5 class M issuer swap provider in relation to such swap
to pay interest due and payable on the series 5 class M issuer
notes;
(G) 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 class C 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 class C issuer swap provider in relation to such swap
to pay interest due and payable on the series 5 class C issuer
notes;
(H) 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;
* the series 5 issuer class A 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 class A
issuer swap provider;
* the series 5 class B 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 class B
issuer swap provider;
* the series 5 class M 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 class M
issuer swap provider; and
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* the series 5 class C 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 class C
issuer swap provider;
(I) 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
(J) 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 item
(A) of the issuer pre-enforcement revenue priority of payments,
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), (B) or (C) 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), (K) and (M) of the Funding 1
pre-enforcement revenue priority of payments on the relevant
Funding 1 interest payment date;
* in respect of the previous term advances made by Permanent
Financing (No. 1) PLC, Permanent Financing (No. 2) PLC and
Permanent Financing (No. 3) PLC only, and 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) (inclusive) and (H), (J)
and (L) 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
159
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);
* in so far as available for and needed to make eligible general
reserve fund principal repayments (see "CREDIT STRUCTURE -- GENERAL
RESERVE FUND" below), the amount that would then be standing to the
credit of the general 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 (N) (inclusive)
of the Funding 1 pre-enforcement revenue priority of payments plus
any amounts which will be credited to the general reserve ledger
under item (B) of the relevant Funding 1 pre-enforcement principal
priority of payments on the next Funding 1 interest payment date
(i.e. occurring at the end of such period of four business days);
and
* in so far as available and needed, the amount that would then be
standing to the credit of the liquidity 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 (N) (inclusive) of the Funding 1 pre-enforcement revenue
priority of payments plus any amounts which will be credited to the
liquidity reserve ledger under item (C) of the relevant Funding 1
pre-enforcement principal priority of payments 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), (J) and (L) 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 __;
* in relation to the issuer series 2 term AAA advance, the
Funding 1 interest payment date falling in __;
* in relation to the issuer series 3 term AAA advance, the
Funding 1 interest payment date falling in __ in respect of the
first scheduled amortisation amount and __ in respect of the
second scheduled amortisation amount;
* in relation to the issuer series 4 term AAA advances, the
Funding 1 interest payment date falling in __ in respect of
each first scheduled amortisation amount and __ in respect of
each second scheduled amortisation amount;
* in relation to the issuer series 5 term AAA advance, the
Funding 1 interest payment date falling in __;
* 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 A 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 A 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;
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* in relation to the issuer series 3 term A 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 A 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;
* in relation to the issuer series 5 term A 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;
* 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 A 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 A 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 A 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 A 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 A 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, to the extent only that monies have been drawn from the
general reserve fund to make eligible general reserve fund
principal repayments, towards a credit to the general reserve
ledger to the extent the amount standing to the credit thereof is
less than the general reserve fund required amount;
(C) then, to the extent only that monies have been drawn from the
liquidity reserve fund, towards a credit to the liquidity reserve
ledger to the extent the amount standing to the credit thereof is
less than the liquidity reserve fund required amount;
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(D) 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), (3) and (4) below;
(E) 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;
(F) then, towards repayment of all term A 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), (3) and (4) below;
(G) 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), (3) and (4) below;
(H) 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 (D) of this priority
of payments); and
(I) 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 (D), (E), (F) and (G) of the priority of
payments set out above and below:
RULE (1) -- DEFERRAL OF REPAYMENT OF PASS-THROUGH TERM ADVANCES AND/OR
SCHEDULED AMORTISATION INSTALMENTS IN CERTAIN CIRCUMSTANCES
(A) Deferral of term AA advances, term A 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, the A 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 general reserve fund level is less than the
general 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 (D) 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 (E) of the
above priority of payments;
(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 (D) and/or (E) of the above priority of payments then the
term A advances (including the issuer term A advances) will not
be entitled to principal repayments under item (F) of the
priority of payments set out above; and/or
(c) any term AAA advance, any AA term advance or any A term advance
(whether or not such term AAA advance, term AA advance or A
term advance is then due and payable) remains outstanding after
making the payments under items (D) and/or (E) and/or (F) 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 (G) of the priority of
payments set out above.
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(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 (D) 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
then, on or before their step-up dates, the original pass-through
term advances will be entitled to principal repayments under items
(D), (E), (F) and (G) (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 (D) 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 (D) 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 (H) of the above priority of payments);
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"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), (B) and (C) and before item (D) 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), (B) and (C) and before item (D)
of the above priority of payments,
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 (D), (E),
(F) and (G) 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;
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(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 items (G), (I), (K) and (M) of the Funding 1 pre-
enforcement revenue 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
(iv) the aggregate amount repaid on a Funding 1 interest payment date in
respect of intercompany loan B under items (D), (E), (F) and (G) of
the above 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 items (G), (I), (K) and (M) of the Funding 1 pre-
enforcement revenue 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.
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RULE (4) -- DEFERRAL OF EXTENDABLE BULLET TERM ADVANCES WHEN CORRESPONDING
CLASSES OF NOTES HAVE BEEN REDEEMED
On a Funding 1 interest payment date falling after the date that the
relevant corresponding classes of notes that have funded the extendable bullet
term advances have been fully redeemed by the issuer:
(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
extendable bullet term advances 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 extendable bullet term advances; and
(b) no amount may be applied in repayment of the relevant
extendable bullet term advances 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), (B) and (C) and before item (D)
of the above priority of payments,
is greater than or equal to
(ii)the sum of the bullet accumulation liability and the
aggregate amount outstanding of the extendable bullet term
advances which are due and payable as at that time.
"EXTENDABLE BULLET TERM ADVANCE" means a bullet term advance that has been
funded by a class of notes that (to the extent of any shortfall in amounts
received on the corresponding extendable bullet term advance) have been
redeemed on the final maturity date thereof using a payment made by the
relevant swap provider. In relation to the issuer only, the extendable bullet
term advances are the issuer series 1 term AAA advance and the issuer series 2
term AAA advance.
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, to the extent only that monies have been drawn from the
general reserve fund to make eligible general reserve fund
principal repayments, towards a credit to the general reserve
ledger to the extent the amount standing to the credit thereof is
less than the general reserve fund required amount;
(C) then, to the extent only that monies have been drawn from the
liquidity reserve fund, towards a credit to the liquidity reserve
ledger to the extent the amount standing to the credit thereof is
less than the liquidity reserve fund required amount;
(D) 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;
(E) 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;
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(F) then, in no order of priority between them but in proportion to the
amounts due, to repay the term A advances until those term A
advances are fully repaid; and
(G) 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, in no order of priority between them but in proportion to
the respective amounts due, 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 and towards repayment of
any amounts outstanding under the extendable bullet term advances
following the date that the relevant corresponding class of notes
used to fund those extendable bullet term advances has been fully
redeemed;
(B) then, to the extent only that monies have been drawn from the
general reserve fund to make eligible general reserve fund
principal repayments, towards a credit to the general reserve
ledger to the extent the amount standing to the credit thereof is
less than the general reserve fund required amount;
(C) then, to the extent only that monies have been drawn from the
liquidity reserve fund, towards a credit to the liquidity reserve
ledger to the extent the amount standing to the credit thereof is
less than the liquidity reserve fund required amount;
(D) 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;
(E) 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;
(F) then, in no order of priority between them, but in proportion to
the amounts due, to repay the term A advances until each of those
term A advances is fully repaid; and
(G) 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, in no order of priority between them but in proportion to
the respective amounts due, 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 and
towards repayment of any amounts outstanding under the extendable
bullet term advances following the date that the relevant
corresponding class of notes used to fund those extendable bullet
term advances has been fully redeemed;
(B) then, to the extent only that monies have been drawn from the
general reserve fund to make eligible general reserve fund
principal repayments, towards a credit to the general reserve
ledger
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to the extent the amount standing to the credit thereof is less
than the general reserve fund required amount;
(C) then, to the extent only that monies have been drawn from the
liquidity reserve fund, towards a credit to the liquidity reserve
ledger to the extent the amount standing to the credit thereof is
less than the liquidity reserve fund required amount;
(D) 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;
(E) 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;
(F) then, in no order of priority between them, but in proportion to
the amounts due, to repay the term A advances, until each of those
advances is fully repaid; and
(G) 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.
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 previous 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 previous bullet term advances made
under any of the previous intercompany loans and the remainder shall be applied
to repay the relevant previous 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 (i) all principal amounts to be repaid by Funding 1 to the issuer under the
issuer intercompany loan during the relevant interest period and (ii) any
payments to be received by the issuer or to be paid to the issuer on the final
maturity date of the series 1 class A issuer notes or the series 2 class A
issuer notes, by the series 1 issuer swap provider or the series 2 issuer swap
provider, as applicable.
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
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notes will be redeemed in amounts corresponding to (i) the
principal exchange amounts (if any) received plus (ii) other
amounts received on the final maturity date of the series 1 class A
issuer notes as a consequence of satisfaction of the CPR swap
conditions, in each case 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 (i) the principal exchange amounts (if any)
received plus (ii) other amounts received on the final maturity
date of the series 2 class A issuer notes as a consequence of
satisfaction of the CPR swap conditions, in each case 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 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 4A1 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 A1 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 A1
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4A2 term AAA advance on each Funding 1
interest payment date shall be applied by the issuer to redeem the
series 4 class A2 issuer notes on each applicable interest payment
date; 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
class B 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 class B issuer swap provider under the
series 5 class B issuer swap.
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CLASS M ISSUER NOTES
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 1 term A 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 M 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 M
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 2 term A 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 M 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 M
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 3 term A 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 M 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 M
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4 term A 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 M 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 M
issuer swap; and
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 5 term A advance on each Funding 1
interest payment date, shall be paid by the issuer to the series 5
class M issuer swap provider, and on each applicable interest
payment date the series 5 class M issuer notes will be redeemed in
amounts corresponding to the principal exchange amounts (if any)
received from the series 5 class M issuer swap provider under the
series 5 class M 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;
* 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
class C 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 class C issuer swap provider under the
series 5 class C issuer swap.
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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;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4A1 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 A1 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 A1 issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4A2 term AAA advance on each
Funding 1 interest payment date shall be applied by the issuer
to redeem the series 4 class A2 notes on each applicable
interest payment date; 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 on each applicable interest
payment date;
(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
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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 class B 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 class B 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 M issuer notes as follows:
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 1 term A 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 M 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 M issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 2 term A 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 M 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 M issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 3 term A 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 M 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 M issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4 term A 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 M 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 M issuer swap; and
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 5 term A 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 M 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 M issuer swap.
(D) 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 payment
date the series 2 class C
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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/or any new issuer in
respect of that 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);
(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);
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(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 A advances;
(I) 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;
(J) 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);
(K) 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, any previous issuer and/or any new
issuer in respect of their respective obligations (if any) to
pay any current swap excluded termination amount to a current
swap provider following a current swap provider default or a
current 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
(L) 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 (other than amounts
representing any excess swap collateral which shall be returned directly to the
relevant issuer swap provider) 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;
* 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
174
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 A1 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 A1 issuer
swap to pay interest and principal due and payable on the
series 4 class A1 issuer notes;
* interest and principal on the series 4 class A2 issuer notes;
and
* amounts due to the series 5 class A issuer swap provider in
respect of the series 5 class A 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
A issuer swap to pay interest and principal due and payable 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;
* 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
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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 class B 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 class B 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 M 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 M issuer
swap to pay interest and principal due and payable on the
series 1 class M issuer notes;
* amounts due to the series 2 issuer swap provider in respect of
the series 2 class M 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 M issuer
swap to pay interest and principal due and payable on the
series 2 class M issuer notes;
* amounts due to the series 3 issuer swap provider in respect of
the series 3 class M 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 M issuer
swap to pay interest and principal due and payable on the
series 3 class M issuer notes;
* amounts due to the series 4 issuer swap provider in respect of
the series 4 class M 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 M issuer
swap to pay interest and principal due and payable on the
series 4 class M issuer notes; and
* amounts due to the series 5 class M issuer swap provider in
respect of the series 5 class M issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from the
series 5 class M issuer swap provider in respect of the series
5 class M issuer swap to pay interest and principal due and
payable on the series 5 class M 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 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
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* amounts due to the series 5 class C 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 class C 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.
(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, 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
* 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 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 general 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 general 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);
* Funding 1 will be obliged to establish a liquidity reserve fund if
the seller ceases to have a long-term unsecured, unsubordinated and
unguaranteed credit rating by Moody's of at least A3 or at least A-
by Fitch (unless the relevant rating agency confirms that the
current rating of the notes will not be adversely affected by the
rating downgrade of the seller);
* payments on the class C issuer notes will be subordinated to
payments on the class A issuer notes, the class B issuer notes and
the class M issuer notes;
* payments on the class M 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 previous term advances and principal amounts due on the previous
original bullet term advances and previous original scheduled
amortisation term advances in the circumstances described below;
* a fourth start-up loan will be provided to increase the general
reserve fund and meet the costs of setting up the structure; and
* in respect of certain series of notes, the swap provider has agreed
to pay, subject to the satisfaction of the CPR swap conditions, some
shortfalls in principal amounts due on the final maturity date
thereof.
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 issuers have 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), (J) and (L) 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.
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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 general reserve fund, as
described in "-- GENERAL RESERVE FUND";
second, drawings under the liquidity reserve fund, if available, as
described in "--LIQUIDITY RESERVE FUND";
third, principal receipts, if any, as described in "-- USE OF FUNDING 1
PRINCIPAL RECEIPTS TO PAY FUNDING 1 INCOME DEFICIENCY"; AND
fourth, drawings under the Funding 1 liquidity facility, if available, as
described in "-- FUNDING 1 LIQUIDITY FACILITY", but only to pay certain
amounts due on the term advances made by the previous issuers.
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 funds.
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 funds) to pay items (A) to
(F), (H), (J) and (L) 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".
GENERAL RESERVE FUND
A general 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 GENERAL 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 general 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
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portion of the second start up loan and on 25th November, 2003
by a portion of the third start up loan and will amount to
[GBP]__ on the closing date after crediting a drawing of
[GBP]__ under the fourth start-up loan to the general reserve
ledger (see "-- FOURTH START-UP LOAN" below);
(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 funds 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 general reserve ledger is maintained by the cash manager to record the
balance from time to time of the general reserve fund.
On each Funding 1 interest payment date the amount of the general reserve
fund is added to certain other income of Funding 1 in calculating Funding 1
available revenue receipts.
The general reserve fund is replenished up to and including an amount equal
to the general reserve fund required amount on Funding 1 interest payment dates
from Funding 1 available revenue receipts at item (O) of the Funding 1 pre-
enforcement revenue priority of payments and from Funding 1 available principal
receipts at item (B) of the relevant Funding 1 pre-enforcement principal
priority of payments. The "GENERAL 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 general 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"); and/or
* the application of Funding 1 available principal receipts which are
allocated to fund the liquidity reserve fund up to the liquidity
reserve fund required amount.
The principal deficiency ledger is split into four 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;
* the A principal deficiency sub-ledger corresponding to the term A
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 A principal deficiency sub-ledger until the balance
of the A principal deficiency sub-ledger is equal to the aggregate
principal amount outstanding of the term A advances;
* third, on the AA principal deficiency sub-ledger until the balance
of the AA principal deficiency sub-ledger is equal to the aggregate
principal amount outstanding of the term AA advances; and
* fourth, 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
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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 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 AA advances has been
paid, in an amount necessary to reduce to zero the balance on the AA
principal deficiency sub-ledger;
* third, provided that interest due on the term A advances has been
paid, in an amount necessary to reduce to zero the balance on the A
principal deficiency sub-ledger; and
* fourth, provided that interest due on the 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, THE CLASS M 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 M issuer notes, interest
payments on the class M issuer notes will be subordinated to interest payments
on the class B issuer notes and interest payments on the class B issuer notes
will be subordinated to interest payments on the class A issuer notes, in each
case in accordance with the issuer priority of payments.
Any shortfall in payments of interest on the class B issuer notes, the class
M 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 maturity date of the notes, at which point if there is
insufficient money available to us to pay interest on the class B issuer notes,
the class M 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, the class M 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, the class M issuer notes and the class C
issuer notes; the class B issuer notes will rank in priority to the class M
issuer notes and the class C issuer notes; and the class M 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 agreement, a
form of which has been filed as an exhibit to the registration statement of
which this prospectus is a part. You should note that the Funding 1 liquidity
facility is not available to make payments on the issuer term advances, but
rather is available only to pay certain amounts due on the term advances made
by Permanent Financing (No. 1) PLC, Permanent Financing (No. 2) PLC and
Permanent Financing (No. 3) PLC.
GENERAL DESCRIPTION
On 14th June, 2002 Funding 1 entered into the Funding 1 liquidity facility
agreement with the Funding 1 liquidity facility provider in relation to the
previous term advances made to it by Permanent Financing (No. 1) PLC. On 6th
March, 2003, the Funding 1 liquidity facility agreement was amended and
restated to, amongst other matters, provide liquidity for the previous term
advances made to it by Permanent Financing (No. 2) PLC. On 25th November, 2003,
the Funding 1 liquidity facility agreement was amended and restated to, amongst
other matters, provide liquidity for the previous term advances made to it by
Permanent Financing (No. 3) PLC. Under the Funding 1 liquidity facility
agreement, the Funding 1 liquidity facility provider has agreed to grant to
Funding 1 a liquidity facility upon the terms, subject to the conditions and
for the purposes described below:
* paying in full on any Funding 1 interest payment date interest due
and payable on all previous term advances made by Permanent
Financing (No. 1) PLC, Permanent Financing (No. 2) PLC and Permanent
Financing (No. 3) PLC 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 item (F) of the Funding 1
pre-enforcement revenue priority of payments (being payment of
interest on the previous term AAA advances) if, at the date of
the relevant drawing, the debit balance on the previous 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 previous term AAA advances; and
(2) drawings may not be made under the Funding 1 liquidity
facility to pay interest on item (H) of the Funding 1
pre-enforcement revenue priority of payments (being payment of
interest on the previous term AA advances) if, at the date of
the relevant drawing, the debit balance on
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the previous 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 previous term AA advances; and
(3) drawings may not be made under the Funding 1 liquidity
facility to pay interest on item (L) of the Funding 1
pre-enforcement revenue priority of payments (being payment of
interest on the previous term BBB advances) if, at the date of
the relevant drawing, the debit balance on the previous 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 previous 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 previous original bullet term advances;
and
(b) repayments of principal in respect of previous 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 previous original bullet term
advances and previous 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 previous
original bullet term advances or previous 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"
above (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 (a "FUNDING 1 LIQUIDITY FACILITY DRAWING") 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
funds.
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 the Funding 1 liquidity facility agreement;
or
* the Funding 1 liquidity facility provider does not agree to renew
the Funding 1 liquidity facility beyond each 364-day commitment
period,
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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.
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 of a Funding 1 liquidity facility drawing but is not payable
on the principal amount of a Funding 1 stand-by drawing (other than, for so
long as amounts are outstanding under the intercompany loan made by Permanent
Financing (No. 1) PLC to Funding 1, the first [GBP]60,000,000 of the Funding 1
stand-by drawing). This interest is payable at a rate based on three-month
sterling LIBOR plus a margin of 0.50 per cent. per annum. Unpaid interest will
be added to the principal amount owed to the Funding 1 liquidity facility
provider and interest will accrue on that amount.
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. A contingent fee will be payable at the rate of 0.38 per cent.
per annum on any Funding 1 stand-by drawing together with an amount equal to
any interest received by Funding 1 on the Funding 1 liquidity facility stand-by
account (other than, for so long as amounts are outstanding under the
intercompany loan made by Permanent Financing (No. 1) PLC to Funding 1, the
first [GBP]60,000,000 of the Funding 1 stand-by drawing).
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 revenue
priority of payments and under the Funding 1 post-enforcement priority of
payments.
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 previous 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:
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* 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 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.
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.
LIQUIDITY RESERVE FUND
Funding 1 will be required to establish a liquidity reserve fund if, and for
as long as, the long-term, unsecured, unsubordinated and unguaranteed debt
obligations of the seller cease to be rated at least A3 by Moody's or A- by
Fitch (unless Moody's or Fitch, as applicable, confirms that the then current
ratings of the issuer notes will not be adversely affected by the ratings
downgrade). If following a subsequent increase in the seller's rating Funding 1
would no longer be required to maintain the liquidity reserve fund, then
Funding 1 at its option may terminate the liquidity reserve fund, and all
amounts standing to the credit of the liquidity
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reserve ledger will then be treated as Funding 1 available revenue receipts for
the next Funding 1 interest payment date.
Prior to enforcement of the Funding 1 security, the liquidity reserve fund
may be used to help meet any deficit in Funding 1 available revenue receipts
which are allocated to the issuer to pay amounts due on the intercompany loans,
but only to the extent that such amounts are necessary to fund the payment by
the issuer of operating and administrative expenses due and interest due on the
relevant interest payment date in respect of the class A issuer notes, the class
B issuer notes, the class M issuer notes and/or the class C issuer notes and to
help meet any deficit recorded on the principal deficiency ledger in respect of
the class A issuer notes.
The liquidity reserve fund, if required to be funded, will be funded
initially from Funding 1 available revenue receipts in accordance with the
Funding 1 pre-enforcement revenue priority of payments. The liquidity reserve
fund will be deposited in Funding 1's name in the Funding 1 GIC account into
which the general reserve fund is also deposited. All interest or income
accrued on the amount of the liquidity reserve fund while on deposit in the
Funding 1 GIC account will belong to Funding 1. The cash manager will maintain
a separate liquidity reserve ledger to record the balance from time to time of
the liquidity reserve fund.
On each payment date prior to enforcement of the Funding 1 security, funds
standing to the credit of the liquidity reserve fund will be added to certain
other income of Funding 1 in calculating Funding 1 available revenue receipts
to make payments due under the intercompany loan.
The liquidity reserve fund is replenished up to and including an amount
equal to the liquidity reserve fund required amount on Funding 1 interest
payment dates from Funding 1 available revenue receipts at item (P) of the
Funding 1 pre-enforcement revenue priority of payments and from Funding 1
available principal receipts at item (C) of the relevant Funding 1 pre-
enforcement principal priority of payments. The "LIQUIDITY RESERVE FUND
REQUIRED AMOUNT" is an amount as of any payment date equal to __% of the
aggregate outstanding balance of the issuer notes on that payment date.
Following enforcement of the Funding 1 security, amounts standing to the
credit of the liquidity reserve ledger may be applied in making payments of
principal due under the term advances.
The seller, Funding 1 and the security trustee may agree to increase,
decrease or amend the liquidity 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.
FOURTH START-UP LOAN
The following section contains a summary of the material terms of the fourth
start-up loan agreement. The summary does not purport to be complete and is
subject to the provisions of the fourth 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 "-- GENERAL
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 fourth start-up loan under the fourth start-up loan
agreement. This will be a subordinated loan facility in an amount of [GBP]__,
which will be used for increasing the general reserve fund on the closing date
by [GBP]__ and for meeting the costs and expenses incurred by Funding 1 in
connection with its payment to the seller for loans (together with their
related security) sold to the mortgages trustee on the closing date and the
fees payable under the issuer intercompany loan agreement which relate to the
costs of issue of the issuer notes.
INTEREST ON THE FOURTH START-UP LOAN
The fourth 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 __ at the rate of
LIBOR for three-month sterling deposits at [0.50] per cent. per annum. For the
first interest period, LIBOR will be determined on the basis of a linear
interpolation between LIBOR for l-month and l-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.
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REPAYMENT OF THE FOURTH START-UP LOAN
Funding 1 will repay the fourth 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 fourth start-up loan, it will have no
further recourse to the start-up loan provider.
EVENT OF DEFAULT
It will be an event of default under 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 fourth start-up loan will become
immediately due and payable.
GOVERNING LAW
The fourth start-up loan agreement will be governed by English law.
THE ISSUER SWAP AGREEMENTS
If on the final maturity date of the series 1 class A notes or the series 2
class A notes, the issuer has not received sufficient monies from Funding 1
under the corresponding extendable bullet term advance to repay the principal
amount outstanding of the relevant class of notes on that date, then in respect
of such class of notes, then, subject to the satisfaction of the CPR swap
conditions, the issuer will be entitled under the series 1 class A issuer swap
or the series 2 class A issuer swap, as applicable, to receive an amount equal
to the shortfall from the relevant swap provider. Thereafter, the relevant swap
provider will be entitled to receive from the issuer principal amounts received
by the issuer on the extendable bullet term advances. Further detail in respect
of these swaps is set out in "THE SWAP AGREEMENTS" below.
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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 have 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 US 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;
* 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 class A1 issuer notes, the
series 4 class B issuer notes, the series 4 class M issuer notes,
the series 4 class C issuer notes, the series 5 class A issuer
notes, the series 5 class B issuer notes, the series 5 class M
issuer notes and the series 5 class C issuer notes; and
* series 1 class A issuer swap and series 2 class A issuer swap: to
the extent (i) the principal amount outstanding of the series 1
class A issuer notes or the series 2 class A issuer notes on their
final maturity date exceeds (ii) amounts received by the issuer on
or before that final maturity date from Funding 1 in respect of the
corresponding issuer series 1 term AAA advance or the issuer series
2 term AAA advance, to protect the issuer by paying, subject to
satisfaction of the CPR swap conditions, an amount equal to such
excess to the order of the issuer.
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 a variable 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
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* provide for the notional amount to be increased as appropriate to
hedge against similar potential interest rate mismatches in relation
to any new issues.]
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 the current 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.
189
THE ISSUER 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 US-dollar deposits or a LIBOR based
rate for three-month US dollar deposits. In addition, the series 4 issuer notes
(other than the series 4 class A2 issuer notes) and the series 5 issuer notes
will be denominated in euro and will accrue interest at a EURIBOR based rate
for three-month euro deposits (although the series 5 class A issuer notes will
accrue interest at a fixed rate until the interest payment date in _). 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 currency 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 currency swap will be the principal
amount outstanding under the term advance for the issuer notes to which the
relevant issuer currency swap relates. In order to allow for the effective
currency amount of each issuer currency swap to amortise at the same rate as
the relevant series and class of issuer notes, each issuer currency swap
agreement will provide that, as and when the issuer notes amortise, a
corresponding portion of the currency amount of the relevant issuer currency
swap will amortise. Pursuant to each issuer currency swap agreement, any
portion of the issuer currency swap so amortised will be swapped from sterling
into US dollars at the relevant US dollar currency exchange rate or into euro
at the euro currency exchange rate, as applicable.
[The payment obligations of the series __ issuer swap provider will be
guaranteed by the __ issuer swap guarantor pursuant to a guarantee (the "L
ISSUER SWAP GUARANTEE").]
In the event that any currency 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 currency swap in respect of
that class and series of issuer notes. Any replacement issuer currency swap
must be entered into on terms acceptable to the rating agencies, the issuer and
the security trustee and with a replacement issuer currency 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 currency swaps on terms acceptable to the rating
agencies, this may affect amounts available to pay amounts due under the issuer
notes.
If an issuer currency 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 US dollars or euros as required.
The terms of the series 1 class A issuer swap and series 2 class A issuer
swap also provide that if on the final maturity date of the series 1 class A
issuer notes or, as applicable, the series 2 class A issuer notes, (i) the
principal amount outstanding of the series 1 class A issuer notes or, as
applicable the series 2 class A issuer notes exceeds (ii) amounts received by
the issuer on or before that final maturity date from Funding 1 in respect of
the corresponding issuer series 1 term AAA advance or the issuer series 2 term
AAA advance, then the series 1 class A swap provider or, as applicable, the
series 2 class A swap provider will pay, subject to the satisfaction of the CPR
swap conditions, an amount equal to such excess to the issuer. Thereafter, any
principal amounts received by the issuer from Funding 1 in respect of the series
1 term AAA advance or, as applicable, the issuer series 2 term AAA advance, will
be paid by the issuer to the series 1 class A swap provider or, as applicable,
the series 2 class A swap provider.
The "CPR SWAP CONDITIONS" are as follows:
* no asset trigger event has occurred;
* no issuer note acceleration notice has been served in respect of the
issuer notes; and
* __
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RATINGS DOWNGRADE OF SWAP PROVIDERS
Under each of the swap agreements, in the event that the relevant rating(s)
of a swap provider, or its respective guarantor, as applicable, is or are, as
applicable, downgraded by a rating agency below the 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), 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 and the series 3 class A 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 __ 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 __
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.
* Any swap agreement may also be terminated in certain other
circumstances, including the following, 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 (in the case of an issuer swap) and/or Funding 1 or the Funding 1
swap provider may be liable to make a termination payment to the other (in the
case of the Funding swap). 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 as determined on the basis of quotations sought
from leading dealers as to the cost of entering into a swap with the same terms
and conditions that would have the effect of preserving the economic equivalent
of the respective full payment obligations of the parties (or based upon a good
faith determination of total losses and costs (or gains) if an
191
insufficient number of quotations can be obtained or if basing the valuation on
quotations would not produce a commercially reasonable result). 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, then, pursuant to its obligations under
the issuer intercompany loan, Funding 1 shall pay to the issuer an amount equal
to the termination payment due to the relevant issuer swap provider less any
amount received by the issuer under any replacement issuer swap agreement.
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 CLASS A1 ISSUER
NOTES, THE SERIES 4 CLASS B ISSUER NOTES, THE SERIES 4 CLASS M ISSUER NOTES,
THE SERIES 4 CLASS C ISSUER NOTES, THE SERIES 5 CLASS A ISSUER NOTES, THE
SERIES 5 CLASS B ISSUER NOTES, THE SERIES 5 CLASS M ISSUER NOTES, AND SERIES 5
CLASS C ISSUER NOTES" and "RISK FACTORS -- YOU MAY BE SUBJECT TO INTEREST RATE
RISKS ON THE SERIES 5 CLASS A ISSUER NOTES").
If the issuer receives a termination payment from an issuer currency swap
provider, then the issuer shall use those funds towards meeting its costs in
effecting currency exchanges at the applicable spot rate of exchange until a
replacement issuer currency swap is entered into and/or to acquire a
replacement issuer currency 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, subject to certain conditions specified in
the relevant issuer swap agreement, including (without limitation) the
satisfaction of certain requirements of the rating agencies, transfer its
obligations under any of the issuer swaps to another entity.
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.
Each 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.
[The __ issuer swap guarantor will be obliged to gross up payments made by
it to the issuer if withholding taxes are imposed on payments made under the __
issuer swap guarantee.
However, the __ issuer swap guarantee provides that, if the __ issuer swap
guarantor is required to gross up a payment under the __ issuer swap guarantee
in respect of a relevant issuer currency swap, it may terminate the relevant
issuer currency swap.]
GOVERNING LAW
The Funding 1 swap agreement and the issuer 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 the security trustee 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
and the liquidity reserve fund;
(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 general reserve ledger, which records the amount credited
to the general reserve fund from a portion of the proceeds of
(i) the first start-up loan on the initial closing date, (ii)
the second start-up loan on 6th March, 2003, (iii) the third
start-up loan on 25th November, 2003, (iv) the fourth start-up
loan on the closing date, (v) other amounts standing to the
credit of the general reserve fund (but not exceeding the
general reserve fund required amount) and (vi) all deposits
and other credits in respect of the general reserve fund;
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* 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;
* the Funding 1 liquidity facility ledger, which will record
drawings made under the Funding 1 liquidity facility and
repayments of those drawings; and
* the liquidity reserve ledger, which will record the amounts
credited to the liquidity reserve fund from Funding 1
available revenue receipts and from Funding 1 available
principal receipts up to the liquidity reserve fund required
amount and drawings made under the liquidity reserve fund;
(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 funds 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 reimbursed 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).
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:
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* 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 reimbursed 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.
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:
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* 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, as amended; 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 M noteholders take
precedence for so long as the class M 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, as amended. Generally, these provisions outline the
duties, rights and responsibilities of the note trustee and the issuer and the
rights of the noteholders. Specifically these include, but are not limited to:
(a) maintenance of a noteholder list by the note trustee;
(b) provision of financial statements and other information by the
issuer to the note trustee;
(c) ability of noteholders to waive certain past defaults of the issuer;
(d) duty of the note trustee to use the same degree of care in
exercising its responsibilities as would be exercised by a prudent
person conducting their own affairs;
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(e) duty of the note trustee to notify all noteholders of any events of
default of which it has actual knowledge; and
(f) right of the note trustee to resign at any time by notifying the
issuer in writing, and the ability of the issuer to remove the note
trustee under certain circumstances.
TRUST INDENTURE ACT PREVAILS
The issuer trust deed contains a provision that, if any other provision of
the issuer trust deed limits, qualifies or conflicts with another provision
which is required to be included in the issuer trust deed by, and is not
subject to contractual waiver under, the US Trust Indenture Act of 1939, as
amended, then the required provision of that Act will prevail.
GOVERNING LAW
The issuer trust deed will be governed by English law.
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THE ISSUER NOTES AND THE GLOBAL ISSUER NOTES
The issue of the issuer notes will be authorised by a resolution of the
board of directors of the issuer passed prior to the closing date. The issuer
notes will be constituted by an issuer trust deed to be dated the closing date,
between the issuer and the note trustee, as trustee for, among others, the
holders for the time being of the issuer notes. While the material terms of the
issuer notes and the global notes are described in this prospectus, the
statements set out in this section with regard to the issuer notes and the
global issuer notes are subject to the detailed provisions of the issuer trust
deed. The issuer trust deed will include the form of the global issuer notes
and the form of definitive issuer notes. The issuer trust deed includes
provisions which enable it to be modified or supplemented and any reference to
the issuer trust deed is a reference also to the document as modified or
supplemented in accordance with its terms.
An issuer paying agent and agent bank agreement between the issuer, the note
trustee, Citibank, N.A. in London as principal paying agent, the US paying
agent, 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 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 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 por tion of the aggregate
principal amount of issuer notes as to which that participant or those
participants has or have given that direction.
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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;
* "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
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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, 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
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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.
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:
203
* 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 US Securities Exchange Act of
1934, as amended 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 3 issuer 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.
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.
204
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; and
* the issuer swap agreements dated on or about the closing date between
the issuer, the relevant issuer 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. 4) 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;
* __ as issuer swap provider in respect of the series __ issuer notes;
* __ as issuer swap provider in respect of the series __ issuer notes;
* __ as issuer swap provider in respect of the series __ issuer notes;
and
* 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 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, the class M 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, the class M 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 M issuer notes and 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 M issuer notes rank, irrespective of series, without preference or
priority among themselves. Without prejudice to the repayment provisions
described in number 5 below and subject to the relevant scheduled and/or, as
applicable, permitted redemption dates or other payment conditions of the
issuer notes, payments of principal and interest due and payable on the class M
issuer notes will rank ahead of payments of principal and interest due and
payable on the class C issuer notes and 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.
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, the class B issuer notes and the class M issuer notes subject to the
terms and conditions of the issuer notes, the issuer cash management agreement,
the issuer deed of charge, the Funding 1 deed of charge and the other issuer
transaction documents.
206
In the event of the issuer security being enforced, the class A issuer notes
will rank in priority to the class B issuer notes, the class A issuer notes and
the class B issuer notes will rank in priority to the class M issuer notes and
the class A issuer notes, the class B issuer notes and the class M issuer notes
will rank in priority to the class C issuer notes.
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, the class M 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 M noteholders and/or the class C noteholders, then the note trustee
and the security trustee will have regard to the interests of the class B
noteholders only. If there are no class A issuer notes or class B issuer notes
outstanding and there are any class M issuer notes outstanding and there is or
may be a conflict between the interests of the class M noteholders and the
interests of the class C noteholders, then the note trustee and the security
trustee will have regard to the interests of the class M 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, the
class M noteholders and the class C noteholders. However, as described in
number 11, there are provisions limiting the power of the class M noteholders,
the class B noteholders and the class C noteholders to pass an effective
extraordinary resolution, depending on its effect on the class A noteholders.
Except in the limited circumstances described in number 11 there is no
limitation on the power of class B noteholders to pass an effective
extraordinary resolution the exercise of which is binding on the class M
noteholders and the class C noteholders. However, as described in number 11,
there are provisions limiting the power of the class M noteholders and the
class C noteholders to pass an effective extraordinary resolution, depending on
its effect on the class B noteholders. Likewise, except in the limited
circumstances described in number 11 there is no limitation on the power of
class M noteholders to pass an 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 M
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 swap agreements[, the issuer
swap guarantee], 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
(including all of the issuer's property, assets and undertaking
situated in Scotland or governed by Scots law).
The security is described in detail in the issuer deed of charge, which is
described under the heading "SECURITY FOR THE ISSUER'S OBLIGATIONS" in this
prospectus. The issuer deed of charge also sets out how money is to be
distributed between the secured parties if the security is enforced. The
security becomes enforceable at any time following the service of a note
acceleration notice on the issuer, as described in
207
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.
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, standard security, 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 __,
interest on the series 1 class A issuer notes will be payable quarterly in
arrear on the relevant interest payment dates falling in March, June, September
and December in each year, as applicable.
Interest on the offered issuer notes (other than the series 1 class A issuer
notes) will be paid quarterly in arrear on each 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.
208
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 March, June, September and December (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 March, June, September and December (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 10th
April, 2004 for the interest period from and including the closing date to but
excluding 10th April, 2004. The first interest payment date for the offered
issuer notes (other than the series 1 class A issuer notes) will be 10th June,
2004 for the interest period from and including the closing date to but
excluding 10th June, 2004.
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 M issuer notes, the class B issuer notes and the class A issuer notes;
interest payments due and payable on the class M issuer notes will be
subordinated to interest payments due and payable on the class B issuer notes
and the class A issuer notes; and interest payments due and payable on the
class B issuer notes will be subordinated to interest payments due and payable
on the class A issuer notes, in each case in accordance with the issuer
priority of payments.
Any shortfall in payments of interest on the class B issuer notes, the class
M 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 maturity
date of the issuer notes, at which point if there is insufficient money
available to pay interest on the class B issuer notes, the class M 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 M issuer notes will be the sum of three-month USD-
LIBOR plus a margin of __ per cent. per annum up to and including
the interest payment date in __ 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;
* series 2 class M issuer notes will be the sum of three-month USD-
LIBOR plus a margin of __ per cent. per annum up to and including
the interest payment date in __ and thereafter the sum of three-
month USD-LIBOR plus a margin of __ per cent. per annum;
* 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;
209
* series 3 class A issuer notes will be the sum of three-month USD-
LIBOR plus a margin of __ per cent. per annum up to and including
the interest payment date in __ and thereafter 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 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 M issuer notes will be the sum of three-month USD-
LIBOR plus a margin of __ per cent. per annum up to and including
the interest payment date in __ and thereafter 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 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.
"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 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.
210
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 M........................................... series 1 term A
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 M........................................... series 2 term A
series 2 class C........................................... series 2 term BBB
series 3 class A........................................... series 3 term AAA
series 3 class B........................................... series 3 term AA
series 3 class M........................................... series 3 term A
series 3 class C........................................... 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.
(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:
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* 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
Provided that an issuer note acceleration notice has not been served and
subject to the provisos below, 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 (and unpaid) 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 (a) the issuer has provided to the note trustee a certificate
to the effect that the issuer will have funds available to it to redeem the
issuer notes and amounts required to be paid in priority to or pari passu with
the issuer notes on such interest payment date and (b) the note trustee is
satisfied in accordance with the transaction documents that there are
sufficient funds to allow the issuer to redeem the issuer notes.
(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,
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.
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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, an d (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 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, then the issuer may redeem all (but not
some only) of the issuer notes at the principal amount outstanding thereof,
together with any accrued (and unpaid) 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 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
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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.
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)
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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, diligence or other process is levied or enforced upon or
sued out against that business or those assets and is not discharged
within 30 days, or the issuer initiates or consents to the foregoing
proceedings or makes a conveyance or assignment for the benefit of
its creditors generally or 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.
(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 M NOTEHOLDERS
The terms described in this number 9(C) will have no effect so long as any
of the class A issuer notes or the class B issuer notes are outstanding.
Subject to that occurrence, the note trustee may in its absolute discretion
give notice (a "CLASS M ISSUER NOTE ACCELERATION NOTICE") of a class M 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 M issuer notes; or
* directed to by an extraordinary resolution of the class M
noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS M ISSUER NOTE EVENT OF DEFAULT":
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* the issuer fails to pay for a period of three business days any
amount of interest or principal on the class M issuer notes when
that payment is due and payable in accordance with these conditions;
or
* the occurrence of any of the other events in number 9(A) described
above but provided that any reference to the class A issuer notes
and the class A noteholders shall be read as references to the class
M issuer notes and the class M noteholders.
(D) CLASS C NOTEHOLDERS
The terms described in this number 9(D) will have no effect so long as any
of the class A issuer notes, the class B issuer notes or the class M 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, a class M 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:
* 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, the class M 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, class M 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
216
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, class M 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, the class M 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, all of the class M 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, all of the class M 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, class M 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;
* 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;
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* 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 series of the
class B issuer notes which are not all denominated in the same currency, the
principal amount outstanding of any class B issuer note denominated in US
dollars or euro shall be converted into sterling at the relevant issuer dollar
currency exchange rate or the relevant issuer euro currency exchange rate, as
the case may be.
In respect of the class M issuer notes, the issuer trust deed provides that:
* a resolution which, in the sole opinion of the note trustee, affects
the interests of the holders of one series only of the class M
issuer notes shall be deemed to have been duly passed if passed at a
single meeting of the holders of the class M 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
M issuer notes but does not give rise to a conflict of interest
between the holders of those two or more series of the class M
issuer notes, shall be deemed to have been duly passed if passed at
a single meeting of the holders of those two or more series of the
class M issuer notes; and
* a resolution which, in the sole opinion of the note trustee, affects
the interests of the holders of any two or more series of the class
M issuer notes and gives or may give rise to a conflict of interest
between the holders of those two or more series of the class M
issuer notes, shall be deemed to have been duly passed only if, in
lieu of being passed at a single meeting of the holders of those two
or more series of the class M issuer notes, it shall be duly passed
at separate meetings of the holders of those two or more series of
the class M issuer notes.
In the case of a single meeting of the holders of two or more series of the
class M issuer notes which are not all denominated in the same currency, the
principal amount outstanding of any class M issuer note denominated in US
dollars or euro shall be converted into sterling at the relevant issuer dollar
currency 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
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.
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Similar requirements apply in relation to requests in writing from class A
noteholders, class B noteholders, class M 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 US Trust Indenture Act of 1939, as amended,
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 M noteholders, except as mentioned
below, shall take effect while any class A issuer notes or class B issuer notes
remain outstanding unless sanctioned by an extraordinary resolution of the
class A noteholders and/or the class B noteholders (as the case may be), or the
note trustee (or, as the case may be, the 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).
No extraordinary resolution of the class C noteholders, except as mentioned
below, shall take effect while any class A issuer notes, class B issuer notes
or class M issuer notes remain outstanding unless sanctioned by an
extraordinary resolution of the class A noteholders, the class B noteholders
and/or the class M issuer notes (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, the
class B noteholders and/or class M issuer notes (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, the class M 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, the class M 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 M noteholders and
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 M noteholders and the class C noteholders. If there are no class A issuer
notes or class B issuer notes outstanding, an extraordinary resolution of the
class M 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.
(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
219
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 or an error established as
such to the satisfaction of the note trustee.
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.
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
220
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 and/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. RATING AGENCIES
If:
(i) a confirmation of rating or other response by a rating agency is a
condition to any action or step under any transaction document; and
(ii) a written request for such confirmation or response is delivered to
each rating agency by the issuer (copied to the note trustee and/or
the security trustee, as applicable) and either one or more rating
agency (each a "NON-RESPONSIVE RATING AGENCY") indicates that it does
not consider such confirmation or response necessary in the
circumstances or within 30 days of such delivery such request elicits
no confirmation or response and/or such request elicits no statement
by such rating agency that such confirmation or response could not be
given; and
(iii) at least one rating agency gives such a confirmation or response based
on the same facts,
then such condition shall be deemed to be modified with respect to the facts
set out in the request referred to in (ii) so that there shall be no
requirement for the confirmation or response from the non-responsive rating
agency.
The note trustee and/or the security trustee, as applicable, shall be
entitled to treat as conclusive a certificate by any director, officer or
employee of the issuer, Funding 1, the seller, any investment bank or financial
adviser acting in relation to the issuer notes as to any matter referred to in
(ii) in the absence of manifest error or the note trustee and/or the security
trustee, as applicable, having facts contradicting such certificates
specifically drawn to his attention and the note trustee and/or the security
trustee, as applicable, shall not be responsible for any loss, liability,
costs, damages, expenses or inconvenience that may be caused as a result.
16. GOVERNING LAW
The issuer transaction documents, other than the issuer underwriting
agreement, certain aspects of the mortgage sale agreement relating to the
Scottish loans and their related security (which will be governed by Scots law)
and the Scottish declarations of trust (which will be governed by Scots law,
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.
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RATINGS OF THE ISSUER NOTES
The issuer notes are expected, on issue, to be assigned the following
ratings by Moody's, Standard & Poor's and Fitch. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision,
suspension or withdrawal at any time by the assigning rating organisation if,
in its 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.
CLASS OF ISSUER NOTES MOODY'S STANDARD & POOR'S FITCH
- ------------------------ ------- ----------------- -----
Series 1 class A........ P-1 A-1+ F1+
Series 2 class A........ Aaa AAA AAA
Series 3 class A........ Aaa AAA AAA
Series 4 class A1....... Aaa AAA AAA
Series 4 class A2....... Aaa AAA AAA
Series 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 M........ A1 A+ A+
Series 2 class M........ A1 A+ A+
Series 3 class M........ A1 A+ A+
Series 4 class M........ A1 A+ A+
Series 5 class M........ A1 A+ A+
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.
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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) none of the previous issuers 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 sells 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 sells to the mortgages trustee sufficient new loans and their
related security in the period up to but excluding the interest payment
date in __ 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 sale 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. 3) PLC
refinances its outstanding notes on the interest payment date falling in
December 2010, Permanent Financing (No. 2) PLC refinances its outstanding
notes on the interest payment date falling in December 2008 and Permanent
Financing (No. 1 PLC) refinances its outstanding notes on the interest
payment date falling in June 2007 and such that the Funding 1 share and
the outstanding trust property is not reduced;
(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
previous series 1 term AAA advance made by Permanent Financing (No. 2)
PLC;] and
(11) the closing date of the transaction is __, 2004,
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:
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POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE
AVERAGE AVERAGE 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 LIFE OF THE LIFE OF THE
SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2 SERIES 2 SERIES 2 SERIES 3
CLASS A CLASS B CLASS M CLASS C CLASS A CLASS B CLASS M CLASS C CLASS A
CONSTANT ISSUER ISSUER ISSUER ISSUER ISSUER ISSUER ISSUER ISSUER ISSUER
REPAYMENT RATE NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES
(% PER ANNUM) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS)
- -------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
5% __ __ __ __ __ __ __ __ __
10% __ __ __ __ __ __ __ __ __
15% __ __ __ __ __ __ __ __ __
20% __ __ __ __ __ __ __ __ __
25% __ __ __ __ __ __ __ __ __
30% __ __ __ __ __ __ __ __ __
35% __ __ __ __ __ __ __ __ __
POSSIBLE POSSIBLE POSSIBLE
AVERAGE AVERAGE AVERAGE
LIFE OF THE LIFE OF THE LIFE OF THE
SERIES 3 SERIES 3 SERIES 3
CLASS B CLASS M CLASS C
CONSTANT ISSUER ISSUER ISSUER
REPAYMENT RATE NOTES NOTES NOTES
(% PER ANNUM) (YEARS) (YEARS) (YEARS)
- -------------- ----------- ----------- -----------
5% __ __ __
10% __ __ __
15% __ __ __
20% __ __ __
25% __ __ __
30% __ __ __
35% __ __ __
224
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".
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MATERIAL LEGAL ASPECTS OF THE LOANS
The following discussion is a summary of the material legal aspects of
English and Scottish residential property loans and mortgages. It is not an
exhaustive analysis of the relevant law.
ENGLISH LOANS
GENERAL
There are two parties to a mortgage. The first party is the mortgagor, who
is the borrower and homeowner. The mortgagor grants the mortgage over its
property. The second party is the mortgagee, who is the lender. Each English
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. Prior to 13th October, 2003 title to the
land was 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, however, pursuant to the Land
Registration Act 2002 which came into force on 13th October, 2003 the provision
of land certificates and charge certificates has now been abolished. Title to
land is now established by reference to entries on the registers held by H.M.
Land Registry.
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 and those classified as
unregistered interests which override first registration and unregistered
interests which override registered dispositions.
Title information documents provided by H.M. Land Registry will reveal the
present owner of the land, together with any legal charges and other interests
affecting the land. However, the Land Registration Act 2002 provides that some
interests in the land will bind the land even though they are not capable of
registration at H.M. Land Registry such as unregistered interests which
override first registration and unregistered interests which override
registered dispositions. The title information documents 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
226
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.
In the system of unregistered land, the mortgagee protects its interest by
retaining possession of the title deeds to the property. Without the title
deeds to the property, the borrower is unable to establish the necessary chain
of ownership, and is therefore effectively prevented from dealing with its land
without the consent of the mortgagee. Priority of mortgages over unregistered
land is governed first by the possession of title deeds, and in relation to
subsequent mortgages by the registration of a land charge.
THE SELLER AS MORTGAGEE
The sale of the English mortgages by the seller to the mortgages trustee
will take effect in equity only. The mortgages trustee will not apply to H.M.
Land Registry or the Central Land Charges Registry to register or record its
equitable interest in the mortgages. The consequences of this are explained in
the section "RISK FACTORS -- THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT
THE MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGES WHICH MAY ADVERSELY
AFFECT PAYMENTS ON THE ISSUER NOTES".
ENFORCEMENT OF MORTGAGES
If a borrower defaults under a loan, the English mortgage conditions provide
that all monies under the loan will become immediately due and payable. The
seller or its successors or assigns would then be entitled to recover all
outstanding principal, interest and fees under the covenant of the borrower
contained in the English mortgage conditions to pay or repay those amounts. In
addition, the seller or its successors or assigns may enforce its mortgage in
relation to the defaulted loan. Enforcement may occur in a number of ways,
including the following:
* The mortgagee may enter into possession of the property. If it does
so, it does so in its own right and not as agent of the mortgagor,
and so may be personally liable for mismanagement of the property
and to third parties as occupier of the property.
* The mortgagee may lease the property to third parties.
* The mortgagee may foreclose on the property. Under foreclosure
procedures, the mortgagor's title to the property is extinguished
so that the mortgagee becomes the owner of the property. The remedy
is, because of procedural constraints, rarely used.
* The mortgagee may sell the property, subject to various duties to
ensure that the mortgagee exercises proper care in relation to the
sale. This power of sale arises under the Law of Property Act 1925.
The purchaser of a property sold pursuant to a mortgagee's power of
sale becomes the owner of the property.
SCOTTISH LOANS
GENERAL
A standard security is the only means of creating a fixed charge over
heritable or long leasehold property in Scotland. Its form must comply with the
requirements of the Conveyancing and Feudal Reform (Scotland) Act 1970 (the
"1970 ACT"). There are two parties to a standard security. The first party is
the grantor, who is the borrower and homeowner. The grantor grants the standard
security over its property (and is generally the only party to execute the
standard security). The second party is the grantee of the standard security,
who is the lender and is called the heritable creditor. Each Scottish loan will
be secured by a standard security which has a first ranking priority over all
other standard securities secured on the property and over all unsecured
creditors of the borrower. Borrowers may create a subsequent standard security
over the relevant property without the consent of the seller. Upon intimation
to the seller (in its capacity as trustee for the mortgages trustee pursuant to
the relevant Scottish declaration of trust) of any subsequent standard security
the prior ranking of the seller's standard security shall be restricted to
security for advances made prior to such intimation and advances made
subsequent to such intimation which the seller or the mortgages trustee is
obliged to advance, and interest and expenses in respect thereof.
The 1970 Act automatically imports a statutory set of "STANDARD CONDITIONS"
into all standard securities, although the majority of these may be varied by
agreement between the parties. The seller, along with most major lenders in the
residential mortgage market in Scotland, has elected to vary the Standard
Conditions by means of its own set of Scottish mortgage conditions, the terms
of which are in turn imported
227
into each standard security. The main provisions of the Standard Conditions
which cannot be varied by agreement relate to redemption and enforcement, and in
particular the notice and other procedures that require to be carried out prior
to the exercise of the heritable creditor's rights on a default by the borrower.
NATURE OF PROPERTY AS SECURITY
While title to all land in Scotland is registered there are currently two
possible forms of registration, namely the Land Register and Sasine Register.
Both systems of registration can include both heritable (the Scottish
equivalent to freehold) and long leasehold land.
LAND REGISTER
This system of registration was established by the Land Registration
(Scotland) Act 1979 and now applies to the whole of Scotland. Any sale of land
(including a long leasehold interest in land) the title to which has not been
registered in the Land Register or the occurrence of certain other events in
relation thereto (but not the granting of a standard security alone) trigger
its registration in the Land Register, when it is given a unique title number.
Title to the land is established by a land certificate containing official
copies of the entries on the Land Register relating to that land. Similarly,
the holder of any standard security over the land in question receives a charge
certificate containing official copies of the entries relating to that
security. A person registered in the Land Register owns the land free from all
interests other than those entered on the Register, those classified as
overriding interests and any other interests implied by law.
The land certificate will reveal the present owners of the land, together
with any standard securities and other interests (other than certain overriding
interests) affecting the land. The land certificate will also contain a plan
indicating the location and extent of the land. While this plan is not in all
circumstances conclusive as to the extent of the land, it cannot be amended if
this would be to the prejudice of a proprietor in possession of the land,
unless this indemnity has been expressly excluded in the land certificate
itself.
SASINE REGISTER
Title to all land in Scotland where no event has yet occurred to trigger
registration in the Land Register is recorded in the General Register of
Sasines. Title to such land is proved by establishing a chain of documentary
evidence of title going back at least ten years. Where the land is affected by
third party rights, some of those rights can be proved by documentary evidence
or by proof of continuous exercise of the rights for a prescribed period and do
not require registration. However, other rights (including standard securities)
would have to be recorded in the Sasine Register in order to be effective
against a subsequent purchaser of the land.
TAKING SECURITY OVER LAND
A heritable creditor must register its standard security in the Land
Register or the Sasine Register (as applicable) in order to perfect its
security and secure priority over any subsequent standard security. Until such
registration occurs, a standard security will not be effective against a
subsequent purchaser or the heritable creditor under another standard security
over the property. Priority of standard securities is (subject to express
agreement to the contrary between the security holders) governed by their date
of registration rather than their date of execution. There is no equivalent in
Scotland to the priority period system which operates in relation to registered
land in England and Wales.
THE SELLER AS HERITABLE CREDITOR
The sale of the Scottish mortgages by the seller to the mortgages trustee
will be given effect by a declaration of trust by the seller (and any sale of
Scottish mortgages in the future will be given effect by further declarations of
trust), by which the beneficial interest in the Scottish mortgages will be
transferred to the mortgages trustee. Such beneficial interest (as opposed to
the legal title) cannot be registered in the Land Register or Sasine Register.
The consequences of this are explained in "RISK FACTORS -- THERE MAY BE RISKS
ASSOCIATED WITH THE FACT THAT THE MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE
MORTGAGES, WHICH MAY ADVERSELY AFFECT THE PAYMENTS ON THE ISSUER NOTES".
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ENFORCEMENT OF MORTGAGES
If a borrower defaults under a Scottish loan, the Scottish mortgage
conditions provide that all monies under the loan will become immediately due
and payable. The seller or its successors or assignees would then be entitled
to recover all outstanding principal, interest and fees under the obligation of
the borrower contained in the Scottish mortgage conditions to pay or repay
those amounts. In addition, the seller or its successors or assignees may
enforce its standard security in relation to the defaulted loan. Enforcement
may occur in a number of ways, including the following (all of which arise
under the 1970 Act):
* The heritable creditor may enter into possession of the property. If it
does so, it does so in its own right and not as agent of the borrower,
and so may be personally liable for mismanagement of the property and to
third parties as occupier of the property.
* The heritable creditor may grant a lease of the property of up to 7 years
(or longer with the courts' permission) to third parties.
* The heritable creditor may sell the property, subject to various duties
to ensure that the sale price is the best that can reasonably be
obtained. The purchaser of a property sold pursuant to a heritable
creditor's power of sale becomes the owner of the property.
* The heritable creditor may, in the event that a sale cannot be achieved,
foreclose on the property. Under foreclosure procedures the borrower's
title to the property is extinguished so that the heritable creditor
becomes the owner of the property. However, this remedy is rarely used.
In contrast to the position in England and Wales, the heritable creditor has
no power to appoint a receiver under the standard security.
BORROWER'S RIGHT OF REDEMPTION
Under Section 11 of the Land Tenure Reform (Scotland) Act 1974 the grantor
of any standard security has an absolute right, on giving appropriate notice,
to redeem that standard security once it has subsisted for a period of 20
years, subject only to the payment of certain sums specified in Section 11 of
that Act. These specified sums consist essentially of the principal monies
advanced by the lender, interest thereon and expenses incurred by the lender in
relation to that standard security.
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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 a "recognised stock exchange", an amount
must be withheld on account of UK income tax at the lower rate (currently 20%),
subject to any direction to the contrary from the Inland Revenue in respect of
such relief as may be available pursuant to the provisions of an applicable
double taxation treaty.
Residents of the US are generally not subject to tax in the UK on payments
on the 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
where the amounts paid on the issuer notes exceed the return on comparable debt
instruments, in which event 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, in the
case of a noteholder which is a company, 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, and (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.
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.
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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.) 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
Interest on the issuer notes has a UK source. Accordingly, payments of
interest 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 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 noteholder carries on a
trade, profession or vocation through a branch or agency (or, in the case of a
noteholder which is a company, which carries on a trade through a permanent
establishment) in the UK in connection with which the 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
or permanent establishment.
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 fluctuations, 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.
TAXATION OF RETURNS: OTHER NOTEHOLDERS
Noteholders who are not within the charge to UK corporation tax and who are
resident or ordinarily resident in the UK for tax purposes or who carry on a
trade, profession or vocation in the UK through a branch or agency in connection
with which interest on the issuer notes is received or to which the issuer notes
are attributable will generally be liable to UK tax on the amount of any
interest received in respect of the issuer notes. As the series 1 issuer notes,
series 2 issuer notes and series 3 issuer notes are denominated in US dollars,
the series 4 class A1 issuer notes, series 4 class B issuer notes, series 4
class M issuer notes, series 4 class C issuer notes, the series 5 class A issuer
notes, series 5 class B issuer notes, series 5 class M issuer notes and series 5
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 class A issuer notes and the series 4 class
A2 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
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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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EU SAVINGS DIRECTIVE
The EU has adopted a Directive regarding the taxation of savings income.
Subject to a number of important conditions being met, it is proposed that
Member States will be required from a date not earlier than 1 January 2005 to
provide to the tax authorities of other Member States details of payments of
interest and other similar income paid by a person to an individual in another
Member State, except that Austria, Belgium and Luxembourg will instead impose a
withholding system for a transitional period unless during such period they
elect otherwise. It is expected that a number of third countries and
territories including the United Kingdom will adopt similar measures with
effect from the same date.
Jersey is not a member of the European Union and therefore is not required
to implement the EU Savings Tax Directive. However, the Policy & Resources
Committee of the States of Jersey has announced that, in keeping with Jersey's
policy of constructive international engagement, Jersey, in line with steps
proposed by other relevant third countries proposes to introduce a withholding
tax system in respect of payments of interest, or other similar income, made to
an individual beneficial owner resident in an EU Member State by a paying agent
situated in Jersey (the terms "beneficial owner" and "paying agent" for this
purpose are as defined in the EU Savings Tax Directive). The withholding tax
system would apply for a transitional period prior to the implementation of a
system of automatic communication to EU Member States of information regarding
such payments. During this transitional period, such an individual beneficial
owner resident in an EU Member State will be entitled to request a paying agent
not to withhold tax from such payments but instead to apply a system by which
the details of such payments are communicated to the tax authorities of the EU
Member State in which the beneficial owner is resident.
The States of Jersey have not yet adopted measures to implement these
proposals but are expected to adopt such measures on the same timetable as EU
Member States and other relevant third countries.
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UNITED STATES FEDERAL INCOME TAXATION
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 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
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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 (other than interest on
the series 1 class A issuer 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 (other than discount
on the series 1 class A issuer 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 US notes that are class B issuer notes,
class M issuer notes or class C issuer 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 (other than a series
1 class A issuer 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 US notes that are class B issuer notes, class M
issuer notes or class C issuer notes and accordingly, the issuer intends to
assume that such 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.
In general, United States holders who report income for US federal income
tax purposes under the accrual method are required to accrue OID on short-term
obligations, such as the series 1 class A issuer notes, on a straight-line basis
unless an election is made to accrue the OID under a constant yield method
(based on daily compounding). A United States holder who is an individual or
other cash method holder is not required to accrue such OID unless such holder
elects to do so. If such an election is not made, any gain recognised by such
holder on the sale, exchange or maturity of the series 1 class A issuer notes
will be ordinary income to the extent of the holder's ratable share of OID
accrued on a straight-line basis, or upon election under the constant yield
method (based on daily compounding), through the date of the sale, exchange or
maturity.
As an alternative to the above treatments, 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.
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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. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
REGARDING 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 issuer 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 issuer 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 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 the 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
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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
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.
237
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.
238
ERISA CONSIDERATIONS
The offered 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 offered 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 offered 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 offered 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.
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
239
the offered 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 offered 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) (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 offered 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 offered 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.
240
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.
241
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS
None of the issuer notes will constitute "MORTGAGE RELATED SECURITIES" under
the United States Secondary Mortgage Market Enhancement Act of 1984, as
amended.
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 period ended [31st December, 2003] 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. 4) PLC as of __, 2004 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
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.
242
UNDERWRITING
UNITED STATES
The issuer has agreed to sell, and Citigroup Global Markets Limited, Morgan
Stanley and UBS Warburg (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 3 class A issuer 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 Citigroup Global Markets Limited
and UBS Warburg (the "CLASS B/M/C LEAD UNDERWRITERS" and, together with the
class A lead underwriters, the "LEAD UNDERWRITERS") have agreed to purchase,
the principal amount of those issuer notes listed in the following tables (also
called the "CLASS B/M/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
- -------------------------------------- ------------ ------------ ------------
Citigroup Global Markets Limited......
Morgan Stanley........................
UBS Warburg...........................
------------ ------------ ------------
Total.................................
============ ============ ============
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
THE SERIES THE SERIES THE SERIES
1 CLASS B 2 CLASS B 3 CLASS B
UNDERWRITERS ISSUER NOTES ISSUER NOTES ISSUER NOTES
- -------------------------------------- ------------ ------------ ------------
Citigroup Global Markets Limited......
UBS Warburg...........................
------------ ------------ ------------
Total.................................
============ ============ ============
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
THE SERIES THE SERIES THE SERIES
1 CLASS M 2 CLASS M 3 CLASS M
UNDERWRITERS ISSUER NOTES ISSUER NOTES ISSUER NOTES
- -------------------------------------- ------------ ------------ ------------
Citigroup Global Markets Limited......
UBS Warburg...........................
------------ ------------ ------------
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
- -------------------------------------- ------------ ------------ ------------
Citigroup Global Markets Limited......
UBS Warburg...........................
------------ ------------ ------------
Total.................................
============ ============ ============
243
The class A underwriters or affiliates of certain of the class A
underwriters have also agreed to pay and subscribe for the series 4 class A
issuer notes and the series 5 class A issuer notes and the class B/M/C
underwriters or affiliates of certain of the class B/M/C underwriters have also
agreed to pay and subscribe for the series 4 class B issuer notes, the series 4
class M issuer notes, the series 4 class C issuer notes, the series 5 class B
issuer notes, the series 5 class M 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 underwriters will offer and sell the offered issuer notes in the United
States only through their selling agents which are registered broker-dealers in
the United States.
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 M issuer notes a selling commission
of __ per cent. of the aggregate principal amount of the series 1 class M
issuer notes and a management and underwriting fee of __ per cent. of the
aggregate principal amount of the series 1 class M issuer notes. The issuer has
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
to the underwriters of the series 2 class M issuer notes a selling commission
of __ per cent. of the aggregate principal amount of the series 2 class M
issuer notes and a management and underwriting fee of __ per cent. of the
aggregate principal amount of the series 2 class M issuer notes. The issuer has
also agreed to pay to 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 3 class A issuer notes and a management and underwriting
fee of __ per cent. of the aggregate principal amount of the series 3 class A
issuer notes. 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
to the underwriters of the series 3 class M issuer notes a selling commission
of __ per cent. of the aggregate principal amount of the series 3 class M
issuer notes and a management and underwriting fee of __ per cent. of the
aggregate principal amount of the series 3 class M issuer notes. The issuer has
also agreed to pay to 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.
244
The class B/M/C lead underwriters have advised the issuer that they propose
initially to offer the series 1 class B issuer notes, the series 1 class M
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, up to __ per cent. for each series 1 class M issuer note and up to
__ per cent. for each series 1 class C issuer note. The class B/M/C lead
underwriters may allow, and those dealers may re-allow, concessions up to __
per cent. of the principal balance of the series 1 class B issuer notes, up to
__ per cent. of the principal balance of the series 1 class M 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, up to __ per cent. of
the principal balance of the series 2 class M issuer notes and up to __ per
cent. for each series 2 class C issuer note. The class B/M/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, up to __ per cent.
of the principal balance of the series 2 class M 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 3 class A issuer notes to
the public at the public offering price stated on the cover page of this
prospectus, and to some dealers at that price, less a concession up to __ per
cent. for each series 3 class A issuer note. The class A underwriters may
allow, and those dealers may re-allow, concessions up to __ per cent. of the
principal balance of the series 3 class A issuer notes to some brokers and
dealers.
The class B/M/C lead underwriters have advised the issuer that they propose
initially to offer the series 3 class B issuer notes, the series 3 class M
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, up to __ per cent. for each series 3 class M issuer note and up to
__ per cent. for each series 3 class C issuer note. The class B/M/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, up to
__ per cent. of the principal balance of the series 3 class M 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 fourth 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$l, which will be paid by
the seller on behalf of the issuer.
The issuer and Halifax have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the US Securities Act of 1933,
as amended.
The underwriters or their affiliates 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 US 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
245
of the offered issuer notes in the open market after pricing that
could adversely affect investors who purchase in the offering.
* Short covering transactions involve purchases of the offered issuer
notes in the open market after the distribution has been completed
in order to cover naked short positions.
* Stabilising transactions permit bids to purchase the offered issuer
notes so long as the stabilising bids do not exceed a specified
maximum.
* Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the offered issuer notes
originally sold by that syndicate member are purchased in a short
covering transaction.
Similar to other purchase transactions, these transactions may have the
effect of raising or maintaining the market price of the offered issuer notes
or preventing or retarding a decline in the market price of the offered issuer
notes. As a result, these transactions may cause the prices of the offered
issuer notes to be higher than they would otherwise be in the absence of those
transactions. Neither the issuer nor any of the underwriters represent that any
underwriter will engage in any of these transactions or that these
transactions, once begun, will not be discontinued without notice at any time.
The offered issuer notes will be registered under the US 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/M/C lead underwriter (with respect to the class B/M/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 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; and
* (i) it is a person whose ordinary activities involve it in
acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of its business and (ii) it
has not offered or sold and will not offer or sell any issuer notes
other than to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as
principal or as agent) for the purposes of their businesses or who
it is reasonable to expect will acquire, hold, manage or dispose of
investments (as principal or agent) for the purposes of their
businesses where the issue of the issuer notes would otherwise
constitute a contravention of Section 19 of the FSMA by the issuer;
and
* it has complied and will comply with all applicable provisions of
the FSMA with respect to anything done by it in relation to the
offered issuer notes in, from or otherwise involving the United
Kingdom.
ITALY
[The lead underwriters have represented and agreed that the offering of the
series 1 issuer notes, the series 2 issuer notes and the series 3 issuer notes
has not been cleared by CONSOB (the Italian Securities Exchange Commission)
pursuant to Italian securities legislation and, accordingly, they will not
offer, sell or deliver any such issuer notes in the Republic of Italy or
distribute in the Republic of Italy copies of this
246
prospectus or any other document relating to such issuer notes except (i) to
professional investors (investitori professionali/operatori qualificati), as
defined in Article 31, second paragraph, of CONSOB Regulation No. 11522 of 1
July 1998 as amended and (ii) in circumstances which are exempted from the rules
on solicitation of investments pursuant to Article 30.2 and Article 100 of
Legislative Decree No. 58 of 24 February 1998 (the "FINANCIAL SERVICES ACT") and
Article 33, first paragraph, of CONSOB Regulation No. 11971 of 14 May 1999, as
amended, in all circumstances in accordance with all Italian securities, tax and
other applicable laws and regulations.
Any offer, sale or delivery of the series 1 issuer notes, the series 2 issuer
notes and the series 3 issuer notes or distribution of copies of this
prospectus or any other document relating to such issuer notes in the Republic
of Italy under (i) and (ii) above must be (a) made by an investment firm, bank
or financial intermediary permitted to conduct such activities in the Republic
of Italy in accordance with the Financial Services Act, Legislative Decree No.
385 of 1 September 1993, as amended (the "BANKING ACT"), CONSOB Regulation No.
11522 of 1 July 1998, as amended and any other applicable laws and regulations,
(b) in compliance with Article 129 of the Banking Act and the implementing
guidelines of the Bank of Italy pursuant to which the issue or the offer of
securities in the Republic of Italy may need to be preceded and followed by an
appropriate notice to be filed with the Bank of Italy depending, inter alia, on
the aggregate value of the securities issued or offered in the Republic of
Italy and their characteristics and (c) in compliance with any other applicable
notification requirement or limitation that may be imposed by CONSOB or the
Bank of Italy.]
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.
SPAIN
[The proposed offer of the series 1 issuer notes, the series 2 issuer notes
and the series 3 issuer notes has not been registered with the Spanish Comision
Nacional del Mercado de Valores. Accordingly, such issuer notes cannot be
offered, sold, distributed or proposed in Spain nor any document or offer
material be distributed in Spain or targeted to Spanish resident investors
(including any legal entity set up, incorporated, domiciled or resident in the
Kingdom of Spain), save in compliance and in accordance with the provisions of
the Spanish Security Markets Act of 28 July 1998 (Ley 24/1998 de 28 de julio,
del Mercado de Valores), as amended, and the Royal Decree 291/1992 dated 27
March 1992 (Real Decreto 291/1992 de 27 de marzo sobre Emisiones y Ofertas
Publicas de Valores) as amended and restated or as further amended,
supplemented or restated from time to 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/M/C underwriters have advised us that they
intend to make a market in the class B/M/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.
247
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) the class A underwriters and their
affiliates for offers and sales related to market-making transactions in the
class A offered issuer notes and (ii) Citigroup Global Markets Limited, __ and
their affiliates for offers and sales related to market-making transactions in
the class B/M/C offered issuer notes. Such underwriters and their affiliates
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 the
underwriters or their affiliates has any obligation to make a market in such
offered notes, and any market-making may be discontinued at any time without
notice. Citigroup Global Markets Limited, __ and __ are among the underwriters
participating in the initial distribution of the offered notes.
AFFILIATIONS
[__, which is acting as the series __ issuer swap provider for the series __
issuer notes and the series __ issuer swap provider for the series __ issuer
notes is an affiliate of __, one of the underwriters for the issuer notes of
each series.]
248
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 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 __, 2004 subject only to the issue of the global issuer notes. Prior
to listing, however, dealings will be permitted by the London Stock Exchange in
accordance with its rules. Transactions will normally be effected for
settlement, in the case of the series 1 issuer notes, the series 2 issuer notes
and the series 3 issuer notes, in dollars, in the case of the series 4 class A1
issuer notes, the series 4 class B issuer notes, the series 4 class M issuer
notes, the series 4 class C issuer notes and the series 5 issuer notes, in
euro, and in the case of the series 4 class A2 issuer notes, in sterling, and
for delivery on the third working day after the date of the transaction.
The issuer 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, 2003. 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 8th December, 2003 (being the date of incorporation of the issuer),
[31st December, 2003] (being the date of the most recent non-statutory audited
accounts of Funding 1), 9th August, 2001 (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.
249
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 __, 2004.
The offered issuer notes have been accepted for clearance through DTC,
Clearstream, Luxembourg and Euroclear under the following CUSIP numbers, ISINs
and common codes:
CLASS OF ISSUER NOTES CUSIP ISIN COMMON CODE
- --------------------- ----- ---- -----------
Series 1 class A
Series 1 class B
Series 1 class M
Series 1 class C
Series 2 class A
Series 2 class B
Series 2 class M
Series 2 class C
Series 3 class A
Series 3 class B
Series 3 class M
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 __, 2004 and the independent
auditors' report thereon;
(C) the balance sheet of Funding 1 as at 31st December, 2003, the related
profit and loss account and cash flow statement for the period to 31st
December, 2003 and the independent auditors' report thereon;
(D) prior to the closing date, drafts (subject to minor amendment) or
copies, and after the closing date, copies of the following documents
(the "ISSUER 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 second deed of accession to Funding 1 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;
250
* 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;
* 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 fourth 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;
(H) the opinion of Allen & Overy as to US tax matters; and
(I) the opinion of Shepherd+ Wedderburn as to Scots law matters.
251
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
"A PRINCIPAL DEFICIENCY
SUB-LEDGER"
one of four sub-ledgers on the principal deficiency ledger
which specifically records any principal deficiency in
respect of any term A advances
"AA PRINCIPAL DEFICIENCY
SUB-LEDGER"
one of four 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 four 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 GENERAL RESERVE
FUND LEVEL"
the sum of:
(a) the amount standing to the credit of the general reserve
fund; and
(b) the amount (if any) then to be credited in accordance
with item (B) of the relevant Funding 1 pre-enforcement
principal priority of payments
"AGENT BANK"
Citibank, N.A. at 5 Carmelite Street, London EC4Y 0PA
"__ ISSUER SWAP GUARANTOR"
__
"__ ISSUER SWAP GUARANTEE"
the guarantee of the obligations of the series __ issuer swap
provider under the relevant issuer swaps by the __ issuer
swap guarantor
"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
"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-term unsecured,
252
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
"BANK OF SCOTLAND"
The Governor and Company of the Bank of Scotland established
by an Act of the Parliament of Scotland in 1695
"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 four 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 (D) 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 or any other day on
which Funding 1 acquires a further interest in the trust
property
"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
253
"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 (H) 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 (D) 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:
(a) the bullet accumulation liability at that time; and
(b) 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"
"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
254
"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 M ISSUER NOTES"
the series 1 class M issuer notes, the series 2 class M
issuer notes, the series 3 class M issuer notes, the series 4
class M issuer notes and the series 5 class M issuer notes
"CLASS A LEAD UNDERWRITERS"
Citigroup Global Markets Limited, __ and __
"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/M/C OFFERED ISSUER
NOTES"
the series 1 class B notes, the series 1 class M notes, the
series 1 class C notes, the series 2 class B notes, the
series 2 class M notes, the series 2 class C notes, the
series 3 class B notes, the series 3 class M 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"
Citigroup Global Markets Limited, __, __, __ and __
"CLASS B/M/C UNDERWRITERS"
Citigroup Global Markets Limited and __
"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 __, 2004
"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, as amended
"COMMON DEPOSITARY"
Citibank, N.A. at 5 Carmelite Street, London EC4Y 0PA
"CORE TERMS" the main subject matter of the contract
"CORPORATE (a) in respect of Funding 1, Holdings, the post-
SERVICES enforcement call option holder and the issuer,
PROVIDER" 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
255
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 timebeing 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 ISSUES" the previous notes issued by the previous issuers and the
issuer notes issued by the issuer which remain outstanding
"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 following a current
swap provider downgrade termination event;
less
(b) the amount, if any, received by the issuer or a previous
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 current 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
"DILIGENCE"
the process (under Scots law) by which a creditor attaches
the property of a debtor to implement or secure a court
decree or judgment
"DISTRIBUTION 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
"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 __;
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* in relation to the issuer series 2 term AAA
advance, the Funding 1 interest payment date
falling in __;
* 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
advances, 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 A 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 A 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 A 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 A 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;
* in relation to the issuer series 5 term A 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;
* 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 A 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 A advance has been fully repaid;
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* 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 A 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 A 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 A 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.
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 GENERAL 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
258
(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
"ENGLISH LOAN" a loan secured by an English mortgage
"ENGLISH MORTGAGE"
a mortgage secured over a property in England and Wales
"ENGLISH MORTGAGE CONDITIONS"
the mortgage conditions applicable to English loans
"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 class A1 issuer notes, the series 4
class B issuer notes, the series 4 class M notes, the
series 4 class C issuer notes, the series 5 class B
issuer notes, the series 5 class M 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 and four 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 4 class A1
issuer notes, the series 4 class B issuer notes, the
series 4 class M notes, the series 4 class C issuer
notes, the series 5 class B issuer notes, the series 5
class M notes and the series 5 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 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
259
(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
"EXCESS SWAP COLLATERAL"
means an amount equal to the value of the collateral (or the
applicable part of any collateral) provided by an issuer swap
provider to the issuer in respect of that issuer swap
provider's obligations to transfer collateral to the issuer
under the relevant issuer swap agreement which is in excess
of that issuer swap provider's liability under the relevant
issuer swap agreement as at the date of termination of the
relevant issuer swap agreement or which it is otherwise
entitled to have returned to it under the terms of the
relevant issuer swap agreement
"EXTENDABLE BULLET TERM
ADVANCES"
means a bullet term advance that has been funded by a class
of notes that may (to the extent of any shortfall in amounts
received on the corresponding extendable bullet term advance)
be redeemed on the final maturity date thereof from payments
made by the relevant swap provider.
"FINAL MATURITY DATE"
in respect of the series 1 class A issuer notes means the
interest payment date falling in [March 2005];
in respect of the series 2 class A issuer notes means the
interest payment date falling in [March 2009];
in respect of the series 3 class A issuer notes means the
interest payment date falling in [September 2033];
in respect of the series 4 class A1 issuer notes means the
interest payment date falling in __;
in respect of the series 4 class A2 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 June 2042;
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 M issuer notes means the
interest payment date falling in June 2042;
in respect of the series 2 class M issuer notes means the
interest payment date falling in June 2042;
in respect of the series 3 class M issuer notes means the
interest payment date falling in June 2042;
260
in respect of the series 4 class M issuer notes means the
interest payment date falling in June 2042;
in respect of the series 5 class M 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;
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 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 ISSUER CLOSING DATE"
14th June, 2002
"FIRST START-UP LOAN"
the loan made by the first start-up loan provider to Funding
1 under the first start-up loan agreement
"FIRST START-UP LOAN AGREEMENT"
the agreement entered into on 14th June, 2002 between the
first start-up loan provider and Funding 1 under which the
first start-up loan was made by the first start-up loan
provider to Funding 1
"FIRST START UP LOAN PROVIDER"
Halifax plc, in its capacity as provider of the first start-
up loan under the first start-up loan agreement
"FIRST ISSUER SWAP PROVIDER"
means JPMorgan Chase Bank, Banque AIG, Credit Suisse First
Boston International or such other swap provider appointed
from time to time in respect of the previous notes issued by
the first issuer
"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
"FOURTH START-UP LOAN"
the loan made by the start-up loan provider to Funding 1
under the fourth start-up loan agreement
"FOURTH START-UP LOAN
AGREEMENT" the agreement to be entered into on the closing date between
the fourth start-up loan provider and Funding 1 under which
the fourth start-up loan will be made by the fourth start-up
loan provider to Funding 1
"FOURTH START-UP LOAN PROVIDER"
Halifax plc, in its capacity as provider of the fourth start-
up loan under the fourth start-up loan agreement
261
"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
payments, a scheduled amortisation instalment or to make
a payment under items (A), (B) or (C) 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), (K) and (M) of the
Funding 1 pre- enforcement revenue priority of payments
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)
(inclusive), (H), (J) and (L) 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
general reserve fund principal repayments, the amount
that would then be standing to the credit of the general
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 (N)
(inclusive) of the Funding 1 pre-enforcement revenue
priority of payments plus any amounts which will be
credited to the general 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), (J) and (L) 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;
262
(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;
(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 amounts standing to the credit of the general
reserve ledger and (if established) the liquidity
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 first issuer, the corporate services provider,
the account bank, the Funding 1 GIC provider, the security
trustee, the seller, the start-up loan provider, the Funding
1 liquidity facility 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 fourth start-up
loan provider 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
March, June September and December in each year
"FUNDING 1 LIQUIDITY FACILITY
AGREEMENT"
the liquidity facility agreement entered into on 14th June,
2002 as amended and restated 6th March, 2003 and as further
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]150,000,000 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
DRAWING"
a drawing (other than a liquidity facility stand-by drawing)
under the Funding 1 liquidity facility
"FUNDING 1 LIQUIDITY FACILITY
PROVIDER"
JPMorgan Chase Bank
263
"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 SHORTFALL"
where there are insufficient amounts to make the payments
specified in "CREDIT STRUCTURE -- FUNDING 1 LIQUIDITY
FACILITY -- GENERAL DESCRIPTION", after taking into account
the amount available for drawing from the reserve funds
"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
264
"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 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
"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
265
"GENERAL RESERVE FUND"
at any time the amount standing to the credit of the general
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 -- GENERAL RESERVE FUND"
"GENERAL RESERVE FUND
REQUIRED AMOUNT"
an amount equal to [GBP]__
"GENERAL RESERVE FUND THRESHOLD"
the lesser of:
(a) the general reserve fund required amount, and
(b) the highest amount which the adjusted general 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
"GENERAL RESERVE LEDGER"
a ledger maintained by the cash manager to record the amount
credited to the general 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
"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 LOANS" the loans sold 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,
266
contingent and prospective liabilities) or otherwise
becomes insolvent; or
(c) proceedings (including, but not limited to, presentation
of an application 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 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"
"INTERCOMPANY LOAN TERMS
AND CONDITIONS" the standard terms and conditions incorporated into each
intercompany loan agreement, signed for the purposes of
identification on the first issuer closing date by
Funding 1, the security trustee and the agent bank
"INTEREST DETERMINATION DATE"
(a) in respect of the series 1 issuer notes, the series 2
issuer notes, and the series 3 issuer notes, means the
date which is two London business days before the first
day of the interest period for which the rate will
apply;
(b) in respect of the series 4 class A1 issuer notes, the
series 4 class B issuer notes, the series 4 class M
issuer notes, the series 4 class C issuer notes, the
series 5 class B issuer notes, the series 5 class M
issuer notes and the series 5 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 4 class A2 issuer notes, means
the first day of the interest period for which the rate
will apply;
(d) in respect of the series 5 class A issuer notes,
commencing on the earlier of (i) the interest payment
date falling in __, (ii) the occurrence of a trigger
event or (iii) the enforcement of the issuer security,
means the
267
date which is two TARGET business days before the first
day of the interest period for which the rate will
apply;
(e) in respect of the issuer term advances, means, in
respect of the first interest period, the closing date
and, in respect of subsequent interest periods, the
first day of the interest period for which the rate will
apply
"INTEREST PAYMENT 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 __, (ii) the occurrence of a trigger event or
(iii) enforcement of the issuer security, and thereafter
the 10th day of March, June, September and December in
each year;
(b) in respect of the series 5 class A issuer notes, the
10th day of [June] in each year up to and including the
earliest of (i) the interest payment date falling in __,
(ii) the occurrence of a trigger event or (iii)
enforcement of the issuer security, and thereafter the
10th day of March, June, September and December in each
year; and
(c) in all other cases, the 10th day of March, June,
September and December 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 __, 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
March, June, September and December and thereafter will
be the period from (and including) such interest payment
date to (but excluding) the next following 10th day of
March, June, September and December in each year;
(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
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"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 CURRENCY SWAPS"
means the issuer euro currency swaps and the issuer dollar
currency swaps
"ISSUER CURRENCY SWAP
PROVIDERS" means the issuer euro currency swap providers and the issuer
dollar currency swap providers
"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 US dollars are converted to sterling or, as
the case may be, sterling is converted to US 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 US dollars are converted
into sterling or, as the case may be, sterling is converted
into US 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,
replaced 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 US 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 US 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
confirmations relating to the issuer euro currency swaps to
be entered into on or before the
269
closing date between the issuer, the relevant issuer euro
currency swap provider and the security trustee (as amended,
restated, supplemented, replaced and/or novated from time to
time)
"ISSUER EURO CURRENCY SWAP
PROVIDERS" the series 4 issuer swap provider (in respect of the series 4
class A1 issuer notes, the series 4 class B issuer notes, the
series 4 class M issuer notes and the series 4 class C issuer
notes) and the series 5 issuer swap provider (in respect of
the series 5 class B issuer notes, the series 5 class M
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 (except the series 4 class A2 issuer notes) and
the series 5 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 condition 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, the class M 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, the class M 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, the class M 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 SERVICE OF A NOTE ACCELERATION
NOTICE ON
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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;
(d) 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 (including any amounts received by the issuer in
consideration of it entering into a replacement issuer
swap agreement but excluding the return or transfer of
any excess swap collateral as set out under any of the
issuer swap agreements); and
(e) any additional amount the issuer receives from any
taxing authority on account of amounts paid to that
taxing authority for and on account of tax by an issuer
swap provider under an issuer swap agreement
"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 SERIES 4A1 TERM
AAA ADVANCE" the advance made by the issuer to Funding 1 under the issuer
intercompany loan agreement from the proceeds of the issue of
the series 4 class A1 notes
"ISSUER SERIES 4A2 TERM
AAA ADVANCE" the advance made by the issuer to Funding 1 under the issuer
intercompany loan agreement from the proceeds of the issue of
the series 4 class A2 notes
"ISSUER SERIES 4 TERM AAA
ADVANCES" the issuer series 4A1 term AAA advance and the issuer series
4A2 term AAA advance
"ISSUER SERIES 5 TERM AAA
ADVANCE" the advance made by the issuer to Funding 1 under the issuer
intercompany loan agreement from the proceeds of the issue of
the series 5 class A notes
271
"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 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 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 A 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 M issuer notes, the series 2 class M issuer
notes, the series 3 class M issuer notes, the series 4 class
M issuer notes and the series 5 class M issuer notes
"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 advances, 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
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AA advance, the issuer series 5 term AA advance, the issuer
series 1 term A advance, the issuer series 2 term A advance,
the issuer series 3 term A advance, the issuer series 4 term A
advance, the issuer series 5 term A 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"
"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"
"LIQUIDITY RESERVE
FUND" a liquidity reserve fund established on the occurrence of
certain ratings downgrades of the seller to meet interest and
principal (in limited circumstances) on the issuer notes
"LIQUIDITY RESERVE
FUND REQUIRED AMOUNT"
an amount calculated in accordance with the formula set out
in "CREDIT STRUCTURE -- LIQUIDITY RESERVE FUND"
"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 __-month and __-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,
273
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 purpose of agreeing a total of two banks to provide
such quotations and the relevant rate for that interest
period will be the arithmetic mean of the quotations as
calculated in (2). If no such banks are agreed then the
relevant rate for that interest period will be the rate
in effect for the last preceding interest period for
which (1) or (2) was applicable.
See also the definitions of EURIBOR and USD-LIBOR
"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
274
indemnity cover on that loan. The weighted average credit
enhancement value for the portfolio is then determined
"MANAGERS" Citigroup Global Markets Limited, __, __ and __
"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" the legal charge or standard security securing a loan
"MORTGAGE CONDITIONS"
the terms and conditions applicable to the loans as contained
in the seller's "MORTGAGE CONDITIONS" booklets for England
and Wales and Scotland 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 sale of the
initial portfolio and new loans to the mortgages trustee from
time to time, as amended and/or restated from time to time
and as further described in "SALE 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"
275
"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"
"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 and if
required
"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
276
"NEW LOANS" loans, other than the current loans, which the seller may
sell, 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 sell 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
"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 A 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 A
"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;
(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 [June 2008 is less than [GBP]15,750,000,000]
"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
277
"OFFERED ISSUER NOTES"
the class A offered issuer notes and the class B/M/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
"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), (B) and (C) and before
item (D) 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 (i) the issuer series 5 term
AAA advance, the issuer term AA advances, the issuer term A
advances, the issuer term BBB advances; (ii) the previous
series 5 term AAA advance, the previous term AA advances and
the previous term BBB advances made by Permanent Financing
(No. 3) PLC; (iii) the previous series 5 term AAA advance, the
previous term AA advances and the previous term BBB advances
made by Permanent Financing (No. 2) PLC; and (iv) 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
278
"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 sold to the
mortgages trustee and held by the mortgages trustee on trust
for the beneficiaries
"POST ENFORCEMENT CALL OPTION"
means the call option granted to Permanent PECOH Limited in
respect of the class B issuer notes, the class M issuer notes
and the class C issuer notes under the issuer post-
enforcement call option agreement
"POST-ENFORCEMENT CALL
OPTION HOLDER"
Permanent PECOH Limited
"PREVIOUS CLOSING DATES"
in respect of Permanent Financing (No. 1) PLC 14th June,
2002, in respect of Permanent Financing (No. 2) PLC 6th
March, 2003 and in respect of Permanent Financing (No. 3) PLC
25th November, 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, Permanent Financing (No. 2)
PLC and Permanent Financing (No. 3) 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 of the previous
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 of 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 of 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 each of Permanent
Financing (No. 1) PLC and Permanent Financing (No. 3) PLC to
Funding 1 under the applicable previous intercompany loan
agreement
279
"PREVIOUS SERIES 4A2 TERM
AAA ADVANCE" the series 4A2 term advance made by each of Permanent
Financing (No. 1) PLC and Permanent Financing (No. 3) PLC to
Funding 1 under the applicable previous intercompany loan
agreement
"PREVIOUS SERIES 4 TERM
AAA ADVANCE" the series 4 term AAA advance made by each of Permanent
Financing (No. 2) PLC and Permanent Financing (No. 3) PLC to
Funding 1 under the applicable previous intercompany loan
agreement
"PREVIOUS SERIES 5 TERM
AAA ADVANCE" the series 5 term advance made by each of Permanent Financing
(No. 2) PLC and Permanent Financing (No. 3) PLC to Funding 1
under the applicable previous intercompany loan agreement
"PREVIOUS START-UP LOAN
AGREEMENTS" the first start-up loan agreement and the second start-up
loan agreement
"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 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, the dollar currency swaps and euro currency swap
entered into by Permanent Financing (No. 2) PLC under the
previous swap agreements and the dollar currency swaps and
euro currency swap entered into by Permanent Financing (No.
3) 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 four sub-ledgers, the AAA
principal deficiency sub-ledger, the AA principal deficiency
sub-ledger, the A principal deficiency sub-ledger and the BBB
principal deficiency sub-ledger and which records any
deficiency of principal (following a loss on a loan or the
application of principal receipts to meet any deficiency in
Funding 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.
280
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
"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;
(e) 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
(f) 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 and Scotland 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 sold 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 __ of the
281
prospectus) whether or not actually repaid on that scheduled
repayment date
"RELEVANT ISSUERS"
the previous issuers, the issuer and any new issuers, as
applicable
"RELEVANT SHARE
CALCULATION DATE"
means the calculation date at the start of the most recent
completed calculation period
"RESERVE FUNDS" the general reserve fund and the liquidity 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
"SALE DATE"
means the date on which any new loans are sold to the
mortgages trustee in accordance with clause 4 of the mortgage
sale agreement
"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
[GBP]__ which are payable on the scheduled repayment
dates falling in __ and __;
(b) in respect of the issuer series 4A1 term AAA advance,
[two] equal scheduled amortisation instalments of
[GBP]__ which are payable on the scheduled repayment
dates falling in __ and __;
(c) in respect of the issuer series 4A2 term AAA advance,
[two] equal scheduled amortisation instalments of
[GBP]__ on the scheduled repayment dates falling in __
and __;
(d) in respect of the previous series 3 term AAA advance
made by Permanent Financing (No. 3) PLC, two equal
scheduled amortisation instalments of [GBP]449,125,000
which are payable on the scheduled repayment dates
falling in June 2008 and September 2008;
(e) in respect of the previous series 4A1 term AAA advance
made by Permanent Financing (No. 3) PLC, two equal
scheduled amortisation instalments of [GBP]241,375,000
which are payable on the scheduled repayment dates
falling in March 2009 and June 2009;
(f) in respect of the previous series 4A2 term AAA advance
made by Permanent Financing (No. 3) PLC, two equal
scheduled amortisation instalments of [GBP]375,000,000
which are payable on the scheduled repayment dates
falling in March 2009 and June 2009; and
(g) in respect of the previous series 3 term AAA advance
made by Permanent Financing (No. 2) PLC, two equal
scheduled amortisation instalments of [GBP]427,187,500
which are payable on the scheduled repayment dates
falling in March 2006 and June 2006
"SCHEDULED AMORTISATION
REPAYMENT RESTRICTIONS"
means at any time on a Funding 1 interest payment date:
282
(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), (B) and (C) and before (D) 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 (i) the issuer series 3 term AAA advance and the issuer
series 4 term AAA advances, (ii) the previous series 3 term
AAA advance and the previous series 4 term AAA advances made
by Permanent Financing (No. 3) PLC, (iii) the previous series
1 term AAA advance made by Permanent Financing (No. 2) PLC
and (iv) 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 [March 2005];
(b) in respect of the series 2 class A issuer notes, the
interest payment date in [March 2007];
(c) in respect of the series 3 class A issuer notes, the
interest payment dates in [December 2008 and March
2009];
(d) in respect of the series 4 class A1 issuer notes, the
interest payment dates in __ and __; and
(e) in respect of the series 4 class A2 issuer notes, the
interest payment dates in __ and __
283
"SCHEDULED REPAYMENT DATES"
(a) in respect of the issuer series 1 term AAA advance, the
interest payment date in __;
(b) in respect of the issuer series 2 term AAA advance, the
interest payment date in __;
(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 advances, the
interest payment dates in __ and __;
(e) in respect of the previous series 1 term AAA advance
made by Permanent Financing (No. 3) PLC, the interest
payment date in December 2004;
(f) in respect of the previous series 2 term AAA advance
made by Permanent Financing (No. 3) PLC, the interest
payment date in September 2006;
(g) in respect of the previous series 3 term AAA advance
made by Permanent Financing (No. 3) PLC, the interest
payment dates in June 2008 and September 2008;
(h) in respect of the previous series 4 term AAA advances
made by Permanent Financing (No. 3) PLC, the interest
payment dates in March 2009 and June 2009;
(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. 2) PLC, the interest
payment date in March 2006 and June 2006;
(l) in respect of the series 4 term AAA advance made by
Permanent Financing (No. 2) PLC the interest payment
date in December 2007;
(m) in respect of the previous series 2 term AAA advance
made by Permanent Financing (No. 1) PLC, the interest
payment date in June 2005;
(n) in respect of the previous series 3 term AAA advance
made by Permanent Financing (No. 1) PLC, the interest
payment date in December 2005;
(o) 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;
(p) 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; and
(q) 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
"SCOTTISH DECLARATIONS OF TRUST"
the declarations of trust to be granted by the seller in
favour of the mortgages trustee pursuant to the mortgage sale
agreement transferring the beneficial interest in Scottish
loans to the mortgages trustee
"SCOTTISH LOAN"
a loan secured by a Scottish mortgage
284
"SCOTTISH MORTGAGE"
a mortgage secured over a property in Scotland
"SCOTTISH MORTGAGE CONDITIONS"
the mortgage conditions applicable to Scottish loans
"SEC"
The United States Securities and Exchange Commission
"SECOND DEED OF ACCESSION"
means the deed of accession entered into by, amongst others,
Funding 1 and Permanent Financing (No. 3) PLC on 25th
November, 2003
"SECOND ISSUER" Permanent Financing (No. 2) PLC
"SECOND ISSUER CLOSING DATE"
6th March, 2003
"SECOND ISSUER SWAP PROVIDER"
means CDC IXIS Capital Markets, JPMorgan Chase Bank, Banque
AIG, or such other swap provider appointed from time to time
in respect of the previous notes issued by the second issuer
"SECOND START-UP LOAN"
the loan made by the second 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
second start up loan provider and Funding 1 under which the
second start-up loan was made by the second start-up loan
provider to Funding 1
"SECOND START UP LOAN
PROVIDER" Halifax, 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
"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
"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 $__ series 1 class A floating rate issuer notes due
[March 2005]
"SERIES 2 CLASS A ISSUER NOTES"
the $__ series 2 class A floating rate issuer notes due
[March 2009]
"SERIES 3 CLASS A ISSUER NOTES"
the $__ series 3 class A floating rate issuer notes due
[September 2033]
"SERIES 4 CLASS A1 ISSUER
NOTES"
the [e]__ series 4 class A1 floating rate issuer notes due __
"SERIES 4 CLASS A2 ISSUER
NOTES"
the [GBP]__ series 4 class A2 floating rate issuer notes due
__
"SERIES 4 CLASS A ISSUER NOTES"
means the series 4 class A1 issuer notes and the series 4
class A2 issuer notes
"SERIES 5 CLASS A ISSUER NOTES"
the [e]__ series 5 class A [fixed-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 [e]__ 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
285
"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 M ISSUER NOTES"
the $__ series 1 class M floating rate issuer notes due June
2042
"SERIES 2 CLASS M ISSUER NOTES"
the $__ series 2 class M floating rate issuer notes due June
2042
"SERIES 3 CLASS M ISSUER NOTES"
the $__ series 3 class M floating rate issuer notes due June
2042
"SERIES 4 CLASS M ISSUER NOTES"
the [e]__ series 4 class M floating rate issuer notes due
June 2042
"SERIES 5 CLASS M ISSUER NOTES"
the [e]__ series 5 class M floating rate issuer notes due
June 2042
"SERIES 1 CLASS A PREVIOUS
NOTES"
the series 1 class A previous notes issued by the previous
issuers
"SERIES 2 CLASS A PREVIOUS
NOTES"
the series 2 class A previous notes issued by the previous
issuers
"SERIES 3 CLASS A PREVIOUS
NOTES"
the series 3 class A previous notes issued by the previous
issuers
"SERIES 4 CLASS A PREVIOUS
NOTES"
the series 4 class A previous notes issued by the previous
issuers
"SERIES 4 CLASS A1 PREVIOUS
NOTES"
the series 4 class A1 previous notes issued by Permanent
Financing (No. 1) PLC and Permanent Financing (No. 3) PLC
"SERIES 4 CLASS A2 PREVIOUS
NOTES"
the series 4 class A2 previous notes issued by Permanent
Financing (No. 1) PLC and Permanent Financing (No. 3) PLC
"SERIES 5 CLASS A PREVIOUS
NOTES"
the series 5 class A previous notes issued by Permanent
Financing (No. 2) PLC and Permanent Financing (No. 3) PLC
"SERIES 1 CLASS B PREVIOUS
NOTES"
the series 1 class B previous notes issued by the previous
issuers
"SERIES 2 CLASS B PREVIOUS
NOTES"
the series 2 class B previous notes issued by the previous
issuers
"SERIES 3 CLASS B PREVIOUS
NOTES"
the series 3 class B previous notes issued by the previous
issuers
"SERIES 4 CLASS B PREVIOUS
NOTES"
the series 4 class B previous notes issued by the previous
issuers
"SERIES 5 CLASS B PREVIOUS
NOTES"
the series 5 class B previous notes issued by Permanent
Financing (No. 2) PLC and Permanent Financing (No. 3) PLC
"SERIES 1 CLASS C PREVIOUS
NOTES"
the series 1 class C previous notes issued by the previous
issuers
"SERIES 2 CLASS C PREVIOUS
NOTES"
the series 2 class C previous notes issued by the previous
issuers
"SERIES 3 CLASS C PREVIOUS
NOTES"
the series 3 class C previous notes issued by the previous
issuers
"SERIES 4 CLASS C PREVIOUS
NOTES"
the series 4 class C previous notes issued by the previous
issuers
"SERIES 5 CLASS C PREVIOUS
NOTES"
the series 5 class C previous notes issued by Permanent
Financing (No. 2) PLC and Permanent Financing (No. 3) PLC
"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 A1 ISSUER
SWAP"
the issuer euro currency swap entered into in relation to the
series 4 class A1 issuer notes
"SERIES 5 CLASS A ISSUER SWAP"
the issuer [euro currency and interest rate] swap entered
into in relation to the series 5 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
286
"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 CLASS M ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 1 class M issuer notes
"SERIES 2 CLASS M ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 2 class M issuer notes
"SERIES 3 CLASS M ISSUER SWAP"
the issuer dollar currency swap entered into in relation to
the series 3 class M issuer notes
"SERIES 4 CLASS M ISSUER SWAP"
the issuer euro currency swap entered into in relation to the
series 4 class M issuer notes
"SERIES 5 CLASS M ISSUER SWAP"
the issuer euro currency swap entered into in relation to the
series 5 class M 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
"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 class A1 issuer notes, the series
4 class B issuer notes, the series 4 class M issuer notes and
the series 4 class C issuer notes
"SERIES 5 ISSUER SWAP PROVIDER"
__, or such other swap provider appointed from time to time
in relation to the series 5 issuer notes
"SERIES 5 CLASS A ISSUER SWAP
PROVIDER"
means the series 5 issuer swap provider
"SERIES 5 CLASS B ISSUER SWAP
PROVIDER"
means the series 5 issuer swap provider
"SERIES 5 CLASS C ISSUER SWAP
PROVIDER"
means the series 5 issuer swap provider
"SERIES 5 CLASS M ISSUER SWAP
PROVIDER"
means the series 5 issuer swap provider
"SERIES 1 ISSUER NOTES"
the series 1 class A issuer notes, the series 1 class B
issuer notes, the series 1 class M issuer notes and the
series 1 class C issuer notes
287
"SERIES 2 ISSUER NOTES"
the series 2 class A issuer notes, the series 2 class B
issuer notes, the series 2 class M issuer notes and the
series 2 class C issuer notes
"SERIES 3 ISSUER NOTES"
the series 3 class A issuer notes, the series 3 class B
issuer notes, the series 3 class M 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, the series 4 class M 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, the series 5 class M 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
"ST ANDREW'S INSURANCE"
means St Andrew's Insurance, a non-life insurance company
incorporated on 15th September, 2003, whose office is at St
Andrew's House, Portsmouth Road, Esher, Surrey
"START-UP LOANS"
the first start-up loan, the second start-up loan, the third
start-up loan, the fourth 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, the fourth
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 (i) 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 (ii) 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
"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 and the issuer 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 A ADVANCES"
the issuer term A advances and any new term A advance made by
a new issuer to Funding 1 that has a term advance rating of
"A" or its equivalent
288
"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, the term A
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 DEED OF ACCESSION"
means the third deed of accession to the Funding 1 deed of
charge entered into by, amongst others, Funding 1 and the
issuer and dated on or about the closing date
"THIRD ISSUER" Permanent Financing (No. 3) PLC
"THIRD ISSUER CLOSING DATE"
25th November, 2003
"THIRD ISSUER SWAP PROVIDER"
means Credit Suisse First Boston International, JPMorgan
Chase Bank, Banque AIG or HBOS Treasury Services plc, or such
other swap provider appointed from time to time in respect of
the previous notes issued by the third issuer
"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 third start-up loan provider to Funding
1 under the third start-up loan agreement
"THIRD START-UP LOAN
AGREEMENT" the agreement entered into on 25th November, 2003 between the
third start-up loan provider and Funding 1 under which the
third start-up loan was made by the third start-up loan
provider to Funding 1
"THIRD START-UP LOAN PROVIDER"
Halifax, 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)
289
"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
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 sold
to the mortgages trustee by the seller at their relevant
sale dates;
(c) any new loans and their related security sold 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/M/C 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
(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
290
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 issuer notes, the series 2 issuer notes
and the series 3 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-week and one-month US dollar
deposits and (in all other cases) the linear
interpolation of the arithmetic mean of such offered
quotations for __-month and __-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 issuer
notes, the series 2 issuer notes and the series 3 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
* 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")
291
"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"
292
ANNEX A
[TO BE UPDATED]
The following is an extract from the reports on Form 6-K for the period from
[1st January, 2004 to 31st January, 2004] for Permanent Financing (No. 1) PLC,
Permanent Financing (No. 2) PLC, Permanent Financing (No. 3) PLC, Permanent
Funding (No. 1) Limited and Permanent Mortgages Trustee Limited, as filed with
the SEC on __th February, 2003. The extract describes certain aspects of the
mortgage loans in the mortgages trust during the period from [1st January, 2004
to 31st January, 2004].
The monthly reports filed with the SEC on behalf of Permanent Financing (No.
1) PLC, Permanent Financing (No. 2) PLC, Permanent Financing (No. 3) PLC,
Permanent Funding (No. 1) Limited and Permanent Mortgages Trustee Limited may
be accessed by investors (see -- "WHERE INVESTORS CAN FIND MORE INFORMATION").
QUARTER 10TH SEPTEMBER, 2003 TO 10TH DECEMBER, 2003
MONTHLY REPORT -- JANUARY 2004
DATE OF REPORT __TH FEBRUARY, 2004
- ---------------------------------------------------- ---
MORTGAGES
Number of Mortgages in Pool.........................
Current Principal Balance...........................
Opening Trust Assets................................
Total...............................................
Cash Accumulation Ledger Balance (Total Requirement)
Funding Share.......................................
Funding Share Percentage............................
Seller Share........................................
Seller Share Percentage.............................
Minimum Seller Share (Amount).......................
ARREARS ANALYSIS OF NON REPOSSESSED MORTGAGES
NUMBER PRINCIPAL ARREARS % BY PRINCIPAL
- -------------- ------ --------- ------------ ---------
1 -- 2 months.
2 -- 3 months.
3 -- 6 months.
6 -- 12 months
12 months +...
------ --------- ------------ ---------
Total.........
====== ========= ============ =========
AMOUNT IN
PROPERTIES IN POSSESSION NUMBER BALANCE ARREARS
- ------------------------ ------ ------- ---------
Total...................
====== ======= =========
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
293
SUBSTITUTION NUMBER PRINCIPAL
- ------------------------------------------------------------- ------ ---------
Substituted this period (this month).........................
Substituted this period (since __)*...........................
* On 25th November 2003, Permanent 3 closed. The Permanent Trust was topped-up
by __ accounts (to value: [GBP]__).
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........................................
August 2003..........................................
July 2003............................................
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
294
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....................................................
Effective Date of Change.............................................
Current HVR2 Rate....................................................
Effective Date of Change.............................................
RATING
(MOODY'S/S&P/ REFERENCE
NOTES DEAL FITCH) OUTSTANDING RATE MARGIN
- ----------------- ------------------------- ---------------- ----------- --------- ------
Series 1 Class A Permanent Financing No. 1 P-1 / A-1+ / F1+
Series 1 Class A Permanent Financing No. 2 P-1 / A-1+ / F1+
Series 1 Class A Permanent Financing No. 3 P-1 / A-1+ / F1+
Series 1 Class B Permanent Financing No. 1 Aa3 / AA / AA
Series 1 Class B Permanent Financing No. 2 Aa3 / AA / AA
Series 1 Class B Permanent Financing No. 3 Aa3 / AA / AA
Series 1 Class C Permanent Financing No. 1 Baa2 / BBB / BBB
Series 1 Class C Permanent Financing No. 2 Baa2 / BBB / BBB
Series 1 Class C Permanent Financing No. 3 Baa2 / BBB / BBB
Series 2 Class A Permanent Financing No. 1 Aaa / AAA / AAA
Series 2 Class A Permanent Financing No. 2 Aaa / AAA / AAA
Series 2 Class A Permanent Financing No. 3 Aaa / AAA / AAA
Series 2 Class B Permanent Financing No. 1 Aa3 / AA / AA
Series 2 Class B Permanent Financing No. 2 Aa3 / AA / AA
Series 2 Class B Permanent Financing No. 3 Aa3 / AA / AA
Series 2 Class C Permanent Financing No. 1 Baa2 / BBB / BBB
Series 2 Class C Permanent Financing No. 2 Baa2 / BBB / BBB
Series 2 Class C Permanent Financing No. 3 Baa2 / BBB / BBB
Series 3 Class A Permanent Financing No. 1 Aaa / AAA / AAA
Series 3 Class A Permanent Financing No. 2 Aaa / AAA / AAA
Series 3 Class A Permanent Financing No. 3 Aaa / AAA / AAA
Series 3 Class B Permanent Financing No. 1 Aa3 / AA / AA
Series 3 Class B Permanent Financing No. 2 Aa3 / AA / AA
Series 3 Class B Permanent Financing No. 3 Aa3 / AA / AA
Series 3 Class C Permanent Financing No. 1 Baa2 / BBB / BBB
Series 3 Class C Permanent Financing No. 2 Baa2 / BBB / BBB
Series 3 Class C Permanent Financing No. 3 Baa2 / BBB / BBB
Series 4 Class A1 Permanent Financing No. 1 Aaa / AAA / AAA
Series 4 Class A1 Permanent Financing No. 3 Aaa / AAA / AAA
Series 4 Class A Permanent Financing No. 2 Aaa / AAA / AAA
Series 4 Class A2 Permanent Financing No. 1 Aaa / AAA / AAA
Series 4 Class A2 Permanent Financing No. 3 Aaa / AAA / AAA
Series 4 Class B Permanent Financing No. 1 Aa3 / AA / AA
295
Series 4 Class B Permanent Financing No. 2 Aa3 / AA / AA
Series 4 Class B Permanent Financing No. 3 Aa3 / AA / AA
Series 4 Class C Permanent Financing No. 1 Baa2 / BBB / BBB
Series 4 Class C Permanent Financing No. 2 Baa2 / BBB / BBB
Series 4 Class C Permanent Financing No. 3 Baa2 / BBB / BBB
Series 5 Class A Permanent Financing No. 2 Aaa / AAA / AAA
Series 5 Class A Permanent Financing No. 3 Aaa / AAA / AAA
Series 5 Class B Permanent Financing No. 2 Aa3 / AA / AA
Series 5 Class B Permanent Financing No. 3 Aa3 / AA / AA
Series 5 Class C Permanent Financing No. 2 Baa2 / BBB / BBB
Series 5 Class C Permanent Financing No. 3 Baa2 / BBB / BBB
General 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.
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 is equal to or less than the Minimum
Seller Share.
* The outstanding principal balance of the trust property is less
than [GBP]15.75 bn to December 2007.
Asset trigger events:
* If there has been a debit to the AAA Principal Deficiency Sub-
Ledger.
NO TRIGGER EVENTS HAVE OCCURRED
FUNDING SELLER SHARE LEDGER
MONTH POOL BALANCE FUNDING SHARE SELLER SHARE FUNDING SELLER
- ------------- ------------ ------------- ------------ ------- ------
November 2003.......
December 2003.......
January 2004........
PRINCIPAL LEDGER
PRINCIPAL FURTHER
MONTH RECEIVED ADVANCES SUB TOTAL
- ------------------------------------------------ --------- -------- ---------
November 2003...................................
December 2003...................................
January 2004....................................
--------- -------- ---------
========= ======== =========
296
PRINCIPAL DISTRIBUTION
MONTH FUNDING SELLER
- ----------------------------------------------------------- --------- --------
November 2003...................................
December 2003...................................
January 2004....................................
--------- --------
========= ========
REVENUE LEDGER
AUTHORISED
REVENUE INVESTMENT
MONTH RECEIVED GIC INTEREST INCOME SUB TOTAL
- --------------------------------- -------- ------------ ---------- ---------
November 2003....................
December 2003....................
January 2004.....................
-------- ------------ ---------- ---------
======== ============ ========== =========
PAID TO
MORTGAGE AVAILABLE
MONTH TRUSTEE ADMINISTRATOR REVENUE
- -------------------------------------------- -------- ------------- ---------
November 2003...............................
December 2003...............................
January 2004................................
--------- ------------- ---------
========= ============= =========
297
REVENUE DISTRIBUTION
MONTH FUNDING SELLER
- --------------------------------------------------------------- ------- ------
November 2003..................................................
December 2003..................................................
January 2004...................................................
------- ------
======= ======
LOSSES LEDGER
MONTH LOSSES
- ------------------------------------------------------------------------ ------
Balance b/fwd...........................................................
November 2003...........................................................
December 2003...........................................................
January 2004............................................................
Closing Balance.........................................................
------
======
LOSSES DISTRIBUTION
MONTH FUNDING SELLER RECONCILIATION
- ----------------------------------------------- ------- ------ --------------
November 2003..................................
December 2003..................................
January 2004...................................
------- ------ --------------
======= ====== ==============
CPR ANALYSIS
AVERAGE AVERAGE
1 MONTH 1 MONTH
CPR OVER LAST CPR OVER LAST
MONTH ANNUALISED CPR 1 MONTH CPR 3 MONTHS 12 MONTHS
November 2003..........
December 2003..........
January 2004...........
-------------- ----------- ------------- ------------
============== =========== ============= ============
REGIONAL ANALYSIS
HALIFAX MAPPED REGION NUMBER VALUE % OF TOTAL
- ----------------------------------------------------- ------ ----- ----------
London & South East..................................
Midlands & East Anglia...............................
North................................................
North West...........................................
South Wales & West...................................
Scotland.............................................
Unknown..............................................
------ ----- ----------
Totals ====== ===== ==========
298
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 financial
statements 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, 2003]. 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, 2004] and
annually on the last day of December thereafter.
During the period from incorporation on 8th December, 2003 until the date of
this prospectus, the issuer had not traded, and did not have any receipts or
payments apart from the subscriptions of share capital referred to in "THE
ISSUER". Consequently, during this period, the issuer has neither made a profit
nor loss and no profit and loss account nor cashflow statement has been
prepared.
INDEX OF APPENDICES
- -------------------
Appendix A......... Independent Auditors' Report for Permanent Financing (No. 4) PLC
Appendix B......... Financial Statements as at __, 2004 of Permanent Financing (No. 4) PLC
Appendix C......... Notes to the Financial Statements of Permanent Financing (No. 4) 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, 2003]
of Permanent Funding (No. 1) Limited
Appendix F......... Notes to Financial Statements of Permanent Funding (No. 1) Limited
299
APPENDIX A
PERMANENT FINANCING (NO. 4) PLC
(A WHOLLY-OWNED SUBSIDIARY OF PERMANENT HOLDINGS LIMITED)
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF:
PERMANENT FINANCING (NO. 4) PLC
We have audited the accompanying balance sheet of Permanent Financing (No.
4) PLC ("THE COMPANY") as of __, 2004. 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
financial statement is free from material misstatement. An audit includes
examining, on a test basis, evidence supporting amounts and disclosures in the
financial statement. 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
statement provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of the Company as of __, 2004
in conformity with generally accepted accounting principles in the United
Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted
accounting principles in the United States of America. Application of generally
accepted accounting principles in the United States of America would have
affected shareholders' equity as of __, 2004 to the extent described in Note 5
of the Notes to the financial statement.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
Date: __, 2004
1 The Embankment
Neville Street
Leeds
LS1 4DW
300
APPENDIX B
PERMANENT FINANCING (NO. 4) PLC
(A WHOLLY-OWNED SUBSIDIARY OF PERMANENT HOLDINGS LIMITED)
Balance Sheet as at __, 2004
NOTE [GBP]
----- -----
ASSETS
Cash and cash equivalents.....................................
----- -----
===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY share capital (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)................................. 3
----- -----
Total liabilities and shareholders' equity ...................
===== =====
See "NOTES TO THE FINANCIAL STATEMENT" (APPENDIX C)
301
APPENDIX C
PERMANENT FINANCING (NO. 4) PLC
(A WHOLLY-OWNED SUBSIDIARY OF PERMANENT HOLDINGS LIMITED)
NOTES TO THE FINANCIAL STATEMENT
1. ACCOUNTING POLICIES
The non-statutory financial statement has been prepared under the historical
cost convention and in accordance with generally accepted accounting
principles in the United Kingdom ("UK GAAP").
The financial statement of the Company has 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 8th December, 2004. The
principal purpose of the Company is to issue asset backed floating and fixed
rate notes and to enter into all financial arrangements in that connection.
The Company has not had any trading activity since the date of
incorporation. No statutory audited financial statements have been prepared
and no dividends have been declared or paid since the date of incorporation.
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 __, 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 financial statement was prepared in accordance with
generally accepted accounting principles in the United Kingdom. In so far as
the accounting principles adopted by the Company in the preparation of the
accompanying financial statement, there are no material differences from
generally accepted accounting principles in the United States of America.
302
APPENDIX D
PERMANENT FUNDING (NO.1) LIMITED
INDEPENDENT AUDITORS' REPORT TO THE MEMBER OF:
PERMANENT FUNDING (NO.1) LIMITED
We have audited the accompanying balance sheets of Permanent Funding (No. 1)
Limited (the "COMPANY") as of 31st December, 2002 and 2003, and the related
profit and loss accounts, and cash flow statements for the year ended 31st
December, 2003 and for the period 14 June 2002 to 31 December 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 also 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in
all material respects, the financial position of the Company as of 31st
December, 2002 and 2003, and the results of its operations and its cash flows
for the year ended 31st December, 2003 and for the period 14 June 2002 to 31
December 2002, in conformity with generally accepted accounting principles 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 net income for the
year ended 31st December, 2003 and for the period 14 June 2002 to 31 December
2002 and shareholder's equity as of 31st December, 2002 and 2003, to the extent
described in Note 19 (as restated) to the financial statements.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
Date: __, 2004
1 The Embankment
Neville Street
Leeds
LS1 4DW
303
APPENDIX E
PERMANENT FUNDING (NO.1) LIMITED
FINANCIAL STATEMENTS
31ST DECEMBER, 2002 AND 2003
304
ISSUER
PERMANENT FINANCING (NO. 4) 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 ISSUER AND
THE UNDERWRITERS THE SERVICER
as to English law and US law as to English law and US law
SIDLEY AUSTIN BROWN & WOOD ALLEN & OVERY
1 Threadneedle Street One New Change
London EC2R 8AW London EC4M 9QQ
as to Scots law as to Scots law
TODS MURRAY WS SHEPHERD+ WEDDERBURN
66 Queen Street Saltire Court
Edinburgh EH2 4NE 20 Castle Terrace
Edinburgh EH1 2ET
LEGAL ADVISERS TO THE MORTGAGES TRUSTEE LEGAL ADVISERS TO THE NOTE TRUSTEE
AND THE SECURITY TRUSTEE
as to Jersey law as to English law and US law
MOURANT DU FEU & JEUNE CLIFFORD CHANCE
22 Grenville Street 10 Upper Bank Street
St. Helier, Jersey JE4 8PX London E14 5JJ
AUTHORISED ADVISER
CITIGROUP GLOBAL MARKETS LIMITED
__
London __
305
Through and including __, 2004 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. 4) PLC
$[1,250,000,000] SERIES 1 CLASS A FLOATING RATE ISSUER NOTES DUE [MARCH 2005]
$[37,500,000] SERIES 1 CLASS B FLOATING RATE ISSUER NOTES DUE JUNE 2042
$[37,500,000] SERIES 1 CLASS M 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 [MARCH 2009]
$[25,000,000] SERIES 2 CLASS B FLOATING RATE ISSUER NOTES DUE JUNE 2042
$[25,000,000] SERIES 2 CLASS M FLOATING RATE ISSUER NOTES DUE JUNE 2042
$[25,000,000] SERIES 2 CLASS C FLOATING RATE ISSUER NOTES DUE JUNE 2042
$[1,250,000,000] SERIES 3 CLASS A FLOATING RATE ISSUER NOTES
DUE [SEPTEMBER 2033]
$[25,000,000] SERIES 3 CLASS B FLOATING RATE ISSUER NOTES DUE JUNE 2042
$[25,000,000] SERIES 3 CLASS M FLOATING RATE ISSUER NOTES DUE JUNE 2042
$[25,000,000] SERIES 3 CLASS C FLOATING RATE ISSUER NOTES DUE JUNE 2042
---------
PRELIMINARY PROSPECTUS
---------
ARRANGER
CITIGROUP
JOINT LEAD UNDERWRITERS FOR THE SERIES 1, SERIES 2 AND SERIES 3 CLASS A ISSUER
NOTES
CITIGROUP MORGAN STANLEY UBS WARBURG
JOINT LEAD UNDERWRITERS FOR THE SERIES 1, SERIES 2 AND SERIES 3 CLASS B, CLASS
M AND CLASS C ISSUER NOTES
CITIGROUP UBS WARBURG
Preliminary Prospectus dated __, 2004
306
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................................. $[321,577.50]
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. 4) 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. 4) 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:
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- ----------- -------------------------------------------------------------------------------------------------- -------------
1.1 Form of Underwriting Agreement(3)
3.1.1 Memorandum and Articles of Association of Permanent Financing (No. 4) 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 Amended and Restated Intercompany Loan Terms and Conditions and Form of Loan Confirmation(3)
4.2 Form of Amended and Restated 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. 4) PLC(3)
4.5 Third 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 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)
4.12 Form of Issuer Bank Account 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)
8.3 Opinion of Mourant du Feu & Jeune as to Jersey tax Matters (2)
10.1 Form of Amended and Restated Funding 1 Liquidity Facility Agreement (2)
10.2.1 Form of Series 1 Class A Dollar Currency Swap Agreement(3)
10.2.2 Form of Series 1 Class B Dollar Currency Swap Agreement(3)
10.2.3 Form of Series 1 Class M Dollar Currency Swap Agreement(3)
10.2.4 Form of Series 1 Class C Dollar Currency Swap Agreement(3)
10.2.5 Form of Series 2 Class A Dollar Currency Swap Agreement(3)
10.2.6 Form of Series 2 Class B Dollar Currency Swap Agreement(3)
10.2.7 Form of Series 2 Class M Dollar Currency Swap Agreement(3)
10.2.8 Form of Series 2 Class C Dollar Currency Swap Agreement(3)
10.2.9 Form of Series 3 Class A Dollar Currency Swap Agreement(3)
10.2.10 Form of Series 3 Class B Dollar Currency Swap Agreement(3)
10.2.11 Form of Series 3 Class M Dollar Currency Swap Agreement(3)
10.2.12 Form of Series 3 Class C Dollar Currency Swap Agreement(3)
10.3 Form of Amended and Restated Funding 1 Swap Agreement(2)
10.4 Form of Fourth 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 Mourant du Feu & Jeune (included in Exhibit 8.3) (3)
23.3 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. 3) PLC (File No. 333-109144) which became effective on November 12,
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 January 12, 2004.
PERMANENT FINANCING (NO. 4) PLC
By:/s/ James 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/ Jonathan Keighley
------------------------------------
Name: SFM Directors Limited by
its authorized person
Jonathan Keighley for and
on its behalf
Title: Director
PERMANENT MORTGAGES TRUSTEE LIMITED
/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. 4) PLC
SIGNATURE TITLE DATE
- ------------------------------------------------ -------------------------------- ----------------
By: /s/ James Macdonald
--------------------------------------------
Name: SFM Directors Limited by its authorized Director 01/12/04
person James G S Macdonald for and on
its behalf
By: /s/ Jonathan Keighley
--------------------------------------------
Name: SFM Directors No. 2 Limited by its Director 01/12/04
authorized person Jonathan Keighley for
and on its behalf
By: /s/ David Balai
--------------------------------------------
Name: David Balai Director 01/12/04
PERMANENT FUNDING (NO. 1) LIMITED
SIGNATURE TITLE DATE
- ------------------------------------------------ -------------------------------- ----------------
By: /s/ James Macdonald
--------------------------------------------
Name: SFM Directors Limited by its authorized Director 01/12/04
person James G S Macdonald for and on
its behalf
By: /s/ Jonathan Keighley
--------------------------------------------
Name: SFM Directors No. 2 Limited by its Director 01/12/04
authorized person Jonathan Keighley for
and on its behalf
By: /s/ David Balai
--------------------------------------------
Name: David Balai Director 01/12/04
PERMANENT MORTGAGES TRUSTEE LIMITED
SIGNATURE TITLE DATE
- ------------------------------------------------ -------------------------------- ----------------
By: /s/ Michael Best
--------------------------------------------
Name: Michael George Best Director 01/12/04
By: /s/ Peter Richardson
--------------------------------------------
Name: Peter John Richardson Director 01/12/04
By: /s/ David Balai
--------------------------------------------
Name: David Balai Director 01/12/04
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
PERMANENT FINANCING (NO. 4) PLC
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Permanent Financing (No.
4) PLC, has signed this registration statement or amendment thereto in New
York, New York on January 12, 2004.
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 January 12, 2004.
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 January 12, 2004.
By:/s/ Jill Kranz
--------------------------------------------
Name: Jill Kranz
--------------------------------------------
Office:CT Corporation System
--------------------------------------------