NO. 333 - *
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 2005
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------
FORM S-11
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
----------------------------
PERMANENT FINANCING (NO. 7) PLC
(Exact name of Registrant 1 as specified in its charter)
BLACKWELL HOUSE, GUILDHALL YARD, LONDON EC2V 5AE, UNITED KINGDOM,
(+44) 020 7556 0970
(Address and telephone number of Registrant 1's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212)894-8600
(Name, address and 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 0970
(Address and telephone number of Registrant 2's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212)894-8600
(Name, address and phone number of Registrant 2's agent for service)
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)894-8600
(Name, address and phone number of Registrant 3's agent for service)
----------------------------
Copies to:
David Balai Christopher Bernard, Esq. Robert Torch, Esq.
HBOS Treasury Services plc Allen & Overy LLP Sidley Austin Brown & Wood
33 Old Broad Street One New Change Woolgate Exchange, 25 Basinghall Street
London EC2N 1HZ, United Kingdom London EC4M 9QQ, United Kingdom London EC2V 5HA, United Kingdom
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
------------------------------------------------------
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CALCULATION OF REGISTRATION FEE
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING AMOUNT BEING OFFERING PRICE OFFERING PRICE REGISTRATION
REGISTERED REGISTERED PER UNIT (1) (1) FEE (3)
- ------------------------------------ ----------------- ----------------- ----------------- -----------------
$[1,000,000,000] series 1 class A
floating rate notes due [*] $[1,000,000,000] 100% $[1,000,000,000] $[117,700.00]]
$[*] series 1 class B floating
rate notes due [*] $[*] 100% $[*] $[*]
$[*] series 1 class C floating
rate notes due [*] $[*] 100% $[*] $[*]
$[1,000,000,000] series 2 class A
floating rate notes due [*] $[1,000,000,000] 100% $[1,000,000,000] $[117,700.00]
$[*] series 2 class B floating
rate notes due [*] $[*] 100% $[*] $[*]
$[*] series 2 class C floating
rate notes due [*] $[*] 100% $[*] $[*]
Series 1 term AAA advance (2)
Series 1 term AA advance (2)
Series 1 term BBB advance (2)
Series 2 term AAA advance (2)
Series 2 term AA advance (2)
Series 2 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. 7) PLC. Those
term advances will be the primary source of payments on the series 1 notes
and the series 2 notes being registered hereby, respectively. Permanent
Funding (No. 1) Limited, Permanent Mortgages Trustee Limited and Permanent
Financing (No. 7) PLC are the registrants for the series 1 notes and the
series 2 notes being registered hereby.
(3) The total registration fee is $[235,400.00]. A filing fee of $13,810.30 was
previously paid in connection with unsold securities registered on the Form
S-11 (File No. 333-119202) of Permanent Financing (No. 6) PLC, Permanent
Funding (No. 1) Limited and Permanent Mortgages Trustee Limited initially
filed on September 23, 2004, and will be offset against the currently due
filing fee.
---------------------------------
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.
PRELIMINARY PROSPECTUS
PERMANENT FINANCING (NO. 7) PLC
(incorporated in England and Wales with limited liability,
registered number 05330776)
HALIFAX PLC
SELLER, SERVICER AND CASH MANAGER
PRINCIPAL AMOUNT OF
PRICE TO ISSUER NOTES AND SCHEDULED
PUBLIC PER PROCEEDS TO ISSUER REDEMPTION
CLASS INTEREST RATE ISSUER NOTE PER CLASS DATES FINAL MATURITY DATE
series 1 class A [__]% margin below 100% $[1,000,000,000] [December 2005] [December 2005]
one-month USD-LIBOR
series 1 class B [__]% margin above 100% $[__] -- [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% $[1,000,000,000] [June, September [March 2012]
three-month USD-LIBOR and December
2007 and March
2008]
series 2 class B [__]% margin above 100% $[__] -- [June 2042]
three-month USD-LIBOR
series 2 class C [__]% margin above 100% $[__] -- [June 2042]
three-month USD-LIBOR
* The principal asset from which Permanent Financing (No. 7) 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,
and the Scottish declarations of trust, which are governed by Scots law).
* Permanent Holdings Limited, the parent of Permanent Financing (No. 7) PLC
and Permanent Funding (No. 1) Limited, is also the parent of the previous
issuers which have issued the previous notes referred to in this
document. Among others, the issuer and the previous issuers will share
the security granted by Permanent Funding (No. 1) Limited to secure its
obligations to each of them under their respective intercompany loans.
PLEASE CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE [__] IN THIS
PROSPECTUS.
THE ISSUER NOTES OFFERED BY THIS PROSPECTUS WILL BE OBLIGATIONS OF THE
ISSUER ONLY. THE ISSUER NOTES WILL NOT BE OBLIGATIONS OF HALIFAX PLC OR ANY OF
ITS AFFILIATES OR ANY OF THE UNDERWRITERS.
Application has been made to the UK Listing Authority for each class of
issuer notes to be admitted to the official list maintained by the UK Listing
Authority and to the London Stock Exchange plc (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 ISSUER NOTES OR DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENCE.
ARRANGER
HBOS TREASURY SERVICES PLC
JOINT LEAD UNDERWRITERS FOR THE SERIES 1 CLASS A ISSUER
NOTES AND SERIES 2 CLASS A ISSUER NOTES
[ABN AMRO] [LEHMAN BROTHERS] [MORGAN STANLEY]
CO-UNDERWRITERS FOR THE SERIES 1 CLASS A ISSUER NOTES AND
SERIES 2 CLASS A ISSUER NOTES
[__] [__] [__]
JOINT LEAD UNDERWRITERS FOR THE SERIES 1 CLASS B AND CLASS C ISSUER NOTES
AND SERIES 2 CLASS B AND CLASS C ISSUER NOTES
[__] [__]
Preliminary Prospectus dated[__] February, 2005
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 [__] March, 2005.
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............................................................. [__]
SUMMARY OF PROSPECTUS..................................................... [__]
RISK FACTORS.............................................................. [__]
US DOLLAR PRESENTATION.................................................... [__]
THE ISSUER................................................................ [__]
USE OF PROCEEDS........................................................... [__]
HALIFAX PLC............................................................... [__]
FUNDING 1................................................................. [__]
THE MORTGAGES TRUSTEE..................................................... [__]
HOLDINGS.................................................................. [__]
PERMANENT PECOH LIMITED................................................... [__]
THE ISSUER SWAP PROVIDERS................................................. [__]
THE FUNDING 1 LIQUIDITY FACILITY PROVIDER................................. [__]
DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES
AND THE PREVIOUS INTERCOMPANY LOANS................................... [__]
THE LOANS................................................................. [__]
THE SERVICER.............................................................. [__]
THE SERVICING AGREEMENT................................................... [__]
SALE OF THE LOANS AND THEIR RELATED SECURITY.............................. [__]
THE MORTGAGES TRUST....................................................... [__]
THE ISSUER INTERCOMPANY LOAN AGREEMENT.................................... [__]
SECURITY FOR FUNDING 1'S OBLIGATIONS...................................... [__]
SECURITY FOR THE ISSUER'S OBLIGATIONS..................................... [__]
CASHFLOWS................................................................. [__]
CREDIT STRUCTURE.......................................................... [__]
THE SWAP AGREEMENTS....................................................... [__]
CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING 1................... [__]
CASH MANAGEMENT FOR THE ISSUER............................................ [__]
DESCRIPTION OF THE ISSUER TRUST DEED...................................... [__]
THE ISSUER NOTES AND THE GLOBAL ISSUER NOTES.............................. [__]
TERMS AND CONDITIONS OF THE OFFERED ISSUER NOTES.......................... [__]
RATINGS OF THE ISSUER NOTES............................................... [__]
MATURITY AND PREPAYMENT CONSIDERATIONS.................................... [__]
MATERIAL LEGAL ASPECTS OF THE LOANS....................................... [__]
UNITED KINGDOM TAXATION................................................... [__]
EU SAVINGS TAX DIRECTIVE.................................................. [__]
UNITED STATES FEDERAL INCOME TAXATION..................................... [__]
MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSIDERATIONS...................... [__]
ERISA CONSIDERATIONS...................................................... [__]
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES..................... [__]
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS............................. [__]
EXPERTS................................................................... [__]
LEGAL MATTERS............................................................. [__]
UNDERWRITING.............................................................. [__]
REPORTS TO NOTEHOLDERS.................................................... [__]
WHERE INVESTORS CAN FIND MORE INFORMATION................................. [__]
MARKET-MAKING............................................................. [__]
AFFILIATIONS.............................................................. [__]
LISTING AND GENERAL INFORMATION........................................... [__]
GLOSSARY.................................................................. [__]
ANNEXE A: EXTRACT FROM REPORTS ON FORM 6-K................................ [__]
INDEX OF APPENDICES....................................................... [__]
APPENDIX A: REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM FOR PERMANENT FINANCING (NO. 7) PLC........ [__]
APPENDIX B: FINANCIAL STATEMENTS OF PERMANENT FINANCING (NO. 7)
PLC AND NOTES THERETO...................................... [__]
APPENDIX C: REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM FOR PERMANENT FUNDING (NO. 1) LIMITED...... [__]
APPENDIX D: FINANCIAL STATEMENTS OF PERMANENT FUNDING
(NO. 1) LIMITED AND NOTES THERETO.......................... [__]
APPENDIX E: UNAUDITED FINANCIAL STATEMENTS OF PERMANENT FUNDING
(NO. 1) LIMITED AND NOTES THERETO.......................... [__]
3
DEFINED TERMS
The principal and technical terms used in this prospectus have the
meanings set forth in the glossary, unless otherwise defined where they appear
in the text.
References in this document to "WE" or "US" mean the issuer and
references to "YOU" mean potential investors in the issuer notes.
References in this prospectus to "(POUND)", "POUNDS" or "STERLING" are to
the lawful currency for the time being of the United Kingdom of Great Britain
and Northern Ireland. References in this prospectus to "US$", "$", "US DOLLARS"
or "DOLLARS" are to the lawful currency of the United States of America.
References to "(EURO)", "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 some 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. 7) PLC, the "PREVIOUS NOTES" are the notes issued by each of
Permanent Financing (No. 1) PLC, Permanent Financing (No. 2) PLC, Permanent
Financing (No. 3) PLC, Permanent Financing (No. 4) PLC, Permanent Financing (No.
5) PLC and Permanent Financing (No. 6) PLC, the "CURRENT NOTES" are the previous
notes together with the notes issued by Permanent Financing (No. 7) PLC, the
"NEW NOTES" are notes which may be issued in future transactions and the "NOTES"
are the previous notes, the issuer notes and any new notes.
4
SUMMARY OF PROSPECTUS
The information in this section 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 the initial closing date 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 part of the initial consideration 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.
5
(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.
(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
[GRAPHIC OMITTED]
6
DIAGRAM OF OWNERSHIP STRUCTURE
[GRAPHIC OMITTED]
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, Permanent Financing (No. 3) PLC, Permanent
Financing (No. 4) PLC, Permanent Financing (No. 5) PLC and Permanent
Financing (No. 6) 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 on each previous closing date. 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.
7
* 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 3 issuer notes, the series 4 issuer notes and the
series 5 issuer notes. These additional issuer notes will be secured over the
same property as the notes offered by this prospectus. These additional issuer
notes have not been registered in the United States and are not being offered by
this prospectus. However, the term "ISSUER NOTES" when used in this prospectus
includes all of the series 1 issuer notes, series 2 issuer notes, series 3
issuer notes, series 4 issuer notes and series 5 issuer notes, some features of
which are summarised in this section.
Some series of issuer notes will be paid ahead of others, regardless of
the ranking of the issuer notes. In particular, some payments on some series of
class B issuer notes and class C issuer notes will be paid before some series of
class A issuer notes, as described in "- THE ISSUER NOTES - PAYMENT AND RANKING
OF THE ISSUER NOTES".
8
SERIES OF ISSUER NOTES
--------------------------- ---------------------------- ----------------------------
SERIES 1 SERIES 1 SERIES 1
CLASS A CLASS B CLASS C
--------------------------- ---------------------------- ----------------------------
Principal amount: $[1,000,000,000] $[__] $[__]
Credit enhancement: Subordination of the Subordination of the The reserve funds
class B issuer notes and class C issuer notes and
the class C issuer notes, the reserve funds
and the reserve funds
Interest rate: One-month USD-LIBOR Three-month USD- Three-month USD-
- margin LIBOR + margin LIBOR + margin
Margin: [__]% p.a. [__]% p.a. [__]% p.a.
Until interest payment N/A [December 2011] [December 2011]
date falling in:
And thereafter: N/A [__]% p.a. [__]% p.a.
Scheduled [December 2005] N/A N/A
redemption date(s):
Interest accrual 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
dates: falling in each 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 [December 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 [June 2005] [June 2005] [June 2005]
date:
Final maturity date: [December 2005] [June 2042] [June 2042]
Tax treatment: Debt for United States Debt for United States Debt for United States
federal income tax federal income tax federal income tax
purposes, subject to the purposes, subject to the purposes, subject to the
considerations considerations considerations
contained in "UNITED contained in "UNITED contained in "UNITED
STATES FEDERAL INCOME STATES FEDERAL INCOME STATES FEDERAL INCOME
TAXATION" TAXATION" TAXATION"
ERISA eligible: Yes, subject to the Yes, subject to the Yes, subject to the
considerations in considerations in considerations in
"ERISA "ERISA "ERISA
CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS"
Listing: UK Listing Authority and UK Listing Authority and UK Listing Authority and
London Stock Exchange London Stock Exchange London Stock Exchange
ISIN: [__] [__] [__]
Common code: [__] [__] [__]
CUSIP number: [__] [__] [__]
Expected ratings [A-1+/P-1/F1+] [AA/Aa3/AA] [BBB/Baa2/BBB]
(S&P/Moody's/Fitch):
9
SERIES OF ISSUER NOTES
--------------------------- ---------------------------- ----------------------------
SERIES 2 SERIES 2 SERIES 2
CLASS A CLASS B CLASS C
--------------------------- ---------------------------- ----------------------------
Principal amount: $[1,000,000,000] $[__] $[__]
Credit enhancement: Subordination of the Subordination of the The reserve funds
class B issuer notes, class C issuer notes and
and the class C issuer the reserve funds
notes, and the reserve
funds
Interest rate: Three-month USD- Three-month USD- Three-month
LIBOR + margin LIBOR + margin USD-LIBOR + margin
Margin: [__]% p.a. [__]% p.a. [__]% p.a.
Until interest payment [December 2011] [December 2011] [December 2011]
date falling in:
And thereafter: [__]% p.a. [__]% p.a. [__]% p.a.
Scheduled [June, N/A N/A
redemption date(s): September and
December 2007 and March
2008]
Interest accrual Actual/360 Actual/360 Actual/360
method:
Interest payment For the series 2 issuer notes, quarterly in arrear on the interest payment dates
dates: falling in March, June, September and December of each year.
First interest payment [June 2005] [June 2005] [June 2005]
date:
Final maturity date: [March 2012] [June 2042] [June 2042]
Tax treatment: Debt for United States Debt for United States Debt for United States
federal income tax federal income tax federal income tax
purposes, subject to the purposes, subject to the purposes, subject to the
considerations considerations considerations
contained in "UNITED contained in "UNITED contained in "UNITED
STATES FEDERAL INCOME STATES FEDERAL INCOME STATES FEDERAL INCOME
TAXATION" TAXATION" TAXATION"
ERISA eligible: Yes, subject to the Yes, subject to the Yes, subject to the
considerations in considerations in considerations in
"ERISA "ERISA "ERISA
CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS"
Listing: UK Listing Authority and UK Listing Authority and UK Listing Authority and
London Stock Exchange London Stock Exchange London Stock Exchange
ISIN: [__] [__] [__]
Common code: [__] [__] [__]
CUSIP number: [__] [__] [__]
Expected ratings [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
(S&P/Moody's/Fitch):
10
SERIES OF ISSUER NOTES
--------------------------- ---------------------------- ----------------------------
SERIES 3 SERIES 3 SERIES 3
CLASS A CLASS B CLASS C
--------------------------- ---------------------------- ----------------------------
Principal amount: (pound)[__] (pound)[__] (pound)[__]
Credit enhancement: Subordination of the Subordination of the The reserve funds
class B issuer notes and class C issuer notes and
the class C issuer notes, the reserve funds
and the reserve funds
Interest rate: Three-month sterling Three-month sterling Three-month sterling
LIBOR + margin LIBOR + margin LIBOR + margin
Margin: [__]% p.a. + additional [__]% p.a. [__]% p.a.
amount
Additional amount (a) [__]% per annum for as long as the series 3 A issuer notes are (i) rated
(series 3 class A below AA- by S&P or Aa3 by Moody's and (ii) held by an asset-backed commercial
issuer notes only): paper conduit, or an entity funded by one or more asset-backed commercial paper
conduits, administered by HBOS Treasury Services plc, which holder has outstanding
obligations to repay a drawdown under one or more liquidity facilities; or
(b) [__]% per annum from the date that the series 3 class A issuer notes (i) are rated below AA- by
S&P or Aa3 by Moody's and (ii) following such downgrade, have been transferred to a liquidity
provider for an asset-backed commercial paper conduit, or an entity funded by one or more
asset-backed commercial paper conduits, administered by HBOS Treasury Services plc, by
such conduit or entity of the series 3 class A issuer notes in consideration of the
cancellation of such conduit or entity's outstanding obligations to such liquidity
provider; or
(c) [__]% per annum from the date that a change in the law or regulations of the United Kingdom
becomes effective as a consequence of which there is an adverse change in the regulatory
treatment for HBOS plc in respect of the series 3 class A issuer notes, whilst such notes are
held by an asset-backed commercial paper conduit, or an entity funded by one or more
asset-backed commercial paper conduits, administered by HBOS Treasury Services plc; or
(d) up to [__]% per annum at any time the series 3 class A issuer notes are held by an asset-backed
commercial paper conduit, or an entity funded by one or more asset-backed commercial paper
conduits, administered by HBOS Treasury Services plc, which holder has outstanding obligations to
repay a drawdown under one or more liquidity facilities and such drawdowns were not made as a
result of the occurrence of the events set forth in paragraphs (a), (b) and (c) above.
Until interest payment [December 2011] [December 2011] [December 2011]
date falling in:
And thereafter: [__]% p.a. [__]% p.a. [__]% p.a.
Scheduled [, N/A N/A
redemption date(s): March, June,
September and December
2008]
Interest accrual Actual/365 Actual/365 Actual/365
method:
Interest payment For the series 3 issuer notes, quarterly in arrear on the interest payment dates
dates: falling in [March, June, September and December] of each year.
11
SERIES OF ISSUER NOTES
--------------------------- ---------------------------- ----------------------------
SERIES 3 SERIES 3 SERIES 3
CLASS A CLASS B CLASS C
--------------------------- ---------------------------- ----------------------------
First interest payment [June 2005] [June 2005] [June 2005]
date:
Final maturity date: [September 2032] [June 2042] [June 2042]
Tax treatment: N/A (These issuer notes N/A (These issuer notes N/A (These issuer notes
are not being offered or are not being offered or are not being offered or
sold in the United sold in the United sold in the United
States) States) States)
ERISA eligible: N/A (These issuer notes N/A (These issuer notes N/A (These issuer notes
are not being offered or are not being offered or are not being offered or
sold in the United sold in the United sold in the United
States) States) States)
Listing: UK Listing Authority and UK Listing Authority and UK Listing Authority and
London Stock Exchange London Stock Exchange London Stock Exchange
ISIN: [N/A] [__] [__]
Common code: [N/A] [__] [__]
CUSIP number: N/A N/A N/A
Expected ratings [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
(S&P/Moody's/Fitch):
12
SERIES OF ISSUER NOTES
--------------------------- ---------------------------- ----------------------------
SERIES 4 SERIES 4 SERIES 4
CLASS A CLASS B CLASS C
--------------------------- ---------------------------- ----------------------------
Principal amount: (euro)[__] (euro)[__] (euro)[__]
Credit enhancement: Subordination of the Subordination of the The reserve funds
class B issuer notes and class C issuer notes and
the class C issuer notes, the reserve funds
and the reserve funds
Interest rate: Three-month EURIBOR Three-month EURIBOR Three-month EURIBOR
+ margin + margin + margin
Margin: [__]% p.a. [__]% p.a. [__]% p.a.
Until interest payment [December 2011] [December 2011] [December 2011]
date falling in:
And thereafter: [__]% p.a. [__]% p.a. [__]% p.a.
Scheduled [March and N/A N/A
redemption date(s): June 2010]
Interest accrual Actual/360 Actual/360 Actual/360
method:
Interest payment For the series 4 issuer notes, quarterly in arrear on the interest payment dates
dates: falling in March, June, September and December of each year.
First interest payment [June 2005] [June 2005] [June 2005]
date:
Final maturity date: [June 2042] [June 2042] [June 2042]
Tax treatment: N/A (These issuer notes N/A (These issuer notes N/A (These issuer notes
are not being offered or are not being offered or are not being offered or
sold in the United sold in the United sold in the United
States) States) States)
ERISA eligible: N/A (These issuer notes N/A (These issuer notes N/A (These issuer notes
are not being offered or are not being offered or are not being offered or
sold in the United sold in the United sold in the United
States) States) States)
Listing: UK Listing Authority and UK Listing Authority and UK Listing Authority and
London Stock Exchange London Stock Exchange London Stock Exchange
ISIN: [__] [__] [__]
Common code: [__] [__] [__]
CUSIP number: N/A N/A N/A
Expected ratings [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
(S&P/Moody's/Fitch):
13
SERIES OF ISSUER NOTES
------------------------------------------------------------------------------------------------
SERIES 5 SERIES 5 SERIES 5 SERIES 5
CLASS A1 CLASS A1 CLASS B CLASS C
-------------------- --------------------- --------------------- ----------------------------
Principal amount: (pound)[__] (pound)[__] (pound)[__] (pound)[__]
Credit Subordination of Subordination of the Subordination of the The reserve funds
enhancement: the class B issuer class B issuer class C issuer notes
notes, and the notes, and the class and the reserve funds
class C issuer C issuer notes, and
notes, and the the reserve funds
reserve funds
Interest rate: Three-month Three-month sterling Three-month sterling Three-month sterling
sterling LIBOR + margin LIBOR + margin LIBOR + margin
LIBOR + margin
Margin: [__]% p.a. [__]% p.a. [__]% p.a. [__]% p.a.
Until interest [December 2011] [December 2011] [December 2011] [December 2011]
payment date
falling in:
And thereafter: [__]% p.a. [__]% p.a. [__]% p.a. [__]% p.a.
Scheduled N/A N/A N/A N/A
redemption
date(s):
Interest Actual/365 Actual/365 Actual/365 Actual/365
accrual
method:
Interest payment For the series 5 issuer notes, quarterly in arrear on the interest payment dates falling
dates: in [March, June, September and December] of each year.
First interest [June 2005] [June 2005] [June 2005] [June 2005]
payment date:
Final maturity [June 2042] [June 2042] [June 2042] [June 2042]
date:
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 offered or sold in offered or sold in offered or sold in
the United States) the United States) the United States) the United States)
ERISA eligible: N/A (These 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 offered or sold in offered or sold in offered or sold in
the United States) the United States) the United States) the United States)
Listing: UK Listing UK Listing Authority UK Listing Authority UK Listing Authority
Authority and and London Stock and London Stock and London Stock
London Stock Exchange Exchange Exchange
Exchange
ISIN: [__] [__] [__] [__]
Common code: [__] [__] [__] [__]
CUSIP number: N/A N/A N/A N/A
Expected ratings [AAA/Aaa/AAA] [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
(S&P/Moody's/
Fitch):
14
THE ISSUER
Permanent Financing (No. 7) PLC is a public limited company incorporated
in England and Wales. Its registered office is Blackwell House, Guildhall Yard,
London EC2V 5AE. Its telephone number is (+44) (0)20 7556 0972.
The issuer is a newly created special purpose company. The purpose of the
issuer is to issue the issuer notes which represent its asset-backed obligations
and to lend the equivalent net issue proceeds to Funding 1. The issuer will not
engage in any activities that are unrelated to these purposes.
FUNDING 1
Permanent Funding (No. 1) Limited is a private limited company
incorporated in England and Wales. Its registered office is Blackwell House,
Guildhall Yard, London EC2V 5AE. Its telephone number is (+44) (0)20 7556 0972.
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 Funding 1's 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 0BD, 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 2176.
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.
15
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
The series 1 class A issuer notes, the series 1 class B issuer notes and
the series 1 class C issuer notes are collectively referred to as the series 1
issuer notes and references to the series 2 issuer notes, the series 3 issuer
notes, the series 4 issuer notes and the series 5 issuer notes are to be
construed in an analogous manner.
The series 1 class A issuer notes, the series 2 class A issuer notes, the
series 3 class A issuer notes, the series 4 class A issuer notes and the series
5 class A issuer notes are also collectively referred to as the class A issuer
notes and references to the class B issuer notes and the class C issuer notes
are to be construed in an analogous manner.
The series 5 class A1 issuer notes and the series 5 class A2 issuer notes
together are referred to as the series 5 class A issuer notes.
The series 3 issuer notes, 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 16 separate issuer term advances, each with a series and
ratings designation. The proceeds of each of the 16 classes of issuer notes will
be used to make the corresponding issuer term advances to Funding 1. The
relationship between the issuer notes and the issuer term advances is set out in
"THE ISSUER INTERCOMPANY LOAN AGREEMENT". For more information on the issuer
intercompany loan, see "THE ISSUER INTERCOMPANY LOAN".
We will repay each class of issuer notes from payments made by Funding 1
under the corresponding issuer term advance (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 RELATING TO 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.
16
PAYMENT AND RANKING OF THE ISSUER NOTES
On any interest payment date, payments of interest and principal on the
class A issuer notes of each series will rank ahead of payments of interest and
principal on the class B issuer notes of any series and the class C issuer notes
of any series. Payments of interest and principal on the class B issuer notes of
each series will rank ahead of payments of interest and principal on the class C
issuer notes of any series. For more information on the priority of payments to
you, see "CASHFLOWS" and see also "RISK FACTORS - SUBORDINATION OF OTHER NOTE
CLASSES MAY NOT PROTECT YOU FROM ALL RISK OF LOSS".
Payments of interest and principal on the class A issuer notes of each
series rank equally (but subject to the scheduled redemption dates or permitted
redemption dates of each series of class A issuer notes). Payments of interest
and principal on the class B issuer notes of each series rank equally (but
subject to the permitted redemption dates of each series of class B issuer
notes). Payments of interest and principal on the class C issuer notes of each
series rank equally (but subject to the permitted redemption dates of each
series of class C issuer notes).
Unless an asset trigger event or a non-asset trigger event (each as
described in "THE MORTGAGES TRUST") has occurred or the issuer security or the
Funding 1 security has been enforced (see "- SECURITY GRANTED BY FUNDING 1 AND
THE ISSUER"):
* the series 1 class A issuer notes will be redeemed in full on the
interest payment date falling in [December 2005] (as described in "-
SCHEDULED REDEMPTION");
* each other class of the series 1 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 issuer notes of a higher rating
have been redeemed in full;
* the series 2 class A issuer notes will be redeemed according to the
series 2 class A redemption schedule starting on or after the interest
payment date falling in [September 2007] (as described in "- SCHEDULED
REDEMPTION");
* each other class of the series 2 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 issuer notes of a higher rating
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 [March 2008] (as described in "- SCHEDULED
REDEMPTION");
* each other class of the series 3 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 issuer notes of a higher rating
have been redeemed in full;
* the series 4 class A issuer notes will be redeemed according to the
series 4 class A redemption schedule starting on or after the interest
payment date falling in [March 2010] (as described in "- SCHEDULED
REDEMPTION");
* each other class of the series 4 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 issuer notes of a higher rating
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 [December 2011];
* each other class of the series 5 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 issuer notes of a higher rating
have been redeemed in full.
Investors should note that the principal repayment schedule outlined here
could result in lower ranking issuer notes being repaid before higher ranking
issuer notes. For example, the series 1 class B issuer notes and the series 1
class C issuer notes could be repaid in full prior to principal payments being
made on the series 2 class A issuer notes.
17
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 the issuer series 1 term AAA advance over its
cash accumulation period in order to repay that issuer term advance (such issuer
term advance referred to as an issuer bullet term advance) as a lump sum payment
to us so that we can redeem the series 1 class A issuer notes in full on the
interest payment date falling in [December 2005]. 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 in full on the relevant interest
payment date. The cash accumulation period will be determined according to a
formula described under "THE MORTGAGES TRUST - CASH MANAGEMENT OF TRUST PROPERTY
- - PRINCIPAL RECEIPTS".
As set out in the schedule following this paragraph, we will seek to
repay each of the series 2 class A issuer notes and the series 3 class A issuer
notes in four equal instalments and the series 4 class A issuer notes in two
equal instalments (each a "SCHEDULED AMORTISATION INSTALMENT") on the interest
payment dates indicated below in respect of each such class of 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
each of the issuer series 2 AAA term advance, the issuer series 3 AAA term
advance and the issuer series 4 AAA term advance in order to repay that issuer
term advance to us, so that we can redeem the corresponding series 2 class A
issuer notes, series 3 class A issuer notes and 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 (or one month in the case of
the scheduled amortisation instalments relating to the series 2 class A issuer
notes and the series 3 class A issuer notes), 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 2 class A issuer notes and/or 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.
AMOUNT ON
SCHEDULED EACH SCHEDULED
REDEMPTION DATES REDEMPTION DATE
- ----------------------------------- ----------------- ---------------------
series 2 class A issuer notes...... [June, September, $ [__]
December 2007 and
March 2008]
series 3 class A issuer notes...... [March, (pound) [__]
June, September
and December
2008]
series 4 class A issuer notes...... [March and (EURO) [__]
June 2010]
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 WILL
BE REDEEMED IN THEIR ENTIRETY OR, IN THE CASE OF THE SERIES 2 CLASS A ISSUER
NOTES, THE SERIES 3 CLASS A ISSUER NOTES AND THE SERIES 4 CLASS A ISSUER NOTES,
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".
18
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, the issuer swap providers 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, as well as any amounts required to be paid in priority to or
pari passu with 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), on any interest payment date falling on or after the
interest payment date in [December 2011] (the "ISSUER STEP-UP DATE").
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% 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.
REDEMPTION OR PURCHASE FOLLOWING A REGULATORY EVENT
We may redeem all of one or more classes of the issuer notes or require
holders of all of one or more classes of the issuer notes to sell their issuer
notes to us, in each case on any interest payment date on or after the interest
payment date falling in [March 2008] for a price equal to the principal amount
outstanding of the issuer notes to be purchased, together with any accrued
interest, if (a) the new Basel Capital Accord has been implemented in the United
Kingdom, (b) on the interest payment date for such sale or redemption of the
issuer notes, no issuer note acceleration notice has been served, (c) we give
not more than 60 nor less than 30 days' notice to noteholders, the issuer swap
providers and the note trustee in accordance with the terms and conditions of
the issuer notes, (d) each rating agency has confirmed that its then current
ratings of the notes would not be adversely affected by such sale or redemption
and (e) we have, prior to giving such notice, certified to the note trustee that
we will have the necessary funds to pay principal, interest and any amount
required to be paid by us in priority to or pari passu with principal and
interest in respect of the issuer notes on the relevant interest payment date.
Any issuer notes purchased by us in the exercise of this right will remain
outstanding until the date on which they would otherwise be redeemed or
cancelled in accordance with the terms and conditions of the issuer notes.
19
WITHHOLDING TAX
Payments of interest and principal with respect to the issuer notes will
be subject to any applicable withholding taxes and we will not be obliged to pay
additional amounts in relation thereto. The applicability of any UK withholding
tax is discussed under "UNITED KINGDOM TAXATION".
THE CLOSING DATE
The issuer notes will be issued on or about[__] March, 2005.
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, 388 Greenwich Street, New York, New York 10013. 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), draw further
amounts under the loan, make underpayments or take a payment holiday on a given
payment date under some circumstances (see "THE LOANS - FLEXIBLE LOANS"). 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.
20
The loans have been or will be originated according to the seller's
lending criteria for mortgage loans applicable at the time of origination. The
seller's current lending criteria are described further in "THE LOANS - LENDING
CRITERIA". The seller has given or, as applicable, will give warranties to the
mortgages trustee in the mortgage sale agreement that, among other things, the
loans have been originated in accordance with the seller's policy in effect at
the time of origination. If a loan or its related security does not comply with
these warranties, then the seller will have 20 London business days in which to
cure the default. If the default cannot be or is not cured within 20 London
business days, then the seller will be required to repurchase the loan or loans
under the relevant mortgage account and their related security from the
mortgages trustee. If the seller does not repurchase those loans and their
related security, then the trust property will be deemed to be reduced by an
amount equal to the amount outstanding under those loans. The size of the
seller's share of the trust property will reduce by that amount but the size of
Funding 1's share of the trust property will not alter, and the respective
percentage shares of the seller and Funding 1 in the trust property will alter
accordingly.
SALE OF THE LOANS
On the initial closing date, 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.
On the closing date, the seller will sell new loans and their related security
to the mortgages trustee. 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.
21
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 [__],
representing approximately [__]% of the trust property; and
* the seller's share of the trust property will be approximately [__],
representing approximately [__]% 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.
22
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).
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 sterling 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 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
divided into separate term advances, each corresponding to a series and class of
issuer notes. The relationship between the issuer notes and the issuer term
advances is set out in "THE ISSUER INTERCOMPANY LOAN AGREEMENT". Together these
advances are referred to in this prospectus as the issuer term advances.
The issuer term AAA advances, issuer term AA advances and issuer term BBB
advances reflect the ratings expected to be assigned to the class A issuer
notes, class B issuer notes and class C issuer notes, respectively, by the
rating agencies on the closing date. These ratings are set out in "- SUMMARY OF
THE ISSUER NOTES".
Funding 1 will repay the issuer intercompany loan primarily from payments
received from Funding 1's share of the trust property. We will make payments of
interest and principal on the issuer notes from payments of interest and
principal made by Funding 1 under the issuer intercompany loan. As further
described in "CASHFLOWS - DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL RECEIPTS
- - DUE AND PAYABLE DATES OF ISSUER TERM ADVANCES", under the terms of the issuer
intercompany loan agreement, Funding 1 is required, prior to the occurrence of a
trigger event or enforcement of the security granted by Funding 1 or the issuer,
to:
* repay the issuer series 1 term AAA advance on the Funding 1 interest
payment date falling in [December 2005];
* repay each other issuer series 1 term 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 advances with a higher rating have been
fully repaid;
23
* repay the issuer series 2 term AAA advance in an amount equal to the
scheduled amortisation instalment due on each of the Funding 1 interest
payment dates falling in [June, September and December 2007 and March
2008], 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 2 term AAA advance is fully repaid;
* repay each other issuer series 2 term 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 advances with a higher rating have been
fully repaid;
* repay the issuer series 3 term AAA advance in an amount equal to the
scheduled amortisation instalment due on each of the Funding 1 interest
payment dates falling in [March, June, September and December 2008], 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 each other issuer series 3 term 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 advances with a higher rating have been
fully repaid;
* repay the issuer series 4 term AAA advance in an amount equal to the
scheduled amortisation instalment due on each of the Funding 1 interest
payment dates falling in [March and June 2010], but to the extent there
are insufficient funds to repay a scheduled amortisation instalment
according to the repayment schedule on the relevant Funding 1 interest
payment date, the shortfall shall be repaid on subsequent Funding 1
interest payment dates to the extent of principal receipts available to
Funding 1 for that purpose, until the issuer series 4 term AAA advance is
fully repaid;
* repay each other issuer series 4 term 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 advances with a higher rating have been
fully repaid;
* repay the issuer series 5 term AAA advances 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 [December 2011] until the issuer series 5 term AAA advances
have been fully repaid; and
* repay each other issuer series 5 term 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 advances with a higher rating have been
fully repaid.
24
The repayment schedule for the issuer term AAA advances (other than the
issuer series 5A1 term AAA advance and the issuer series 5A2 term AAA advance)
is as follows:
SCHEDULED
ISSUER TERM ADVANCE REPAYMENT DATES AMOUNT
- ------------------------------------------- -------------------- -------------
Issuer series 1 term AAA advance........... [December 2005] (pound)[__]
Issuer series 2 term AAA advance........... [June 2007] (pound)[__]
[September 2007] (pound)[__]
[December 2007 and (pound)[__]
March 2008] (pound)[__]
Issuer series 3 term AAA advance........... [March 2008 (pound)[__]
June 2008 (pound)[__]
September 2008 and (pound)[__]
December 2008] (pound)[__]
Issuer series 4 term AAA advance........... [March 2010 and (pound)[__]
June 2010] (pound)[__]
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 monies 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%; or
* both:
(i) the quarterly CPR is equal to or greater than 10%, but less
than 15%, and
(ii) the annualised CPR is less than 10%.
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".
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.
25
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% 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%; and
* there is a cash accumulation shortfall at that time,
then, on or before their step-up dates, the issuer series 5 term AAA advances,
the issuer term AA advances and the issuer term BBB advances will be entitled to
principal repayments only to the extent permitted under the pass-through
repayment restrictions (see "CASHFLOWS - DISTRIBUTION OF FUNDING 1 AVAILABLE
PRINCIPAL RECEIPTS - REPAYMENT OF TERM ADVANCES OF EACH SERIES PRIOR TO THE
OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO THE SERVICE ON FUNDING 1 OF AN
INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF A NOTE
ACCELERATION NOTICE").
If the issuer intercompany loan is not repaid on the step-up date, then
the amount of principal receipts that Funding 1 can allocate to repay the
outstanding issuer term advances (other than issuer bullet term advances or
issuer scheduled amortisation instalments) on a Funding 1 interest payment date
may not exceed the proportion that the issuer intercompany loan bears to the
aggregate outstanding principal balance of all of the intercompany loans.
If a note acceleration notice is served on us (but not on every other
issuer), then the issuer term advances will be immediately due and payable, but
the Funding 1 security will not be automatically enforced unless Funding 1 is
also in default under the issuer intercompany loan agreement, and Funding 1 will
allocate its principal receipts to repay the outstanding issuer term advances
based on the proportion that the issuer intercompany loans bear to the aggregate
outstanding principal balance of all of the intercompany loans.
If a note acceleration notice is served on us (and a note acceleration
notice is or has been served on every other issuer as well), then the issuer
term advances will be immediately due and payable, but the Funding 1 security
will not be automatically enforced unless Funding 1 is also in default under one
or other of the relevant intercompany loan agreements, and Funding 1 will
allocate its principal receipts to repay the various term advances based on
their respective term advance ratings (the highest rated term advances being
paid in priority to the lower rated term advances).
26
If a trigger event occurs or an intercompany loan acceleration notice is
served on Funding 1, then principal receipts will be allocated as described in
the "CASHFLOWS" section of this prospectus.
THE SECURITY TRUSTEE
The Bank of New York was appointed security trustee in respect of the
security created under the Funding 1 deed of charge pursuant to a deed of
appointment dated 25th July, 2003. Its address is One Canada Square, London E14
5AL. The Bank of New York will also be appointed to act as the security trustee
for the issuer secured creditors under the issuer deed of charge on the closing
date. See "SECURITY FOR THE ISSUER'S OBLIGATIONS".
SECURITY GRANTED BY FUNDING 1 AND THE ISSUER
On the initial closing date, Funding 1 entered into a deed of charge to
secure its obligations to its then existing secured creditors. Funding 1
subsequently entered into five deeds of accession to the Funding 1 deed of
charge pursuant to which the previous issuers, among others, acceded to the
Funding 1 deed of charge as Funding 1 secured creditors. To secure its
obligations to us under the issuer intercompany loan and to the start-up loan
provider under the issuer start-up loan agreement, Funding 1 will on the closing
date enter into a deed of accession to the Funding 1 deed of charge with us, the
issuer start-up loan provider and Funding 1's other secured creditors.
In addition, on 12th March, 2004 Funding 1 granted additional fixed and
floating security in favour of the security trustee, to secure the same
obligations as under the Funding 1 deed of charge (the "SECOND SUPPLEMENTAL
FUNDING 1 DEED OF CHARGE"). The second supplemental Funding 1 deed of charge is
principally governed by English law but contains certain Scots law provisions.
By their execution of the issuer deed of accession, the parties thereto will
accede to the second supplemental Funding 1 deed of charge.
Together, the deed of charge, the deeds of accession and the second
supplemental Funding 1 deed of charge (except where the context otherwise
requires) 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 and
the additional security created by the second supplemental Funding 1 deed of
charge 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".
27
SWAP PROVIDERS
The Funding 1 swap provider is Halifax plc. For more information about
the Funding 1 swap provider, see "HALIFAX PLC". The issuer swap provider for the
series 1 issuer notes is [__] and its payment obligations will be guaranteed by
[__] (the "[__] ISSUER SWAP GUARANTOR"). The issuer swap provider for the series
2 issuer notes is [__]acting through its London branch and its payment
obligations will be guaranteed by [__] (the "[__] ISSUER SWAP GUARANTOR"). The
issuer swap provider for the series 4 issuer notes is[__]. For more information
about the issuer swap providers, see "THE ISSUER SWAP PROVIDERS".
The Funding 1 swap provider has entered into the Funding 1 swap
agreement, 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 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
subsequent dates the swap agreement was amended and restated in relation to the
previous issues by the other previous issuers.
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 and the series 2 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 offered 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 the offered issuer notes.
28
Similarly, to enable us to make payments on the interest payment dates in
respect of the series 4 issuer notes in euro, we will enter into the issuer euro
currency swap agreements with the issuer euro currency swap provider and the
security trustee. Under the issuer euro currency swaps, we will pay to the
issuer euro currency swap provider the sterling amounts received on the issuer
term advances corresponding to the series 4 notes and the issuer euro currency
swap provider will pay to us amounts in euro that are equal to the amounts to be
paid on the series 4 issuer notes.
The terms of the swaps are described in greater detail below in "THE SWAP
AGREEMENTS".
ISSUER POST-ENFORCEMENT CALL OPTION AGREEMENT
The issuer post-enforcement call option agreement will be entered into
between the note trustee, as trustee for and on behalf of the class B
noteholders and the class C noteholders, the security trustee, the issuer and a
subsidiary of Holdings called Permanent PECOH Limited. The terms of the option
will require, upon exercise of the option by Permanent PECOH Limited following
the enforcement of the security granted by us pursuant to the issuer deed of
charge, the transfer to Permanent PECOH Limited of all of the class B issuer
notes and/or all of the class C issuer notes, as the case may be. The class B
noteholders and the class C noteholders will be bound by the terms of the class
B issuer notes and the class C issuer notes, respectively, to transfer the
issuer notes to Permanent PECOH Limited in these circumstances. The class B
noteholders and the class C noteholders will be paid a nominal amount only for
that transfer.
However, as the post-enforcement call option can be exercised only after
the security trustee has enforced the security granted by us under the issuer
deed of charge and has determined that there are no further assets available to
pay amounts due and owing to the class B noteholders and/or the class C
noteholders, as the case may be, the exercise of the post-enforcement call
option and delivery by the class B noteholders and/or the class C noteholders of
the class B issuer notes and/or the class C issuer notes to Permanent PECOH
Limited will not extinguish any other rights or claims other than the rights to
payment of interest and repayment of principal under the class B issuer notes
and/or the class C issuer notes that such class B noteholders and/or class C
noteholders, as the case may be, may have against us.
RATING OF THE ISSUER NOTES
The ratings expected to be assigned to each class of issuer notes by
Standard & Poor's, Moody's and Fitch on the closing date are set out in "-
SUMMARY OF THE ISSUER NOTES".
A credit rating is not a recommendation to buy, sell or hold securities
and may be subject to revision, suspension or withdrawal at any time by the
assigning rating organisation if, in its judgment, circumstances in the future
so warrant.
Standard & Poor's, Moody's and Fitch together comprise the rating
agencies referred to in this prospectus. The term "rating agencies" also
includes 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.
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 on various dates beginning
on the initial closing date.
29
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's 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 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 term advances under any intercompany loan, including the issuer
intercompany loan, provided that the quarterly CPR is greater than 15% and there
is no cash accumulation shortfall at that time.
30
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 LLP, 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%) 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 definitive issuer notes;
* Funding 1 and the issuer will generally be subject to UK
corporation tax, currently at a rate of 30%, 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.
In respect of Funding 1, the profit in the profit and loss account
will not exceed 0.01% 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% 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
31
* 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
While not free from doubt, in the opinion of Allen & Overy LLP, our US
tax advisers, the offered issuer notes will be treated as debt for US federal
income tax purposes. Our US tax advisers have also provided their opinion that,
assuming compliance with the transaction documents, the mortgages trustee acting
in its capacity as trustee of the mortgages trust, Funding 1 and the issuer will
not be subject to US federal income tax. See "UNITED STATES FEDERAL INCOME
TAXATION" for the relevant limitations relating to the foregoing and a complete
discussion of the characterisation of (and the consequences of owning) the
offered 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% 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 offered 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.
32
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 year of the Ahead of all revenue Each distribution date
aggregate amounts payable to
outstanding principal Funding 1 by the
amount of the trust mortgages trustee
property
Mortgages trustee fee (pound)[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 year of Ahead of all issuer Each Funding 1
fee principal amount term advances interest payment date
outstanding of the
Notes
Cash management fee of Estimated [0.025]% Ahead of all Each interest
each previous issuer per year of the outstanding previous payment date
principal amount notes of such
outstanding of the previous issuer
applicable previous
intercompany loan
Corporate expenses of each Estimated (pound)[5,200] Ahead of all Each interest
previous issuer each year outstanding previous payment date
notes of such
previous issuer
Issuer cash management fee Estimated [0.025]% Ahead of all Each interest
per year of the outstanding issuer payment date
principal amount notes
outstanding of the
issuer inter company
Loan
Corporate expenses of Estimated (pound)[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 (pound)[1,200] Ahead of all issuer Each Funding 1
Funding 1 each year term advances interest payment date
Corporate expenses of Estimated (pound)[5,200] Ahead of all Each interest
issuer each year outstanding issuer payment date
notes
Commitment fee under [0.08]% of undrawn Ahead of all issuer Each Funding 1
Funding 1 amount under term advances interest payment date
liquidity facility Funding 1
liquidity facility
from time to time
Fee payable by Funding 1 to (pound)[2,500] each year Ahead of all issuer Each Funding 1
security trustee (including term advances interest payment date
paying agents)
Subject to the following, the fees set out in the preceding table are,
where applicable, inclusive of value added tax, which is currently assessed at
17.5%. The fees will be subject to adjustment if the applicable rate of value
added tax changes. The commitment fee under the Funding 1 liquidity facility is
exclusive of value added tax, if any, chargeable thereon.
33
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.
Funding 1 has entered into the Funding 1 liquidity facility, which is
available (subject to satisfying certain conditions precedent) to pay certain
amounts due and payable on the term advances made by us and the previous
issuers. 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 us.
We will not have any other significant sources of funds available to meet
our obligations under the issuer notes and/or any other payments ranking in
priority to the issuer notes.
FUNDING 1 IS NOT OBLIGED TO MAKE PAYMENTS ON THE ISSUER TERM ADVANCES IF
IT DOES NOT HAVE ENOUGH MONEY TO DO SO, WHICH COULD ADVERSELY AFFECT PAYMENTS ON
THE ISSUER NOTES
Funding 1's ability to pay amounts due on the issuer term advances will
depend upon:
* Funding 1 receiving enough funds from its entitlement to the trust
property on or before each Funding 1 interest payment date;
* Funding 1 receiving the required funds from the Funding 1 swap
provider;
* the amount of funds credited to the 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 payments of
certain fees and expenses of Funding 1 and payments on certain higher ranking
term advances under any intercompany loan agreements.
34
Funding 1 will be obliged to pay principal receipts due to us under the
issuer intercompany loan only to the extent that it has principal receipts
available for that purpose after repaying amounts ranking in priority to us
(including repaying any higher ranking previous term advances or new term
advances), as described in "CASHFLOWS - DISTRIBUTION OF FUNDING 1 AVAILABLE
PRINCIPAL RECEIPTS - REPAYMENT OF TERM ADVANCES OF EACH SERIES PRIOR TO THE
OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO THE SERVICE ON FUNDING 1 OF AN
INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF A NOTE
ACCELERATION NOTICE".
If there is a shortfall between the amounts payable by Funding 1 to us
under the issuer intercompany loan agreement and the amounts payable by us on
the issuer notes, you may, depending on what other sources of funds are
available to us and to Funding 1, not receive the full amount of interest and/or
principal which would otherwise be due and payable on the issuer notes.
FAILURE BY FUNDING 1 TO MEET ITS OBLIGATIONS UNDER THE ISSUER INTERCOMPANY LOAN
AGREEMENT WOULD ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
If Funding 1 does not make payments due and payable on the issuer
intercompany loan, then we may not have enough money to make payments on the
issuer notes, and in addition we will have only limited recourse to the assets
of Funding 1. If Funding 1 does not pay amounts under the issuer intercompany
loan because it does not have enough money available, those amounts will be
deemed not to be due and payable, so there will not be an event of default under
the issuer intercompany loan, and we will not have recourse to the assets of
Funding 1 in that instance.
ON THE FINAL REPAYMENT DATE OF THE ISSUER INTERCOMPANY LOAN ANY OUTSTANDING
AMOUNTS IN RESPECT OF THE ISSUER TERM AA ADVANCES AND THE ISSUER TERM BBB
ADVANCES WILL BE EXTINGUISHED, WHICH WOULD CAUSE A LOSS ON ANY CLASS B ISSUER
NOTES AND ANY CLASS C ISSUER NOTES STILL OUTSTANDING
The transaction has been structured in the expectation that on the final
repayment date of the issuer intercompany loan in [June 2042], the interest and
principal due and payable on the issuer term AA advances and the issuer term BBB
advances will be in an amount equal to the sum available to pay all outstanding
interest and/or principal (including interest and/or principal deferred and
unpaid) on the issuer term AA advances and the issuer term BBB advances (after
paying amounts of a higher order of priority as required by the Funding 1
priority of payments).
If there is a shortfall between the amount available to pay such interest
and/or principal and the amount required to pay all outstanding interest and/or
principal on the issuer term AA advances and the issuer term BBB advances, then
the shortfall will be deemed to be not due and payable under the issuer
intercompany loan agreement and we will not have any claim against Funding 1 for
the shortfall.
If there is such a shortfall in interest and/or principal payments under
the issuer intercompany loan agreement, you may not receive the full amount of
interest and/or principal which would otherwise be due and payable on the class
B issuer notes or the class C issuer notes outstanding.
ENFORCEMENT OF THE ISSUER SECURITY IS THE ONLY REMEDY FOR A DEFAULT IN THE
ISSUER'S OBLIGATIONS, AND THE PROCEEDS OF THAT ENFORCEMENT MAY NOT BE ENOUGH TO
MAKE PAYMENTS ON THE ISSUER NOTES
The only remedy for recovering amounts on the issuer notes is through the
enforcement of the issuer security. We have no recourse to the assets of Funding
1 unless Funding 1 has also defaulted on its obligations under the issuer
intercompany loan and the Funding 1 security has been enforced.
If the security created as required by the issuer deed of charge is
enforced, the proceeds of enforcement may be insufficient to pay all principal
and interest due on the issuer notes.
THE TRANSACTION HAS BEEN STRUCTURED IN THE EXPECTATION THAT THE SERIES 1 ISSUER
NOTES WILL BE REDEEMED BEFORE THE SERIES 2 ISSUER NOTES AND SO ON
The transaction has been structured in the expectation that:
* the series 1 issuer notes will be redeemed in full prior to the
redemption of the series 2 issuer notes, the series 3 issuer
notes, the series 4 issuer notes and the series 5 issuer notes;
35
* the series 2 issuer notes will be redeemed in full prior to the
redemption of the series 3 issuer notes, the series 4 issuer notes
and the series 5 issuer notes;
* the series 3 issuer notes will be redeemed in full prior to the
redemption of the series 4 issuer notes and the series 5 issuer
notes; and
* the series 4 issuer notes will be redeemed in full prior to the
redemption of the series 5 issuer notes.
This means, among other things, that the series 1 class B issuer notes
and the series 1 class C issuer notes are expected to be redeemed before the
series 2 class A issuer notes, the series 3 class A issuer notes, the series 4
class A issuer notes and the series 5 class A issuer notes, even though the
series 2 class A issuer notes, the series 3 class A issuer notes, the series 4
class A issuer notes and the series 5 class A issuer notes have a higher rating
than the series 1 class B issuer notes and the series 1 class C issuer notes.
Similarly, the series 2 class B issuer notes and the series 2 class C issuer
notes are expected to be redeemed before the series 3 class A issuer notes, the
series 4 class A issuer notes and the series 5 class A issuer notes, and so on
for each series of issuer notes.
However, there is no assurance that the series 1 issuer notes will be
redeemed in full before the series 2 issuer notes, the series 3 issuer notes,
the series 4 issuer notes and the series 5 issuer notes or that the series 2
issuer notes will be redeemed in full before the series 3 issuer notes, the
series 4 issuer notes and the series 5 issuer notes or that the series 3 issuer
notes will be redeemed in full before the series 4 issuer notes and the series 5
issuer notes or that the series 4 issuer notes will be redeemed in full before
the series 5 issuer notes. In each case, redemption of the issuer notes is
ultimately dependent on, among other things, repayment and redemptions on the
loans and on the term advance rating of the issuer term advances. Further, if on
any interest payment date, amounts are due and payable in respect of the class A
issuer notes of any series and amounts are due and payable in respect of the
class B issuer notes of any series and/or the class C issuer notes of any
series, then payments of principal will be made on the class A issuer notes in
priority to payments of principal on the class B issuer notes and the class C
issuer notes. Similarly, if on any interest payment date, amounts are payable in
respect of the class B issuer notes of any series and the class C issuer notes
of any series, then payments of principal will be made on the class B issuer
notes in priority to payments of principal on the class C issuer notes. See "-
SUBORDINATION OF OTHER NOTE CLASSES MAY NOT PROTECT YOU FROM ALL RISK OF LOSS"
AND "MATURITY AND PREPAYMENT CONSIDERATIONS".
THERE MAY BE CONFLICTS BETWEEN YOUR INTERESTS AND THE INTERESTS OF ANY OF OUR
OTHER SECURED CREDITORS, AND THE INTERESTS OF THOSE SECURED CREDITORS MAY
PREVAIL OVER YOUR INTERESTS
The issuer deed of charge requires the security trustee to consider the
interests of each of the issuer secured creditors in the exercise of all of its
powers, trusts, authorities, duties and discretions, but requires the security
trustee, in the event of a conflict between your interests and 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.
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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 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 (in respect of each document
to which they are a party), 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 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 conflict with the interests of another
class or classes of the noteholders. The issuer trust deed and the terms of the
issuer notes will provide that where, in the sole opinion of the note trustee
there is such a conflict, then:
* the note trustee is to have regard only to the interests of the
class A noteholders in the event of a conflict between the
interests of the class A noteholders on the one hand and the class
B noteholders and/or the class C noteholders on the other hand;
* the note trustee is to have regard only to the interests of the
class B noteholders in the event of a conflict between the
interests of the class B noteholders on the one hand and the class
C noteholders on the other hand.
37
THERE MAY BE A CONFLICT BETWEEN THE INTERESTS OF THE HOLDERS OF EACH SERIES OF
THE CLASS A ISSUER NOTES, THE HOLDERS OF EACH SERIES OF THE CLASS B ISSUER NOTES
AND THE HOLDERS OF EACH SERIES OF THE CLASS C ISSUER NOTES, AND THE INTERESTS OF
OTHER SERIES OF NOTEHOLDERS MAY PREVAIL OVER YOUR INTERESTS
There may also be circumstances where the interests of the class A
noteholders of one series of the issuer notes conflicts with the interests of
the class A noteholders of another series of the issuer notes. Similarly, there
may be circumstances where the interests of the class B noteholders of one
series of the issuer notes conflicts with the interests of the class B
noteholders of another series of the issuer notes or the interests of the class
C noteholders of one series of the issuer notes conflicts with the interests of
the class C noteholders of another series of the issuer notes.
The issuer trust deed and the terms of the issuer notes will provide that
where, in the sole opinion of the note trustee there is such a conflict, then a
resolution directing the note trustee to take any action must be passed at
separate meetings of the holders of each series of the class A issuer notes, or,
as applicable, each series of the class B issuer notes or each series of the
class C issuer notes. A resolution may only be passed at a single meeting of the
noteholders of each series of the relevant class if the note trustee is, in its
absolute discretion, satisfied that there is no conflict between them.
Similar provisions will apply in relation to requests in writing from
holders of a specified percentage of the principal amount outstanding of the
issuer notes of each class within each series (the principal amount outstanding
being converted into sterling for the purposes of making the calculation). You
should note that as a result of repayments of principal first to the series 1
issuer notes, then to the series 2 issuer notes, then to the series 3 issuer
notes, then to the series 4 issuer notes and then to the series 5 issuer notes,
the principal amount outstanding of each series of the issuer notes will change
after the closing date.
HOLDINGS HAS ESTABLISHED ANOTHER COMPANY, FUNDING 2, WHICH MAY BECOME AN
ADDITIONAL BENEFICIARY UNDER THE MORTGAGES TRUST
Holdings has established a separate entity, Funding 2, which may issue
notes from time to time and use the proceeds to pay for a direct interest in the
trust property rather than lending the proceeds to Funding 1. Simultaneously
with the acquisition by Funding 2 of an interest in the trust 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 (iii) to regulate the distribution of interest and principal
receipts in the trust property to Funding 2 and the other
beneficiaries; and
38
* the cash management agreement to regulate the application of
monies to Funding 2.
There may be conflicts of interest between Funding 1 and Funding 2, in
which case it is expected that the mortgages trustee will follow the directions
given by the relevant beneficiary (excluding the seller) that has the largest
share of the trust property at that time. The interests of Funding 1 may not
prevail, which may adversely affect your interests.
Your prior consent to the inclusion of Funding 2 as a beneficiary of the
mortgages trust and the subsequent amendments to the documents and/or release of
security by Funding 1 will not be 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
39
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:
* 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 the initial closing date which comprised
Funding 1's original share of the trust property. Funding 1 used most of the
proceeds of each other previous intercompany loan to pay the seller for loans
(together with their related security) sold to the mortgages trustee or to pay
consideration to the seller for an increase in Funding 1's share in the
mortgages trust.
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
40
our benefit (and the benefit of the other Funding 1 secured creditors) under the
Funding 1 deed of charge. In addition, the liabilities owed to the Funding 1
liquidity facility provider and the Funding 1 swap provider which are secured by
the Funding 1 deed of charge may increase each time that Funding 1 enters into a
new intercompany loan agreement. These factors could ultimately cause a
reduction in the payments you receive on your issuer notes. Your consent to the
requisite changes to the transaction documents will not be 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.
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, each scheduled amortisation instalment under 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
advances, the issuer term AA advances or the issuer term BBB advances that are
due and payable if the quarterly CPR of the loans in the trust property is
greater than 15% and other conditions are met as described in "- PRINCIPAL
PAYMENTS ON THE ORIGINAL PASS-THROUGH TERM ADVANCES WILL BE DEFERRED IN CERTAIN
CIRCUMSTANCES" below. This means that there may be no corresponding repayments
of principal on the series 5 class A issuer notes, the class B issuer notes or
the class C issuer notes.
41
The extent to which sufficient funds are saved by Funding 1 during a cash
accumulation period or received by it from its share in the mortgages trust for
application on a scheduled repayment date will depend on whether the actual
principal prepayment rate of the loans is the same as the assumed principal
prepayment rate. If Funding 1 is not able to save enough money during a cash
accumulation period or does not receive enough money from its share in the
mortgages trust for application on a scheduled repayment date to repay the
relevant issuer term AAA advance (and, if in respect of the issuer bullet term
advances or, where applicable, scheduled amortisation instalments) it is unable
to make a drawing on the 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 dates only the amount that it has actually
saved or received. Any shortfall will be deferred and paid on subsequent Funding
1 interest payment dates when Funding 1 has money available to make the payment.
In these circumstances, there will be a variation in the yield to maturity of
the relevant class of issuer notes.
OUR ABILITY TO REDEEM THE SERIES 1 CLASS A ISSUER NOTES AND/OR THE SERIES 2
CLASS A ISSUER NOTES AND/OR THE SERIES 3 CLASS A ISSUER NOTES AND/OR THE SERIES
4 CLASS A ISSUER NOTES ON THEIR SCHEDULED REDEMPTION DATES IS AFFECTED BY THE
RATE OF PREPAYMENT ON THE LOANS
The rate of prepayment of loans is influenced by a wide variety of
economic, social and other factors, including prevailing mortgage market
interest rates, the availability of alternative financing programs, local and
regional economic conditions and homeowner mobility. For instance, prepayments
on the loans may be due to borrowers refinancing their loans and sales of
properties 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.
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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 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. The principal source of income for repayment by
Funding 1 of the issuer intercompany loan is its interest in the loans held on
trust by the mortgages trustee for Funding 1 and the seller. If the timing and
payment of the loans is adversely affected by any of the risks described in this
section, then the payments on the issuer notes could be reduced or delayed.
THE OCCURRENCE OF TRIGGER EVENTS AND ENFORCEMENT OF THE ISSUER SECURITY MAY
ADVERSELY AFFECT THE SCHEDULED REDEMPTION DATES OF THE SERIES 1 CLASS A ISSUER
NOTES, SERIES 2 CLASS A ISSUER NOTES, SERIES 3 CLASS A ISSUER NOTES AND/OR
SERIES 4 CLASS A ISSUER NOTES
If no trigger event has occurred and the issuer security has not been
enforced in accordance with the terms of the issuer deed of charge, then
payments of principal will not occur on the series 1 class A issuer notes,
series 2 class A issuer notes, series 3 class A issuer notes and/or series 4
class A issuer notes before their respective scheduled redemption dates.
If a trigger event occurs or the issuer security is enforced in
accordance with the issuer deed of charge prior to the scheduled redemption
dates for the series 1 class A issuer notes, series 2 class A issuer notes,
series 3 class A issuer notes and/or series 4 class A issuer notes, then the
relevant classes of issuer notes outstanding will not be repaid on their
scheduled redemption dates but will be repaid on each interest payment date from
monies received from Funding 1 on the issuer term AAA advances of the
corresponding series as described in the following three risk factors.
43
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 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 previous intercompany loans
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.
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 previous intercompany loans
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.
44
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 THE 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 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%
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.
45
SUBORDINATION OF OTHER NOTE CLASSES MAY NOT PROTECT YOU FROM ALL RISK OF LOSS
The class B issuer notes and the class C issuer notes are subordinated in
right of payment of interest to the class A issuer notes. The class C issuer
notes are subordinated in right of payment of interest to the class B issuer
notes. However, as described in "- THE TRANSACTION HAS BEEN STRUCTURED IN THE
EXPECTATION THAT THE SERIES 1 ISSUER NOTES WILL BE REDEEMED BEFORE THE SERIES 2
ISSUER NOTES AND SO ON" above, the transaction has been structured in the
expectation that the series 1 class A 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 or the holders of class B issuer
notes from all risk of loss.
PRINCIPAL PAYMENTS ON THE ORIGINAL PASS-THROUGH TERM ADVANCES WILL BE DEFERRED
IN SOME CIRCUMSTANCES
Principal repayments on the issuer term AA advances and/or the issuer
term BBB advances will be deferred in the following circumstances:
If on a Funding 1 interest payment date:
* there is a 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
* 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% of the aggregate outstanding principal balance of
loans in the mortgages trust,
then to the extent that any term AAA advance remains outstanding (whether
or not such term AAA advance is then due and payable) after the allocation of
principal on that Funding 1 interest payment date to those term advances, the
issuer term AA advances and issuer term BBB advances will not be entitled to
principal repayments until the relevant circumstance as described above has been
remedied or otherwise ceases to exist. In addition, if any term AA advance
remains outstanding (whether or not such term AA advance is then due and
payable) after the allocation of principal on that Funding 1 interest payment
date to those term advances, the issuer term BBB advances will not be entitled
to principal repayments until the relevant circumstances as described above have
been remedied or otherwise cease to exist and 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 advance will not be entitled to principal
repayments until the relevant circumstances as described above have been
remedied or otherwise cease to exist. This means that payments of principal on
the class C issuer notes of all series and, as applicable, the class B issuer
notes of all series will be deferred until the earlier of the time when the
relevant circumstance described in this risk factor has been remedied (if ever)
and the final maturity date of the relevant issuer notes.
Furthermore, if, on a Funding 1 interest payment date prior to the issuer
step-up date:
* one or more bullet term advances and/or scheduled amortisation
instalments are then in a cash accumulation period; and
* the quarterly CPR is less than 15%; 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".
46
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 RISKS RELATING TO EXCHANGE RATES ON THE ISSUER NOTES
Investors will pay for the offered issuer notes in US dollars and the
series 4 issuer notes in euro, but the issuer term advances to be made by us to
Funding 1 and repayments of principal and payments of interest by Funding 1 to
us under the issuer intercompany loan will be in sterling.
To hedge our currency exchange rate exposure, including the interest rate
exposure connected with that currency exposure, we will enter into the issuer
dollar currency swaps for the offered issuer notes with the issuer dollar
currency swap providers and the issuer euro currency swaps for the series 4
issuer notes with the issuer euro currency swap provider (see "THE SWAP
AGREEMENTS - THE ISSUER CURRENCY SWAPS").
If we fail to make timely payments of amounts due or certain other events
occur in relation to us under an issuer swap, then we will have defaulted under
that issuer swap. Each issuer swap provider is obliged only to make payments
under an issuer swap if and for so long as we make payments under the same. If
an issuer swap provider is not obliged to make payments, or if it exercises any
right to terminate that it may have under the relevant issuer swap, or if it
defaults in its obligations to make payments of amounts in US dollars or euro,
as applicable, equal to the full amount to be paid by it on the payment dates
under the relevant issuer swap (which are the same dates as the interest payment
dates in respect of the issuer notes), we will be exposed to changes in US
dollar/sterling or euro/sterling currency exchange rates and in the associated
interest rates on these currencies. Unless a replacement issuer swap is entered
into, as a result of any adverse movements in the relevant spot exchange rates,
we may have insufficient funds to make payments due on the issuer notes of any
class and any series that are then outstanding.
Each issuer swap provider will be obliged to gross up payments made by it
to us if withholding taxes are imposed on payments under the relevant issuer
swap [and the [__] issuer swap guarantor will be obliged to gross up payments
made by it to us if withholding taxes are imposed on payments under the [__]
issuer swap guarantee]. However, if such a gross up is required, the relevant
issuer swap provider may, subject to obtaining the consent of the security
trustee, terminate the relevant issuer swap. If it does terminate the relevant
issuer swap, we will be exposed to changes in currency exchange rates and in the
associated interest rates on these currencies. Unless a replacement issuer swap
is entered into, we may have insufficient funds to make payments due on the
issuer notes of any class and any series that are then outstanding.
THERE MAY BE A DELAY IN PAYMENT OF INTEREST ON SERIES 1 CLASS A ISSUER NOTES ON
THE OCCURRENCE OF A TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER SECURITY
After the occurrence of a trigger event or enforcement of the issuer
security, the interest payments on the series 1 class A issuer notes will no
longer be payable monthly, but will be payable quarterly. In these circumstances
a noteholder will not receive interest under the series 1 class A issuer notes
on the expected payment dates.
THE MORTGAGES TRUSTEE GIC PROVIDER OR THE FUNDING 1 GIC PROVIDER MAY CEASE TO
SATISFY CERTAIN CRITERIA TO PROVIDE THE MORTGAGES TRUSTEE GIC ACCOUNT OR THE
FUNDING 1 GIC ACCOUNT
The mortgages trustee GIC provider and the Funding 1 GIC provider are
required to satisfy certain criteria (including certain criteria and/or
permissions set or required by the FSA from time to time) in order
47
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 those criteria then the relevant
account may be transferred to another entity which does satisfy those 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.
The criteria referred to above include a requirement that the short-term,
unguaranteed and unsecured ratings of the mortgages trustee GIC provider or the
Funding 1 GIC provider, as the case may be, are at least A-1+ by Standard &
Poor's, F1+ by Fitch and P-1 by Moody's, unless each rating agency confirms that
its then current rating of the notes would not be adversely affected as a result
of such ratings falling below these minimum ratings.
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 Funding 1 swap provider is not obliged to make payments, or if
it exercises any right to terminate that it may have under the Funding 1 swap,
or if it 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
48
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.
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. When the amount recorded on the principal deficiency ledger
exceeds 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
49
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 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 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, 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 B issuer
notes and the class A issuer notes, as the case may be; and/or
* we may be unable to pay, in full or at all, interest due on your
issuer notes.
For more information on income and principal deficiencies, see "CREDIT
STRUCTURE - PRINCIPAL DEFICIENCY LEDGER".
THE SELLER SHARE OF THE TRUST PROPERTY DOES NOT PROVIDE CREDIT ENHANCEMENT FOR
THE ISSUER NOTES
Any losses from loans included in the trust property will be allocated to
Funding 1 and the seller proportionally on each distribution date in accordance
with the Funding 1 share percentage and the seller share percentage of the trust
property. The seller's share of the trust property therefore does not provide
credit enhancement for the Funding 1 share of the trust property or the issuer
notes. Losses on the loans in the trust property are allocated proportionately
between the seller and Funding 1 depending on their respective shares in the
trust property.
WE WILL ONLY HAVE RECOURSE TO THE SELLER IF THERE IS A BREACH OF WARRANTY BY THE
SELLER, BUT OTHERWISE THE SELLER'S ASSETS WILL NOT BE AVAILABLE TO US AS A
SOURCE OF FUNDS TO MAKE PAYMENTS ON THE ISSUER NOTES
After an intercompany loan acceleration notice under an intercompany loan
is given (as described in "SECURITY FOR FUNDING 1'S OBLIGATIONS"), the security
trustee may, but shall not be obliged to, sell the Funding 1 share of the trust
property. There is no assurance that a buyer would be found or that such a sale
would realise enough money to repay amounts due and payable under the issuer
intercompany loan agreement.
We will not, and Funding 1 and the mortgages trustee will not, have any
recourse to the seller of the loans, other than in respect of a breach of
warranty under the mortgage sale agreement.
We will not, and the mortgages trustee, Funding 1 and the security
trustee will not, undertake any investigations, searches or other actions on any
loan or its related security and we and each of them will rely instead on the
warranties given in the mortgage sale agreement by the seller.
If any of the warranties made by the seller (a) in the case of each loan
in the portfolio, was materially untrue on the date that loan was 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
50
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 expected portfolio as at
the reference date, approximately [__]% are interest-only loans. For
interest-only loans, because the principal is repaid in a lump sum at the
maturity of the loan, the borrower is recommended to have some repayment
mechanism (such as an investment plan) in place which is intended to provide
sufficient funds 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 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 LOANS AND THEIR RELATED SECURITY, 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 has been given effect by a Scottish declaration of
trust by the seller (and any sale of Scottish mortgages on the closing date and
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
the 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
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
51
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 LOANS AND THEIR RELATED SECURITY,
WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES", the seller has made,
and in the future may make, an equitable assignment of the relevant loans and
their related security, or in the case of Scottish loans a transfer of the
beneficial interest in the relevant loans and their related security, 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
mortgages trust does not currently include flexible loans or delayed cashbacks,
those loans may be added to the mortgages trust in the future. Set-off rights
(including analogous rights in Scotland) may occur if the seller fails to
advance to a borrower a drawing or permit the borrower to make an underpayment
or take a payment holiday under a flexible loan when the borrower is entitled to
draw additional amounts or make an underpayment or take a payment holiday 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 permit the borrower to make
an underpayment or take a payment holiday or pay the delayed cashback, then the
relevant borrower may set off any damages claim (or exercise analogous rights in
Scotland) arising from the seller's breach of contract against the seller's
(and, as assignee or holder of the beneficial interest in the loans and their
related security, 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 although,
in the case of flexible loans or delayed cashbacks which are Scottish, it is
possible that the borrower's rights of set-off could extend to the full amount
of the relevant drawing: 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
52
the time the mortgage was taken out or which otherwise were reasonably
foreseeable. In either case, the damages claim will be limited by general legal
principles concerning remoteness of loss and mitigation. These include (i) the
principle that something, which is a real possibility but would only occur in a
small minority of cases, will not usually fall within the contractual measure of
damages, and (ii) the borrower's duty to mitigate his loss.
In respect of a delayed cashback, underpayment or payment holiday 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 (or
exercise analogous rights in Scotland). In that case, the servicer will be
entitled to take enforcement proceedings against the borrower although the
period of non-payment by the borrower is likely to continue until a judgment is
obtained.
The exercise of set-off rights by borrowers would reduce the incoming
cashflow to the mortgages trustee during the exercise. However, the amounts
set-off will be applied to reduce the seller share of the trust property only.
Further there may be circumstances in which 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 will be
required to be authorised under FSMA (as defined below) in order to administer
loans that constitute regulated mortgage contracts. 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.
REGULATORY CHANGES BY THE OFFICE OF FAIR TRADING, THE FINANCIAL SERVICES
AUTHORITY AND 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
53
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.
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 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 under the
CCA, for example, a regulated mortgage contract under the FSMA (as defined
below).
Any credit agreement that is wholly or partly regulated by the CCA or to
be treated as such has to comply with requirements under the CCA as to licensing
of originators and brokers, documentation and procedures of credit agreements,
and (in so far as will be applicable) pre-contract disclosure. If it does not
comply with those requirements, then to the extent that the credit agreement is
regulated by the CCA or to be treated as such, it is unenforceable against the
borrower: (a) without an order of the OFT, if the originator or any broker does
not hold the required licence at the relevant time; (b) totally, if the form to
be signed by the borrower is not signed by the borrower personally or omits or
mis-states a "prescribed term"; or (c) without a court order in other cases and,
in exercising its discretion whether to make the order, the court would take
into account any prejudice suffered by the borrower and any culpability by the
originator.
Any loan or further advance might be wholly or partly regulated by the
CCA or to be treated as such because of technical rules on: (a) determining
whether any credit under the CCA arises, or whether the financial limit of the
CCA is exceeded; (b) determining whether the credit agreement is an exempt
agreement under the CCA; and (c) changes to credit agreements.
A court order under section 126 of the CCA is necessary to enforce a
mortgage securing a credit agreement to the extent that the credit agreement is
regulated by the CCA or to be treated as such. In dealing with such application,
the court has the power, if it appears just to do so, to amend the credit
agreement or to impose conditions upon its performance or to make a time order
(for example, giving extra time for arrears to be cleared).
In July 2001, the UK Department of Trade and Industry ("DTI") published a
consultation paper on modernising the CCA, which invited views on which aspects
of the CCA are to be reviewed. The DTI has since published consultation papers
on specific aspects of the CCA to be reviewed.
In November 2002, the DTI announced its intention that a credit agreement
will be regulated by the CCA 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, then any
loan or further advance originated or changed such that a new contract is
entered into after this time, other than a regulated mortgage contract under the
FSMA (as defined below) or other exempt agreement under the CCA, will be
regulated by the CCA. Such loan or further advance will have to comply with
requirements as to licensing of originators and brokers, documentation and
procedures of credit agreements, and (in so far as will be applicable) as to
pre-contract disclosure. If such loan or further advance does not comply, it
will be unenforceable against the borrower as described above.
In December 2003, the DTI published a White Paper proposing amendments to
the CCA and to secondary legislation made under it. In June 2004, secondary
legislation was made on: (a) amending requirements as to documentation of credit
agreements, coming into force on 31st May 2005, or 31st August 2005 for
agreements given to the borrower for signature but not made before 31 May 2005;
(b) pre-contract disclosure, coming into force on 31st May, 2005; and (c)
replacing the formula for calculating the maximum amount payable on early
settlement with a formula more favourable to the borrower, coming into force on
31st May, 2005 for new agreements or on 31st May, 2007 or 31st May, 2010
(depending on the term of the agreement) for agreements existing before 31st
May, 2005. Draft amendments to the CCA expected at the end of 2004 may include:
(a) removing the financial limit, save for certain
business-to-business lending;
54
(b) strengthening the licensing regime;
(c) reforming the law on extortionate credit, and in February 2004 the
DTI announced its intention that such change will have
retrospective effect on existing agreements; and
(d) introducing alternative dispute resolution procedures outside the
courts for consumer credit agreements.
Further amendments to the CCA and further secondary legislation made
under it are expected at an unspecified time.
In the United Kingdom, regulation of residential mortgage business by the
FSA under the Financial Services and Markets Act 2000 (the "FSMA") came into
effect on 31 October 2004, the date known as "N(M)". Entering into, arranging,
advising on and administering regulated mortgage contracts, and agreeing to do
any of these things, are (subject to applicable exemptions) regulated activities
under the FSMA.
A credit agreement is a regulated mortgage contract under the FSMA if, at
the time it is entered into on or after N(M): (a) the borrower is an individual
or trustee; (b) the contract provides for the obligation of the borrower to
repay to be secured by a first legal mortgage on land (other than timeshare
accommodation) in the UK; and (c) at least 40% of that land is used, or is
intended to be used, as or in connection with a dwelling by the borrower or (in
case of credit provided to trustees) by an individual who is a beneficiary of
the trust, or by a related person.
The main effects are that, unless an exclusion or exemption applies: (a)
each entity carrying on a regulated mortgage activity has to hold authorisation
and permission from the FSA to carry on that activity; and (b) generally, each
financial promotion relating to a regulated mortgage contract has to be issued
or approved by a person holding authorisation and permission from the FSA. If
requirements as to authorisation and permission of lenders and brokers or as to
issue and approval of advertisements are not complied with, a regulated mortgage
contract will be unenforceable against the borrower except with the approval of
a court. An unauthorised person who administers a regulated mortgage contract
entered into on or after N(M) may commit a criminal offence, but this will not
render the contract unenforceable against the borrower.
The seller is required to hold, and holds, authorisation and permission
to enter into and to administer and, where applicable, to advise on regulated
mortgage contracts. Subject to any exemption, brokers will be required to hold
authorisation and permission to arrange and, where applicable, to advise on
regulated mortgage contracts.
The issuer and mortgages trustee are not and do not propose to be
authorised persons under the FSMA. The issuer and mortgages trustee do not
require authorisation in order to acquire legal or beneficial title to a
regulated mortgage contract. The issuer and mortgages trustee do not carry on
the regulated activity of administering in relation to regulated mortgage
contracts by having them administered pursuant to an administration agreement by
an entity having the required FSA authorisation and permission. If such
administration agreement terminates, however, the issuer and mortgages trustee
will have a period of not more than one month in which to arrange for mortgage
administration to be carried out by a replacement administrator having the
required FSA authorisation and permission. In addition, from N(M) no variation
has been or will be made to the loans and no further advance has been or will be
made in relation to a loan, where it would result in the issuer, Funding 1,
Funding 2 or the mortgages trustee arranging, advising on, administering or
entering into a regulated mortgage contract or agreeing to carry on any of these
activities, if the issuer, Funding 1, Funding 2 or the mortgages trustee would
be required to be authorised under the FSMA to do so.
The FSA Mortgages: Conduct of Business Sourcebook ("MCOB"), which sets
out its rules for regulated mortgage activities, came into force on 31 October
2004. These rules cover, inter alia, certain pre-origination matters such as
financial promotion and pre-application illustrations, pre-contract and
start-of-contract and post-contract disclosure, contract changes, charges, and
arrears and repossessions. FSA rules for prudential and authorisation
requirements for mortgage firms and insurance intermediaries, and for extending
the appointed representatives regime, came into force on 31 October 2004 for
mortgages, and will come into force on 14 January 2005 for general insurance.
55
A borrower who is a private person is entitled to claim damages for loss
suffered as a result of any contravention by an authorised person of an FSA
rule, and may set-off the amount of the claim against the amount owing by the
borrower under the loan or any other loan that the borrower has taken (or
exercise analogous rights in Scotland). Any such set-off may adversely affect
our ability to make payments on the issuer notes.
So as to avoid dual regulation, regulated mortgage contracts will not be
regulated by the CCA. This exemption only affects credit agreements made on or
after N(M), and credit agreements made before N(M) but subsequently changed such
that a new contract is entered into on or after N(M) and constitutes a regulated
mortgage contract. A court order under section 126 of the CCA is, however,
necessary to enforce a mortgage securing a regulated mortgage contract that
would, apart from this exemption, be regulated by the CCA or be treated as such.
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 or compliance costs 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.
Prior to N(M), in the United Kingdom, self-regulation of mortgage
business existed under the Mortgage Code (the "CML CODE") issued by the Council
of Mortgage Lenders (the "CML"). Halifax subscribes to the CML Code and since
N(M), as an authorised person, is subject to the FSA requirements in MCOB.
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 required by the
FSA. UK lenders generally were 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 original 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 not exceeding euro
20,000 are 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 original form, mortgage loans which do not comply with these
requirements may be unenforceable. Significantly, in its original form, 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.
There has been significant opposition from the European Parliament to the
original form of the proposed directive. On 13th February, 2004, the Committee
of Legal Affairs and the Internal Market published the European Parliament's
amendments to the proposed draft. These amendments provide
56
that (subject to certain exceptions) loans not exceeding euro 100,000 will be
regulated, but that the proposed directive will not apply to any loan secured by
a mortgage on land, and will not apply to any loan originated before national
implementing legislation comes into force. On 20th April, 2004, the European
Parliament voted on its first reading on the proposed directive. The European
Commission is expected to publish a further re-drafted form of the proposed
directive later in 2004 which, it is understood, will include equity release.
There are differences in opinion as to the extent to which mortgage loans should
be included in the scope of the proposed directive, which may be substantially
further amended before it is ultimately brought into effect.
The proposal is unlikely to come into force before 2006 as the
co-decision procedure of the European Parliament and of the Council, 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.
Until the final text of the directive is decided and the details of the
United Kingdom implementing legislation are published, it is not certain what
effect the adoption and implementation of the directive would have 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.
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 "1999 REGULATIONS"), which, together with (in so far as
applicable) the Unfair Terms in Consumer Contracts Regulations 1994 (together
with the 1999 Regulations, the "UTCCR"), 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 enjoin (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 or any other loan that the borrower has taken. 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 the 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. The FSA has agreed
with the OFT to take responsibility for the enforcement of the UTCCR in mortgage
agreements. It is expected that the FSA will issue guidance on interest
variation terms shortly.
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 1999 Regulations
into a single piece of legislation and a final report, together
57
with a bill on unfair terms, is expected in December 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.
No assurance can be given that changes in the 1999 Regulations, if
enacted, or changes to guidance on interest variation terms, if adopted, will
not 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.
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 activities and transactions under
its jurisdiction 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 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 (pound)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
(pound)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 (pound)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
58
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.
As the Financial Ombudsman Service is required to make decisions on the
basis of, among other things, the principles of fairness, it is not possible to
predict how any future decision of the Financial Ombudsman Service would affect
the ability of the issuer to repay the issuer notes.
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%, 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 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 been enacted in past
years, 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
59
turnover is not more than (pound)5.6 million, (ii) its balance sheet total is
not more than (pound)2.8 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. 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 (pound)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 at the date
of filing for a moratorium has incurred a liability (including a present, future
or contingent liability) of at least (pound)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.
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 (pound)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 (pound)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 appointment of the
administrator
60
proposed by the directors or the company or appoint an alternative
administrator, although the moratorium will take effect immediately after notice
is given. If the qualifying floating charge holder does not respond to the
directors' or company's 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 administration 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% of the
first (pound)10,000 of floating charge realisations plus 20% of the floating
charge realisations thereafter, provided that such amount may not exceed
(pound)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
and the security created by the second supplemental Funding 1 deed of charge 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, beneficial ownership
of the issuer notes (other than the series 3 class A issuer notes in definitive
registered form) will only be recorded in book-entry form with DTC, Euroclear or
Clearstream, Luxembourg. The lack of issuer notes (other than the series 3 class
A issuer notes in definitive registered form) in physical form could, among
other things:
* result in payment delays on such 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 such issuer notes if issuer
notes in physical form are required by the party demanding the
pledge; and
* hinder your ability to resell such 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
61
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 OR
PERMIT US TO REDEEM OR PURCHASE YOUR ISSUER NOTES
The Basel Committee on Banking Supervision has issued proposals for
reform of the 1988 Capital Accord and has proposed a framework which places
enhanced emphasis on market discipline and sensitivity to risk. The third
consultative paper on the New Basel Capital Accord was issued on 29th April,
2003, with the consultation period ending on 31st July, 2003. The Committee
announced on 11th May, 2004 that it has achieved consensus on the remaining
issues and published the text of the new framework on 26th June, 2004. This text
will serve as the basis for national rule-making and approval processes to
continue and for banking organisations to complete their preparations for
implementation of the New Basel Capital Accord. The Committee confirmed that it
is currently intended that the various approaches under the New Basel Capital
Accord will be implemented in stages, some from year-end 2006; the most advanced
at year-end 2007. Consequently, you should consult your own advisers as to the
consequences to and effect on you of the proposed implementation of the New
Basel Capital Accord. The European Commission issued its consultative paper on
the EU Capital Adequacy Directive ("CAD 3") on 14th July, 2004. CAD 3 will
implement the New Basel Capital Accord in the EU capital adequacy framework and
is proceeding on a parallel track to the New Basel Capital Accord. If the New
Basel Capital Accord is adopted in its current form (including via CAD 3) the
proposals could affect the risk weighting of the issuer notes in respect of
certain investors if those investors are regulated in a manner which will be
affected by the proposals.
We may, under certain circumstances relating to implementation of the New
Basel Capital Accord in the United Kingdom, as described in number 5(F)
(Redemption or purchase following a regulatory event) in the section "TERMS AND
CONDITIONS OF THE OFFERED ISSUER NOTES", require you to sell your issuer notes
to us or redeem your issuer notes.
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 [(pound)[__]= 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[__], 2005. 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 [TO BE UPDATED]
PERIOD
ENDED YEARS ENDED 31ST DECEMBER,
[__] -------------------------------------------------------------------
2005 2004 2003 2002 2001 2000
------------------------------------------------------------------------------------
Last(1) .................... [__] [__] 1.7858 1.6100 1.4546 1.4930
Average(2) ................. [__] [__] 1.6359 1.5038 1.4407 1.5160
High........................ [__] [__] 1.7858 1.6100 1.5038 1.6537
Low......................... [__] [__] 1.5541 1.4082 1.3727 1.3977
- ------------------------
Notes:
(1) 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 daily exchange rate during the period.
Source: Bloomberg
63
THE ISSUER
INTRODUCTION
The issuer was incorporated in England and Wales on 12 January, 2005
(registered number 05330776) and is a public limited company under the Companies
Act 1985. The authorised share capital of the issuer comprises 50,000 ordinary
shares of (pound)1 each. The issued share capital of the issuer comprises 50,000
ordinary shares of (pound)1 each, 49,998 of which are partly paid to .25 each
and 2 of whiCH are fully paid and all of which are beneficially owned by
Holdings (see "HOLDINGS"). The registered office of the issuer is Blackwell
House, Guildhall Yard, London EC2V 5AE.
The issuer is organised as a special purpose company. The issuer has no
subsidiaries. The seller does not own directly or indirectly any of the share
capital of Holdings or the issuer.
The principal objects of the issuer are set out in its memorandum of
association and include:
* lending money and giving credit, with or without security;
* borrowing or raising money and obtaining credit or finance; and
* securing payment or repayment of money credit or finance by any security
over the issuer's property.
The issuer was established to issue the issuer notes and to make the
issuer term AAA advances, the issuer term AA advances and the issuer term BBB
advances to Funding 1.
The issuer has not engaged, since its incorporation, in any material
activities other than those incidental to its incorporation as a public company
under the Companies Act 1985 and to the proposed issue of the issuer notes and
to the authorisation of the other issuer transaction documents referred to in
this prospectus.
There is no intention to accumulate surplus cash in the issuer except in
the circumstances set out in "SECURITY FOR THE ISSUER'S OBLIGATIONS".
The accounting reference date of the issuer is the last day of December.
DIRECTORS AND SECRETARY
The following table sets out the directors of the issuer and their
respective business addresses and occupations.
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ---------------------------- -------------------------- ----------------------
SFM Directors Limited....... Blackwell House Director of special
Guildhall Yard purpose companies
London EC2V 5AE
SFM Directors (No. 2) Blackwell House Director of special
Limited..................... Guildhall Yard purpose companies
London EC2V 5AE
David Balai................. HBOS Treasury Services plc Head of Mortgage
33 Old Broad Street Securitisation and
London EC2N 1HZ Covered Bonds
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, the making of 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[__],
2005:
(POUND)
-----------------
AUTHORISED SHARE CAPITAL
Ordinary shares of (pound)1 each............................. 50,000.00
ISSUED SHARE CAPITAL
2 ordinary shares of (pound)1 each fully paid................ 2.00
49,998 ordinary shares each one quarter paid................. 12,499.50
-----------------
12,501.50
=================
The issuer has no loan capital, term loans, other borrowings or
indebtedness or contingent liabilities or guarantees as at such date.
There has been no material change in the capitalisation, indebtedness,
guarantees or contingent liabilities of the issuer since such date.
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 3 issuer
notes, 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 issuer start-up loan, and (2) the additional offering
expenses otherwise payable by the issuer in connection with the issuance of the
offered issuer notes will be partly paid by the seller and partly paid by the
underwriters on the issuer's behalf, see "UNDERWRITING".
66
HALIFAX PLC [TO BE UPDATED]
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 (pound)419,981 million at 30th
June, 2004. HBOS's consolidated profit on ordinary activities before tax for the
six months ended 30th June, 2004 was (pound)2,161 million.
The seller had total consolidated assets of (pound)159,787 million at
31st December, 2003. The seller's consolidated profit on ordinary activities
before tax for the year ended 31st December, 2003 was (pound)1,213 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
(pound)128.1 billion, compared with (pound)122.1 billion as at 31st December,
2002.
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 Halifax plc 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
67
the seller to borrowers. In March 2001 the seller introduced the Total
Mortgage Protection Policy, of which the mortgage repayment cover element
is underwritten by Halifax Insurance Ireland Limited. In a few instances,
the seller still offers mortgage repayment insurance. In these instances,
the insurance continues to be underwritten by Halifax Insurance Ireland
Limited.
68
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
(pound)1 each. The issued share capital of Funding 1 comprises one ordinary
share of (pound)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
Guildhall Yard purpose companies
London EC2V 5AE
SFM Directors (No. 2) Blackwell House Director of special
Limited.................... Guildhall Yard purpose companies
London EC2V 5AE
David Balai................. HBOS Treasury Services plc Head of Mortgage
33 Old Broad Street Securitisation and
London EC2N 1HZ Covered Bonds
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.
69
CAPITALISATION STATEMENT
The following table shows the capitalisation of Funding 1 as at[o, 2005]:
(POUND)
-----------------
AUTHORISED SHARE CAPITAL
Ordinary shares of (pound)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
=================
The indebtedness of Funding 1 as at such date consists entirely of term
advances made to it by the previous issuers, all of which are secured and
unguaranteed. The outstanding amounts of such term advances as of such date are
set out in note 19(c)(vii) of the notes to the financial statements of Funding 1
set out in Appendix D.
Other than such term advances, Funding 1 has no loan capital, term loans,
other borrowings or indebtedness or contingent liabilities or guarantees as at
such date.
Other than in connection with the issuance of the fourth issuer notes on
12th March, 2004 and the fifth issuer notes on 22nd July, 2004 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 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.
70
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 (pound)2 divided into 2
ordinary shares of (pound)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 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 Mortgage
33 Old Broad Street Securitisation and
London EC2N 1HZ Covered Bonds
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
The company secretary of the mortgages trustee is: SFM Offshore Limited,
47 Esplanade, St Helier, Jersey, JE1 0BD.
71
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 (pound)100 divided into 100
ordinary shares of (pound)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 seller does not
own directly or indirectly any of the share capital of Holdings.
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) Blackwell House Director of special
Limited Guildhall Yard purpose companies
London EC2V 5AE
David Balai HBOS Treasury Head of Mortgage
Services plc Securitisation and
33 Old Broad Street Covered Bonds
London EC2N 1HZ
David Balai is an employee of a company in the same group of companies as
the seller.
72
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
Claudia Wallace Administration Manager
The business address of the directors of SFM Directors Limited is
Blackwell House, Guildhall Yard, London EC2V 5AE.
The directors of SFM Directors (No. 2) Limited and their respective
occupations are:
NAME BUSINESS OCCUPATION
- -------------------------------------------------------- ----------------------
Jonathan Keighley Company Director
James Macdonald Company Director
Robert Berry Company Director
Annika Aman-Goodwille Company Secretary
Paivi Helena Whitaker Company Secretary
Claudia Wallace 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.
73
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 (pound)1 each. The issued share capital of the
post-enforcement call option holder comprises one ordinary share of (pound)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) Blackwell House Director of special
Limited Guildhall Yard purpose companies
London EC2V 5AE
David Balai HBOS Treasury Head of Mortgage
Services plc Securitisation and
33 Old Broad Street Covered Bonds
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.
74
THE ISSUER SWAP PROVIDERS [TO BE INSERTED UPON SELECTION]
The information contained in this section of the 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.
75
THE FUNDING 1 LIQUIDITY FACILITY PROVIDER [TO BE UPDATED]
JPMorgan Chase Bank is a wholly owned bank subsidiary of JPMorgan 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 30th June, 2004, JPMorgan Chase Bank had total assets of
$654.6 billion, total net loans of $184.8 billion, total deposits of $341.7
billion, and total stockholder's equity of $37.5 billion. As of 31st December,
2003, JPMorgan Chase Bank had total assets of $628.7 billion, total net loans of
$181.1 billion, total deposits of $326.7 billion, and total stockholder's equity
of $37.5 billion.
Effective 1st July, 2004, Bank One Corporation merged with and into
JPMorgan Chase & Co., the surviving corporation in the merger, pursuant to the
Agreement and Plan of Merger dated as of 14th January, 2004. On 20th July, 2004,
J.P. Morgan Chase & Co. changed its name to JPMorgan Chase & Co. The change
eliminated the periods and space in JPMorgan so that the style of the formal
name of the company is now consistent with the style used in referring to the
JPMorgan Chase brand.
Additional information, including the most recent Form 10-K for the year
ended 31st December, 2003 of JPMorgan Chase & Co. and additional annual,
quarterly and current reports filed with the Securities and Exchange Commission
by JPMorgan Chase & Co., as they become available, may be obtained from the
Securities and Exchange Commission's Internet site (http://www.sec.gov), or
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, JPMorgan
Chase & Co., 270 Park Avenue, New York, New York 10017.
The information in the preceding three 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. 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 above is
correct as of any time subsequent to its date.
76
DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES
AND THE PREVIOUS INTERCOMPANY LOANS
The previous issuers 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.
77
SERIES OF PREVIOUS NOTES ISSUED BY
PERMANENT FINANCING (NO. 1) 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:.............. $750,000,000 $26,000,000 $26,000,000 $750,000,000 $26,000,000 $26,000,000
Interest rate:......................... One-month Three-month Three-month 4.20% p.a. Three-month Three-month
USD-LIBOR USD-LIBOR USD-LIBOR USD-LIBOR USD-LIBOR
+ margin + margin + margin + margin + margin
Margin:................................ -0.02% p.a. 0.27% p.a. 1.05% p.a. N/A 0.28% p.a. 1.18% p.a.
Until interest payment date falling in: June 2003 June 2007 June 2007 June 2005 June 2007 June 2007
Three-month
USD-LIBOR
And thereafter:........................ N/A 0.54% p.a. 2.05% p.a. +0.16% 0.56% p.a. 2.18% p.a.
Initial interest periods:.............. Monthly Quarterly Quarterly Semi-annually Quarterly Quarterly
Alternative interest periods:.......... Quarterly N/A N/A Quarterly N/A N/A
Issuance date:......................... June 2002 June 2002 June 2002 June 2002 June 2002 June 2002
Scheduled redemption date(s):.......... June 2003 N/A N/A June 2005 N/A N/A
Final maturity date:................... June 2003 June 2042 June 2042 June 2007 June 2042 June 2042
Ratings as at 14th June, 2002
(S&P/ Moody's/Fitch):.................. A-1+/P-1/F1+ AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB
Ratings as at [__], 2005
(S&P/Moody's/Fitch):................... N/A N/A N/A [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
SERIES 3 SERIES 3 SERIES 3 SERIES 4 SERIES 4
CLASS A CLASS B CLASS C CLASS A1 CLASS A2
-------------- ----------- -------------- -------------- ------------------
Initial principal amount:.............. $1,100,000,000 $38,500,000 $38,500,000 [e]750,000,000 [GBP]1,000,000,000
Interest rate:......................... Three-month Three-month Three-month 5.10% p.a. Three-month
USD-LIBOR USD-LIBOR USD-LIBOR sterling LIBOR
+ margin + margin + margin + margin
Margin:................................ 0.125% p.a. 0.30% p.a. 1.20% p.a. N/A 0.18% p.a.
Until interest payment date falling in: N/A June 2007 June 2007 June 2007 June 2007
And thereafter:........................ N/A 0.60% p.a. 2.20% p.a. 0.20% p.a. 0.36% p.a.
Initial interest periods:.............. Quarterly Quarterly Quarterly Annually Quarterly
Alternative interest periods:.......... N/A N/A N/A Quarterly N/A
Issuance date:......................... June 2002 June 2002 June 2002 June 2002 June 2002
Scheduled redemption date(s):.......... December 2005 N/A N/A June 2007 N/A
Final maturity date:................... December 2007 June 2042 June 2042 June 2009 June 2042
Ratings as at 14th June, 2002
(S&P/ Moody's/Fitch):.................. AAA /Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AAA /Aaa/AAA
Ratings as at [__], 2005
(S&P/Moody's/Fitch):................... [AAA /Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB] [AAA/Aaa/AAA] [AAA /Aaa/AAA]
SERIES 4 SERIES 4
CLASS B CLASS C
--------------- ---------------
Initial principal amount:.............. [GBP]52,000,000 [GBP]52,000,000
Interest rate:......................... Three-month Three-month
sterling LIBOR sterling LIBOR
+ margin + margin
Margin:................................ 0.30% p.a. 1.20% p.a.
Until interest payment date falling in: June 2007 June 2007
And thereafter:........................ 0.60% p.a. 2.20% p.a.
Initial interest periods:.............. Quarterly Quarterly
Alternative interest periods:.......... N/A N/A
Issuance date:......................... June 2002 June 2002
Scheduled redemption date(s):.......... N/A N/A
Final maturity date:................... June 2042 June 2042
Ratings as at 14th June, 2002
(S&P/ Moody's/Fitch):.................. AA/Aa3/AA BBB/Baa2/BBB
Ratings as at [__], 2005
(S&P/Moody's/Fitch):................... [AA/Aa3/AA] [BBB/Baa2/BBB]
* previously redeemed
SERIES OF PREVIOUS NOTES ISSUED BY
PERMANENT FINANCING (NO. 2) 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:.... $1,000,000,000 $34,000,000 $34,000,000 $1,750,000,000 $61,000,000 $61,000,000
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% 0.23% p.a. 1.25% p.a 0.15% p.a. 0.33% p.a. 1.45% p.a.
Until interest payment date
falling in:.................. N/A December 2008 December 2008 December 2008 December 2008 December 2008
And thereafter:.............. N/A 0.46% 2.25% p.a N/A 0.66% p.a. 2.45% p.a.
Initial interest periods:.... Monthly Quarterly Quarterly Quarterly Quarterly Quarterly
Alternative interest periods: Quarterly N/A N/A Quarterly N/A N/A
Issuance date:............... March 2003 March 2003 March 2003 March 2003 March 2003 March 2003
Scheduled redemption date(s): March 2004 N/A N/A September 2005 N/A N/A
Final maturity date:......... March 2004 June 2042 June 2042 September 2007 June 2042 June 2042
Ratings as at 6th March, 2003
(S&P/Moody's/Fitch):......... A-1+/P-1/F1+ AA/Aa3AA BBB/Baa2BBB AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB
Ratings as at [__], 2005
(S&P/Moody's/Fitch):......... N/A N/A N/A [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
SERIES 3 SERIES 3 SERIES 3 SERIES 4 SERIES 4 SERIES 4
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
---------------- ------------- -------------- -------------- ------------- --------------
Initial principal amount:.... [e]1,250,000,000 [e]43,500,000 [e]43,500,000 $1,750,000,000 [e]56,500,000 [e]56,500,000
Interest rate:............... Three-month Three-month Three-month Three-month Three-month Three-month
EURIBOR EURIBOR EURIBOR USD-LIBOR EURIBOR EURIBOR
+ margin + margin + margin + margin + margin + margin
Margin:...................... 0.23% p.a. 0.43% p.a. 1.45% p.a. 0.22% p.a. 0.45% p.a. 1.45% p.a.
Until interest payment date
falling in:.................. N/A December 2008 December 2008 December 2008 December 2008 December 2008
And thereafter:.............. 0.46% p.a. 0.86% p.a. 2.45% p.a. N/A 0.90% p.a. 2.45% 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:............... March 2003 March 2003 March 2003 March 2003 March 2003 March 2003
Scheduled redemption date(s): March 2006 and N/A N/A December 2007 N/A N/A
June 2006
Final maturity date:......... December 2032 June 2042 June 2042 December 2009 June 2042 June 2042
Ratings as at 6th March, 2003
(S&P/Moody's/Fitch):......... AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB
Ratings as at [__], 2005
(S&P/Moody's/Fitch):......... [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB] [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
SERIES 5 SERIES 5 SERIES 5
CLASS A CLASS B CLASS C
---------------- --------------- ---------------
Initial principal amount:.... [GBP]750,000,000 [GBP]26,000,000 [GBP]26,000,000
Interest rate:............... Three-month Three-month Three-month
sterling LIBOR sterling LIBOR sterling LIBOR
+ margin + margin + margin
Margin:...................... 0.25% p.a. 0.45% p.a. 1.45% p.a.
Until interest payment date
falling in:..................
And thereafter:.............. 0.50% p.a. 0.90% p.a. 2.45% p.a.
Initial interest periods:.... Quarterly Quarterly Quarterly
Alternative interest periods: N/A N/A N/A
Issuance date:............... March 2003 March 2003 March 2003
Scheduled redemption date(s): N/A N/A N/A
Final maturity date:......... June 2042 June 2042 June 2042
Ratings as at 6th March, 2003
(S&P/Moody's/Fitch):......... AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB
Ratings as at [__], 2005
(S&P/Moody's/Fitch):......... [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
* previously redeemed
78
SERIES OF PREVIOUS NOTES ISSUED BY
PERMANENT FINANCING (NO. 3) PLC
Series 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2
class A CLASS B CLASS C CLASS A CLASS B
-------------- ------------- -------------- -------------- -------------
Initial principal amount:.............. $1,100,000,000 $38,000,000 $38,000,000 $1,700,000,000 $59,000,000
Interest rate:......................... One-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:................................ 0.04% p.a. 0.18% p.a. 0.95% p.a. 0.11% p.a. 0.25% p.a.
Until interest payment date falling in: N/A December 2010 December 2010 N/A December 2010
And thereafter:........................ N/A 0.36% p.a. 1.90% p.a. N/A 0.50% p.a.
Initial interest periods............... Monthly Quarterly Quarterly Quarterly Quarterly
Alternative interest periods........... Quarterly N/A N/A N/A N/A
Issuance date:......................... November 2003 November 2003 November 2003 November 2003 November 2003
Scheduled redemption date(s):.......... December 2004 N/A N/A September 2006 N/A
Final maturity date:................... December 2004 June 2042 June 2042 September 2010 June 2042
Ratings as at 25th November, 2003
(S&P/Moody's/Fitch):................... A-1+/P-1/F1+ AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA
Rating as at [__], 2005
(S&P/Moody's/Fitch):................... [A-1+/P-1/F1+] [AA/Aa3/AA] [BBB/Baa2/BBB] [AAA/Aaa/AAA] [AA/Aa3/AA]
SERIES 2 SERIES 3 SERIES 3 SERIES 3 SERIES 4
CLASS C CLASS A CLASS B CLASS C CLASS A1
-------------- -------------- ------------- -------------- --------------
Initial principal amount:.............. $59,000,000 $1,500,000,000 $52,000,000 $52,000,000 [e]700,000,000
Interest rate:......................... Three-month Three-month Three-month Three-month Three-month
USD-LIBOR + USD-LIBOR + USD-LIBOR + USD-LIBOR + EURIBOR +
margin margin margin margin margin
Margin:................................ 1.05% p.a. 0.18% p.a. 0.35% p.a. 1.15% p.a. 0.19% p.a.
Until interest payment date falling in: December 2010 December 2010 December 2010 December 2010 December 2010
And thereafter:........................ 2.05% p.a. 0.36% p.a. 0.70% p.a. 2.15% p.a. 0.38% p.a.
Initial interest periods............... Quarterly Quarterly Quarterly Quarterly Quarterly
Alternative interest periods........... N/A N/A N/A N/A N/A
Issuance date:......................... November 2003 November 2003 November 2003 November 2003 November 2003
June 2008 and March 2009 and
Scheduled redemption date(s):.......... N/A September 2008 N/A N/A June 2009
Final maturity date:................... June 2042 September 2033 June 2042 June 2042 September 2033
Ratings as at 25th November, 2003
(S&P/Moody's/Fitch):................... BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA
Rating as at [__], 2005
(S&P/Moody's/Fitch):................... [BBB/Baa2/BBB] [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB] [AAA/Aaa/AAA]
SERIES 4 SERIES 4 SERIES 4 SERIES 5 SERIES 5
CLASS A2 CLASS B CLASS C CLASS A CLASS B
---------------- ------------- ------------- --------------------------- -------------
Initial principal amount:.............. [GBP]750,000,000 [e]62,000,000 [e]62,000,000 [GBP]400,000,000 [e]20,000,000
Interest rate:......................... Three-month Three-month Three-month 5.521% p.a. Three-month
sterling LIBOR + EURIBOR + EURIBOR + EURIBOR +
margin margin margin margin
Margin:................................ 0.19% p.a. 0.39% 1.18% p.a. N/A 0.45% p.a.
Until interest payment date falling in: December 2010 December 2010 December 2010 December 2010 December 2010
Three-months sterling LIBOR
+ margin of
And thereafter:........................ 0.38% p.a. 0.78% p.a. 2.18% p.a. 0.434% p.a. 0.90% p.a.
Initial interest periods............... Quarterly Quarterly Quarterly Annually Quarterly
Alternative interest periods........... N/A N/A N/A Annually N/A
Issuance date:......................... November 2003 November 2003 November 2003 November 2003 November 2003
March 2009 and
Scheduled redemption date(s):.......... June 2009 N/A N/A N/A N/A
Final maturity date:................... September 2033 June 2042 June 2042 June 2042 June 2042
Ratings as at 25th November, 2003
(S&P/Moody's/Fitch):................... AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA
Rating as at [__], 2005
(S&P/Moody's/Fitch):................... [AAA/Aaa/AAA] [AA/Aa3/AA] [AA/Aa3/AA] [BBB/Baa2/BBB] [AAA/Aaa/AAA]
SERIES 5
CLASS C
-------------
Initial principal amount:.............. [e]20,000,000
Interest rate:......................... Three-month
EURIBOR +
margin
Margin:................................ 1.23% p.a.
Until interest payment date falling in: December 2010
And thereafter:........................ 2.23% p.a.
Initial interest periods............... Quarterly
Alternative interest periods........... N/A
Issuance date:......................... November 2003
Scheduled redemption date(s):.......... N/A
Final maturity date:................... June 2042
Ratings as at 25th November, 2003
(S&P/Moody's/Fitch):................... BBB/Baa2/BBB
Rating as at [__], 2005
(S&P/Moody's/Fitch):................... [AA/Aa3/AA]
SERIES OF PREVIOUS NOTES ISSUED BY
PERMANENT FINANCING (NO. 4) PLC
Series 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2 SERIES 2
class A CLASS B CLASS M CLASS A CLASS B CLASS M
-------------- ----------- ----------- -------------- ------------ -----------
Initial principal amount:.............. $1,500,000,000 $78,100,000 $56,500,000 $2,400,000,000 $100,700,000 $59,900,000
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:................................ 0.05% p.a 0.14% p.a 0.23% p.a 0.07% p.a 0.18% p.a 0.33% p.a
Until interest payment date falling in: N/A March 2011 March 2011 N/A March 2011 March 2011
And thereafter:........................ N/A 0.28% p.a 0.46% p.a N/A 0.36% p.a 0.66% 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:......................... March 2004 March 2004 March 2004 March 2004 March 2004 March 2004
Scheduled redemption date(s):.......... March 2005 N/A N/A March 2007 N/A N/A
Final maturity date:................... March 2005 June 2042 June 2042 March 2009 June 2042 June 2042
Ratings as at 12th March, 2004
(S&P/Moody's/Fitch):................... A-1+/P-1/F1+ AA/Aa3/AA A/A2/A AAA/Aaa/AAA AA/Aa3/AA A/A2/A
Rating as at [__], 2005
(S&P/Moody's/Fitch):................... [A-1+/P-1/F1+] [AA/Aa3/AA] [A/A2/A] [AAA/Aaa/AAA] [AA/Aa3/AA] [A/A2/A]
SERIES 2 SERIES 3 SERIES 3 SERIES 3 SERIES 3
CLASS C CLASS A CLASS B CLASS M CLASS C
-------------- -------------- ----------- ----------- --------------
Initial principal amount:.............. $82,200,000 $1,700,000,000 $75,800,000 $40,400,000 $55,400,000
Interest rate:......................... 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:................................ 0.72% p.a 0.14% p.a 0.23% p.a 0.37% p.a 0.80% p.a
Until interest payment date falling in: March 2011 March 2011 March 2011 March 2011 March 2011
And thereafter:........................ 1.44% p.a 0.28% p.a 0.46% p.a 0.74% p.a 1.60% p.a
Initial interest periods Quarterly Quarterly Quarterly Quarterly Quarterly
Alternative interest periods........... N/A N/A N/A N/A N/A
Issuance date:......................... March 2004 March 2004 March 2004 March 2004 March 2004
December 2008
Scheduled redemption date(s):.......... N/A and March 2009 N/A N/A N/A
Final maturity date:................... June 2042 March 2024 June 2042 June 2042 June 2042
Ratings as at 12th March, 2004
(S&P/Moody's/Fitch):................... BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA A/A2/A BBB/Baa2/BBB
Rating as at [__], 2005
(S&P/Moody's/Fitch):................... [BBB/Baa2/BBB] [AAA/Aaa/AAA] [AA/Aa3/AA] [A/A2/A] [BBB/Baa2/BBB]
SERIES 4 SERIES 4 SERIES 4 SERIES 5
CLASS A CLASS B CLASS M CLASS A1
-------------------------------- ------------- ------------- --------------
Initial principal amount:.............. [e]1,500,000,000 [e]85,000,000 [e]62,500,000 [e]750,000,000
Interest rate:......................... Three-month Three-month Three-month 3.9615% p.a
EURIBOR + EURIBOR + EURIBOR +
margin margin margin
Margin:................................ 0.15% p.a 0.28% p.a 0.45% p.a N/A
Until interest payment date falling in: March 2011 March 2011 March 2011 March 2011
And thereafter:........................ 0.30% p.a 0.56% p.a 0.90% p.a Three-month
EURIBOR
+0.38% p.a
Initial interest periods Quarterly Quarterly Quarterly Annually
Alternative interest periods........... N/A N/A N/A Quarterly
Issuance date:......................... March 2004 March 2004 March 2004 March 2004
Scheduled redemption date(s):.......... September 2009 and December 2009 N/A N/A N/A
Final maturity date:................... March 2034 June 2042 June 2042 June 2042
Ratings as at 12th March, 2004
(S&P/Moody's/Fitch):................... AAA/Aaa/AAA AA/Aa3/AA A/A2/A AAA/Aaa/AAA
Rating as at [__], 2005
(S&P/Moody's/Fitch):................... [AAA/Aaa/AAA] [AA/Aa3/AA] [A/A2/A] [AAA/Aaa/AA]A]
SERIES 5 SERIES 5 SERIES 5 SERIES 5
CLASS A2 CLASS B CLASS M CLASS C
------------------ --------------- --------------- ---------------
Initial principal amount:.............. [GBP]1,100,000,000 [GBP]43,000,000 [GBP]32,000,000 [GBP]54,000,000
Interest rate:......................... Three-month Three-month Three-month Three-month
sterling LIBOR sterling LIBOR sterling LIBOR sterling LIBOR
+ margin + margin + margin + margin
Margin:................................ 0.17% p.a 0.33% p.a 0.50% p.a 0.90% p.a
Until interest payment date falling in: March 2011 March 2011 March 2011 March 2011
And thereafter:........................ 0.34% p.a 0.66% p.a 1.00% p.a 1.80% p.a
Initial interest periods Quarterly Quarterly Quarterly Quarterly
Alternative interest periods........... N/A N/A N/A N/A
Issuance date:......................... March 2004 March 2004 March 2004 March 2004
Scheduled redemption date(s):.......... N/A N/A N/A N/A
Final maturity date:................... June 2042 June 2042 June 2042 June 2042
Ratings as at 12th March, 2004
(S&P/Moody's/Fitch):................... AAA/Aaa/AAA AA/Aa3/AA A/A2/A BBB/Baa2/BBB
Rating as at [__], 2005
(S&P/Moody's/Fitch):................... [AAA/Aaa/AAA] [AA/Aa3/AA] [A/A2/A] [BBB/Baa2/BBB]
79
SERIES OF PREVIOUS NOTES ISSUED BY PERMANENT FINANCING (NO. 5) PLC
SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2
CLASS A CLASS B CLASS C CLASS A CLASS B
-------------- ----------- -------------- -------------- -----------
Initial principal amount:......................... $1,250,000,000 $53,000,000 $44,000,000 $1,300,000,000 $56,400,000
Interest rate:.................................... One-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:........................................... -0.02% 0.14% 0.50% 0.11% 0.18%
Until interest payment date falling in:........... N/A June 2011 June 2011 N/A June 2011
And thereafter:................................... N/A 0.28% 1.00% N/A 0.36%
Initial interest periods.......................... Monthly Quarterly Quarterly Quarterly Quarterly
Alternative interest periods...................... Quarterly N/A N/A N/A N/A
Issuance date:.................................... July 2004 July 2004 July 2004 July 2004 July 2004
December 2006,
March 2007,
June 2007 and
Scheduled redemption date(s):..................... June 2005 N/A N/A September 2007 N/A
Final maturity date:.............................. June 2005 June 2042 June 2042 June 2011 June 2042
Ratings as at 19th July, 2004 (S&P/Moody's/Fitch): A-1+/P-1/F1+ AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA
Rating as at [__], 2005
(S&P/Moody's/Fitch):.............................. [A-1+/P-1/F1+] [AA/Aa3/AA] [BBB/Baa2/BBB] [AAA/Aaa/AAA] [AA/Aa3/AA]
SERIES 2 SERIES 3 SERIES 3 SERIES 3 SERIES 4
CLASS C CLASS A CLASS B CLASS C CLASS A
-------------- -------------- ----------- -------------- -----------------
Initial principal amount:......................... $46,200,000 $750,000,000 $32,500,000 $27,000,000 [e]1,000,000,000
Interest rate:.................................... Three-month Three-month Three-month Three-month Three-month
USD-LIBOR + USD-LIBOR + USD-LIBOR + USD-LIBOR + EURIBOR +
margin margin margin margin margin
Margin:........................................... 0.65% 0.16% 0.26% 0.82% 0.17%
Until interest payment date falling in:........... June 2011 June 2011 June 2011 June 2011 June 2011
And thereafter:................................... 1.30% 0.32% 0.52% 1.64% 0.34%
Initial interest periods.......................... Quarterly Quarterly Quarterly Quarterly Quarterly
Alternative interest periods...................... N/A N/A N/A N/A N/A
Issuance date:.................................... July 2004 July 2004 July 2004 July 2004 July 2004
March 2009 and September 2009
Scheduled redemption date(s):..................... N/A June 2009 N/A N/A and December 2009
Final maturity date:.............................. June 2042 June 2034 June 2042 June 2042 June 2042
Ratings as at 19th July, 2004 (S&P/Moody's/Fitch): BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA
Rating as at [__], 2005
(S&P/Moody's/Fitch):.............................. [BBB/Baa2/BBB] [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB] [AAA/Aaa/AAA]
SERIES 4 SERIES 4 SERIES 5 SERIES 5
CLASS B CLASS C CLASS A1 CLASS A2
------------- -------------- -------------------- ----------------
Initial principal amount:......................... [e]43,500,000 [e]36,000,000 [GBP]500,000,000 [GBP]750,000,000
Interest rate:.................................... Three-month Three-month 5.625% Three-month
EURIBOR + EURIBOR + sterling LIBOR +
margin margin margin
Margin:........................................... 0.33% 0.78% N/A 0.19%
Until interest payment date falling in:........... June 2011 June 2011 June 2009 June 2011
And thereafter:................................... 0.66% 1.56% Three-month 0.38%
sterling LIBOR
+0.16% (or
+0.32% after the
interest payment
date falling in June
2011
Initial interest periods.......................... Quarterly Quarterly Semi-annually Quarterly
Alternative interest periods...................... N/A N/A Quarterly N/A
Issuance date:.................................... July 2004 July 2004 July 2004 July 2004
Scheduled redemption date(s):..................... N/A N/A N/A N/A
Final maturity date:.............................. June 2042 June 2042 June 2042 June 2042
Ratings as at 19th July, 2004 (S&P/Moody's/Fitch): AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AAA/Aaa/AAA
Rating as at [__], 2005
(S&P/Moody's/Fitch):.............................. [AA/Aa3/AA] [BBB/Baa2/BBB] [AAA/Aaa/AAA] [AAA/Aaa/AAA]
SERIES 5 SERIES 5
CLASS B CLASS C
---------------- ----------------
Initial principal amount:......................... [GBP]47,000,000 [GBP]39,000,000
Interest rate:.................................... Three-month Three-month
sterling LIBOR + sterling LIBOR +
margin margin
Margin:........................................... 0.35% 0.85%
Until interest payment date falling in:........... June 2011 June 2011
And thereafter:................................... 0.70% 1.70%
Initial interest periods.......................... Quarterly Quarterly
Alternative interest periods...................... N/A N/A
Issuance date:.................................... July 2004 July 2004
Scheduled redemption date(s):..................... N/A N/A
Final maturity date:.............................. June 2042 June 2042
Ratings as at 19th July, 2004 (S&P/Moody's/Fitch): AA/Aa3/AA BBB/Baa2/BBB
Rating as at [__], 2005
(S&P/Moody's/Fitch):.............................. [AA/Aa3/AA] [BBB/Baa2/BBB]
80
SERIES OF PREVIOUS NOTES ISSUED BY PERMANENT FINANCING (NO. 6) PLC
Series 1 SERIES 1 SERIES 1
class A CLASS B CLASS C
-------------- -------------- --------------
Initial principal amount:................... $1,000,000,000 $35,800,000 $34,700,000
Interest rate:.............................. One-month Three-month Three-month
USD- LIBOR - USD-LIBOR + USD-LIBOR +
margin margin margin
Margin:..................................... 0.03% p.a. 0.10% p.a. 0.70% p.a.
Until interest payment date falling in:..... N/A September 2011 September 2011
And thereafter:............................. N/A 0.20% p.a. 0.70% p.a.
Initial interest periods.................... Monthly Quarterly Quarterly
Alternative interest periods................ Quarterly N/A N/A
Issuance date:.............................. November 2004 November 2004 November 2004
Scheduled redemption date(s):............... September 2005 N/A N/A
Final maturity date:........................ September 2005 June 2042 June 2042
Ratings as at 5th November, 2004
(S&P/Moody's/Fitch):........................ A-1+/P-1/F1+ AA/Aa3/AA BBB/Baa2/BBB
Rating as at [__], 2005 (S&P/Moody's/Fitch): [A-1+/P-1/F1+] [AA/Aa3/AA] [BBB/Baa2/BBB]
SERIES 2 SERIES 2 SERIES 2
CLASS A CLASS B CLASS C
---------------- -------------- --------------
Initial principal amount:................... $1,000,000,000 $59,000,000 $59,000,000
Interest rate:.............................. Three-month Three-month Three-month
USD-LIBOR + USD-LIBOR + USD-LIBOR +
margin margin margin
Margin:..................................... 0.09% p.a. 0.14% p.a. 0.45% p.a.
Until interest payment date falling in:..... September 2011 September 2011 September 2011
And thereafter:............................. 0.18% p.a. 0.28% p.a. 0.90% p.a.
Initial interest periods.................... Quarterly Quarterly Quarterly
Alternative interest periods................ N/A N/A N/A
Issuance date:.............................. November 2004 November 2004 November 2004
March, June,
September and
Scheduled redemption date(s):............... December 2007 N/A N/A
Final maturity date:........................ December 2011 June 2042 June 2042
Ratings as at 5th November, 2004
(S&P/Moody's/Fitch):........................ AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB
Rating as at [__], 2005 (S&P/Moody's/Fitch): [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB]
SERIES 3 SERIES 3 SERIES 3 SERIES 4
CLASS A CLASS B CLASS C CLASS A
------------------ ---------------- ---------------- -----------------
Initial principal amount:................... [GBP]1,000,000,000 [GBP]35,300,000 [GBP]34,200,000 [e]750,000,000
Interest rate:.............................. Three-month Three-month Three-month Three-month
sterling-LIBOR + sterling-LIBOR + sterling-LIBOR + EURIBOR +
margin margin margin margin
Margin:..................................... 0.125% p.a. 0.23% p.a. 0.68% p.a. 0.14% p.a.
Until interest payment date falling in:..... September 2011 September 2011 September 2011 September 2011
And thereafter:............................. 0.25% p.a. 0.46% p.a. 1.36% p.a. 0.28% p.a.
Initial interest periods.................... Quarterly Quarterly Quarterly Quarterly
Alternative interest periods................ N/A N/A N/A N/A
Issuance date:.............................. November 2004 November 2004 November 2004 November 2004
December 2007
and March, June
and September December 2009
Scheduled redemption date(s):............... 2008 N/A N/A and March 2010
Final maturity date:........................ September 2032 June 2042 June 2042 June 2042
Ratings as at 5th November, 2004
(S&P/Moody's/Fitch):........................ AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA
Rating as at [__], 2005 (S&P/Moody's/Fitch): [AAA/Aaa/AAA] [AA/Aa3/AA] [BBB/Baa2/BBB] [AAA/Aaa/AAA]
SERIES 4 SERIES 4 SERIES 5 SERIES 5 SERIES 5
CLASS B CLASS C CLASS A1 CLASS A2 CLASS B
-------------- --------------- ---------------- ---------------- ----------------
Initial principal amount:................... [e]26,100,000 [e]25,300,000 [GBP]500,000,000 [GBP]500,000,000 [e]20,000,000
Interest rate:.............................. Three-month Three-month Three-month. Three-month Three-month
EURIBOR + EURIBOR + sterling LIBOR + sterling LIBOR + sterling LIBOR +
margin margin margin Margin margin
Margin:..................................... 0.23% 0.68% p.a. 0.15% p.a. 0.16% p.a. 0.31% p.a.
Until interest payment date falling in:..... September 2011 September 2011 September 2011 September 2011 September 2011
And thereafter:............................. 0.46% p.a. 1.36% p.a. 0.30% p.a. 0.32% p.a 0.62% p.a.
Initial interest periods.................... Quarterly Quarterly Quarterly Quarterly Quarterly
Alternative interest periods................ N/A N/A N/A N/A N/A
Issuance date:.............................. November 2004 November 2004 November 2004 November 2004 November 2004
Scheduled redemption date(s):............... N/A N/A N/A N/A N/A
Final maturity date:........................ June 2042 June 2042 June 2042 June 2042 June 2042
Ratings as at 5th November, 2004
(S&P/Moody's/Fitch):........................ AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AAA/Aaa/AAA AA/Aa3/AA
Rating as at [__], 2005 (S&P/Moody's/Fitch): [AA/Aa3/AA] [BBB/Baa2/BBB]] [AAA/Aaa/AAA] [AAA/Aaa/AAA [AA/Aa3/AA]
SERIES 5
CLASS C
----------------
Initial principal amount:................... [e]20,000,000
Interest rate:.............................. Three-month
sterling LIBOR +
margin
Margin:..................................... 0.80% p.a.
Until interest payment date falling in:..... September 2011
And thereafter:............................. 1.60% p.a.
Initial interest periods.................... Quarterly
Alternative interest periods................ N/A
Issuance date:.............................. November 2004
Scheduled redemption date(s):............... N/A
Final maturity date:........................ June 2042
Ratings as at 5th November, 2004
(S&P/Moody's/Fitch):........................ BBB/Baa2/BBB
Rating as at [__], 2005 (S&P/Moody's/Fitch): [BBB/Baa2/BBB]
81
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 loans to pay the seller for the
initial loans and additional loans (and their related security) sold by the
seller to the mortgages trustee or 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 issuer's primary asset is its previous intercompany loan. Neither
of the previous issuers nor the previous noteholders have any direct interest in
the trust property, although the previous issuers share the security interest
under the Funding 1 deed of charge in Funding 1's share of the trust property.
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 INTEREST AMOUNT
RATE RATE
TERM PER ANNUM PER ANNUM SCHEDULED FINAL OUTSTANDING
AS
ADVANCE (LIBOR (LIBOR REPAYMENT REPAYMENT AT [__],,
SERIES NAME RATING PLUS/MINUS) STEP-UP DATE PLUS/MINUS) DATE DATE 2005
- ------------- ---------- ------------ ------------ ------------ ------------- ------------- -------------
Series 1*... AAA -0.04030% N/A N/A June 2003 June 2003 (pound)0
Series 1*... AA +0.28760% June 2007 +0.81760% N/A June 2042 (pound)0
Series 1*... BBB +1.13060% June 2007 +2.39060% N/A June 2042 (pound)0
Series 2.... AAA +0.16834% N/A N/A June 2005 June 2007 (pound)509,614,731
Series 2.... AA +0.29420% June 2007 +0.83420% N/A June 2042 (pound)17,666,644
Series 2.... BBB +1.26850% June 2007 +2.52850% N/A June 2042 (pound)17,666,644
Series 3.... AAA +0.12810% N/A N/A December 2005 December 2007 (pound)748,299,320
Series 3.... AA +0.33100% June 2007 +0.89100% N/A June 2042 (pound)26,190,476
Series 3.... BBB +1.27940% June 2007 +2.53940% N/A June 2042 (pound)26,190,476
Series 4A1.. AAA +0.22000% N/A N/A June 2007 June 2009 (pound)484,000,000
Series 4A2.. AAA +0.18000% June 2007 +0.36000% N/A June 2042 (pound)1,000,000,000
Series 4.... AA +0.30000% June 2007 +0.60000% N/A June 2042 (pound)52,000,000
Series 4.... BBB +1.20000% June 2007 +2.20000% N/A June 2042 (pound)52,000,000
-------------
Total....... (pound)2,933,628,291
=============
* previously repaid
82
PREVIOUS TERM ADVANCES OF PERMANENT FINANCING (NO. 2) PLC
INITIAL STEPPED-UP
INTEREST INTEREST PRINCIPAL
DESIGNATED RATE PER RATE PER AMOUNT
TERM ANNUM ANNUM SCHEDULED FINAL OUTSTANDING
ADVANCE (LIBOR (LIBOR REPAYMENT REPAYMENT AS AT [__]
SERIES NAME RATING PLUS/MINUS) STEP-UP DATE PLUS/MINUS) DATE DATE 2005
- ------------ ---------- ------------ ------------- ------------- ------------- ------------- -------------
Series 1*... AAA -0.04930% N/A N/A March 2004 March 2004 (pound)0
Series 1*... AA +0.25050% December 2008 +0.76100% N/A June 2042 (pound)0
Series 1*... BBB +1.36080% December 2008 +2.62080% N/A June 2042 (pound)0
September September
Series 2.... AAA +0.15830% N/A N/A 2005 2007 (pound)1,108,016,000
Series 2.... AA +0.35660% December 2008 +0.97320% N/A June 2042 (pound)38,622,000
Series 2.... BBB +1.55060% December 2008 +2.81060% N/A June 2042 (pound)38,622,000
March 2006
and
Series 3.... AAA +0.23310% December 2008 +0.72620% June 2006 December 2032 (pound)854,375,000
Series 3.... AA +0.44595% December 2008 +1.15190% N/A June 2042 (pound)29,732,000
Series 3.... BBB +1.55880% December 2008 +2.81880% N/A June 2042 (pound)29,732,000
Series 4.... AAA +0.22360% N/A N/A December 2007 December 2009 (pound)1,107,250,000
Series 4.... AA +0.48380% December 2008 +1.22760% N/A June 2042 (pound)38,644,000
Series 4.... BBB +1.53690% December 2008 +2.79690% N/A June 2042 (pound)38,644,000
Series 5.... AAA +0.25% December 2008 +0.50% N/A June 2042 (pound)750,000,000
Series 5.... AA +0.45% December 2008 +0.90% N/A June 2042 (pound)26,000,000
Series 5.... BBB +1.45% December 2008 +2.45% N/A June 2042 (pound)26,000,000
-------------
Total....... (pound)4,085,637,000
=============
* previously repaid
PREVIOUS TERM ADVANCES OF PERMANENT FINANCING (NO. 3) PLC
INITIAL STEPPED-UP
INTEREST INTEREST PRINCIPAL
DESIGNATED RATE PER RATE PER AMOUNT
TERM ANNUM ANNUM SCHEDULED FINAL OUTSTANDING
ADVANCE (LIBOR (LIBOR REPAYMENT REPAYMENT AS AT [__],
SERIES NAME RATING PLUS/MINUS) STEP-UP DATE PLUS/MINUS) DATE DATE 2005
- ------------ ------------ ------------ ------------ ---------- ------------- ------------- -------------
Series 1.... AAA - 0.04100% N/A N/A December 2004 December 2004 (pound)658,500,000
Series 1.... AA +0.20700% December +0.66400% N/A June 2042 (pound)22,900,000
2010
Series 1.... BBB +1.09000% December 2010 +2.09000% N/A June 2042 (pound)22,900,000
Series 2.... AAA +0.12800% N/A N/A September 2006 2010 (pound)1,018,000,000
Series 2.... AA +0.28500% December 2010 +0.82000% N/A June 2042 (pound)35,400,000
Series 2.... BBB +1.21500% December 2010 +2.21500% N/A June 2042 (pound)35,400,000
June 2008 and
Series 3.... AAA +0.20613% December 2010 +0.66226% September 2008 September 2033 (pound)898,250,000
Series 3.... AA +0.41184% December 2010 +1.07368% N/A June 2042 (pound)31,200,000
Series 3.... BBB +1.27224% December 2010 +2.27224% N/A June 2042 (pound)31,200,000
March 2009 September
Series 4A1.. AAA +0.21200% December 2010 +0.67400% and June 2009 2033 (pound)482,750,000
March 2009 September
Series 4A2.. AAA +0.19000% December 2010 +0.38000% and June 2009 2033 (pound)750,000,000
Series 4.... AA +0.43450% December 2010 +1.11900% N/A June 2042 (pound)42,850,000
Series 4.... BBB +1.30400% December 2010 +2.30400% N/A June 2042 (pound)42,850,000
Series 5.... AAA +0.21700% December 2010 +0.43400% N/A June 2042 (pound)400,000,000
Series 5.... AA +0.51022% December 2010 +1.27044% N/A June 2042 (pound)13,900,000
Series 5.... BBB +1.35876% December 2010 +2.35876% N/A June 2042 (pound)13,900,000
-------------
Total....... (pound)4,500,000,000
=============
* previously repaid
83
PREVIOUS TERM ADVANCES OF PERMANENT FINANCING (NO. 4) PLC
INITIAL STEPPED-UP
INTEREST INTEREST PRINCIPAL
DESIGNATED RATE PER RATE PER AMOUNT
TERM ANNUM ANNUM SCHEDULED FINAL OUTSTANDING
ADVANCE (LIBOR (LIBOR REPAYMENT REPAYMENT AS AT [__],
SERIES NAME RATING PLUS/MINUS) STEP-UP DATE PLUS/MINUS) DATE DATE 2005
- ------------ ----------- ------------- ------------ ------------ ------------ ----------- -------------
Series 1.... AAA +0.002725% N/A N/A March 2005 March 2005 (pound)803,859,000
Series 1.... AA +0.214900% March 2011 +0.679800% N/A June 2042 (pound)41,855,000
Series 1.... A +0.318050% March 2011 +0.886100% N/A June 2042 (pound)30,279,000
Series 2.... AAA +0.143000% N/A N/A March 2007 March 2009 (pound)1,286,174,000
Series 2.... AA +0.259000% March 2011 +0.768000% N/A June 2042 (pound)53,966,000
Series 2.... A +0.418000% March 2011 +1.086000% N/A June 2042 (pound)32,101,000
Series 2.... BBB +0.831000% March 2011 +1.662000% N/A June 2042 (pound)44,052,000
December
2008
Series 3.... AAA +0.221470% March 2011 +0.692940% and March March 2024 (pound)911,040,000
2009
Series 3.... AA +0.340540% March 2011 +0.931080% N/A June 2042 (pound)40,622,000
Series 3.... A +0.495760% March 2011 +1.241520% N/A June 2042 (pound)21,651,000
Series 3.... BBB +0.962150% March 2011 +1.924300% N/A June 2042 (pound)29,690,000
September
2009 and
Series 4.... AAA +0.213000% March 2011 +0.676000% December March 2034 (pound)999,751,000
2009
Series 4.... AA +0.352000% March 2011 +0.998000% N/A June 2042 (pound)56,653,000
Series 4.... A +0.534000% March 2011 +1.426000% N/A June 2042 (pound)41,657,000
Series 5A1.. AAA +0.276953% March 2011 +0.803906% N/A June 2042 (pound)499,725,000
Series 5A2.. AAA +0.170000% March 2011 +0.590000% N/A June 2042 (pound)1,100,000,000
Series 5.... AA +0.330000% March 2011 +0.910000% N/A June 2042 (pound)43,000,000
Series 5.... A +0.500000% March 2011 +1.250000% N/A June 2042 (pound)32,000,000
Series 5.... BBB +0.900000% March 2011 +1.800000% N/A June 2042 (pound)54,000,000
-------------
Total....... (pound)6,122,075,000
=============
PREVIOUS TERM ADVANCES OF PERMANENT FINANCING (NO. 5) PLC
INITIAL STEPPED-UP
INTEREST INTEREST PRINCIPAL
DESIGNATED RATE PER RATE PER AMOUNT
TERM ANNUM ANNUM FINAL OUTSTANDING
ADVANCE (LIBOR (LIBOR SCHEDULED REPAYMENT AS AT [__],
SERIES NAME RATING PLUS/MINUS) STEP-UP DATE PLUS/MINUS) REPAYMENT DATE 2005
DATE
- ------------ ----------- ------------ ------------- ------------ ------------- ------------- -------------
Series 1.... AAA -0.00980% N/A N/A June 2005 June 2005 (pound)667,736,000
Series 1.... AA +0.16730% June 2011 +0.58460% N/A June 2042 (pound)28,312,000
Series 1.... BBB +0.55000% June 2011 +1.35000% N/A June 2042 (pound)23,718,000
December
2006,
March 2007,
June 2007 and
Series 2.... AAA +0.15370% N/A N/A September June 2011 (pound)694,445,000
2007
Series 2.... AA +0.23170% June 2011 +0.71340% N/A June 2042 (pound)30,129,000
Series 2.... BBB +0.74150% June 2011 +1.73300% N/A June 2042 (pound)24,680,000
March 2009
and
Series 3.... AAA +0.20984% June 2011 +0.66968% June 2009 June 2034 (pound)400,642,000
Series 3.... AA +0.33875% June 2011 +0.92750% N/A June 2042 (pound)17,362,000
Series 3.... BBB +0.94156% June 2011 +1.94156% N/A June 2042 (pound)14,424,000
September
2009
and December
Series 4.... AAA +0.21300% June 2011 +0.67600% 2009 June 2042 (pound)666,000,000
Series 4.... AA +0.39990% June 2011 +1.04980% N/A June 2042 (pound)29,000,000
Series 4.... BBB +0.93440% June 2011 +1.93440% N/A June 2042 (pound)24,000,000
Series 5A1.. AAA +0.17500% June 2009 +0.60000% N/A June 2042 (pound)500,000,000
Series 5A2.. AAA +0.19000% June 2011 +0.63000% N/A June 2042 (pound)750,000,000
Series 5.... AA +0.35000% June 2011 +0.95000% N/A June 2042 (pound)47,000,000
Series 5.... BBB +0.85000% June 2011 +1.85000% N/A June 2042 (pound)39,000,000
-------------
Total....... (pound)3,956,448,000
=============
84
PREVIOUS TERM ADVANCES OF PERMANENT FINANCING (NO. 6) PLC
INITIAL STEPPED-UP
INTEREST INTEREST PRINCIPAL
DESIGNATED RATE PER RATE PER AMOUNT
TERM ANNUM ANNUM FINAL OUTSTANDING
ADVANCE (LIBOR (LIBOR SCHEDULED REPAYMENT AS AT [__],
SERIES NAME RATING PLUS/MINUS) STEP-UP DATE PLUS/MINUS) REPAYMENT DATE 2005
DATE
- ------------ ----------- ------------ ------------- ------------ ------------- ------------- -------------
Series 1.... AAA -0.02310% N/A N/A September September (pound)541,711,000
2005 2005
Series 1.... AA +0.12250% September +0.49500% N/A June 2042 (pound)19.394,000
2011
Series 1.... BBB +0.40710% September +1.06420% N/A June 2042 (pound)18,798,000
2011
March 2007,
June 2007,
September
2007
Series 2.... AAA +0.11610% September +0.48220% and December December 2011 (pound)541,712,000
2011 2007
Series 2.... AA +0.19190% September +0.63380% N/A June 2042 (pound)19,394,000
2011
Series 2.... BBB +0.52670% September +1.30340% N/A June 2042 (pound)18,798,000
2011
December 2007
March 2008
June 2008 and
Series 3.... AAA +0.12500% September +0.25000% September September (pound)1,000,000,000
2011 2008 2032
Series 3.... AA +0.23000% September +0.46000% N/A June 2042 (pound)35,300,000
2011
Series 3.... BBB +0.68000% September +1.36000% N/A June 2042 (pound)34,200,000
2011
December 2009
and March
Series 4.... AAA +0.16290% September +0.57580% 2010 June 2042 (pound)519,000,000
2011
Series 4.... AA +0.26020% September +0.77040% N/A June 2042 (pound)18,082,000
2011
Series 4.... BBB +074260% September +1.73520% N/A June 2042 (pound)17,528,000
2011
Series 5A1.. AAA +0.15000% September +0.30000% N/A June 2042 (pound)500,000,000
2009
Series 5A2.. AAA +0.16000% September +0.32000% N/A June 2042 (pound)500,000,000
2011
Series 5.... AA +0.31000% September +0.62000% N/A June 2042 (pound)34,800,000
2011
Series 5.... BBB +0.80000% September +1.60000% N/A June 2042 (pound)33,700,000
2011
-------------
Total....... (pound)3,853,017,000
=============
The previous term AAA advances reflect the rating assigned by the rating
agencies to the class A previous notes at their time of issue (namely, in the
case of the series 1 class A previous notes, 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 (namely, AA by Standard & Poor's, Aa3 by Moody's and AA by
Fitch), the previous term A advances reflect the rating assigned to the class M
previous notes by the rating agencies (namely, A by Standard & Poor's, A2 by
Moody's and A by Fitch) and the previous term BBB advances reflect the rating
assigned to the class C previous notes by the rating agencies (namely, 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
85
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 tables 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".
86
THE LOANS
INTRODUCTION
The following is a description of some of the characteristics of the loans
currently or previously originated by the seller including details of loan
types, the underwriting process, lending criteria and selected statistical
information.
On the initial closing date 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 in consideration
for loans (together with their related security) sold to the mortgages trustee
on the closing date pursuant to the terms of the mortgage sale agreement. 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
[__], 2005 (which is referred to as the REFERENCE DATE), 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 the reference date, 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
expected 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 the reference date comprised [__] mortgage
accounts having an aggregate outstanding principal balance of (pound)[__] 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.
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 the reference date 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;
* "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
87
from month to month for various reasons, including changes in interest rates.
As at the reference date, approximately [__]% of the loans in the expected
portfolio were repayment loans and approximately [__]% were interest-only loans.
As at the reference date, approximately [__]% 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 [__]% 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) which is intended to provide
sufficient funds 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 borrower if the loan is redeemed within the product period. See "- REPAYMENT
FEES" below.
No capped rate loans will form part of 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 that deposit account in favour of Halifax. Additional features such as
payment holidays
88
(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 after 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 3% per annum.
The changes that the seller may make to the tracker margin may be more or less
than the amount by which the Bank of England repo rate has fallen. All relevant
borrowers are given 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. If the seller makes a change in the tracker margin to
the borrower's disadvantage while the repo rate is below 3% and it subsequently
increases to 3% or above, the changed margin will continue to apply (unless the
tracker margin is changed again). 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 the reference date, approximately [__]% of the loans in the expected
portfolio were fixed rate loans. The remaining approximately [__]% 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. Although the mortgages trust does
not currently include flexible loans, these loans may be added to the mortgages
trust in the future and they may be priced by reference to another, new,
variable interest rate, the Halifax flexible variable rate.
As at[__], 2005, HVR 1 was [__]% per annum, HVR 2 was [__]% per annum and
the Halifax flexible variable rate was [__]%.
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, altering the tracking rate margin (as described above) or charging an
added rate. An added rate of not more than 2% may be charged if the borrower has
let the property, changed the use of the
89
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;
* 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 2% above the Bank of England base rate at
any time. The seller may vary the 2% limit but, prior to doing so, will give 30
days' notice to borrowers who pay interest at a variable base rate, a discounted
rate or an added rate and are subject to a repayment fee. Those borrowers will
then have three months to repay their mortgage if they so require without
incurring the repayment fee (this does not apply to borrowers who pay interest
at a fixed, capped or tracker rate).
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% 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
90
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 marginal interest rate or the rate by
which the variable base rate cap exceeds the Bank of England base rate to the
borrower's disadvantage and the loan is subject to a repayment fee, the borrower
may 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 (pound)250 or more and the borrower has paid the normal required
monthly payments due for the rest of the year. The seller will not make any
adjustment to the interest charged in respect of the borrower's normal monthly
payments, but the borrower will be credited with interest at the rate of
interest charged on the borrower's mortgage. This concession may be withdrawn or
changed by the seller. Borrowers may repay up to 10% of their loan each year
without incurring a repayment fee.
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.
This section does not apply to flexible loans (see "FLEXIBLE LOANS"
below).
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 seller will perform a credit reference search and
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 initial 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.
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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, nor have
a current payment arrangement or have had one within the last six months with
the seller on their loan. The applicant may not borrow any further money from
the seller during the course of the payment holiday.
Payments deferred under the payment holiday programme 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% of the
value of the property and must comply with the seller's normal lending limits.
However, the borrower may make over payments (subject to terms and conditions)
to pay off their debt sooner. The payment holiday does not include buildings and
contents insurance premiums, mortgage repayment insurance premiums, life
assurance or total mortgage protection premiums, nor can the mortgage be a
building mortgage.
This section does not apply to flexible loans (see "FLEXIBLE LOANS"
below).
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% 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%.
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.
Where originated by the seller after 31st October, 2004, the total amount of the
facility must not be less than (pound)25,005. Borrowers must draw down amounts
of at least (pound)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 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.
This section does not apply to flexible loans (see "FLEXIBLE LOANS"
below).
FLEXIBLE LOANS
Certain loans originated by the seller after [31st October, 2004] that may
be added to the portfolio after the closing date are subject to a range of
options available for selection by the borrower that give the borrower greater
flexibility in the timing and amount of payments made under the loan as well as
access to pre-approved further advances under the loan (flexible loans). These
flexible loans may be discounted
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variable rate loans, capped rate loans or tracker rate loans and offer the
optional features described below, subject to certain conditions and financial
limits. Each borrower of a flexible loan is subject to an agreement which sets
out a credit limit and the terms and conditions of the pre-approved further
advances available to the borrower. The availability of the flexible loan
options is generally limited to the available reserve, which in broad terms at
any time is the difference between the credit limit and the amount of the
outstanding debt at that time.
Flexible loans include the following flexible options, which may be
exercised in any combination, all subject to certain conditions and financial
limits. In general, the flexible options impose fewer conditions and
restrictions than those referred to under "OVERPAYMENTS AND UNDERPAYMENTS",
"PAYMENT HOLIDAYS" and "FURTHER ADVANCES" above and those sections do not apply
to flexible loans.
Overpayments. Borrowers may increase their regular monthly payments above
the normal monthly payment then applicable at any time.
Underpayments. Borrowers may reduce their monthly payments below the
amount of the applicable normal monthly payment. The amount underpaid cannot
exceed six normal monthly payments in any twelve month period or have the
effect, including payment holidays, of the borrower not paying the normal
monthly payment for six consecutive months.
Payment holidays. Borrowers may stop monthly payments for up to six months
in any twelve month period.
Lump-sum payments. Borrowers may repay all or part of the loan at any
time.
Drawdown. Borrowers may borrow further amounts, subject to a minimum
amount of (pound)250 (unless the available reserve is less than (pound)250 in
which case the borrower may borrow such lesser amount).
The terms and conditions of the flexible loans provide that:
(i) the flexible options will be available after the first monthly
payment has been made;
(ii) the borrower must inform the seller that it wishes to exercise the
underpayment, payment holidays or overpayment options one month
before the borrower wishes to exercise the relevant flexible
option;
(iii) amounts repaid under the flexible options agreement may be redrawn
at any time using any available options;
(iv) the borrower may not exceed the available reserve set out in the
flexible options agreement; and
(v) the amount underpaid by the borrower by exercising the underpayment
and/or the payment holidays options may not exceed six normal
monthly payments in any twelve month period.
In addition to the above restrictions, the seller has the right to reduce
the available reserve to zero where: (a) an event requiring the immediate
repayment of the debt (as set out in the applicable terms and conditions)
occurs; or (b) the borrower's financial circumstances change adversely; or (c)
the value of the security granted by the borrower for the debt is reduced such
that part of the debt is unsecured; or (d) the seller obtains adverse
information about the borrower from a credit reference agency or from any fraud
prevention register or from its dealings with the seller and the seller
reasonably considers that the available reserve should be reduced or withdrawn
to protect its interests under the flexible options agreement; or (e) a borrower
dies and the seller reasonably considers that the financial resources available
to the borrower's personal representatives or (as the case may be) the surviving
joint-borrower are not sufficient to support further borrowing up to the
existing available reserve. If the available reserve is withdrawn, the payment
holidays, underpayment and/or drawdown options will cease to be available and
any unused part of the available reserve will not be able to be utilised.
The maximum total borrowing under a flexible loan is expected to be
limited to 90% of the original property value, subject to a lower limit if a
borrower's maximum loan affordability is lower than this amount.
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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 THE 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 the reference date, approximately
[__]% were originated through the branch network, approximately [__]% through
intermediaries and approximately [__]% 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 is subject to the Financial Ombudsman Service, which is a
statutory scheme under the FSMA, and follows both the Code of Banking Practice
and the Council of Mortgage Lenders' Code of Mortgage Lending Practice. The
seller has pledged its support for regulation of the UK mortgage industry by the
FSA and, in particular, the implementation of CAT marked loans. CAT is a
voluntary UK Government standard that was introduced for mortgages in 2000. The
CAT mark indicates that the product meets minimum standards for charges, access
and terms.
UNDERWRITING
Traditionally, the seller's decision whether to underwrite or not
underwrite a loan has been made by underwriters in one of the seller's business
centres, who liaise with the intermediaries and sales staff in the branch
network. Each underwriter must undertake a training programme conducted by the
seller to gain the authority to approve loans. The seller has established
various levels of authority for its underwriters who approve loan applications.
The levels are differentiated by, among other things, degree of risk and the
ratio of the loan amount to the value of the property in the relevant
application. An underwriter wishing to move to the next level of authority must
undertake further training.
During 2001, the seller introduced a new automated system whereby the
majority of mortgages are underwritten at the point of sale and do not make use
of the traditional system of full evaluation by an underwriter. 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.
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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 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%.
For properties of (pound)150,000 or less, the seller may currently lend up to
97% of the improved valuation of the property (the original valuation plus the
increase in value deriving from any improvements). For properties in excess of
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(pound)150,000 the permissible LTV ratio decreases as the property value
increases. The seller does not provide loans in excess of 100% 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%, the borrower pays high LTV fees based on the
difference between the actual LTV ratio and a 75% 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%, though during 1999 and 2000 the seller paid the premium for the MIG cover
if the LTV ratio was between 75% and 90%. Approximately [__]% of the loans in
the expected portfolio as at the reference date 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
include 60% of any regular overtime, bonuses, or commission (100% if
guaranteed). The seller will deduct the annual cost of existing commitments
which have over 12 months to run 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% 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% of
value or the borrower's credit
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score fails. There is an exception from this policy for existing Halifax
mortgage customers who are moving home and the seller's overall position is
improved.
(7) Credit history
(a) Credit search
With the exception, in some circumstances, of further advances to
existing Halifax borrowers, a credit search is carried out in
respect of all applicants. Applications may be declined where an
adverse credit history (for example, county court judgment,
Scottish court decree for payment, default, or bankruptcy notice)
is revealed or the score does not meet the required risk/reward
trade-off.
(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 or sight of a bank statement
or rent record book. 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 2005.
Mortgage collection is conducted through payment collection departments located
in Leeds, Manchester and Romford.
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.
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If the borrower does not insure the property, or insures the property but
violates a provision of the insurance contract, the seller will upon becoming
aware of the same insure the property itself, in which case the seller may
determine who the insurer will be, what will be covered by the policy, the
amount of the sum insured and any excess. The borrower will be responsible for
the payment of insurance premiums. The seller retains the right to settle all
insurance claims on reasonable terms without the borrower's consent.
HALIFAX POLICIES
If the buildings insurance is purchased by the borrower through the
seller, the seller will arrange the insurance through Halifax General Insurance
Services Limited. The premiums paid by the borrower will be calculated depending
on the location of the borrower's residence, the type, age and use of the
borrower's property, and the borrower's age and past claims history. The
borrower will have the option of paying the premium as a lump sum or over a
12-month period with the borrower's monthly mortgage payments. If paid monthly,
interest will be charged. Any unpaid premiums will be added directly to the
mortgage loan and interest charged. The policy will be automatically renewed
each year. The seller will provide cover from the date the purchase contracts
for a property are exchanged; if the borrower already owns the property, cover
will start on the date that the borrower's mortgage is completed.
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. Prior to 1st January,
2004 all buildings or contents insurance was underwritten by Royal & Sun
Alliance Insurance plc ("ROYAL & SUN ALLIANCE"). With effect on and from 1st
January, 2004 all new business or renewals is, or has been, underwritten by St
Andrew's Insurance plc.
In the event of a claim, the insured will receive up to the full cost of
rebuilding the property in the same form as before the damage occurred,
including the costs of complying with local authority and other statutory
requirements, professional fees and related costs. Standard policy conditions
apply. Amounts paid under the insurance policy are generally utilised to fund
the reinstatement of the property or are otherwise paid to the seller to reduce
the amount of the loan(s).
The seller has procured the endorsement of Royal & Sun Alliance and will
on or before the closing date procure the endorsement of St Andrew's Insurance
plc 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.
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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 plc 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 (pound)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.
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 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 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% 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% LTV ratio.
Approximately [__]% of the mortgages in the expected portfolio as at the
reference date 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 -
99
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%.
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 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 the reference date. Columns stating percentage amounts may not
add up to 100% 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.
100
OUTSTANDING CURRENT BALANCES Range of outstanding current balances:
RANGE OF OUTSTANDING CURRENT
BALANCES (INCLUDING CAPITALISED AGGREGATE NUMBER OF
HIGH LTV FEES AND/OR BOOKING FEES OUTSTANDING CURRENT MORTGAGE
AND/OR VALUATION FEES) BALANCE ((POUND)) % OF TOTAL ACCOUNTS % OF TOTAL
- ------------------------------------------- ------------------------ ------------- ------------- -------------
(pound)0 - (pound)24,999.99................ (pound)[__] [__]% [__] [__]%
(pound)25,000 - (pound)49,999.99........... (pound)[__] [__]% [__] [__]%
(pound)50,000 - (pound)74,999.99........... (pound)[__] [__]% [__] [__]%
(pound)75,000 - (pound)99,999.99........... (pound)[__] [__]% [__] [__]%
(pound)100,000 - (pound)124,999.99......... (pound)[__] [__]% [__] [__]%
(pound)125,000 - (pound)149,999.99......... (pound)[__] [__]% [__] [__]%
(pound)150,000 - (pound)174,999.99......... (pound)[__] [__]% [__] [__]%
(pound)175,000 - (pound)199,999.99......... (pound)[__] [__]% [__] [__]%
(pound)200,000 - (pound)224,999.99......... (pound)[__] [__]% [__] [__]%
(pound)225,000 - (pound)249,999.99......... (pound)[__] [__]% [__] [__]%
(pound)250,000 - (pound)299,999.99......... (pound)[__] [__]% [__] [__]%
(pound)300,000 - (pound)349,999.99......... (pound)[__] [__]% [__] [__]%
(pound)350,000 - (pound)399,999.99......... (pound)[__] [__]% [__] [__]%
(pound)400,000 - (pound)449,999.99......... (pound)[__] [__]% [__] [__]%
(pound)450,000 - (pound)500,000............ (pound)[__] [__]% [__] [__]%
------------------------ ------------- ------------- -------------
Totals..................................... (pound)[__] [__]% [__] [__]%
======================== ============= ============= =============
The largest mortgage account has an outstanding current balance of
(pound)[__]and the smallest mortgage account has an outstanding current balance
of (pound)[__]. The average outstanding current balance is approximately
(pound)[__].
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.
RANGE OF LTV RATIOS AT ORIGINATION
(EXCLUDING CAPITALISED HIGH LTV AGGREGATE NUMBER OF
FEES AND/OR BOOKING FEES AND/OR OUTSTANDING CURRENT MORTGAGE
VALUATION FEES) BALANCE ((POUND)) % OF TOTAL ACCOUNTS % OF TOTAL
- -------------------------------------------- ------------------------ ------------- ------------- -------------
0% - 24.99%................................ (pound)[__] [__]% [__] [__]%
25% - 49.99%............................... (pound)[__] [__]% [__] [__]%
50% - 74.99%............................... (pound)[__] [__]% [__] [__]%
75% - 79.99%............................... (pound)[__] [__]% [__] [__]%
80% - 84.99%............................... (pound)[__] [__]% [__] [__]%
85% - 89.99%............................... (pound)[__] [__]% [__] [__]%
90% - 94.99%............................... (pound)[__] [__]% [__] [__]%
95% - 97%.................................. (pound)[__] [__]% [__] [__]%
------------------------ ------------- ------------- -------------
Totals..................................... (pound)[__] [__]% [__] [__]%
======================== ============= ============= =============
101
The weighted average LTV ratio of the mortgage accounts (excluding any
capitalised high LTV fees and capitalised booking fees) at origination was
[__]%. The highest LTV ratio of any mortgage account (excluding any capitalised
high LTV fees and any capitalised booking fees) at origination was [__]% and the
lowest was [__]%.
CURRENT LTV RATIOS
The following table shows the range of LTV ratios, which express the
outstanding current balance of the mortgage loan as at the reference date
divided by the indexed valuation of the property securing that mortgage loan at
the same date.
RANGE OF CURRENT LTV RATIOS
(EXCLUDING ANY OUTSTANDING FEES, AGGREGATE NUMBER OF
SUCH AS INSURANCE FEES AND/OR HIGH OUTSTANDING CURRENT MORTGAGE
LTV FEES) BALANCE ((POUND)) % OF TOTAL ACCOUNTS % OF TOTAL
- -------------------------------------------- ------------------------ ------------- ------------- -------------
0% - 24.99%................................ (pound)[__] [__]% [__] [__]%
25% - 49.99%............................... (pound)[__] [__]% [__] [__]%
50% - 74.99%............................... (pound)[__] [__]% [__] [__]%
75% - 79.99%............................... (pound)[__] [__]% [__] [__]%
80% - 84.99%............................... (pound)[__] [__]% [__] [__]%
85% - 89.99%............................... (pound)[__] [__]% [__] [__]%
90% - 94.99%............................... (pound)[__] [__]% [__] [__]%
95% - 96.99%............................... (pound)[__] [__]% [__] [__]%
97% - 100%................................. (pound)[__] [__]% [__] [__]%
100%+...................................... (pound)[__] [__]% [__] [__]%
------------------------ ------------- ------------- -------------
Totals..................................... (pound)[__] [__]% [__] [__]%
======================== ============= ============= =============
The weighted average current LTV ratio of the mortgage accounts (excluding
any capitalised high LTV fees and capitalised booking fees) was [__]%. The
highest current LTV ratio of any mortgage account (including any capitalised
high LTV fees and any capitalised booking fees) was [__]% and the lowest was
[__]%.
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 NUMBER OF
OUTSTANDING CURRENT MORTGAGE
HALIFAX MAPPED REGION BALANCE ((POUND)) % OF TOTAL ACCOUNTS % OF TOTAL
- -------------------------------------------- ------------------------ ------------- ------------- -------------
London & South East........................ (pound)[__] [__]% [__] [__]%
Midlands & East Anglia..................... (pound)[__] [__]% [__] [__]%
North...................................... (pound)[__] [__]% [__] [__]%
North West................................. (pound)[__] [__]% [__] [__]%
Scotland................................... (pound)[__] [__]% [__] [__]%
South Wales & West......................... (pound)[__] [__]% [__] [__]%
Other...................................... (pound)[__] [__]% [__] [__]%
------------------------ ------------- ------------- -------------
Totals..................................... (pound)[__] [__]% [__] [__]%
======================== ============= ============= =============
102
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
[__], 2005 for the purposes of calculating the seasoning.
AGGREGATE NUMBER OF
OUTSTANDING CURRENT MORTGAGE
AGE OF LOANS IN MONTHS BALANCE ((POUND)) % OF TOTAL ACCOUNTS % OF TOTAL
- -------------------------------------------- ------------------------ ------------- ------------- -------------
0 to <6.................................... (pound)[__] [__]% [__] [__]%
6 to <12................................... (pound)[__] [__]% [__] [__]%
12 to <18.................................. (pound)[__] [__]% [__] [__]%
18 to <24.................................. (pound)[__] [__]% [__] [__]%
24 to <30.................................. (pound)[__] [__]% [__] [__]%
30 to <36.................................. (pound)[__] [__]% [__] [__]%
36 to <42.................................. (pound)[__] [__]% [__] [__]%
42 to <48.................................. (pound)[__] [__]% [__] [__]%
48 to <54.................................. (pound)[__] [__]% [__] [__]%
54 to <60.................................. (pound)[__] [__]% [__] [__]%
60 to <66.................................. (pound)[__] [__]% [__] [__]%
66 to <72.................................. (pound)[__] [__]% [__] [__]%
72+........................................ (pound)[__] [__]% [__] [__]%
------------------------ ------------- ------------- -------------
Totals..................................... (pound)[__] [__]% [__] [__]%
======================== ============= ============= =============
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.
YEARS TO MATURITY OF LOANS
The following table shows the number of years of the mortgage term which
remain unexpired:
AGGREGATE NUMBER OF
OUTSTANDING CURRENT MORTGAGE
YEARS TO MATURITY BALANCE ((POUND)) % OF TOTAL ACCOUNTS % OF TOTAL
- -------------------------------------------- ------------------------ ------------- ------------- -------------
<5......................................... (pound)[__] [__]% [__] [__]%
5 to <10................................... (pound)[__] [__]% [__] [__]%
10 to <15.................................. (pound)[__] [__]% [__] [__]%
15 to <20.................................. (pound)[__] [__]% [__] [__]%
20 to <25.................................. (pound)[__] [__]% [__] [__]%
25 to <30.................................. (pound)[__] [__]% [__] [__]%
30 to <35.................................. (pound)[__] [__]% [__] [__]%
35 to <40.................................. (pound)[__] [__]% [__] [__]%
------------------------ ------------- ------------- -------------
Totals..................................... (pound)[__] [__]% [__] [__]%
======================== ============= ============= =============
The weighted average remaining term of loans was [__]years and the maximum
remaining term was [__]years. The minimum remaining term was [__] years.
103
PURPOSE OF LOAN
The following table shows the purpose of the loans on origination:
AGGREGATE NUMBER OF
OUTSTANDING CURRENT MORTGAGE
USE OF PROCEEDS BALANCE ((POUND)) % OF TOTAL ACCOUNTS % OF TOTAL
- -------------------------------------------- ------------------------ ------------- ------------- -------------
Purchase................................... (pound)[__] [__]% [__] [__]%
Remortgage................................. (pound)[__] [__]% [__] [__]%
------------------------ ------------- ------------- -------------
Totals..................................... (pound)[__] [__]% [__] [__]%
======================== ============= ============= =============
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
PROPERTY TYPE BALANCE ((POUND)) % OF TOTAL PROPERTIES % OF TOTAL
- -------------------------------------------- ------------------------ ------------- ------------- -------------
Detached................................... (pound)[__] [__]% [__] [__]%
Other...................................... (pound)[__] [__]% [__] [__]%
Semi-detached.............................. (pound)[__] [__]% [__] [__]%
Terraced................................... (pound)[__] [__]% [__] [__]%
Unknown.................................... (pound)[__] [__]% [__] [__]%
------------------------ ------------- ------------- -------------
Totals..................................... (pound)[__] [__]% [__] [__]%
======================== ============= ============= =============
DISTRIBUTION OF FIXED RATE LOANS
Fixed rate loans remain at the relevant fixed rate for a period of time as
specified in the offer conditions, after which they move to a variable base rate
or some other rate as specified in the offer conditions.
AGGREGATE NUMBER OF % OF TOTAL
OUTSTANDING INTEREST PRODUCT FIXED RATE
FIXED RATE % BEARING BALANCE ((POUND)) % OF TOTAL HOLDINGS HOLDINGS
- -------------------------------------------- ------------------------ ------------- ------------- -------------
0 - 3.99 (pound)[__] [__]% [__] [__]%
4.00 - 4.99 (pound)[__] [__]% [__] [__]%
5.00 - 5.99 (pound)[__] [__]% [__] [__]%
6.00 - 6.99 (pound)[__] [__]% [__] [__]%
7.00 - 7.99 (pound)[__] [__]% [__] [__]%
8.00 - 8.99 (pound)[__] [__]% [__] [__]%
------------------------ ------------- ------------- -------------
Totals (pound)[__] [__]% [__] [__]%
======================== ============= ============= =============
104
AGGREGATE NUMBER OF % OF TOTAL
OUTSTANDING INTEREST PRODUCT FIXED RATE
YEAR IN WHICH FIXED RATE PERIOD ENDS BEARING BALANCE ((POUND)) % OF TOTAL HOLDINGS HOLDINGS
- -------------------------------------------- ------------------------ ------------- ------------- -------------
2004....................................... (pound)[__] [__]% [__] [__]%
2005....................................... (pound)[__] [__]% [__] [__]%
2006....................................... (pound)[__] [__]% [__] [__]%
2007....................................... (pound)[__] [__]% [__] [__]%
2008....................................... (pound)[__] [__]% [__] [__]%
2009....................................... (pound)[__] [__]% [__] [__]%
2010....................................... (pound)[__] [__]% [__] [__]%
2013....................................... (pound)[__] [__]% [__] [__]%
2014....................................... (pound)[__] [__]% [__] [__]%
------------------------ ------------- ------------- -------------
Totals..................................... (pound)[__] [__]% [__] [__]%
======================== ============= ============= =============
CHARACTERISTICS OF UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET
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], 2004, mortgage loans outstanding in the UK amounted to
[__] billion. During the last six months of 2004, outstanding mortgage debt grew
by [__]%, well above the long-term annual average rate of [__]% between 1994 and
[December] 2004. At [31st December], 2004, [__]% of outstanding mortgage debt
was held with banks and [__]% 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.
Set out in the following tables are a number of characteristics of the
United Kingdom mortgage market.
INDUSTRY CPR RATES
This quarterly industry constant prepayment rate ("INDUSTRY CPR") data was
calculated by dividing the amount of scheduled and unscheduled repayments of
mortgages made by building societies in a quarter by the quarterly balance of
mortgages outstanding for building societies in the UK. These quarterly
repayment rates were then annualised using standard methodology.
Over the past 40 years, quarterly industry CPRs experienced in respect of
residential mortgage loans made by building societies have been between 9.5% and
14.0% for approximately [70.6]% of that time.
AGGREGATE AGGREGATE AGGREGATE AGGREGATE
QUARTERS QUARTERS QUARTERS QUARTERS
OVER 40 OVER 40 OVER 40 OVER 40
CPR (%) YEARS CPR (%) YEARS CPR (%) YEARS CPR (%) YEARS
- ----------- ------------- ------------ ------------ ------------ ------------- ------------- -------------
7.0 0 11.5 16 16.0 4 20.5 1
7.5 0 12.0 19 16.5 2 21.0 0
8.0 4 12.5 13 17.0 1 21.5 2
8.5 1 13.0 10 17.5 1 22.0 1
9.0 6 13.5 4 18.0 1 22.5 2
9.5 9 14.0 6 18.5 1 23.0 0
10.0 10 14.5 2 19.0 1 23.5 0
10.5 17 15.0 3 19.5 2 24.0 0
11.0 18 15.5 2 20.0 3 24.5 0
- ---------------
Source: Council of Mortgage Lenders
[TABLE TO BE UPDATED]
105
Over the past 40.5 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 22.41%]. The lowest level was
[7.94% in June and March of 1974].
The highest 12-month rolling average industry CPR over the same 40.5-year
period was [21.13%]. The lowest was ]8.84%].
INDUSTRY INDUSTRY
CPR RATE 12-MONTH CPR RATE 12-MONTH
FOR THE ROLLING FOR THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
QUARTER (%) (%) QUARTER (%) (%)
- ------------------------------ ------------- ------------- ----------------------- ------------- -------------
March 1984 10.40 11.88 June 1984 12.13 11.72
September 1984 12.40 11.70 December 1984 11.87 11.70
March 1985 10.02 11.61 June 1985 11.67 11.49
September 1985 13.46 11.76 December 1985 13.68 12.21
March 1986 11.06 12.47 June 1986 15.53 13.43
September 1986 17.52 14.45 December 1986 15.60 14.92
March 1987 10.57 14.80 June 1987 14.89 14.64
September 1987 16.79 14.46 December 1987 16.18 14.61
March 1988 13.55 15.35 June 1988 16.03 15.64
September 1988 18.23 16.00 December 1988 12.60 15.10
March 1989 8.85 13.93 June 1989 13.04 13.18
September 1989 11.53 11.51 December 1989 10.38 10.95
March 1990 8.91 10.96 June 1990 9.37 10.05
September 1990 9.66 9.58 December 1990 10.58 9.63
March 1991 9.07 9.67 June 1991 10.69 10.00
September 1991 11.57 10.48 December 1991 10.24 10.39
March 1992 9.14 10.41 June 1992 9.12 10.02
September 1992 9.75 9.56 December 1992 7.96 8.99
March 1993 8.53 8.84 June 1993 9.97 9.05
September 1993 10.65 9.28 December 1993 10.01 9.79
March 1994 8.97 9.90 June 1994 10.48 10.03
September 1994 11.05 10.13 December 1994 10.68 10.29
March 1995 9.15 10.34 June 1995 10.51 10.35
September 1995 11.76 10.53 December 1995 11.61 10.76
March 1996 10.14 11.00 June 1996 11.32 11.21
September 1996 13.20 11.57 December 1996 12.58 11.81
March 1997 9.75 11.71 June 1997 15.05 12.65
September 1997 12.18 12.39 December 1997 11.17 12.04
March 1998 10.16 12.14 June 1998 12.05 11.39
September 1998 13.79 11.79 December 1998 13.42 12.36
March 1999 11.14 12.60 June 1999 14.39 13.18
September 1999 15.58 13.63 December 1999 14.94 14.01
March 2000 13.82 14.68 June 2000 13.87 14.55
September 2000 14.90 14.38 December 2000 15.57 14.54
March 2001 15.49 14.96 June 2001 17.39 15.84
September 2001 19.17 16.91 December 2001 19.04 17.77
March 2002 18.70 18.57 June 2002 19.91 19.21
September 2002 22.41 20.01 December 2002 22.16 20.80
March 2003 19.52 21.00 June 2003 20.19 21.07
September 2003 21.66 20.88 December 2003 21.34 20.67
March 2004 20.00 20.80 June 2004 21.50 21.13
September 2004 [__] [__] December 2004 [__] [__]
- ----------
Source of repayment and outstanding mortgage information: Council of Mortgage Lenders
106
You should also note that the prior two CPR tables present the historical
CPR experience only of building societies in the UK. During the late 1990s, a
number of former building societies converted to stock form UK banks, and the
CPR experience of these banks is therefore not included in the foregoing
building society CPR data. According to the Council of Mortgage Lenders, the 12
month rolling average CPR experience of banks during 1999 was 16.08%, during
2000 was 15.34%, during 2001 was 18.69%, during 2002 was 21.81% and during 2003
was 23.81%.
REPOSSESSION RATE
The repossession rate of residential properties in the UK has steadily
declined since 1991:
REPOSSESSIONS REPOSSESSIONS REPOSSESSIONS
YEAR (%) YEAR (%) YEAR (%)
- -------------- --------------------- -------------- --------------------- -------------- ---------------------
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.......... 0.20
1987.......... 0.32 1994.......... 0.47 2001.......... 0.15
1988.......... 0.22 1995.......... 0.47 2002.......... 0.11
1989.......... 0.17 1996.......... 0.40 2003.......... 0.07
1990.......... 0.47 1997.......... 0.31 2004.......... [__]
- --------------
Source: Council of Mortgage Lenders
In July 2004, the Council of Mortgage Lenders published arrears figures
for the half year ended June 2004, which showed that repossessions in the United
Kingdom had fallen to a 20-year low. For the first six months in 2004, the
repossession rate in the United Kingdom was 0.03%. No assurance can be given as
to whether, or for how long, this downward trend will continue.
HOUSE PRICE TO EARNINGS RATIO
The following table shows the ratio for any one year of the average annual
value of houses compared to the average annual salary in the UK. The average
annual earnings figures are constructed using the CML's new earnings survey
figures referring to weekly earnings in April of each year for those male
employees whose earnings were not affected by their absence from work. 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
- -------------------------------- ------------------------- ------------------------- -------------------------
1994............................ 3.42 1999..................... 4.08
1995............................ 3.37 2000..................... 4.44
1996............................ 3.40 2001..................... 4.51
1997............................ 3.62 2002..................... 5.09
1998............................ 3.86 2003..................... 5.64
- --------------
Source: Council of Mortgage Lenders
HOUSE PRICE INDEX
UK residential property prices, as measured by the Nationwide House Price
Index and Halifax Price Index (collectively the "HOUSING INDICES"), have
generally followed the UK Retail Price Index over an extended period. Nationwide
is a UK building society and Halifax is a UK bank.
The housing market has been through three economic cycles since 1976. The
greatest year-to-year increases in the Housing Indices occurred in the late
1970s and late 1980s with the greatest decrease in the early 1990s.
107
The Housing Indices have generally increased since 1996.
RETAIL PRICE NATIONWIDE 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 19.2 23.0 10.5 NA NA
June 1976....................... 39.5 12.9 23.4 8.9 NA NA
September 1976.................. 40.7 13.4 23.9 8.7 NA NA
December 1976................... 42.6 14.0 24.4 8.1 NA NA
March 1977...................... 44.6 15.5 24.8 7.5 NA NA
June 1977....................... 46.5 16.3 25.3 7.8 NA NA
September 1977.................. 47.1 14.5 25.9 8.0 NA NA
December 1977................... 47.8 11.5 26.2 7.1 NA NA
March 1978...................... 48.6 8.7 27.6 10.7 NA NA
June 1978....................... 50.0 7.2 28.9 13.3 NA NA
September 1978.................. 50.8 7.5 31.7 20.2 NA NA
December 1978................... 51.8 8.0 33.6 24.9 NA NA
March 1979...................... 53.4 9.3 35.5 25.2 NA NA
June 1979....................... 55.7 10.8 38.1 27.6 NA NA
September 1979.................. 59.1 15.3 40.9 25.5 NA NA
December 1979................... 60.7 15.9 43.8 26.5 NA NA
March 1980...................... 63.9 18.0 45.2 24.2 NA NA
June 1980....................... 67.4 19.1 46.6 20.1 NA NA
September 1980.................. 68.5 14.7 47.1 14.1 NA NA
December 1980................... 69.9 14.1 46.9 6.8 NA NA
March 1981...................... 72.0 11.9 47.3 4.5 NA NA
June 1981....................... 75.0 10.7 48.1 3.2 NA NA
September 1981.................. 76.3 10.8 48.3 2.5 NA NA
December 1981................... 78.3 11.4 47.5 1.3 NA NA
March 1982...................... 79.4 9.9 48.2 1.9 NA NA
June 1982....................... 81.9 8.8 49.2 2.3 NA NA
September 1982.................. 81.9 7.0 49.8 3.1 NA NA
December 1982................... 82.5 5.3 51.0 7.1 NA NA
March 1983...................... 83.1 4.5 52.5 8.6 97.1 NA
June 1983....................... 84.8 3.6 54.6 10.4 99.4 NA
September 1983.................. 86.1 5.0 56.2 12.1 101.5 NA
December 1983................... 86.9 5.2 57.1 11.3 102.3 NA
March 1984...................... 87.5 5.1 59.2 12.0 104.1 7.0
June 1984....................... 89.2 5.0 61.5 11.9 106.0 6.4
September 1984.................. 90.1 4.6 62.3 10.3 108.4 6.6
December 1984................... 90.9 4.5 64.9 12.8 111.0 8.2
March 1985...................... 92.8 5.9 66.2 11.2 113.5 8.7
June 1985....................... 95.4 6.7 68.2 10.3 115.4 8.5
September 1985.................. 95.4 5.8 69.2 10.5 116.8 7.5
December 1985................... 96.1 5.5 70.7 8.6 120.6 8.3
March 1986...................... 96.7 4.2 71.1 7.1 124.0 8.9
June 1986....................... 97.8 2.5 73.8 7.9 128.1 10.4
September 1986.................. 98.3 3.0 76.3 9.8 132.2 12.4
December 1986................... 99.6 3.7 79.0 11.1 136.8 12.6
108
RETAIL PRICE NATIONWIDE HOUSE HALIFAX HOUSE
INDEX PRICE INDEX PRICE INDEX
------------------------- ------------------------ ------------------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE INDEX CHANGE INDEX CHANGE
- -------------------------------- ----------- ---------- ---------- ---------- ---------- ----------
March 1987...................... 100.6 3.9 81.6 13.8 142.3 13.8
June 1987....................... 101.9 4.1 85.8 15.1 146.7 13.6
September 1987.................. 102.4 4.1 88.6 15.0 151.5 13.6
December 1987................... 103.3 3.6 88.5 11.4 158.0 14.4
March 1988...................... 104.1 3.4 90.0 9.8 167.0 16.0
June 1988....................... 106.6 4.5 97.6 12.9 179.4 20.1
September 1988.................. 108.4 5.7 108.4 20.2 197.4 26.5
December 1988................... 110.3 6.6 114.2 25.5 211.8 29.3
March 1989...................... 112.3 7.6 118.8 27.8 220.7 27.9
June 1989....................... 115.4 7.9 124.2 24.1 226.1 23.1
September 1989.................. 116.6 7.3 125.2 14.4 225.5 13.3
December 1989................... 118.8 7.4 122.7 7.2 222.5 4.9
March 1990...................... 121.4 7.8 118.9 0.1 223.7 1.4
June 1990....................... 126.7 9.3 117.7 (5.4) 223.3 (1.3)
September 1990.................. 129.3 10.3 114.2 (9.2) 222.7 (1.3)
December 1990................... 129.9 8.9 109.6 (11.3) 223.0 0.2
March 1991...................... 131.4 7.9 108.8 (8.9) 223.1 (0.3)
June 1991....................... 134.1 5.7 110.6 (6.2) 221.9 (0.6)
September 1991.................. 134.6 4.0 109.5 (4.2) 219.5 (1.5)
December 1991................... 135.7 4.4 107.0 (2.4) 217.7 (2.4)
March 1992...................... 136.7 4.0 104.1 (4.4) 213.2 (4.5)
June 1992....................... 139.3 3.8 105.1 (5.1) 208.8 (6.1)
September 1992.................. 139.4 3.5 104.2 (5.0) 206.9 (5.9)
December 1992................... 139.2 2.6 100.1 (6.7) 199.5 (8.7)
March 1993...................... 139.3 1.9 100.0 (4.0) 199.6 (6.6)
June 1993....................... 141.0 1.2 103.6 (1.4) 201.7 (3.5)
September 1993.................. 141.9 1.8 103.2 (1.0) 202.6 (2.1)
December 1993................... 141.9 1.9 101.8 1.7 203.5 2.0
March 1994...................... 142.5 2.3 102.4 2.3 204.6 2.5
June 1994....................... 144.7 2.6 102.5 (1.1) 202.9 0.6
September 1994.................. 145.0 2.2 103.2 0.0 202.7 0.1
December 1994................... 146.0 2.9 104.0 2.1 201.9 (0.8)
March 1995...................... 147.5 3.5 101.9 (0.5) 201.8 (1.4)
June 1995....................... 149.8 3.5 103.0 0.5 199.3 (1.8)
September 1995.................. 150.6 3.8 102.4 (0.8) 197.8 (2.5)
December 1995................... 150.7 3.2 101.6 (2.3) 199.2 (1.4)
March 1996...................... 151.5 2.7 102.5 0.6 202.1 0.2
June 1996....................... 153.0 2.1 105.8 2.7 206.7 3.7
September 1996.................. 153.8 2.1 107.7 5.1 208.8 5.4
December 1996................... 154.4 2.4 110.1 8.0 213.9 7.1
March 1997...................... 155.4 2.5 111.3 8.2 216.7 7.0
June 1997....................... 157.5 2.9 116.5 9.6 220.2 6.3
September 1997.................. 159.3 3.5 121.2 11.8 222.6 6.4
December 1997................... 160.0 3.6 123.3 11.3 225.4 5.2
March 1998...................... 160.8 3.4 125.5 12.0 228.4 5.3
June 1998....................... 163.4 3.7 130.1 11.0 232.1 5.3
September 1998.................. 164.4 3.2 132.4 8.8 234.8 5.3
December 1998................... 164.4 2.7 132.3 7.1 237.2 5.1
March 1999...................... 164.1 2.0 134.6 7.0 238.6 4.4
June 1999....................... 165.6 1.3 139.7 7.1 245.5 5.6
109
RETAIL PRICE NATIONWIDE HOUSE HALIFAX HOUSE
INDEX PRICE INDEX PRICE INDEX
------------------------- ------------------------ -------------------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE INDEX CHANGE INDEX CHANGE
- -------------------------------- ----------- ----------- ---------- ---------- ----------- -----------
September 1999.................. 166.2 1.1 144.4 8.7 255.5 8.5
December 1999................... 167.3 1.8 148.9 11.8 264.1 10.7
March 2000...................... 168.4 2.6 155.0 14.1 273.1 13.5
June 2000....................... 171.1 3.3 162.0 14.8 272.8 10.5
September 2000.................. 171.7 3.3 161.5 11.2 275.9 7.7
December 2000................... 172.2 2.9 162.8 8.9 278.6 5.3
March 2001...................... 172.2 2.2 167.5 7.8 281.7 3.1
June 2001....................... 174.4 1.9 174.8 7.6 293.2 7.2
September 2001.................. 174.6 1.7 181.6 11.7 302.4 9.2
December 2001................... 173.4 0.7 184.6 12.6 311.8 11.3
March 2002...................... 174.5 1.3 190.2 12.7 327.3 15.0
June 2002....................... 176.2 1.0 206.5 16.7 343.7 15.9
September 2002.................. 177.6 1.7 221.1 19.7 366.1 19.1
December 2002................... 178.5 2.9 231.3 22.6 392.1 22.9
March 2003...................... 179.9 3.0 239.3 22.9 403.8 21.0
June 2003....................... 181.3 2.9 250.1 19.2 419.0 20.0
September 2003.................. 182.5 2.7 258.9 15.8 434.5 17.3
December 2003................... 183.5 2.8 267.1 14.4 455.2 14.9
March 2004...................... 184.6 2.6 279.7 15.6 480.4 16.9
June 2004....................... 186.8 3.0 298.7 17.8 509.6 19.2
September 2004.................. [__] [__] [__] [__] [__] [__]
December 2004................... [__] [__] [__] [__] [__] [__]
- ------------
Source: Datastream, Nationwide Building Society and Halifax plc, respectively. "NA" indicates that the relevant figure is not
available.] [TO BE UPDATED]
110
THE SERVICER
THE SERVICER
Under the servicing agreement, Halifax plc has been appointed as the
servicer of the loans. The day-to-day servicing of the loans is performed by the
servicer through the servicer's retail branches, telephone and customer service
centres. The servicer's registered office is Trinity Road, Halifax, West
Yorkshire HX1 2RG, United Kingdom.
This section describes the servicer's procedures in relation to mortgage
loans generally. A description of the servicer's obligation under the servicing
agreement follows in the next section.
SERVICING OF LOANS
Servicing procedures include responding to customer enquiries, monitoring
compliance with and servicing the loan features and facilities applicable to the
loans and management of loans in arrears. See "THE SERVICING AGREEMENT".
Pursuant to the terms and conditions of the loans, borrowers must pay the
monthly amount required under the terms and conditions of the loans on or before
each monthly instalment due date, within the month they are due. Interest
accrues in accordance with the terms and conditions of each loan and is
collected from borrowers monthly.
In the case of variable rate loans, the servicer sets the mortgages
trustee variable base rate and the margin applicable to any tracker rate loan on
behalf of the mortgages trustee and the beneficiaries, except in the limited
circumstances as set out in the servicing agreement. In the case of some loans
that are not payable at the mortgages trustee variable base rate, for example
loans at a fixed rate, the borrower will continue to pay interest at the
relevant fixed rate until the relevant period ends in accordance with the
borrower's offer conditions. After that period ends, and unless the servicer
offers, and the borrower accepts, another option with an incentive, interest
will be payable at the mortgages trustee variable base rate. In addition, some
other types of loans are payable or may change so as to become payable by
reference to other rates not under the control of the servicer such as LIBOR or
rates set by the Bank of England, which rates may also include a fixed or
variable rate margin set by the servicer.
The servicer will take all steps necessary under the mortgage terms to
notify borrowers of any change in the interest rates applicable to the loans,
whether due to a change in the mortgages trustee variable base rate or any
variable margin or as a consequence of any provisions of those terms.
Payments of interest and principal on repayment loans are payable monthly
in arrear. Payments of interest on interest-only loans are paid in the month
that they are due. The servicer is responsible for ensuring that all payments
are made by the relevant borrower into the collection account and transferred
into the mortgages trustee GIC account on a regular basis but in any event in
the case of payments by direct debits no later than the next business day after
they are deposited in the seller's account. All amounts which are paid to the
collection account will be held on trust by the seller for the seller and the
mortgages trustee until they are transferred to the mortgages trustee GIC
account. Payments from borrowers are generally made by direct debits from a
suitable bank or building society account or through a Halifax banking account
although in some circumstances borrowers pay by cash, cheque or standing order.
The servicer initially credits the mortgages trustee GIC account with the
full amount of the borrowers' monthly payments. However, direct debits may be
returned unpaid up to three days after the due date for payment, and, under the
Direct Debit Indemnity Scheme, a borrower may make a claim at any time to their
bank for a refund of direct debit payments. In each case, the servicer is
permitted to reclaim from the mortgages trustee GIC account the corresponding
amounts previously credited. In these circumstances the usual arrears procedures
described in "- ARREARS AND DEFAULT PROCEDURES" will be taken.
111
ARREARS AND DEFAULT PROCEDURES
The servicer regularly provides the mortgages trustee and the
beneficiaries with written details of loans that are in arrears. A loan is
identified as being "IN ARREARS" where any amount required is overdue. 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, negotiation and recovery.
The servicer's system tracks arrears and advances and calculates when an
amount is in arrears. When arrears are first reported and are less than two
months overdue, the borrower is contacted and asked for payment of the arrears.
Until an account reaches two months in arrears, this is largely an automatic
process in which the borrower is contacted through a series of letters.
Thereafter, the servicer 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 secured collections units. The
servicer's personnel will contact the borrower via telephone or arrange an
interview through an external agent 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 high risk loans (loans of above 60% LTV) and six
months overdue for lower risk loans (loans below 60% LTV). Where the LTV is less
than 40%, legal action may be delayed where appropriate to allow more time for
recovery. However, legal proceedings may commence earlier or later than these
dates depending on the circumstances of the account (for example, if arrears
occur within the first twelve months or the loan is greater than
(pound)100,000).
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 part) 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.
112
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".
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 any MIG policy, where arranged. 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 by the solicitor acting to the next entitled parties.
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 the reference date (with the exception
of any loans in the portfolio originated on or after[__], 2005). 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 Annexe A.
113
[HALIFAX PLC RESIDENTIAL MORTGAGE LOANS1] [TO BE UPDATED]
31ST 31ST 31ST 31ST 31ST [__]
JANUARY, JANUARY, JANUARY, JANUARY, JANUARY, [__]
2001 2002 2003 2004 2005 2005
--------- --------- -------- --------- -------- -------
Outstanding balance ((pound) millions)....... 76,385.3 84,922.2 89,898.3 98,175.1 [__]
Number of loans outstanding (thousands)...... 2,014.8 2,056.0 2,004.3 1,981.8 [__]
OUTSTANDING BALANCE OF LOANS IN ARREARS
((POUND) MILLIONS)
30-59 days in arrears........................ 1,682.7 1,778.3 1,917.7 1,844.8 [__]
60-89 days in arrears........................ 528.1 456.0 455.5 443.9 [__]
90-119 days in arrears....................... 297.2 258.1 250.7 251.5 [__]
120 or more days in arrears.................. 643.8 564.6 559.1 720.6 [__]
--------- --------- -------- --------- --------
Total outstanding balance of loans in arrears 3,151.8 3,057.0 3,183.0 3,260.8 [__]
========= ========= ======== ========= ========
Total outstanding balance of loans 90 days
or more in
arrears ((pound) millions)................... 941.0 822.7 809.8 972.1 [__]
========= ========= ======== ========= ========
Total outstanding balance of loans 90 days
or more in
arrears as % of the outstanding balance...... 1.2319% 0.9688% 0.9008% 0.9901% [__]%
========= ========= ======== ========= =======
OUTSTANDING BALANCE OF ARREARS ((POUND) MILLIONS)
30-59 days in arrears........................ 15.8 14.2 13.7 13.3 [__]
60-89 days in arrears........................ 9.8 7.7 6.8 6.5 [__]
90-119 days in arrears....................... 8.0 6.4 5.6 5.4 [__]
120 or more days in arrears.................. 44.0 35.1 30.7 39.8 [__]
--------- --------- -------- --------- --------
Total balance of arrears..................... 77.6 63.4 56.8 65.0 [__]
========= ========= ======== ========= ========
Total balance of arrears on loans 90 days or
more in
arrears ((pound) millions)................... 52.0 41.5 36.3 45.2 [__]
========= ========= ======== ========= ========
Total balance of arrears on loans 90 days or
more in
arrears as % of the outstanding balance...... 0.0681% 0.0489% 0.0404% 0.0461% [__]%
========= ========= ======== ========= ========
NUMBER OF LOANS OUTSTANDING IN ARREARS
(THOUSANDS)
30-59 days in arrears........................ 40.6 39.0 36.0 28.9 [__]
60-89 days in arrears........................ 13.0 11.1 9.5 7.7 [__]
90-119 days in arrears....................... 7.5 6.5 5.5 4.7 [__]
120 or more days in arrears.................. 16.1 14.2 13.1 14.7 [__]
--------- --------- -------- --------- --------
Total number of loans outstanding in arrears. 77.2 70.8 64.1 56.0 [__]
========= ========= ======== ========= ========
Total number of loans outstanding 90 days or
more in
arrears (thousands).......................... 23.6 20.7 18.6 19.4 [__]
========= ========= ======== ========= ========
Total number of loans outstanding 90 days or
more in
arrears as % of the number of loans 1.1713% 1.0068% 0.9280% 0.9815% [__]%
outstanding..................................
========= ========= ======== ========= ========
Amount of loan losses ((pound) millions)..... 21.3 14.9 8.7 3.7 [__]
Loan losses as % of total outstanding balance 0.0279% 0.0175% 0.0097% 0.0036% [__]%
114
- -------------
(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 reduced 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 [__]% of the book as at [__], 2004 (compared with 31st
January, 2004: [__]%; 31st January, 2003: [__]%; 31st January, 2002: [__]%).
House price inflation has indirectly contributed to the improved arrears
situation by enabling borrowers to sell at a profit if they encounter financial
hardship. In the late 1980s house prices rose substantially faster than
inflation as housing turnover increased to record levels. This was at a time
when the economy grew rapidly, which led to falling unemployment and relatively
high rates of real income growth. These fed into higher demand for housing, and
house prices rose rapidly. Demand was further increased by changes in taxation
legislation with regard to tax relief on mortgage payments in 1988. When
monetary policy was subsequently tightened (in terms of both "LOCKING IN"
sterling to the European Exchange Rate Mechanism and higher interest rates), the
pace of economic activity first slowed and then turned into recession. Rising
unemployment combined with high interest rates led to a fall in housing demand
and increased default rates and repossessions. The ability of borrowers to
refinance was limited as house prices began to fall and many were in a position
of negative equity (borrowings greater than the resale value of the property) in
relation to their mortgages.
Halifax regularly reviews its lending policies in the light of prevailing
market conditions and reviews actions so as to mitigate possible problems. The
performance of Halifax new business and the arrears profiles are continuously
monitored in monthly reports. Any deterioration of the arrears level is
investigated and the internal procedures are reviewed if necessary.
115
THE SERVICING AGREEMENT
The following section contains a summary of the material terms of the
servicing agreement. The summary does not purport to be complete and is subject
to the provisions of the servicing agreement, a form of which has been filed as
an exhibit to the registration statement of which this prospectus is a part.
INTRODUCTION
On the initial closing date, 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, and to prepare and submit all necessary
applications and requests for any further approvals, authorisations,
consents, and licences required in connection with the performance
of services under the servicing agreement, and in particular any
necessary registrations under the Data Protection Act.
(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
116
the margin then applying to those loans beneficially owned
by the seller outside the portfolio; and
(iii) a margin in respect of any other tracker rate loan which is
higher than the margin which would then be set in accordance
with the seller's policy from time to time in relation to
that loan.
In particular, the servicer shall determine on each Funding 1
interest payment date, having regard to the aggregate of:
(1) the revenue which Funding 1 would expect to receive during
the next succeeding interest period;
(2) 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
(3) 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 and their related security.
(F) To keep the customer files and title deeds in safe custody and
maintain records necessary to
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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.
(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 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 five 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.
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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.
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 the initial closing date 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. 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. 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.
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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 by telegraphic transfer of the
proceeds of any new term advance borrowed from a new issuer
pursuant to a new intercompany loan agreement; and/or
* the promise of the mortgages trustee to hold the trust property
(including the new loans and their related security) on trust for
the seller (as to the seller share) and Funding 1 (as to the
Funding 1 share) in accordance with the terms of the mortgages
trust deed.
The 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 shall 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% 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% 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%;
(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% 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%;
(J) the sale of new loans on the relevant sale date does not result in the
loans (other than fixed rate
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loans) which after taking into account the Funding 1 swap will yield
less than sterling-LIBOR plus 0.50% as at the relevant sale date and
have more than 2 years remaining on their incentive period accounting
for more than 15% 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% 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 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 in [December 2011] (the "ISSUER STEP-UP DATE") (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 (i)
during the period from and including the closing date to but excluding the
interest payment date in [December 2005] is not less than
[(pound)27,000,000,000] and (ii) during the period from and including the
interest payment date in [December 2005] to but excluding the interest payment
date in [December 2009] is not less than [(pound)24,000,000,000] (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
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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 LOANS AND THEIR
RELATED SECURITY, 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 or a note
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;
(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 in writing 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:
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* 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 [*, 2004];
* the final maturity date of each loan is no later than June 2040;
* no loan has an outstanding principal balance of more than
(pound)500,000;
* prior to the making of each advance under a loan, (a) the lending
criteria and all preconditions to the making of any loan were
satisfied in all material respects subject only to exceptions made
on a case by case basis as would be acceptable to a reasonable,
prudent mortgage lender and (b) the requirements of the relevant
MIG policy were met, so far as applicable to that loan;
* 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 immediately preceding the relevant sale date, more than
the amount of the monthly payment then due;
* all of the borrowers are individuals and were aged 18 years or
older at the date of executed mortgage;
* 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 the Land Registry or Registrars
of Scotland which where required have been made and are pending and
in relation to such cases the seller is not aware of any notice or
any other matter that would prevent such registration;
* all of the properties are in England, Wales or Scotland;
* not more than twelve months 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 (a) 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
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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 and (b) received a certificate
of title from such solicitor or licensed conveyancer relating to
such property, the contents of which would have been acceptable to
a reasonable, prudent mortgage lender at that time;
* 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 and/or assigned by the seller to the
mortgages trustee under the mortgage sale agreement;
* each loan and its related security is valid, binding and
enforceable in accordance with its terms and is non-cancellable:
(i) except in relation to any term in any loan or in its related
security, in each case which is not binding by virtue of the
Unfair Terms in Consumer Contracts Regulations 1994 or (as the
case may be) the Unfair Terms in Consumer Contracts
Regulations 1999; and
(ii) except in relation to any flexible loan drawing, delayed
cashback, home cash reserve drawing, and any other further
advance, in each case which is not enforceable by virtue of
the Consumer Credit Act 1974;
* to the best of the seller's knowledge, none of the terms in any
loan or in its related security is not binding by virtue of its
being unfair within the meaning of the Unfair Terms in Consumer
Contracts Regulations 1994 or (as the case may be) the Unfair Terms
in Consumer Contracts Regulations 1999. In this warranty and the
previous warranty, reference to any legislation shall be construed
as a reference to that legislation as amended, extended or
re-enacted from time to time;
* 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.
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
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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 or loans under the relevant 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;
* 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
126
the borrowers of more than 10% 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.
127
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 (pound)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 (pound)[__], which corresponds to approximately [__]% of the trust
property. The actual percentage share of Funding 1 in the
128
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 (pound)[__], which corresponds to approximately [__]% of the trust
property. The actual percentage share of the seller in the trust property will
not be determined until the closing date.
FLUCTUATION OF SHARES IN THE TRUST PROPERTY
The shares of Funding 1 and the seller in the trust property will
fluctuate depending on a number of factors, including:
* the allocation of principal receipts on the loans to Funding 1
and/or the seller;
* losses arising on the loans;
* if new loans and their related security are sold to the mortgages
trustee;
* 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)[__], 2005.
The reason for the recalculation is to determine the new Funding 1
percentage share and the new seller percentage share in the trust property. The
Funding 1 percentage share and the seller percentage share determines the
entitlement of Funding 1 and the seller to interest (including capitalised
interest) and principal receipts from the loans in the trust property and also
the allocation of losses arising on the loans. The method for determining the
new Funding 1 percentage share and the seller percentage share is set out in the
next two sections.
Two London business days after each calculation date (the "DISTRIBUTION
DATE") the mortgages trustee distributes principal and revenue receipts to
Funding 1 and the seller, as described below. In relation to each distribution
date, the "RELEVANT SHARE CALCULATION DATE" means the calculation date at the
start of the most recent completed calculation period.
FUNDING 1 SHARE OF TRUST PROPERTY
On each calculation date (also referred to in this section as the
"RELEVANT CALCULATION DATE") or such time as the mortgages trust terminates, the
interest of Funding 1 in the trust property is recalculated to take effect from
the next distribution date in accordance with the following formulae:
* The share of Funding 1 in the trust property will be an amount
equal to:
A - B - C + D + E + F
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* The percentage share of Funding 1 in the trust property will be an
amount equal to:
A - B - C + D + E + F
---------------------- x 100
G
in the latter case, expressed as a percentage and rounded upwards to five
decimal places, where:
A = the amount of the share of Funding 1 in the trust property
calculated on the immediately preceding calculation date;
B = the amount of any principal receipts on the loans to be
distributed to Funding 1 on the distribution date immediately
following the relevant calculation date (as described under "-
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF PRINCIPAL RECEIPTS
PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT", "- MORTGAGES TRUST
ALLOCATION AND DISTRIBUTION OF PRINCIPAL RECEIPTS ON OR AFTER THE
OCCURRENCE OF A NON-ASSET TRIGGER EVENT BUT PRIOR TO THE OCCURRENCE
OF AN ASSET TRIGGER EVENT" AND "MORTGAGES TRUST ALLOCATION AND
DISTRIBUTION OF PRINCIPAL RECEIPTS ON OR AFTER THE OCCURRENCE OF AN
ASSET TRIGGER event");
C = the amount of losses sustained on the loans in the period from
the immediately preceding calculation date to the relevant
calculation date and the amount of any reductions occurring in
respect of the loans as described in paragraphs (1) to (4) below,
in each case allocated to Funding 1 in the calculation period
ending on the relevant calculation date;
D = the amount of any consideration to be paid by Funding 1 to the
seller with respect to any new loans to be 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
130
circumstances the subject of a product switch or other
obligation of the seller to repurchase, and in each case the
seller fails to repurchase the loan or loans under the
relevant mortgage account and their related security to the
extent required by the terms of the mortgage sale agreement.
In this event, the aggregate outstanding principal balance
of the loans in the trust property will be deemed to be
reduced for the purposes of the calculation in "G" by an
amount equal to the outstanding principal balance of the
relevant loan or loans under the relevant mortgage
account (together with arrears of interest and accrued
interest); and/or
(3) the seller would be required to repurchase a loan and its
related security as required by the terms of the mortgage
sale agreement, but the loan is not capable of being
repurchased. In this event, the aggregate outstanding
principal balance of the loans in the trust property will be
deemed to be reduced for the purposes of the calculation in
"G" by an amount equal to the outstanding principal balance
of the relevant loan or loans under the relevant mortgage
account (together with arrears of interest and accrued
interest); and/or
(4) the seller materially breaches any other material warranty
under the mortgage sale agreement and/or (for so long as the
seller is the servicer) the servicing agreement, which will
also be grounds for terminating the appointment of the
servicer. In this event, the aggregate outstanding principal
balance of the loans in the trust property will be deemed to
be reduced by an amount equal to the resulting loss incurred
by the beneficiaries.
The reductions or deemed reductions set out in paragraphs (1) to (4) above
will be made on the relevant calculation date first to the seller's share
(including the minimum seller share) of the trust property, 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% - 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 (pound)[__], 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
131
where:
X = 5% of the aggregate outstanding principal balance of loans in the
trust property;
Y = the product of: (p X q) X r
where:
p = 8%;
q = the "FLEXIBLE DRAW CAPACITY", being an amount equal to the excess
of (1) the maximum amount that borrowers may draw under flexible
loans included in the trust property (whether or not drawn) over (2)
the aggregate principal balance of actual flexible loan advances in
the trust property on the relevant calculation date; and
r = 3;
and
Z = the aggregate sum of reductions deemed made (if any) in accordance
with paragraphs (2), (3) and (4) as described in "- FUNDING 1 SHARE
OF TRUST PROPERTY" above.
The purpose of "X" is to mitigate the risks relating to certain set-off
risks relating to the loans. The amount of "X" may be reduced from time to time
at the request of the seller or Funding 1 (acting reasonably) provided that the
security trustee has received written confirmation from the rating agencies that
there will be no adverse effect on the then current ratings of the notes as a
result thereof.
The purpose of the calculation in "Y" is to mitigate the risk of the
seller failing to fund a drawing under a flexible loan.
The purpose of the calculation in "Z" is to mitigate the risk of the
seller materially breaching any material warranty under the mortgage sale
agreement and/or the servicing agreement and failing to repurchase certain loans
and their related security to the extent required by the terms of the mortgage
sale agreement.
CASH MANAGEMENT OF TRUST PROPERTY - REVENUE RECEIPTS
Under the cash management agreement, the cash manager is responsible for
distributing revenue receipts on behalf of the mortgages trustee on each
distribution date in accordance with the order of priority described in the
following section. For further information on the role of the cash manager, see
"CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING 1".
MORTGAGES TRUST CALCULATION OF REVENUE RECEIPTS
"MORTGAGES TRUST AVAILABLE REVENUE RECEIPTS" is calculated by the cash
manager on each calculation date and is an amount equal to the sum of:
* revenue receipts on the loans (but excluding principal receipts);
and
* interest payable to the mortgages trustee on the mortgages trustee
GIC account;
less
* amounts due to third parties (also known as "THIRD PARTY AMOUNTS
"), including:
(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:
132
(A) in no order of priority between them but in proportion to the
respective amounts due, to pay amounts due to:
* the mortgages trustee under the provisions of the mortgages
trust deed; and
* third parties from the mortgages trustee in respect of the
mortgages trust, but only if:
(1) payment is not due as a result of a breach by the
mortgages trustee of the documents to which it is a
party; and/or
(2) payment has not already been provided for elsewhere;
(B) in payment of amounts due to the servicer or to become due to the
servicer during the following calculation period under the
provisions of the servicing agreement;
(C) to allocate and pay to Funding 1 an amount equal to the lesser of:
(x) an amount determined by multiplying the total amount of the
remaining mortgages trust available revenue receipts by
Funding 1's percentage share of the trust property as
calculated on the relevant share calculation date; and
(y) the aggregate of Funding 1's obligations on the immediately
succeeding Funding 1 interest payment date as set out under
the Funding 1 pre-enforcement revenue priority of payments
or, as the case may be, the Funding 1 post-enforcement
priority of payments (but excluding any principal amount
due under any intercompany loan and/or amounts relating to
principal in 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,
133
payable. At the date of this prospectus, VAT is calculated at the rate of 17.5%
of the amount to be paid. Payment of VAT will 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 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.
The following table sets out each pass-through term advance and 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 (which comprises bullet term advances and scheduled
amortisation term advances):
134
RELEVANT
SCHEDULED ACCUMULATION
CASH ACCUMULATION ADVANCE TERM ADVANCE DESIGNATION REPAYMENT DATE AMOUNT
- ------------------------------------------ ------------------------------------ ------------------ --------------
ADVANCES MADE BY THE ISSUER
Issuer series 1 term AAA advance......... bullet [December 2005] (pound)[__]
Issuer series 2 term AAA advance......... scheduled amortisation (1st [June 2007] (pound)[__]
instalment)
Issuer series 2 term AAA advance......... scheduled amortisation (2nd [September 2007] (pound)[__]
instalment)
Issuer series 2 term AAA advance......... scheduled amortisation (3rd [December 2007] (pound)[__]
instalment)
Issuer series 2 term AAA advance......... scheduled amortisation (4th [March 2008] (pound)[__]
instalment)
Issuer series 3 term AAA advance......... scheduled amortisation (1st [March 2008] (pound)[__]
instalment)
Issuer series 3 term AAA advance......... scheduled amortisation (2nd [June 2008] (pound)[__]
instalment)
Issuer series 3 term AAA advance......... scheduled amortisation (3rd [September 2008] (pound)[__]
instalment)
Issuer series 3 term AAA advance......... scheduled amortisation (4th [December 2008] (pound)[__]
instalment)
Issuer series 4 term AAA advance......... scheduled amortisation (1st [March 2010] (pound)[__]
instalment)
Issuer series 4 term AAA advance......... scheduled amortisation (2nd [June 2010] (pound)[__]
instalment)
Issuer series 5 term AAA advances........ pass-through N.A. N.A.
Issuer term AA advances.................. pass-through N.A. N.A.
Issuer term BBB advances................. pass-through N.A. N.A.
ADVANCES MADE BY PERMANENT FINANCING
(NO.6) PLC
Previous series 1 term AAA advance....... bullet September 2005 (pound)541,711,000
Previous series 2 term AAA advance....... scheduled amortisation (1st March 2007 (pound)135,428,000
instalment)
Previous series 2 term AAA advance....... scheduled amortisation (2nd June 2007 (pound)135,428,000
instalment)
Previous series 2 term AAA advance....... scheduled amortisation (3rd September 2007 (pound)135,428,000
instalment)
Previous series 2 term AAA advance....... scheduled amortisation (4th December 2007 (pound)135,428,000
instalment)
Previous series 3 term AAA advance....... scheduled amortisation (1st December 2007 (pound)250,000,000
instalment)
Previous series 3 term AAA advance....... scheduled amortisation (2nd March 2008 (pound)250,000,000
instalment)
Previous series 3 term AAA advance....... scheduled amortisation (3rd June 2008 (pound)250,000,000
instalment)
Previous series 3 term AAA advance....... scheduled amortisation (4th September 2008 (pound)250,000,000
instalment)
Previous series 4 term AAA advance....... scheduled amortisation (1st December 2009 (pound)259,800,000
instalment)
Previous series 4 term AAA advance....... scheduled amortisation (2nd March 2010 (pound)259,800,000
instalment)
Previous series 5 term AAA advances...... pass-through N.A. N.A.
Previous term AA advances................ pass-through N.A. N.A.
Previous term BBB advances............... pass-through N.A. N.A.
ADVANCES MADE BY PERMANENT
FINANCING (NO.5) PLC
Previous series 1 term AAA advance....... bullet June 2005 (pound)667,736,000
Previous series 2 term AAA advance....... scheduled amortisation (1st December 2006 (pound)173,611,250
instalment)
Previous series 2 term AAA advance....... scheduled amortisation (2nd March 2007 (pound)173,611,250
instalment)
Previous series 2 term AAA advance....... scheduled amortisation (3rd June 2007 (pound)173,611,250
instalment)
Previous series 2 term AAA advance....... scheduled amortisation (4th September 2007 (pound)173,611,250
instalment)
Previous series 3 term AAA advance....... scheduled amortisation (1st March 2009 (pound)200,321,000
instalment)
Previous series 3 term AAA advance....... scheduled amortisation (2nd June 2009 (pound)200,321,000
instalment)
Previous series 4 term AAA advance....... scheduled amortisation (1st September 2009 (pound)333,000,000
instalment)
Previous series 4 term AAA advance....... scheduled amortisation (2nd December 2009 (pound)333,000,000
instalment)
Previous series 5 term AAA advance....... pass-through N.A. N.A.
Previous term AA advances................ pass-through N.A. N.A.
Previous term BBB advances............... pass-through N.A. N.A.
ADVANCES MADE BY PERMANENT
FINANCING (NO. 4) PLC
Previous series 1 term AAA advance....... bullet March 2005 (pound)803,859,000
Previous series 2 term AAA advance....... bullet March 2007 (pound)1,286,174,000
Previous series 3 term AAA advance....... scheduled amortisation (1st December 2008 (pound)455,520,000
instalment)
Previous series 3 term AAA advance....... scheduled amortisation (2nd March 2009 (pound)455,520,000
instalment)
Previous series 4 term AAA advance....... scheduled amortisation (1st September 2009 (pound)499,875,500
instalment)
Previous series 4 term AAA advance....... scheduled amortisation (2nd December 2009 (pound)499,875,500
instalment)
Previous series 5 term AAA advance....... pass-through N.A. N.A.
Previous term AA advances................ pass-through N.A. N.A.
Previous term A advances................. pass-through N.A. N.A.
Previous term BBB advances............... pass-through N.A. N.A.
135
RELEVANT
SCHEDULED ACCUMULATION
CASH ACCUMULATION ADVANCE TERM ADVANCE DESIGNATION REPAYMENT DATE AMOUNT
- ------------------------------------------ ------------------------------------ ------------------ --------------
ADVANCES MADE BY PERMANENT
FINANCING (NO. 3) PLC
Previous series 1 term AAA advance....... bullet December 2004* (pound)658,500,000
Previous series 2 term AAA advance....... bullet September 2006 (pound)1,018,000,000
Previous series 3 term AAA advance....... scheduled amortisation (1st June 2008 (pound)449,125,000
instalment)
Previous series 3 term AAA advance....... scheduled amortisation (2nd September 2008 (pound)449,125,000
instalment)
Previous series 4A1 term AAA advance..... scheduled amortisation (1st March 2009 (pound)241,375,000
instalment)
Previous series 4A1 term AAA advance..... scheduled amortisation (2nd June 2009 (pound)241,375,000
instalment)
Previous series 4A2 term AAA advance..... scheduled amortisation (1st March 2009 (pound)375,000,000
instalment)
Previous series 4A2 term AAA advance..... scheduled amortisation (2nd June 2009 (pound)375,000,000
instalment)
Previous series 5 term AAA advance....... pass-through N.A. N.A.
Previous term AA advances................ pass-through N.A. N.A.
Previous term BBB advances............... pass-through N.A. N.A.
ADVANCES MADE BY PERMANENT
FINANCING (NO. 2) PLC
Previous series 1 term AAA advance*...... bullet March 2004* (pound)633,312,000
Previous series 2 term AAA advance....... bullet September 2005 (pound)1,108,016,000
Previous series 3 term AAA advance....... scheduled amortisation (1st March 2006 (pound)427,187,500
instalment)
Previous series 3 term AAA advance....... scheduled amortisation (2nd June 2006 (pound)427,187,500
instalment)
Previous series 4 term AAA advance....... bullet December 2007 (pound)1,107,250,000
Previous series 5 term AAA advance....... pass-through N.A. N.A.
Previous term AA advances................ pass-through N.A. N.A.
Previous term BBB advances............... pass-through N.A. N.A.
ADVANCES MADE BY PERMANENT
FINANCING (NO. 1) PLC
Previous series 1 term AAA advance*...... bullet June 2003* (pound)509,614,731
Previous series 2 term AAA advance....... bullet June 2005 (pound)509,614,731
Previous series 3 term AAA advance....... bullet December 2005 (pound)748,299,320
Previous series 4A1 term AAA advance..... bullet June 2007 (pound)484,000,000
Previous series 4A2 term AAA advance..... pass-through N.A. N.A.
Previous term AA advances................ pass-through N.A. N.A.
Previous term BBB advances............... pass-through N.A. N.A.
Any bullet term advance in respect of a as indicated in the principal
new issuer............................... the relevant amount of that
prospectus bullet term
advance
Any scheduled amortisation instalment as indicated in the principal
in respect of a new issuer............... the relevant amount of that
prospectus scheduled
amortisation
instalment
* previously repaid
Definitions:
"CASH ACCUMULATION PERIOD" means the period beginning on the earlier of:
* the commencement of the anticipated cash accumulation period
relating to the relevant accumulation amount; and
* in respect of an original bullet term advance, six months prior to
the scheduled repayment date
136
of that original bullet term advance and, in respect of an
original scheduled amortisation instalment, three months (or one
month, in the case of the scheduled amortisation instalments
relating to the series 2 class A issuer notes and the series 3
class A issuer notes) 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 2 term AAA advance and the
issuer series 3 term AAA advance will consist of four equal scheduled
amortisation instalments and the issuer series 4 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
137
distribution date during the relevant interest period.
The "CASH ACCUMULATION LEDGER" means a ledger maintained by the cash
manager for Funding 1, which records amounts accumulated by Funding 1 to pay
relevant accumulation amounts.
"REPAYMENT REQUIREMENT" means on a calculation date the amount, if any,
by which:
* the aggregate of all amounts that will be payable by Funding 1 on
the next Funding 1 interest payment date as described in items (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) 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 product of (a) the
Funding 1 share percentage as at the start of the most recently
ended calculation period (provided that if during the most
recently ended calculation period loans and their related security
are sold to the mortgages trustee or Funding 1 has acquired part
of the seller's share of the trust property from the seller, then
the Funding 1 share percentage will be calculated for purposes of
this paragraph as the weighted average of the Funding 1 share
percentages as of the first day of such calculation period and as
of the date immediately after such sale or acquisition), (b) the
aggregate amount of principal receipts received by the mortgages
trustee during the most recently ended calculation period and (c)
the outstanding principal balance of intercompany loan A (in the
case of Rule (2)) or intercompany loan B (in the case of Rule
(3)), divided by the aggregate outstanding principal balance of
all intercompany loans, each as of the most recent Funding 1
interest payment date;
* 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 under the servicing agreement 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
138
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 (i)
during the period from and including the closing date to but
excluding the interest payment date in [December 2005] is less
than [(pound)27,000,000,000] or (ii) during the period from and
including the interest payment date in [December 2005] to but
excluding the interest payment date in [December 2009] is less
than [(pound)24,000,000,000].
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 are calculated by
the cash manager on each calculation date and the relevant amounts notified to
the mortgages trustee (who will be entitled to rely on such notifications).
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF PRINCIPAL RECEIPTS PRIOR TO THE
OCCURRENCE OF A TRIGGER EVENT
On each distribution date where no trigger event has occurred on or before
the immediately preceding calculation date, the cash manager will apply
mortgages trust available principal receipts as follows:
(A) first, where Funding 1 has no cash accumulation requirement and no
repayment requirement on that distribution date, all such receipts
will be allocated and paid to the seller until the seller share of
the trust property (as calculated on the relevant share calculation
date) is equal to the minimum seller share;
(B) then if Funding 1 has a cash accumulation requirement on that
distribution date, such receipts will be allocated and paid to
Funding 1 in an amount up to but not exceeding Funding 1's cash
accumulation requirement on that distribution date;
(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
139
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 trust available
principal receipts on that calculation date.
DISPOSAL OF TRUST PROPERTY
The trust property is held on trust for the benefit of Funding 1 and the
seller. Subject to the terms of the mortgages trust deed, the mortgages trustee
is not entitled to dispose of the trust property or create any security interest
over the trust property.
If an event of default occurs under any intercompany loan agreement (an
"INTERCOMPANY LOAN EVENT OF DEFAULT") and the security trustee determines to
serve an intercompany loan acceleration notice on Funding 1, then the security
trustee will be entitled, among other things, to sell Funding 1's share of the
trust property. For further information on the security granted by Funding 1
over its assets, see "SECURITY FOR FUNDING 1'S OBLIGATIONS".
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 under any intercompany loan agreement and no note event
of default have occurred that have 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% of the
aggregate outstanding
140
principal balance of all loans constituting the trust property;
* 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;
* the product of the WAFF and WALS for the loans constituting the
trust property calculated on the relevant date in the same way as
for the initial portfolio (or as agreed by the servicer and the
rating agencies from time to time) does not exceed the product of
the WAFF and WALS for the loans constituting the trust property
calculated on the most recent previous closing date, plus 0.25%;
* the loan-to-value ratio of loans in the trust property, after
application of the LTV test on the relevant date, does not exceed
the loan-to-value ratio (based on the LTV test) of loans in the
trust property on the most recent previous closing date plus
0.25%; and
* the general reserve fund has not been debited on or before the
relevant date for the purposes of curing a principal deficiency in
respect of the term advances in circumstances where the general
reserve fund has not been replenished by a corresponding amount by
the relevant 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
* 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.
141
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.
142
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 offered issuer notes into sterling at the relevant issuer dollar
currency exchange rates and after converting the euro proceeds of the series 4
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 16 separate sub-loans, or
"ISSUER TERM ADVANCES", as described in the following table:
INITIAL FINAL
PRINCIPAL REPAYMENT
AMOUNT OF DATE OF
DESIGNATED EACH EACH
TERM CORRESPONDING ISSUER ISSUER
ISSUER TERM ADVANCE CORRESPONDING ISSUER SWAP TERM TERM
ADVANCE RATING ISSUER NOTES (IF ANY) ADVANCE ADVANCE
- ------------------------------ ------------ ----------------- ----------------- ---------------- -----------------
Series 1 term AAA advance.... AAA Series 1 class A Series 1 class A (pound)[__] [December 2005]
Series 1 term AA advance..... AA Series 1 class B Series 1 class B (pound)[__] June 2042
Series 1 term BBB advance.... BBB Series 1 class C Series 1 class C (pound)[__] June 2042
Series 2 term AAA advance.... AAA Series 2 class A Series 2 class A (pound)[__] [March 2012]
Series 2 term AA advance..... AA Series 2 class B Series 2 class B (pound)[__] June 2042
Series 2 term BBB advance.... BBB Series 2 class C Series 2 class C (pound)[__] June 2042
Series 3 term AAA advance.... AAA Series 3 class A N/A (pound)[__] [December 2032]
Series 3 term AA advance..... AA Series 3 class B N/A (pound)[__] June 2042
Series 3 term BBB advance.... BBB Series 3 class C N/A (pound)[__] June 2042
Series 4 term AAA advance.... AAA Series 4 class A Series 4 class A (pound)[__] June 2042
Series 4 term AA advance..... AA Series 4 class B Series 4 class B (pound)[__] June 2042
Series 4 term BBB advance.... BBB Series 4 class C Series 4 class C (pound)[__] June 2042
Series 5A1 term AAA advance.. AAA Series 5 class A1 Series 5 class A1 (pound)[__] June 2042
Series 5A2 term AAA advance.. AAA Series 5 class A2 N/A (pound)[__] June 2042
Series 5 term AA advance..... AA Series 5 class B N/A (pound)[__] June 2042
Series 5 term BBB advance.... BBB Series 5 class C N/A (pound)[__] June 2042
Total:....................... (pound)[__]
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 advances despite the
series 1 class A issuer notes having different, short-term ratings. The
designated term advance ratings of the issuer term AA advances reflect the
rating expected to be assigned to the class B issuer notes by the rating
agencies on the closing date. The designated term advance ratings of the issuer
term BBB advances reflect the rating expected to be assigned to the class C
issuer notes by the rating agencies on the closing date. If, after the closing
date, the rating agencies subsequently change the ratings assigned to each class
of the issuer notes, then this will not affect the term advance ratings of the
issuer term advances under the issuer intercompany loan.
143
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
(pound)[__], which will be funded by the issue of the class A
issuer notes on the closing date;
* the issuer term AA advances in an aggregate principal amount of
(pound)[__], which will be funded by the issue of the class B
issuer notes on the closing date; and
* the issuer term BBB advances in an aggregate principal amount of
(pound)[__], which will be funded by the issue of the class C
issuer notes on the closing date.
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
part of the initial consideration due for loans (together with their related
security) sold to the mortgages trustee on the closing date, thereby increasing
Funding 1's share of the trust property. Funding 1's interest in the portfolio
will constitute the Funding 1 share of the trust property.
The issuer will make payments of interest and principal on the issuer
notes from, among other things, respective payments of interest and principal
made by Funding 1 to the issuer under the issuer term AAA advances, the issuer
term AA advances and the issuer term BBB advances of the issuer intercompany
loan and from amounts paid by the issuer swap providers to the issuer under the
issuer swaps.
The issuer has no obligation to make any further advances to Funding 1
under the terms of the issuer intercompany loan agreement.
CONDITIONS TO DRAWDOWN
The issuer will not be obliged to make the advances available to Funding 1
unless the security trustee is satisfied on the closing date that a number of
conditions have been met, including:
* that the issuer notes have been issued and the proceeds received
by or on behalf of the issuer;
* that Funding 1 has delivered a certificate certifying that it is
solvent; and
* that each of the issuer transaction documents has been duly
executed by the relevant parties to 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.
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
144
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 two-week and one-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
TERM
ADVANCE INITIAL INTEREST RATE STEPPED-UP INTEREST
SERIES NAME RATING PER ANNUM STEP-UP DATE RATE PER ANNUM
- -------------------------------- ------------- ----------------------- ------------------- -----------------------
Series 1........................ AAA LIBOR minus [__]% N/A N/A
Series 1........................ AA LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 1........................ BBB LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 2........................ AAA LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 2........................ AA LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 2........................ BBB LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 3........................ AAA LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 3........................ AA LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 3........................ BBB LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 4........................ AAA LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 4........................ AA LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 4........................ BBB LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 5A1...................... AAA LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 5A2...................... AAA LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 5........................ AA LIBOR plus [__]% [December 2011] LIBOR plus [__]%
Series 5........................ BBB LIBOR plus [__]% [December 2011] 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 interest period
which ends on the relevant step-up date indicated in that table in relation to
that issuer term advance.
A 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 issuer step-up date.
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 December 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
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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% 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 term AAA advances (other than the issuer
series 1 term AAA advance), the issuer term AA 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 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");
* 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".
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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
(i) to pay the seller for new loans to be sold to the mortgages
trustee under the mortgage sale agreement and/or (ii) to acquire
part of the current seller share of the trust property from the
seller and/or (iii) 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 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 on the BBB advances.
Similarly, each term A advance due and payable will rank equally and
proportionately as to payment of interest and principal due and payable, ahead
of payments of interest and principal due and payable on the term BBB advances.
Investors should note that amounts due and payable on the previous term
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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 trust 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.
These accounts may be required to be transferred to an alternative bank if
the short-term, unguaranteed and unsecured ratings of the account bank fall
below A-1+ by Standard & Poor's, F1+ by Fitch or P-1 by Moody's unless each
rating agency confirms that its then current rating of the notes would not be
adversely affected as a result of such ratings falling below these minimum
ratings.
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 deeds 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
previous start-up loan provider. Together with the issuer start-up loan provider
and the other secured creditors, we will enter into the issuer 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 and the second supplemental 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 and the second supplemental 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.
In addition Funding 1, on 12th March, 2004 granted additional fixed and
floating security in favour of the security trustee for and on behalf of the
Funding 1 secured creditors, to secure the same obligations as under the Funding
1 deed of charge (the "additional Funding 1 security"). The additional security
was granted under the second supplemental Funding 1 deed of charge which was
supplemental to the Funding 1 deed of charge. The second supplemental Funding 1
deed of charge contains certain Scots law provisions and is principally governed
by English law. It will be enforceable in the same circumstances as the Funding
1 deed of charge and the proceeds of enforcement of the second supplemental
Funding 1 deed of charge (if any) will be applied in the order set out in the
Funding 1 deed of charge. By their execution of the issuer deed of accession,
the parties thereto will also accede to the second supplemental 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
(together with the second supplemental Funding 1 deed of charge) 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
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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, except where the context requires otherwise,
the "INITIAL FUNDING 1 SECURITY" and together with the additional Funding 1
security, 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:
* an assignment (which may take effect as a floating charge) of 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 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
undertaking of Funding 1 not otherwise secured by any fixed
security interest detailed above.
NATURE OF SECURITY - FIXED CHARGE
Funding 1 may not deal with those of its assets which are subject to a
fixed charge without the prior written consent of the security trustee.
Accordingly, Funding 1 is not permitted to deal with the assets which are
expressed to be subject to a fixed charge in its ordinary course of business. In
this way, the security is said to "fix" over those assets which are expressed to
be subject to a fixed charge (being the charges and assignments described in the
first three bullet points in this section).
NATURE OF SECURITY - FLOATING CHARGE
Unlike the fixed charges, the floating charge does not attach to specific
assets but instead "floats" over a class of assets which may change from time to
time, allowing Funding 1 to deal with those assets and to give third parties
title to those assets free from any encumbrance in the event of sale, discharge
or modification, provided those dealings and transfers of title are in the
ordinary course of Funding 1's business. Any of Funding 1's assets acquired
after the initial closing date (including assets acquired as a result of the
disposition of any other asset of Funding 1), which are not subject to the fixed
charges mentioned in this section will also be subject to the floating charge.
The Funding 1 deed of charge was created prior to 15th September, 2003
(the "RELEVANT DATE"). 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 prohibition will apply, however, in
relation to the second supplemental Funding 1 deed of charge. In this respect,
Funding 1 secured creditors can rely on the security trustee's ability to
appoint an administrative receiver of Funding 1 under the Funding 1 deed of
charge as set out below.
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
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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). For a description of the nature of
floating charges created after the relevant date, in particular the ranking of
creditors see -"SECURITY FOR THE ISSUER'S OBLIGATIONS - NATURE OF SECURITY -
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 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
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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 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
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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
(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:
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* 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 capitalisation 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;
* 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;
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* 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. The second
supplemental 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
guarantees, the issuer paying agent and agent bank agreement, the
issuer underwriting agreement, the issuer subscription agreements,
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
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written consent of the security trustee. Accordingly, the issuer will not be
permitted to deal in its ordinary course of business with the assets which are
expressed to be subject to a fixed charge. In this way, the security is said to
"fix" over those assets which are expressed to be subject to a fixed charge
(being the charges and assignments described in the first three bullet points in
this section).
NATURE OF SECURITY - FLOATING CHARGE
Unlike the fixed charges, the floating charge does not attach to specific
assets but instead "floats" over a class of assets which may change from time to
time, allowing the issuer to deal with those assets and to give third parties
title to those assets free from any encumbrance in the event of sale, discharge
or modification, provided those dealings and transfers of title are in the
ordinary course of the issuer's business. Any assets acquired by the issuer
after the closing date (including assets acquired as a result of the disposition
of any other assets of the issuer) which are not subject to fixed charges
described in the preceding section (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 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
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charge only in accordance with the directions of the class of noteholders with
the highest-ranking issuer notes. If there is a conflict between the interests
of the class A noteholders of one series and the class A noteholders of another
series, or a conflict between the interests of class B noteholders of one series
and the class B noteholders of another series or a conflict between the
interests of the class C noteholders of one series and the class C noteholders
of another series then a resolution directing the security trustee to take any
action must be passed at separate meetings of the holders of each series of the
class A issuer notes or, as applicable, each series of the class B issuer notes
or each series of the class C issuer notes. In all such cases, the security
trustee will only act if it is indemnified and/or secured to its satisfaction.
The issuer security will become enforceable at any time following the
service of an issuer note acceleration notice on the issuer or if there are no
issuer notes outstanding, following a default in payment of any other secured
obligation of the issuer, provided that, if the issuer security has become
enforceable otherwise than by reason of a default in payment of any amount due
on the issuer notes, the security trustee will not be entitled to dispose of all
or part of the assets comprised in the issuer security unless either:
* a sufficient amount would be realised to allow a full and immediate
discharge of all amounts owing in respect of the class A issuer
notes or, if the class A issuer notes have been fully repaid, the
class B issuer notes or, if the class B issuer notes have been
fully repaid, the class C issuer notes; or
* the security trustee is of the sole opinion that the cashflow
expected to be received by the issuer will not, or that there is a
significant risk that it will not, be sufficient, having regard to
any other relevant actual, contingent or prospective liabilities of
the issuer, to discharge in full over time all amounts owing in
respect of the class A issuer notes or, if the class A issuer notes
have been fully repaid, the class B issuer notes or, if the class B
issuer notes have been fully repaid, the class C issuer notes.
Each of the issuer secured creditors (other than the noteholders, the note
trustee acting on behalf of the noteholders and the security trustee) will agree
under the issuer deed of charge that they will not take steps directly against
the issuer (other than in accordance with the transaction documents) 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.
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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 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.
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RETIREMENT AND REMOVAL
Subject to the appointment of a successor security trustee, the security
trustee may retire after giving three months' notice in writing to the issuer.
In order to be eligible to act as security trustee, such successor security
trustee must agree to be bound by the terms of the issuer deed of charge and
must meet the applicable eligibility requirements under the issuer deed of
charge, including the requirement that it satisfies the minimum capitalisation
and other applicable conditions in regards to trustee eligibility set forth in
the United States Investment Company Act of 1940, as amended. If within 60 days
of having given notice of its intention to retire, the issuer has failed to
appoint a replacement security trustee, the outgoing security trustee will be
entitled to appoint its successor (provided that such successor is acceptable to
the rating agencies and agrees to be bound by the terms of the issuer deed of
charge, and further provided that rating agencies confirm that the current
ratings of the notes shall not be either downgraded, reviewed or withdrawn as a
result of such appointment).
The issuer may remove the security trustee at any time providing that it
has the consent, which must not be unreasonably withheld or delayed, of each of
the issuer secured creditors to the removal.
In addition, the security trustee may, subject to the conditions specified
in the issuer deed of charge, appoint a co-trustee to act jointly with it.
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% of the aggregate principal amount
outstanding of the issuer notes then outstanding or by any other
issuer secured creditor (and then only to the extent that it is
indemnified and/or secured to its satisfaction) provided that:
(i) the security trustee will not act at the direction or request
of the class B noteholders unless either so to do would not,
in its sole opinion, be materially prejudicial to the
interests of the class A noteholders or the action is
sanctioned by an extraordinary resolution of the class A
noteholders;
(ii) the security trustee will not act at the direction or request
of the class C noteholders unless either so to do would not,
in its sole opinion, be materially prejudicial to the
interests of the class A noteholders and/or the class B
noteholders or the action is sanctioned by extraordinary
resolutions of the class A noteholders and/or the class B
noteholders, as the case may be; and
(iii) the security trustee will not act at the direction or request
of any other issuer secured creditor unless so to do would
not, in its sole opinion, be materially prejudicial to the
interests of the noteholders or the action is sanctioned by
extraordinary resolutions of the noteholders and each of the
other relevant secured creditors that ranks ahead of that
issuer secured creditor (in the issuer post-enforcement
priority of payments) also consents to that action;
* 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;
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* the security trustee is not required to monitor whether an issuer
note event of default has occurred or compliance by the issuer with
the issuer transaction documents;
* the security trustee will be taken not to have knowledge of the
occurrence of an issuer note event of default unless the security
trustee has received written notice from an issuer secured creditor
stating that an issuer note event of default has occurred and
describing that issuer note event of default;
* the security trustee may rely (without investigation or further
inquiry) on any instructions or directions given to it by the note
trustee as being given on behalf of the relevant class of
noteholders without inquiry about compliance with the issuer trust
deed and shall not be liable for any loss or damage arising as a
result of such reliance;
* the security trustee has no duties or responsibilities except those
expressly set out in the issuer deed of charge or the issuer
transaction documents;
* any action taken by the security trustee under the issuer deed of
charge or any of the issuer transaction documents binds all of the
issuer secured creditors;
* each issuer secured creditor must make its own independent
investigations, without reliance on the security trustee, as to the
affairs of the issuer and whether or not to request that the
security trustee take any particular course of action under any
issuer transaction document;
* the security trustee in a capacity other than as security trustee
can exercise its rights and powers as such as if it were not acting
as the security trustee;
* the security trustee and its affiliates may engage in any kind of
business with the issuer or any of the issuer secured creditors as
if it were not the security trustee and may receive consideration
for services in connection with any issuer transaction document or
otherwise without having to account to the issuer secured
creditors;
* the security trustee has no liability under or in connection with
the issuer deed of charge or any other issuer transaction document,
whether to an issuer secured creditor or otherwise, (1) other than
to the extent to which the liability is able to be satisfied in
accordance with the issuer deed of charge out of the property held
by it on trust under the issuer deed of charge and (2) it is
actually indemnified for the liability. This limitation of
liability does not apply to a liability of the security trustee to
the extent that it is not satisfied because there is a reduction in
the extent of the security trustee's indemnification as a result of
its fraud, negligence, wilful misconduct or breach of the terms of
the issuer deed of charge; and
* the security trustee is not responsible for any deficiency which
may arise because it is liable to tax in respect of the proceeds of
security.
The security trustee has had no involvement in the preparation of any part
of this prospectus, other than any particular reference to the security trustee.
The security trustee expressly disclaims and takes no responsibility for any
other part of this prospectus. The security trustee makes no statement or
representation in this prospectus, has not authorised or caused the issue of any
part of it and takes no responsibility for any part of it. The security trustee
does not guarantee the success of the issuer notes or the payment of principal
or interest on the issuer notes.
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" for each Funding 1 interest payment
date will be calculated by the cash manager on the day falling four business
days prior to such Funding 1 interest payment date and will be an amount equal
to the sum of:
* all mortgages trust available revenue receipts distributed or to be
distributed to Funding 1 during the then current interest period;
* any amounts paid or to be paid by the seller to Funding 1 during
the then current interest period 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)
and 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 during the then current interest period;
* the amounts then standing to the credit of the general reserve
ledger;
* if a liquidity reserve fund rating event has occurred and is
continuing, and there are no amounts standing to the credit of the
general reserve ledger, the amounts then standing to the credit of
the liquidity reserve ledger and available to be drawn, to the
extent necessary to pay the items in paragraphs (A) to (F), (H),
(J) and (L) in the Funding 1 pre-enforcement revenue priority of
payments; and
* if a liquidity reserve fund rating event has occurred but is no
longer continuing due to an increase in the seller's rating since
the preceding Funding 1 interest payment date, and Funding 1 elects
to terminate the liquidity reserve fund, all amounts standing to
the credit of the liquidity reserve ledger;
less:
* any payment made by the seller to Funding 1 on such Funding 1
interest payment date as described in "THE MORTGAGES TRUST -
PAYMENT BY THE SELLER TO FUNDING 1 OF THE AMOUNT OUTSTANDING UNDER
AN INTERCOMPANY LOAN" and
* any proceeds of a new intercompany loan received by Funding 1
during the then current interest period as described in "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 Funding 1 available revenue receipts (as
calculated above) will be sufficient to pay items (A) to (F), (H), (J) and (L)
of the Funding 1 pre-enforcement revenue priority of payments.
If the cash manager determines that there is an insufficiency, then
Funding 1 shall pay or provide for that insufficiency by applying amounts then
standing to the credit of (a) first, the Funding 1 principal ledger, if any, and
(b) second, any amounts standing to the credit of the cash accumulation ledger
after deducting the amounts standing to the credit of the Funding 1 principal
ledger (if any) from such ledger, and the cash manager shall make a
corresponding entry in the relevant principal deficiency ledger, as described in
"CREDIT STRUCTURE - PRINCIPAL DEFICIENCY LEDGER". Funding 1 principal receipts
thus applied 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. If there are no (or insufficient) amounts standing
to the credit of the Funding 1 principal ledger and the cash accumulation ledger
to cure such insufficiency (referred to as an uncured Funding 1 revenue
shortfall), then the cash manager will direct Funding 1 to request a drawing
under the Funding 1 liquidity facility to apply towards the revenue shortfall in
accordance with the Funding 1 pre-
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enforcement revenue priority of payments. See "CREDIT STRUCTURE - FUNDING 1
LIQUIDITY FACILITY" and "CREDIT STRUCTURE - LIQUIDITY RESERVE FUND".
If the cash manager determines that there is an excess of Funding 1
available revenue receipts over the amount required to pay the specified items
in the Funding 1 pre-enforcement revenue priority of payments, then Funding 1
shall apply such excess to extinguish any balance on the principal deficiency
ledger, as described in "CREDIT STRUCTURE - PRINCIPAL DEFICIENCY LEDGER".
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 (i) the Funding 1 available revenue receipts for such date
(ii) if Funding 1 available revenue receipts for such date are insufficient to
pay items (A) to (F), (H), (J) and (L) below, amounts standing to the credit of
the Funding 1 principal ledger and the cash accumulation ledger (in the manner
described above) and (iii) if there is an uncured Funding 1 revenue shortfall on
such date, drawings under the Funding 1 liquidity facility agreement to the
extent necessary to pay the items listed below in paragraphs (A) to (F), (H),
(J) and (L), 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, scheduled amortisation 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
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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;
(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, if a liquidity reserve fund rating event has occurred and is
continuing, 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
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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% 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.
DISTRIBUTION OF ISSUER REVENUE RECEIPTS
DEFINITION OF ISSUER REVENUE RECEIPTS
"ISSUER REVENUE RECEIPTS" will be calculated by the issuer cash manager
four business days prior to each interest payment date and will be an amount
equal to the sum of:
* interest to be paid by Funding 1 on the relevant Funding 1 interest
payment date in respect of the issuer term advances under the
issuer intercompany loan;
* fees to be paid to the issuer by Funding 1 on the relevant Funding
1 interest payment date under the terms of the issuer intercompany
loan;
* interest payable on the issuer's bank accounts and any authorised
investments (as defined in the glossary) and which will be received
on or before the relevant interest payment date in respect of the
issuer notes;
* 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 (i) 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 (ii) in respect of each issuer
swap provider, prior to the designation of an early termination
date under the relevant issuer swap agreement and the resulting
application of the collateral by way of netting or set-off, an
amount equal to the value of all collateral (other than excess swap
collateral) provided by such issuer swap provider to the issuer
pursuant to the relevant issuer swap agreement (and any interest or
distributions in respect thereof)); 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"):
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(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 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 termination amount) and from amounts received from
the issuer swap provider to pay interest due and payable on
the series 2 class A issuer notes;
* 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 A issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from
the series 4 issuer swap provider in relation to such swap to
pay interest due and payable on the series 4 class A issuer
notes; and
* interest due and payable on the series 5 class A issuer
notes;
(E) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 issuer swap provider in respect
of the series 1 class B issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from
the series 1 issuer swap provider in relation to such swap to
pay interest due and payable on the series 1 class B issuer
notes;
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* 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;
* 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
* interest due and payable on the series 5 class B issuer
notes;
(F) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 issuer swap provider in respect
of the series 1 class C issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from
the series 1 issuer swap provider in relation to such swap to
pay interest due and payable on the series 1 class C issuer
notes;
* amounts due to the series 2 issuer swap provider in respect
of the series 2 class C issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from
the series 2 issuer swap provider in relation to such swap to
pay interest due and payable on the series 2 class C issuer
notes;
* 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
* interest due and payable on the series 5 class C issuer
notes;
(G) then, in no order of priority between them but in proportion to the
respective amounts due, to pay any termination payment due (without
double counting) to:
* the series 1 issuer swap provider as a result of an issuer
swap provider default or an issuer swap provider downgrade
termination event in respect of the series 1 issuer swap
provider;
* the series 2 issuer swap provider as a result of an issuer
swap provider default or an issuer swap provider downgrade
termination event in respect of the series 2 issuer swap
provider; and
* 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;
(H) then, to the issuer, an amount equal to 0.01% of the interest
received on the issuer term advances, to be retained by the issuer
as profit; and
(I) then, to pay to shareholders of the issuer any dividend declared by
the issuer.
DISTRIBUTION OF ISSUER REVENUE RECEIPTS AFTER THE SERVICE OF A NOTE ACCELERATION
NOTICE ON THE ISSUER BUT PRIOR TO THE SERVICE OF AN INTERCOMPANY LOAN
ACCELERATION NOTICE ON FUNDING 1
Following the service of a note acceleration notice on the issuer under
the issuer deed of charge, but prior to the service of an intercompany loan
acceleration notice on Funding 1 under the Funding 1 deed of charge, the
security trustee will apply issuer revenue receipts in the same order of
priority as set out in the issuer pre-enforcement revenue priority of payments,
except that:
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* 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 trust 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 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, 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 Funding
1 pre-enforcement priority of payments 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;
* 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, 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 for and needed to make eligible liquidity
fund principal repayments (see "CREDIT STRUCTURE - LIQUIDITY
RESERVE FUND" below), 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
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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 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 [December 2005];
* in relation to the issuer series 2 term AAA advance, the
Funding 1 interest payment dates falling in [June 2007] in
respect of the first scheduled amortisation amount,
[September 2007] in respect of the second scheduled
amortisation amount, [December 2007] in respect of the third
scheduled amortisation amount and [March 2008] in respect of
the fourth scheduled amortisation amount;
* in relation to the issuer series 3 term AAA advance, the
Funding 1 interest payment dates falling in [March 2008] in
respect of the first scheduled amortisation amount, [June
2008 ]in respect of the second scheduled amortisation amount,
[September 2008] in respect of the third scheduled
amortisation amount and [December 2008] in respect of the
fourth scheduled amortisation amount;
* in relation to the issuer series 4 term AAA advance, the
Funding 1 interest payment dates falling in [March 2010] in
respect of each first scheduled amortisation amount and [June
2010] in respect of the second scheduled amortisation amount;
* in relation to the issuer series 5 term AAA advances, the
Funding 1 interest payment date falling in [December 2011];
* 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 advances have been
fully repaid;
* in relation to the issuer series 1 term BBB advance, the
Funding 1 interest payment date falling ON OR AFTER the date
on which the issuer series 1 term AA advance has been fully
repaid;
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* in relation to the issuer series 2 term BBB advance, the
Funding 1 interest payment date falling ON OR AFTER the date
on which the issuer series 2 term AA advance has been fully
repaid;
* in relation to the issuer series 3 term BBB advance, the
Funding 1 interest payment date falling ON OR AFTER the date
on which the issuer series 3 term AA advance has been fully
repaid;
* in relation to the issuer series 4 term BBB advance, the
Funding 1 interest payment date falling ON OR AFTER the date
on which the issuer series 4 term AA advance has been fully
repaid; and
* in relation to the issuer series 5 term BBB advance, the
Funding 1 interest payment date falling ON OR AFTER the date
on which the issuer series 5 term AA advance has been fully
repaid;
2) the date upon which a trigger event occurs;
3) the date upon which a note acceleration notice is served on the
issuer under the issuer deed of charge;
4) the date upon which an intercompany loan acceleration notice is
served on Funding 1 under the Funding 1 deed of charge; and
5) the date upon which a step-up date occurs in relation to the
relevant issuer term advance.
In each case, when an issuer term advance becomes due and payable, it
shall continue to be due and payable until it is fully repaid. If there are
insufficient funds available to repay an issuer term advance on a Funding 1
interest payment date upon which that issuer term advance is due and payable,
then the shortfall will be repaid on subsequent Funding 1 interest payment dates
from Funding 1 available principal receipts until that issuer term advance is
fully repaid.
The following sections set out various priorities of payments for Funding
1 available principal receipts under the following circumstances, and are
collectively referred to as the "FUNDING 1 PRE-ENFORCEMENT PRINCIPAL PRIORITY OF
PAYMENTS":
* 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;
* 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;
* 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; and
* 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.
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 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
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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, if a liquidity reserve fund rating event has occurred and is
continuing, (i) to the extent only that monies have been drawn from
the liquidity reserve fund in order to make eligible liquidity fund
principal repayments or (ii) to the extent that the liquidity
reserve fund has not been previously fully funded and Funding 1
available revenue receipts on such Funding 1 interest payment date
are insufficient to do so, 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, towards repayment of all term AAA advances that are then due
and payable in an order of priority based on their final repayment
date, so that the earliest maturing term AAA advance is paid first
(and if any term AAA advances have the same final repayment date,
then those term advances will be paid in no order of priority
between them but in proportion to their respective amounts due), in
each case subject to Rules (1), (2) and (3) below;
(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) and (3) 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) and (3) 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% 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
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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 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 term AA advance or any A term advance
(whether or not such term AAA advance, term AA advance or term A
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.
(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%; or
(b) both:
(i) the quarterly CPR is equal to or greater than 10%, but
less than 15%, and
(ii) the annualised CPR is less than 10%;
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%; 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;
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"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);
"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 at 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:
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<table>
Outstanding principal balance of intercompany loan A
Funding 1 principal funds x --------------------------------------------------------
Aggregate outstanding principal balance of all intercompany loans
</table>
where "FUNDING 1 PRINCIPAL FUNDS" means in respect of any Funding 1
interest payment date the sum of:
(A) the aggregate of the following amount for each calculation period
which has ended in the period from the previous Funding 1 interest
payment date to the most recent normal calculation date, such
amount being the product of:
(1) the Funding 1 share percentage as calculated at the start of
the relevant calculation period; and
(2) the aggregate amount of principal receipts received by the
mortgages trustee in the relevant calculation period;
(B) the amount credited to the principal deficiency ledger on the
relevant Funding 1 interest payment date; and
(C) the amount, if any, credited to the Funding 1 principal ledger
pursuant to item (l) of the above Funding 1 pre-enforcement
principal 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
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(2) the aggregate amount of principal receipts received by the
mortgages trustee in the relevant calculation period;
(B) the amount credited to the principal deficiency ledger on the
relevant Funding 1 interest payment date; and
(C) the amount, if any, credited to the Funding 1 principal ledger
pursuant to item (I) of the above Funding 1 pre-enforcement
principal priority of payments on the immediately preceding Funding
1 interest payment date.
Allocations involving Rule (2) or Rule (3)
Where Rule (2) or Rule (3) applies at a level of any priority of payments,
the funds available for making payments at that level shall first be allocated
without reference to Rule (2) or Rule (3) (as applicable). However, if the
amount so allocated to one or more term advances exceeds the amount permitted
under Rule (2) or Rule (3) (as applicable) to be paid in respect of those term
advances (the "CAPPED ADVANCES"), the excess shall then be reallocated among any
other relevant term advances at that level using the method of allocation as
applies at that level but without reference to the capped advances in
calculating such reallocation. If a further such excess arises as a result of
the reallocation process, the reallocation process shall be repeated at that
level in relation to each such further excess that arises until no further funds
can be allocated at that level following which the remaining excess shall then
be applied at the next level of that priority of payments.
REPAYMENT OF TERM ADVANCES OF EACH SERIES FOLLOWING THE OCCURRENCE OF A
NON-ASSET TRIGGER EVENT BUT PRIOR TO THE SERVICE ON FUNDING 1 OF AN INTERCOMPANY
LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF A NOTE ACCELERATION
NOTICE
Following the occurrence of a non-asset trigger event (where no asset
trigger event has occurred) under the mortgages trust deed but prior to the
service on Funding 1 of an intercompany loan acceleration notice under the
Funding 1 deed of charge or the service on each issuer of a note acceleration
notice under their respective deeds of charge, the bullet term advances and the
scheduled amortisation term advances in respect of any intercompany loan will be
deemed to be pass-through term advances and on each Funding 1 interest payment
date Funding 1 will be required to apply Funding 1 available principal receipts
in the following order of priority:
(A) first, towards repayment of the Funding 1 liquidity facility
provider amounts outstanding under the Funding 1 liquidity facility
that were drawn in order to make eligible liquidity facility
principal repayments;
(B) then, 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, if a liquidity reserve fund rating event has occurred and is
continuing, (i) to the extent only that monies have been drawn from
the liquidity reserve fund in order to make eligible liquidity fund
principal repayments or (ii) to the extent that the liquidity
reserve fund has not been previously fully funded and Funding 1
available revenue receipts on such Funding 1 interest payment date
are insufficient to do so, 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;
(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
175
(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, 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, if a liquidity reserve fund rating event has occurred and is
continuing, (i) to the extent only that monies have been drawn from
the liquidity reserve fund in order to make eligible liquidity fund
principal repayments or (ii) to the extent that the liquidity
reserve fund has not been previously fully funded and Funding 1
available revenue receipts on such Funding 1 interest payment date
are insufficient to do so, 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 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 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 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 drawn under the Funding 1 liquidity facility on
the prior Funding 1 interest payment date in order to make eligible
liquidity facility principal repayments;
(B) then, 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;
176
(C) then, if a liquidity reserve fund rating event has occurred and is
continuing, (i) to the extent only that monies have been drawn from
the liquidity reserve fund in order to make eligible liquidity fund
principal repayments or (ii) to the extent that the liquidity
reserve fund has not been previously fully funded and Funding 1
available revenue receipts on such Funding 1 interest payment date
are insufficient to do so, 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 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 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 all
principal amounts to be repaid by Funding 1 to the issuer under the issuer
intercompany loan during the relevant interest period. Following the service of
a note acceleration notice on the issuer, but prior to the service of an
intercompany loan acceleration notice on Funding 1, "ISSUER PRINCIPAL RECEIPTS"
means the sum calculated by the security trustee four business days prior to
each interest payment date as the amount to be repaid by Funding 1 to the issuer
under the issuer intercompany loan during the relevant interest period and/or
the sum otherwise recovered by the security trustee (or the receiver appointed
on its behalf) representing the principal balance of the issuer notes.
DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS PRIOR TO THE SERVICE OF A NOTE
ACCELERATION NOTICE ON THE ISSUER
Prior to the service of a note acceleration notice on the issuer, the
issuer, or the issuer cash manager on its behalf, will apply any issuer
principal receipts on each interest payment date to repay the issuer notes in
the following manner (the "ISSUER PRE-ENFORCEMENT PRINCIPAL PRIORITY OF
PAYMENTS"):
CLASS A ISSUER NOTES
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 1
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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 paymentdate the series 1 class A issuer
notes will be redeemed in amounts corresponding to the principal
exchange amounts (if any) received from the series 1 issuer swap
provider under the series 1 class A issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 2 term AAA advance on each Funding 1
interest payment date shall be paid by the issuer to the series 2
issuer swap provider, and on each applicable interest payment date
the series 2 class A issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 2 issuer swap provider under the series 2 class A
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 3 term AAA advance on each Funding 1
interest payment date shall be applied to redeem the series 3 class
A issuer notes on each applicable interest payment date;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 4 term AAA advance on each Funding 1
interest payment date shall be paid by the issuer to the series 4
issuer swap provider, and on each applicable interest payment date
the series 4 class A issuer notes will be redeemed in amounts
corresponding to the principal exchange amounts (if any) received
from the series 4 issuer swap provider under the series 4 class A
issuer swap;
* any principal amounts received by the issuer from Funding 1 in
respect of the issuer series 5A1 term AAA advance on each Funding 1
interest payment date shall be applied to redeem the series 5 class
A1 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 5A2 term AAA advance on each Funding 1
interest payment date shall be applied to redeem the series 5 class
A2 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 applied by the issuer to redeem the
series 3 class B issuer notes on each applicable interest payment
date;
* 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 applied by the issuer to redeem the
series 5 class B issuer notes on each applicable interest payment
date.
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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 applied by the issuer to redeem the
series 3 class C issuer notes on each applicable interest payment
date;
* 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 applied by the issuer to redeem the
series 5 class C issuer notes on each applicable interest payment
date.
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 applied by the
issuer to redeem the series 3 class A notes on each
applicable interest payment date;
* any principal amounts received by the issuer from Funding 1
in respect of the issuer series 4 term AAA advance on each
Funding 1 interest payment date, shall be paid by the issuer
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to the series 4 issuer swap provider, and on each interest
payment date the series 4 class A issuer notes will be
redeemed in amounts corresponding to the principal exchange
amounts (if any) received from the series 4 issuer swap
provider under the series 4 class A issuer swap;
* any principal amounts received by the issuer from Funding 1
in respect of the issuer series 5A1 term AAA advance on each
Funding 1 interest payment date shall be applied by the
issuer to redeem the series 5 class A1 notes on each
applicable interest payment date; and
* any principal amounts received by the issuer from Funding 1
in respect of the issuer series 5A2 term AAA advance on each
Funding 1 interest payment date shall be applied by the
issuer to redeem the series 5 class A2 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 applied by the
issuer to redeem the series 3 class B issuer notes on each
applicable interest payment date;
* 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 applied by the
issuer to redeem the series 5 class B issuer notes on each
applicable interest payment date.
(C) then, in no order of priority between them, but in proportion to
the amounts due, to repay the class C issuer notes as follows:
* any principal amounts received by the issuer from Funding 1
in respect of the issuer series 1 term BBB advance on each
Funding 1 interest payment date, shall be paid by the issuer
to the series 1 issuer swap provider, and on each interest
payment date the series 1 class C issuer notes will be
redeemed in amounts corresponding to the principal exchange
amounts (if any) received from the series 1 issuer swap
provider under the series 1 class C issuer swap;
* any principal amounts received by the issuer from Funding 1
in respect of the issuer series 2 term BBB advance on each
Funding 1 interest payment date, shall be paid by the issuer
to the series 2 issuer swap provider, and on each interest
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;
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* 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 applied by the
issuer to redeem the series 3 class C issuer notes on each
applicable interest payment date;
* 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 applied by the
issuer to redeem the series 5 class C issuer notes on each
applicable interest payment date.
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);
(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;
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(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 (i) any excess swap collateral which shall be returned directly to
the relevant issuer swap provider and (ii) in respect of each issuer swap
provider, prior to the designation of an early termination date under the
relevant issuer swap agreement and the resulting application of the collateral
by way of netting or set-off, an amount equal to the value of all collateral
(other than excess swap collateral) provided by such issuer swap provider to the
issuer pursuant to the relevant issuer swap agreement (and any interest or
distributions in respect thereof)) received or recovered following enforcement
of the issuer security as follows:
(A) first, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to:
* the security trustee and any receiver appointed by the
security trustee together with interest and any amount in
respect of VAT on those amounts and any amounts then due or
to become due to the security trustee and the receiver under
the provisions of the issuer deed of charge;
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* the note trustee together with interest and any amount in
respect of VAT on those amounts and any amounts then due or
to become due and payable to the note trustee under the
provisions of the issuer trust deed; and
* the agent bank, the paying agents, the registrar and the
transfer agent together with interest and any amount in
respect of VAT on those amounts and any costs, charges,
liabilities and expenses then due or to become due and
payable to them under the provisions of the issuer paying
agent and agent bank agreement;
(B) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of amounts (together with
any amount in respect of VAT on those amounts) due and payable to
the issuer cash manager under the issuer cash management agreement
and to the corporate services provider under the issuer corporate
services agreement and to the issuer account bank;
(C) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 issuer swap provider in respect
of the series 1 class A issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from
the series 1 issuer swap provider in respect of the series 1
class A issuer swap to pay interest and principal due and
payable on the series 1 class A issuer notes;
* amounts due to the series 2 issuer swap provider in respect
of the series 2 class A issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from
the series 2 issuer swap provider in respect of the series 2
class A issuer swap to pay interest and principal due and
payable on the series 2 class A issuer notes;
* interest and principal on the series 3 class A issuer notes;
* amounts due to the series 4 issuer swap provider in respect
of the series 4 class A issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from
the series 4 issuer swap provider in respect of the series 4
class A issuer swap to pay interest and principal due and
payable on the series 4 class A issuer notes; and
* interest and principal on the series 5 class A issuer notes;
(D) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 issuer swap provider in respect
of the series 1 class B issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from
the series 1 issuer swap provider in respect of the series 1
class B issuer swap to pay interest and principal due and
payable on the series 1 class B issuer notes;
* amounts due to the series 2 issuer swap provider in respect
of the series 2 class B issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from
the series 2 issuer swap provider in respect of the series 2
class B issuer swap to pay interest and principal due and
payable on the series 2 class B issuer notes;
* 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 respect of the series 4
class B issuer swap to pay interest and principal due and
payable on
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the series 4 class B issuer notes; and
* interest and principal due and payable on the series 5 class
B issuer notes;
(E) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 issuer swap provider in respect
of the series 1 class C issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from
the series 1 issuer swap provider in respect of the series 1
class C issuer swap to pay interest and principal due and
payable on the series 1 class C issuer notes;
* amounts due to the series 2 issuer swap provider in respect
of the series 2 class C issuer swap (including any
termination payment but excluding any related issuer swap
excluded termination amount) and from amounts received from
the series 2 issuer swap provider in respect of the series 2
class C issuer swap to pay interest and principal due and
payable on the series 2 class C issuer notes;
* 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
* interest and principal due and payable on the series 5 class
C issuer notes;
(F) then, in no order of priority between them but in proportion to the
respective amounts due, to pay any termination payment due (without
double counting) to:
* the series 1 issuer swap provider, following an issuer swap
provider default or an issuer swap provider downgrade
termination event by the series 1 issuer swap provider;
* the series 2 issuer swap provider, following an issuer swap
provider default or an issuer swap provider downgrade
termination event by the series 2 issuer swap provider; and
* 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.
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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 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% below LIBOR for three-month
sterling deposits;
* a liquidity facility is available to Funding 1 to pay interest on
all issuer term advances, previous term advances, principal amounts
due on the issuer original bullet term advances and issuer original
scheduled amortisation 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; and
* the issuer start-up loan will be provided to increase the general
reserve fund and meet the costs of setting up the structure.
Each of these factors is considered more fully in the remainder of this
section.
CREDIT SUPPORT FOR THE ISSUER NOTES PROVIDED BY FUNDING 1 AVAILABLE REVENUE
RECEIPTS
It is anticipated that, during the life of the issuer notes, the Funding 1
share of the interest received from borrowers on the loans will, assuming that
all of the loans are fully performing, be greater than the sum of the interest
which the issuer has to pay on all of the issuer notes, the interest which the
previous 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 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.
GENERAL RESERVE FUND
A general reserve fund has been established:
* to contribute to 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:
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(i) was initially funded on the initial closing date from a
portion of the first start-up loan, was further funded on
each other previous closing date from a portion of the
relevant previous start-up loans and will amount to
approximately (pound)[o] on the closing date;
(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 (pound)[o].
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
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
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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 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 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, A 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".
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THE CLASS B ISSUER NOTES AND THE CLASS C ISSUER NOTES
The order of payments of interest to be made on the classes of notes will
be prioritised so that interest payments on the class C issuer notes will be
subordinated to interest payments on the class B issuer notes and interest
payments on the class B issuer notes will be subordinated to interest payments
on the class A issuer notes, in each case in accordance with the issuer priority
of payments.
Any shortfall in payments of interest on the class B issuer notes and/or
the class C issuer notes will be deferred until the next interest payment date.
On the next interest payment date, the amount of interest due on each class of
notes will be increased to take account of any deferred interest. If on that
interest payment date, there is still a shortfall, that shortfall will be
deferred again. This deferral process will continue until the final 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 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.
The class A issuer notes, the class B issuer notes, and the class C issuer
notes will be constituted by the issuer trust deed and will share the same
security. However, upon enforcement of the issuer security or the occurrence of
a trigger event, the class A issuer notes will rank in priority to the class B
issuer notes and the class C issuer notes; and the class B issuer notes will
rank in priority to the class C issuer notes.
MORTGAGES TRUSTEE GIC ACCOUNT/FUNDING 1 GIC ACCOUNT
All amounts held by the mortgages trustee have been and will continue to
be deposited in the mortgages trustee GIC account with the mortgages trustee GIC
provider. This account is subject to the mortgages trustee guaranteed investment
contract under which the mortgages trustee GIC provider has agreed to pay a
variable rate of interest on funds in the mortgages trustee GIC account of 0.25%
per 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 annum below LIBOR for three-month sterling deposits.
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. These criteria include a requirement that the short-term,
unguaranteed and unsecured ratings of the mortgages trustee GIC provider or the
Funding 1 GIC provider, as the case may be, are at least A-1+ by Standard &
Poor's, F1+ by Fitch and P-1 by Moody's, unless each rating agency confirms that
its then current rating of the notes would not be adversely affected as a result
of such ratings falling below these minimum ratings. If either the mortgages
trustee GIC provider or the Funding 1 GIC provider ceases to satisfy these
criteria, then the relevant account may be transferred to another entity which
does satisfy these criteria.
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. The Funding 1 liquidity facility is available to make
payments on the issuer term advances and previous term
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advances and to pay certain senior expense amounts.
GENERAL DESCRIPTION
On the initial closing date 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. The
Funding 1 liquidity facility agreement was subsequently amended and restated to,
amongst other matters, provide liquidity for the previous term advances made to
it by the other previous issuers. On the closing date, the Funding 1 liquidity
facility agreement will be further amended and restated to, amongst other
matters, provide liquidity for the issuer term advances. 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 issuer term advances and previous term advances
as specified in the Funding 1 pre-enforcement revenue priority of
payments provided that:
(1) drawings may not be made under the Funding 1 liquidity
facility to pay interest on item (H) of the Funding 1
pre-enforcement revenue priority of payments (being payment
of interest on the term AA advances) if, at the date of the
relevant drawing, the debit balance on the AA principal
deficiency sub-ledger is in an amount equal to or in excess
of 50% of the principal amount outstanding of the term AA
advances;
(2) drawings may not be made under the Funding 1 liquidity
facility to pay interest on item (J) of the Funding 1
pre-enforcement revenue priority of payments (being payment
of interest on the term A advances) if, at the date of the
relevant drawing, the debit balance on the A principal
deficiency sub-ledger is in an amount equal to or in excess
of 50% of the principal amount outstanding of the term A
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 term BBB advances) if, at the date of the
relevant drawing, the debit balance on the BBB principal
deficiency sub-ledger is in an amount equal to or in excess
of 50% of the principal amount outstanding of the term BBB
advances; and/or
* making "ELIGIBLE LIQUIDITY FACILITY PRINCIPAL REPAYMENTS ", being:
(i) prior to the occurrence of a trigger event:
(a) repayments of principal which are then due and payable
in respect of previous original bullet term advances
and issuer original bullet term advances; and
(b) repayments of principal in respect of previous original
scheduled amortisation term advances and issuer
original scheduled amortisation term advances on their
respective final maturity dates only; and
(ii) following 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, issuer original bullet term advances, previous
original scheduled amortisation term advances and issuer
original scheduled amortisation term advances on their
respective final maturity dates only; in each case prior to
the service of an intercompany loan acceleration notice on
Funding 1 and taking into account any allocation of principal
to meet any deficiency in Funding 1's available revenue
receipts.
Following the occurrence of an asset trigger event the Funding 1 liquidity
facility will not be available to repay principal in respect of original bullet
term advances or original scheduled amortisation term advances of the current
issuers.
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 30 days and not less than 20 days before the
expiration
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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,
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 STANDBY 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 standby 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 (pound)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 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 annum on the
undrawn, uncancelled amount of the Funding 1 liquidity facility. The commitment
fee is payable quarterly in arrear on each
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Funding 1 interest payment date. A contingent fee will be payable at the rate of
0.38% 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 (pound)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:
* 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.
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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 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 as part of Funding 1 available revenue receipts to fund the payment
of certain senior expenses and interest on term advances made by the issuer and
previous issuers. The liquidity reserve fund is also available to make "ELIGIBLE
LIQUIDITY FUND PRINCIPAL REPAYMENTS", which are:
(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 issuer
original bullet term advances; and
(b) repayments of principal in respect of previous original
scheduled amortisation term advances and issuer original
scheduled amortisation term advances on their respective
final maturity dates only; and
(ii) following the occurrence of a non-asset trigger event or an asset
trigger event, repayments of principal in respect of previous
original bullet term advances, issuer original bullet term
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advances, previous original scheduled amortisation term advances
and issuer 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.
The liquidity reserve fund, if required to be funded, will be funded
initially from Funding 1 available revenue receipts or (if insufficient funds
are available therefrom) from Funding 1 available principal receipts in
accordance with the Funding 1 pre-enforcement revenue priority of payments or
Funding 1 pre-enforcement principal priority of payments, as applicable. 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.
The liquidity reserve fund is funded and 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.
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.
ISSUER START-UP LOAN
The following section contains a summary of the material terms of the
issuer start-up loan agreement. The summary does not purport to be complete and
is subject to the provisions of the issuer 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 previous start-up loan
agreements as described in "- GENERAL RESERVE FUND" above.
GENERAL DESCRIPTION
On the closing date, Halifax (the "ISSUER START-UP LOAN PROVIDER"), acting
through its office at Trinity Road, Halifax, West Yorkshire HX1 2RG, will make
available to Funding 1 the issuer start-up loan under the issuer start-up loan
agreement. This will be a subordinated loan facility in an amount of
approximately (pound)[o], which will be used for meeting the costs and expenses
incurred by Funding 1 in connection with its payment to the seller of part of
the initial consideration 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 ISSUER START-UP LOAN
The issuer start-up loan will bear interest until the issuer step-up date,
at the rate of LIBOR for three-month sterling deposits plus 0.25% per annum and
from the issuer step-up date at the rate of LIBOR for three-month sterling
deposits at 0.50% per annum. For the first interest period, LIBOR will be
determined on the basis of a linear interpolation between LIBOR for two-week and
one-month sterling deposits. Any unpaid interest will be added to the principal
amount owed and will bear interest. Interest is payable by Funding 1 on each
Funding 1 interest payment date.
REPAYMENT OF THE ISSUER START-UP LOAN
Funding 1 will repay the issuer 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 issuer start-up loan
provider are payable after amounts due on the term advances to the current
issuers. After Funding 1 has repaid the issuer start-up loan, it will have no
further recourse to the issuer start-up loan provider.
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EVENT OF DEFAULT
It will be an event of default under any 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 issuer start-up loan will
become immediately due and payable.
GOVERNING LAW
The issuer start-up loan agreement will be governed by English law.
195
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 offered issuer notes (other than the series 1
class A issuer notes), and to address the difference in periodicity
between the interest payment dates in respect of the intercompany
loans, which occur quarterly, and the interest payment dates in
respect of the series 1 class A issuer notes, which occur (i)
monthly until the occurrence of a trigger event or enforcement of
the issuer security and (ii) quarterly on and following the
interest payment date occurring immediately thereafter; and
* issuer euro currency swaps: to protect the issuer against changes
in the sterling to euro exchange rate following the closing date
and the possible variance between a LIBOR-based rate for
three-month sterling deposits and a EURIBOR-based rate for
three-month euro deposits applicable to the series 4 issuer notes.
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
* 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
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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) he 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.
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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 will
be denominated in euro and will accrue interest at a EURIBOR-based rate for
three-month euro deposits. To deal with the potential 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 US dollar denominated issuer notes and all euro
denominated issuer notes 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 1 issuer swap provider will be
guaranteed by the [o]issuer swap guarantor pursuant to the Swiss Re issuer swap
guarantee.]
[The payment obligations of the series 2 issuer swap provider will be
guaranteed by the [o]issuer swap guarantor pursuant to the AIG 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.
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, if applicable, 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
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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 or guarantor, as applicable, 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 and the issuer swaps will or may be terminated under
certain circumstances, including the following:
* 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 and
the series 2 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 [December
2005] 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 [March 2012]
and the date on which the series 2 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, at the option of the relevant
issuer swap provider, if an event of default under the
relevant class of issuer notes occurs and the security
trustee serves an issuer note acceleration notice;
* in respect of the Funding 1 swap, at the option of the
Funding 1 swap provider, if an event of default under any
intercompany loan occurs and the security trustee serves an
intercompany loan acceleration notice;
* in respect of the issuer swaps, at the option of either
party, if a redemption or purchase of the relevant class of
issuer notes occurs pursuant to number 5(F) (Redemption or
purchase following a regulatory event) under "TERMS AND
CONDITIONS OF THE OFFERED ISSUER NOTES";
* at the option of the issuer (in the case of an issuer swap)
or Funding 1 (in the case of the Funding 1 swap), if certain
tax representations by the relevant swap provider prove to
have been incorrect or misleading in any material respect;
* at the option of the relevant swap provider, if certain
insolvency events occur with respect to the issuer (in the
case of an issuer swap) or Funding 1 (in the case of the
Funding 1 swap);
* at the option of the issuer (in the case of an issuer swap)
or Funding 1 (in the case of the Funding 1 swap), upon the
occurrence of an insolvency of the relevant swap provider, or
its guarantor, or the merger of the relevant swap provider
without an assumption of its obligations under the relevant
swap agreement, or if a material misrepresentation is made by
the swap provider under the relevant swap agreement or a
default by the relevant swap provider under an
over-the-counter derivatives transaction under another
agreement between the issuer and such swap provider; or if a
breach of a provision of the relevant swap agreement by the
swap provider is not remedied within the applicable grace
period, or, if applicable, the guarantor of the relevant swap
provider fails to comply with its obligations under the
guarantee;
* if a change in law results in the obligations of one of the
parties becoming illegal;
* at the option of the relevant issuer swap provider but
subject to obtaining the consent of
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the security trustee, if withholding taxes are imposed on
payments made by the issuer swap provider under the issuer
swap or, as the case may be, by the [o]issuer swap guarantor
under the [o]issuer swap guarantee; 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 insufficient
number of quotations can be obtained or if basing the valuation on quotations
would not produce a commercially reasonable result) and will include any unpaid
amounts that became due and payable prior to the date of termination. 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 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 SWAPS
Each swap provider may, subject to certain conditions specified in the
relevant swap agreement, including (without limitation) the satisfaction of
certain requirements of the rating agencies, transfer its obligations under any
of the 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. However, if an
issuer swap provider is required to gross up a payment under the issuer swaps,
the relevant issuer swap provider may, subject to the consent of the security
trustee, terminate the relevant issuer swaps.
[The [o] 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
[o] issuer swap guarantee. However, if the [o] issuer swap guarantor is required
to gross up a payment under the [o] issuer swap guarantee in
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respect of a relevant issuer currency swap, the series [o] issuer swap provider
may, subject to the consent of the security trustee, 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 the initial closing date 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 trust 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 previous start-up loans on the previous closing
dates, (ii) the issuer start-up loan on the closing date,
(iii) other amounts standing to the credit of the general
reserve fund (but not exceeding the general reserve fund
required amount) and (iv) 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 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).
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TERMINATION OF APPOINTMENT OF CASH MANAGER
The security trustee may, upon written notice to the cash manager,
terminate the cash manager's rights and obligations immediately if any of the
following events occurs:
* the cash manager defaults in the payment of any amount due and
fails to remedy the default for a period of three London business
days after becoming aware of the default;
* the cash manager fails to comply with any of its other obligations
under the cash management agreement which in the opinion of the
security trustee is materially prejudicial to the Funding 1 secured
creditors and does not remedy that failure within 20 London
business days after the earlier of becoming aware of the failure
and receiving a notice from the security trustee; or
* Halifax, while acting as the cash manager, suffers an insolvency
event.
If the appointment of the cash manager is terminated or it resigns, the
cash manager must deliver its books of account relating to the loans to or at
the direction of the mortgages trustee, Funding 1 or the security trustee, as
the case may be. The cash management agreement will terminate automatically when
Funding 1 has no further interest in the trust property and the intercompany
loan and all new intercompany loans (if any) have been repaid or otherwise
discharged.
GOVERNING LAW
The cash management agreement is governed by English law.
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CASH MANAGEMENT FOR THE ISSUER
The following section contains a summary of the material terms of the
issuer cash management agreement. The summary does not purport to be complete
and is subject to the provisions of the issuer cash management agreement, a form
of which has been filed as an exhibit to the registration statement of which
this prospectus is a part.
Halifax will be appointed on the closing date by the issuer and the
security trustee to provide cash management services to the issuer.
CASH MANAGEMENT SERVICES TO BE PROVIDED TO THE ISSUER
The issuer cash manager's duties will include but are not limited to:
(A) four business days before each interest payment date, determining:
* the amount of issuer revenue receipts to be applied to pay
interest on the issuer notes on the following interest
payment date and to pay amounts due to other creditors of the
issuer; and
* the amount of issuer principal receipts to be applied to
repay the issuer notes on the following interest payment
date;
(B) applying issuer revenue receipts and issuer principal receipts in
accordance with the relevant order of priority of payments for the
issuer set out in the issuer cash management agreement or, as
applicable, the issuer deed of charge;
(C) providing the issuer, Funding 1, the security trustee and the
rating agencies with quarterly reports in relation to the issuer;
(D) making all returns and filings required to be made by the issuer
and providing or procuring the provision of company secretarial and
administration services to the issuer;
(E) arranging payment of all fees to the London Stock Exchange plc or,
as applicable, the Financial Services Authority; and
(F) if necessary, performing all currency and interest rate conversions
(whether it be a conversion from sterling to dollars or vice versa,
sterling to euro or vice versa, or floating rates of interest to
fixed rates of interest or vice versa) free of charge, cost or
expense at the relevant exchange rate.
ISSUER'S BANK ACCOUNTS
On the closing date, the issuer will maintain a sterling bank account in
its name with Bank of Scotland at 116 Wellington Street, Leeds LS1 4LT, the
right, benefit and interest of which is assigned to the security trustee under
the issuer deed of charge (together with any other accounts of the issuer from
time to time the "ISSUER TRANSACTION ACCOUNT"). The issuer may, with the prior
written consent of the security trustee, open additional or replacement bank
accounts.
An issuer transaction account may be required to be transferred to an
alternative bank if the short-term, unguaranteed and unsecured ratings of the
issuer account bank falls below A-1+ by Standard & Poor's, F1+ by Fitch or P-1
by Moody's unless each rating agency confirms that its then current rating of
the notes would not be adversely affected as a result of such ratings falling
below these minimum ratings.
COMPENSATION OF ISSUER CASH MANAGER
The issuer cash manager will be paid a rate of [0.025]% 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.
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RESIGNATION OF ISSUER CASH MANAGER
The issuer cash manager may resign only on giving 12 months' written
notice to the security trustee and the issuer and if:
* a substitute issuer cash manager has been appointed and a new
issuer cash management agreement is entered into on terms
satisfactory to the security trustee and the issuer; and
* the ratings of the issuer notes at that time would not be adversely
affected as a result of that replacement.
TERMINATION OF APPOINTMENT OF ISSUER CASH MANAGER
The security trustee may, upon written notice to the issuer cash manager,
terminate the issuer cash manager's rights and obligations immediately if any of
the following events occurs:
* the issuer cash manager defaults in the payment of any amount due
and fails to remedy the default for a period of three London
business days after becoming aware of the default;
* the issuer cash manager fails to comply with any of its other
obligations under the issuer cash management agreement which in the
opinion of the security trustee is materially prejudicial to the
issuer secured creditors and does not remedy that failure within 20
London business days after the earlier of becoming aware of the
failure and receiving a notice from the security trustee; or
* the issuer cash manager suffers an insolvency event.
If the appointment of the issuer cash manager is terminated or it resigns,
the issuer cash manager must deliver its books of account relating to the issuer
notes to or at the direction of the security trustee. The issuer cash management
agreement will terminate automatically when the issuer notes have been fully
redeemed.
GOVERNING LAW
The issuer cash management agreement will be governed by English law.
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DESCRIPTION OF THE ISSUER TRUST DEED
GENERAL
The principal agreement governing the issuer notes will be the trust deed
dated on or about the closing date and made between the issuer and the note
trustee (the "ISSUER TRUST DEED"). The issuer trust deed has five primary
functions. It:
* constitutes the issuer notes;
* sets out the covenants of the issuer in relation to the issuer
notes;
* sets out the enforcement and post-enforcement procedures relating
to the issuer notes;
* contains provisions necessary to comply with the US Trust Indenture
Act of 1939, 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 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;
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(d) duty of the note trustee to use the same degree of care in
exercising its responsibilities as would be exercised by a prudent
person conducting their own affairs;
(e) duty of the note trustee to notify all noteholders of any events of
default of which it has actual knowledge; and
(f) right of the note trustee to resign at any time by notifying the
issuer in writing, and the ability of the issuer to remove the note
trustee under certain circumstances.
TRUST INDENTURE ACT PREVAILS
The issuer trust deed contains a provision that, if any other provision of
the issuer trust deed limits, qualifies or conflicts with another provision
which is required to be included in the issuer trust deed by, and is not subject
to contractual waiver under, the US Trust Indenture Act of 1939, as amended,
then the required provision of that Act will prevail.
GOVERNING LAW
The issuer trust deed will be governed by English law.
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THE ISSUER NOTES AND THE GLOBAL ISSUER NOTES
The issue of the issuer notes will be authorised by a resolution of the
board of directors of the issuer passed prior to the closing date. The issuer
notes will be constituted by an issuer trust deed to be dated the closing date,
between the issuer and the note trustee, as trustee for, among others, the
holders for the time being of the issuer notes. While the material terms of the
issuer notes, the definitive issuer notes and the global notes are described in
this prospectus, the statements set out in this section with regard to the
issuer notes, the definitive 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 (other than the series 3 class A
issuer notes) will be represented initially by a global issuer note in
registered form without interest coupons attached. The series 1 issuer notes and
the series 2 issuer notes will initially be offered and sold pursuant to a
registration statement, of which this prospectus forms a part, filed with the
United States Securities and Exchange Commission. The series 3 issuer notes, 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 series 3 class A issuer notes
will be issued in definitive registered form and delivered to the subscriber
thereof on or about the closing date upon certification as to non-U.S.
beneficial ownership.
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 (other than for the series 3 class A 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 definitive
issuer notes and direct interests in a global issuer note will be shown on, and
the transfer of that
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ownership will be effected through, the register maintained by the registrar.
Because of this holding structure of issuer notes, beneficial owners of issuer
notes may look only to DTC, Clearstream, Luxembourg or Euroclear, as applicable,
or their respective participants for their beneficial entitlement to those
issuer notes. The issuer expects that DTC, Clearstream, Luxembourg or Euroclear
will take any action permitted to be taken by a beneficial owner of issuer notes
only at the direction of one or more participants to whose account the interests
in a global issuer note is credited and only in respect of that portion of the
aggregate principal amount of issuer notes as to which that participant or those
participants has or have given that direction.
Beneficial owners will be entitled to the benefit of, will be bound by and
will be deemed to have notice of, all the provisions of the issuer trust deed
and the issuer paying agent and agent bank agreement. Beneficial owners can see
copies of these agreements at the principal office for the time being of the
note trustee, which is, as of the date of this document, The Bank of New York,
One Canada Square, London, E14 5AL and at the specified office for the time
being of each of the paying agents. Pursuant to its obligations under the
Listing Rules made by the UK Listing Authority, the issuer will maintain a
paying agent in the United Kingdom until the date on which the issuer notes are
finally redeemed for as long as any issuer is outstanding, if the proposed
European Union Directive on Taxation of Savings implementing the conclusions of
the ECOFIN Council meeting on 21st January, 2003, or any law implementing or
complying with, or introduced in order to conform to such conclusions is
introduced, the issuer will endeavour to maintain a paying agent in a member
state of the European Union that will not be obliged to withhold or deduct tax
pursuant to such directive or any such law.
PAYMENT
Principal and interest payments on the offered global issuer notes will be
made via the paying agents to DTC or its nominee, as the registered holder of
the offered global issuer notes. DTC's practice is to credit its participants'
accounts on the applicable interest payment date according to their respective
holdings shown on DTC's records unless DTC has reason to believe that it will
not receive payment on that interest payment date.
Payments by DTC, Clearstream, Luxembourg and Euroclear participants to the
beneficial owners of issuer notes (other than the series 3 class A issuer notes
in definitive registered form) 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.
Principal and interest payments on the series 3 class A issuer notes in
definitive registered form will be made in accordance with the terms and
conditions of the issuer notes.
CLEARANCE AND SETTLEMENT
DTC
DTC has advised us and the underwriters that it intends to follow the
following procedures:
DTC will act as securities depository for the offered global issuer notes.
The offered global issuer notes will be issued as securities registered in the
name of Cede & Co. (DTC's nominee).
DTC has advised us that it is a:
* limited-purpose trust company organised under the New York Banking
Law;
* "BANKING ORGANISATION" within the meaning of the New York Banking
Law;
* member of the Federal Reserve System;
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* "CLEARING CORPORATION" within the meaning of the New York Uniform
Commercial Code; and
* "CLEARING AGENCY" registered under the provisions of Section 17A of
the Exchange Act.
DTC holds securities for its participants and facilitates the clearance
and settlement among its participants of securities transactions, including
transfers and pledges, in deposited securities through electronic book-entry
changes in its participants' accounts. This eliminates the need for physical
movement of securities certificates. DTC participants include securities brokers
and dealers, banks, trust companies, clearing corporations and other
organisations. Indirect access to the DTC system is also available to others
including securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a participant, either directly
or indirectly. The rules applicable to DTC and its participants are on file with
the SEC. Transfers between participants on the DTC system will occur under DTC
rules.
Purchases of issuer notes under the DTC system must be made by or through
DTC participants, which will receive a credit for the issuer notes on DTC's
records. The ownership interest of each actual beneficial owner is in turn to be
recorded on the DTC participants' and indirect participants' records. Beneficial
owners will not receive written confirmation from DTC of their purchase.
However, beneficial owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the DTC participant or indirect participant through which the
beneficial owner entered into the transaction. Transfer of ownership interests
in the offered global issuer notes are to be accomplished by entries made on the
books of DTC participants acting on behalf of beneficial owners. Beneficial
owners will not receive certificates representing their ownership interest in
issuer notes unless use of the book-entry system for the issuer notes described
in this section is discontinued.
To facilitate subsequent transfers, all global issuer notes deposited with
DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of these
global issuer notes with DTC and their registration in the name of Cede & Co.
effect no change in beneficial ownership. DTC has no knowledge of the ultimate
beneficial owners of the issuer notes. DTC's records reflect only the identity
of the DTC participants to whose accounts the beneficial interests are credited,
which may or may not be the actual beneficial owners of the issuer notes. The
DTC participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC participants,
by DTC participants to indirect participants, and by DTC participants and
indirect participants to beneficial owners will be governed by arrangements
among them and by any statutory or regulatory requirements in effect from time
to time.
Redemption notices for the offered global issuer notes will be sent to
DTC. If less than all of those global issuer notes are being redeemed by
investors, DTC's practice is to determine by lot the amount of the interest of
each participant in those global issuer notes to be redeemed.
Neither DTC nor Cede & Co. will consent or vote on behalf of the offered
global issuer notes. Under its usual procedures, DTC will mail an omnibus proxy
to the issuer as soon as possible after the record date, which assigns the
consenting or voting rights of Cede & Co. to those DTC participants to whose
accounts the book-entry interests are credited on the record date, identified in
a list attached to the proxy.
The issuer understands that under existing industry practices, when the
issuer requests any action of noteholders or when a beneficial owner desires to
give or take any action which a noteholder is entitled to give or take under the
issuer trust deed, DTC generally will give or take that action, or authorise the
relevant participants to give or take that action, and those participants would
authorise beneficial owners owning through those participants to give or take
that action or would otherwise act upon the instructions of beneficial owners
through them.
CLEARSTREAM, LUXEMBOURG AND EUROCLEAR
Clearstream, Luxembourg and Euroclear each hold securities for their
participating organisations and facilitate the clearance and settlement of
securities transactions between their respective participants through electronic
book-entry changes in accounts of those participants, thereby eliminating the
need for physical movement of securities. Clearstream, Luxembourg and Euroclear
provide various services
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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, Cooperative, a
Belgium co-operative corporation (the "EUROCLEAR CO-OPERATIVE"). All operations
are conducted by the Euroclear operator. All Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear operator,
not the Euroclear co-operative. The board of the Euroclear co-operative
establishes policy for the Euroclear system.
Euroclear participants include banks - including central banks -
securities brokers and dealers and other professional financial intermediaries.
Indirect access to the Euroclear system is also available to other firms that
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing use of Euroclear and
the related Operating Procedures of the Euroclear system. These terms and
conditions govern transfers of securities and cash within the Euroclear system,
withdrawal of securities and cash from the Euroclear system, and receipts of
payments for securities in the Euroclear system. All securities in the Euroclear
system are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear operator acts under
these terms and conditions only on behalf of Euroclear participants and has no
record of or relationship with persons holding through Euroclear participants.
The information in this section concerning DTC and DTC's book-entry
system, Clearstream, Luxembourg and Euroclear has been obtained from sources
that the issuer believes to be reliable, but the issuer takes no responsibility
for the accuracy thereof.
As the holders of book-entry interests, beneficial owners will not have
the right under the issuer trust deed to act on solicitations by the issuer for
action by noteholders. Beneficial owners will only be able to act to the extent
they receive the appropriate proxies to do so from DTC, Clearstream, Luxembourg
or Euroclear or, if applicable, their respective participants. No assurances are
made about these procedures or their adequacy for ensuring timely exercise of
remedies under the issuer trust deed.
No beneficial owner of an interest in a global issuer note will be able to
transfer that interest except in accordance with applicable procedures, in
addition to those provided for under the issuer trust deed, of DTC, Clearstream,
Luxembourg and Euroclear, as applicable. The laws of some jurisdictions require
that some purchasers of securities take physical delivery of those securities in
definitive form. These laws and limitations may impair the ability to transfer
beneficial interests in the global issuer notes.
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
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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
The series 3 class A issuer notes will be issued on the closing date in
definitive registered form and may be exchanged for a global note in registered
form, as described in the terms and conditions of the issuer notes. Beneficial
owners of global issuer notes will only be entitled to receive definitive issuer
notes (such exchanged global issuer notes, together with the series 3 class A
issuer notes, the "DEFINITIVE ISSUER NOTES") under the following limited
circumstances:
* as a result of a change in UK law, the issuer or any paying agent
is or will be required to make any deduction or withholding on
account of tax from any payment on the issuer notes that would not
be required if the issuer notes were in definitive form;
* in the case of the offered global issuer notes, DTC notifies the
issuer that it is unwilling or unable to hold the offered global
issuer notes or is unwilling or unable to continue as, or has
ceased to be, a clearing agency under the 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 and the series 2 issuer notes, or integral multiples
thereof in each case. 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 are 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.
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TERMS AND CONDITIONS OF THE OFFERED ISSUER NOTES
The following is a summary of the material terms and conditions of the
series 1 issuer notes and the series 2 issuer notes (the "OFFERED ISSUER
NOTES"), numbered 1 to 16. 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. 7) 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, N.A. as the Funding 1 liquidity provider;
* [o] as issuer swap provider in respect of the series 1 issuer
notes;
* [o] as issuer swap provider in respect of the series 2 issuer
notes;
* [o]` as issuer swap provider in respect of the series 4 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 escribed in "UNITED KINGDOM TAXATION - WITHHOLDING TAX",
that restrict payments made to non-UK resident noteholders.
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1. FORM, DENOMINATION AND TITLE
The offered issuer notes are being offered and sold to the public in the
United States and to institutional investors outside the United States.
The offered issuer notes are initially in global registered form, without
coupons attached. Transfers and exchanges of beneficial interests in global
issuer notes are made in accordance with the rules and procedures of DTC,
Euroclear and/or Clearstream, Luxembourg, as applicable.
A global note will be exchanged for issuer notes in definitive registered
form only under limited circumstances. The denominations of any offered issuer
notes in definitive form will be $1,000 or $10,000 each or integral multiples
thereof. If issuer notes in definitive form are issued, they will be serially
numbered and issued in an aggregate principal amount equal to the principal
amount outstanding of the relevant global issuer notes and in registered form
only. Title to the global issuer notes or to any definitive issuer notes will
pass on registration in the register maintained by the registrar. The registered
holder of any global issuer note is the absolute owner of that note. Definitive
issuer notes may be transferred in whole upon surrender of the note to the
registrar and completion of the relevant form of transfer. The issuer notes are
not issuable in bearer form.
2. STATUS, SECURITY AND PRIORITY
The class A issuer notes, the class B issuer notes and the class C issuer
notes are direct, secured and unconditional obligations of the issuer and are
all secured by the same security. Payments on each class of issuer notes will be
made equally among all issuer notes of that class.
Without prejudice to the repayment provisions described in number 5 (and
except if a non-asset trigger event occurs or if, prior to enforcement of the
issuer security, amounts are due and payable in respect of more than one series
of the class A issuer notes), the class A issuer notes rank, irrespective of
series, without preference or priority among themselves. Without prejudice to
the repayment provisions described in number 5 below and subject to the relevant
scheduled and/or, as applicable, permitted redemption dates or other payment
conditions of the issuer notes, payments of principal and interest due and
payable on the class A issuer notes will rank ahead of payments of principal and
interest due and payable on the class B issuer notes and the class C issuer
notes subject to the terms and conditions of the issuer notes, the issuer cash
management agreement, the issuer deed of charge, the Funding 1 deed of charge
and the other issuer transaction documents.
Without prejudice to the repayment provisions described in number 5, the
class B issuer notes rank, irrespective of series, without preference or
priority among themselves. Without prejudice to the repayment provisions
described in number 5 below and subject to the relevant scheduled and/or, as
applicable, permitted redemption dates or other payment conditions of the issuer
notes, payments of principal and interest due and payable on the class B issuer
notes will rank ahead of payments of principal and interest due and payable on
the class C issuer notes and will be subordinated to those payments due and
payable on the class A issuer notes subject to the terms and conditions of the
issuer notes, the issuer cash management agreement, the issuer deed of charge,
the Funding 1 deed of charge and the other issuer transaction documents.
Without prejudice to the repayment provisions described in number 5, the
class C issuer notes rank, irrespective of series, without preference or
priority among themselves. Without prejudice to the repayment provisions
described in number 5 below and subject to the relevant scheduled and/or, as
applicable, permitted redemption dates or other payment conditions of the issuer
notes, payments of principal and interest due and payable on the class C issuer
notes will be subordinated to payments due and payable on the class A issuer
notes and the class B issuer notes subject to the terms and conditions of the
issuer notes, the issuer cash management agreement, the issuer deed of charge,
the Funding 1 deed of charge and the other issuer transaction documents.
In the event of the issuer security being enforced, the class A issuer
notes will rank in priority to the class B issuer notes, and the class A issuer
notes and the class B issuer notes will rank in priority to the class C issuer
notes.
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
215
conflict between the interests of the class A noteholders and the interests of
the class B noteholders and/or the class C noteholders, then the note trustee
and the security trustee will have regard to the interests of the class A
noteholders only. If there are no class A issuer notes outstanding and there are
any class B issuer notes outstanding and there is or may be a conflict between
the interests of the class B noteholders and the interests of the class C
noteholders, then the note trustee and the security trustee will have regard to
the interests of the class B noteholders only. Except in limited circumstances
described in number 11, there is no limitation on the power of class A
noteholders to pass an effective extraordinary resolution the exercise of which
is binding on the class B noteholders and the class C noteholders. However, as
described in number 11, there are provisions limiting the power of the class B
noteholders and the class C noteholders to pass an effective extraordinary
resolution, depending on its effect on the class A noteholders. Except in the
limited circumstances described in number 11 there is no limitation on the power
of class B noteholders to pass an effective extraordinary resolution the
exercise of which is binding on the class C noteholders. However, as described
in number 11, there are provisions limiting the power of the class C noteholders
to pass an effective extraordinary resolution, depending on its effect on the
class B noteholders.
The security trustee and the note trustee are entitled to assume (without
further investigation or inquiry) that any exercise by it or them of any power,
discretion or duty under the issuer transaction documents will not be materially
prejudicial to the interests of the noteholders if the rating agencies have
confirmed that the current ratings of the issuer notes will not be adversely
affected by that exercise.
The security for the payment of amounts due under the issuer notes is
created by the issuer deed of charge. The security is created in favour of the
security trustee who will hold it on behalf of the note trustee for and on
behalf of the noteholders and on behalf of other secured creditors of the
issuer. The security consists of the following:
(1) an assignment by way of first fixed security of all of the issuer's
right, benefit and interest under the issuer transaction documents
to which it is a party, including the issuer intercompany loan
agreement, the Funding 1 deed of charge, the second supplemental
Funding 1 deed of charge, the issuer swap agreements, the issuer
swap guarantees, the issuer paying agent and agent bank agreement,
the issuer subscription agreements, 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 undertakings
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 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:
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* 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 or beneficial 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 are paid; and
* the day which is seven days after the principal paying agent or the
US paying agent has notified the relevant class of noteholders,
either in accordance with number 14 or individually, that the
payment will be made, provided that subsequently payment is in fact
made.
Interest on the series 1 class A issuer notes will be paid monthly in
arrear on each applicable interest payment date. If a trigger event occurs or
the issuer security is enforced prior to the interest payment date falling in
[December 2005], 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.
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Each period beginning on, and including, the closing date or any interest
payment date and ending on, but excluding, the next interest payment date is
called an interest period, except that for the series 1 class A issuer notes,
following the occurrence of a trigger event or enforcement of the issuer
security, an interest period is the period from (and including) the 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 June],
2005 for the interest period from and including the closing date to but
excluding [10th June] , 2005. The first interest payment date for the other
offered issuer notes will also be [10th June] , 2005 for the interest period
from and including the closing date to but excluding [10th June], 2005.
The order of payments of interest to be made on the classes of issuer
notes will be prioritised so that interest payments due and payable on the class
C issuer notes will be subordinated to interest payments due and payable on the
class B issuer notes and the class A issuer notes; and interest payments due and
payable on the class B issuer notes will be subordinated to interest payments
due and payable on the class A issuer notes, in each case in accordance with the
issuer priority of payments.
Any shortfall in payments of interest on the class B issuer notes and/or
the class C issuer notes will be deferred until the next interest payment date.
On the next interest payment date, the amount of interest due on each class of
issuer notes will be increased to take account of any deferred interest, and
interest shall be paid on that deferred interest. If on that interest payment
date there is still a shortfall, that shortfall will be deferred again. This
deferral process will continue until the final maturity date of the issuer
notes, at which point if there is insufficient money available to pay interest
on the class B issuer notes and/or the class C issuer notes, then noteholders
may not receive all interest amounts payable on those classes of issuer notes.
Payments of interest due on an interest payment date in respect of the
class A issuer notes will not be deferred. In the event of the delivery of a
class A issuer note acceleration notice (as described in number 9), the amount
of interest that was due but not paid on any payment date will itself bear
interest at the applicable rate until both the unpaid interest and the interest
on that interest are paid.
The rate of interest for each interest period for the:
* series 1 class A issuer notes will be the sum of one-month
USD-LIBOR minus a margin of [o] % per annum;
* series 1 class B issuer notes will be the sum of three-month
USD-LIBOR plus a margin of [o] % per annum up to and including the
issuer step-up date and thereafter the sum of three-month USD-LIBOR
plus a margin of [o] % per annum;
* series 1 class C issuer notes will be the sum of three-month
USD-LIBOR plus a margin of [o] % per annum up to and including the
issuer step-up date and thereafter the sum of three-month USD-LIBOR
plus a margin of [o] % per annum;
* series 2 class A issuer notes will be the sum of three-month
USD-LIBOR plus a margin of [o] % per annum up to and including the
issuer step-up date and thereafter the sum of three-month USD-LIBOR
plus a margin of [o] % per annum;
* series 2 class B issuer notes will be the sum of three-month
USD-LIBOR plus a margin of [o] % per annum up to and including the
issuer step-up date and thereafter the sum of three-month USD-LIBOR
plus a margin of [o] % per annum;
* series 2 class C issuer notes will be the sum of three-month
USD-LIBOR plus a margin of [o] % per annum up to and including the
issuer step-up date and thereafter the sum of three-month USD-LIBOR
plus a margin of [o] % per annum.
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
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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.
The rates and amounts determined by the agent bank will be notified in
writing to the issuer, the issuer cash manager, the note trustee and the paying
agents. The agent bank will also notify those rates and amounts to each stock
exchange, competent listing authority and/or quotation system on which the
issuer notes are then listed, quoted and/or traded and to the relevant class of
noteholders in accordance with number 14 as soon as possible.
If the agent bank for any reason fails to make a required determination or
calculation as described, the note trustee will make the determination or
calculation as it shall deem fair and reasonable or as described in this number
4. If this happens, the determination or calculation will be deemed to have been
made by the agent bank.
The issuer, the issuer cash manager, the note trustee, the reference
banks, the agent bank and the noteholders will (in the absence of wilful
default, bad faith or manifest error) be bound by the determinations properly
made.
The agent bank will ensure that there will be four reference banks with
offices in London and an agent bank while there are issuer notes outstanding.
5. REDEMPTION, PURCHASE AND CANCELLATION
(A) FINAL REDEMPTION
If the offered issuer notes have not previously been redeemed in full as
described in this number 5, the issuer will redeem the issuer notes at their
then principal amount outstanding together with all accrued interest on the
final maturity date in respect of each class of issuer notes.
(B) MANDATORY REDEMPTION
Subject as provided in the next paragraph, each class of issuer notes will
be redeemed on each interest payment date in amounts corresponding to the
amounts (if any) repaid by Funding 1 on the corresponding interest payment date
in respect of, and pursuant to, the relevant issuer term advance of the issuer
intercompany loan as set forth in the following table, in each case converted
into dollars at the relevant issuer dollar currency exchange rate:
OFFERED ISSUER NOTES ISSUER TERM ADVANCE
- --------------------------------------------------------------------------- --------------------
series 1 class A........................................................... series 1 term AAA
series 1 class B........................................................... series 1 term AA
series 1 class C........................................................... series 1 term BBB
series 2 class A........................................................... series 2 term AAA
series 2 class B........................................................... series 2 term AA
series 2 class C........................................................... series 2 term BBB
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
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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:
* 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, the issuer swap
providers 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 issuer step-up
date;
* any interest payment date on which the aggregate principal amount
of the issuer notes then outstanding is less than 10% 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.
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(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.
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, the issuer swap providers and the
noteholders, redeem all (but not some only) of the issuer notes at the principal
amount outstanding together with any accrued interest on the next following
interest payment date, provided that, prior to giving any such notice, the
issuer shall deliver to the note trustee (1) a certificate signed by two
directors of the issuer stating that the circumstances referred to in the bullet
points immediately above prevail and setting out details of such circumstances,
and (2) an opinion in form and substance satisfactory to the note trustee of
independent legal advisers of recognised standing to the effect that the issuer
has or will become obliged to pay such additional amounts as a result of such
change or amendment. The note trustee shall be entitled to accept (without
investigation or inquiry) such certificate and opinion as sufficient evidence of
the satisfaction of the circumstance set out in the bullet points immediately
above, in which event they shall be conclusive and binding on the noteholders.
The issuer may only redeem the issuer notes as described above if the note
trustee is satisfied in accordance with the issuer transaction documents that
the issuer will have funds available to it to make the required payment of
principal and interest due in respect of the issuer notes on the relevant
interest payment date, including any amounts required to be paid in priority to
or in the same priority as the issuer notes outstanding in accordance with the
issuer pre-enforcement revenue priority of payments and the issuer
pre-enforcement principal priority of payments.
If 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, the
issuer swap providers and the issuer noteholders in accordance with number 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.
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(F) REDEMPTION OR PURCHASE FOLLOWING A REGULATORY EVENT
(i) If:
(a) the New Basel Capital Accord (as described in the document
titled "The International Convergence of Capital Measurement
and Capital Standards: A Revised Framework" published in June
2004 by the Basel Committee on Banking Supervision) has been
implemented in the United Kingdom, whether by rule of law,
recommendation of best practices or by any other regulation,
(b) an issuer note acceleration notice has not been served on the
relevant interest payment date for the exercise of the
purchase option or redemption option, as the case may be,
(c) the issuer has given 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 to the note trustee, the
issuer swap providers and the issuer noteholders, in
accordance with number 14, of the exercise of the purchase
option or redemption option, as the case may be,
(d) each rating agency has confirmed to the issuer in writing
that its then current ratings of none of the issuer notes or
notes of any issuer would be adversely affected by the
exercise of the purchase option or redemption option, as the
case may be, and
(e) 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 the issuer will
have sufficient funds to purchase or redeem, as the case may
be, the called notes in accordance with this number 5(F) and
to pay any amounts under the issuer pre-enforcement revenue
priority of payments required to be paid in priority to or
pari passu with payments on the issuer notes on the relevant
interest payment date,
then:
(y) the issuer has the right (the "PURCHASE OPTION") to require
holders of all but not some only of one or more classes of
the issuer notes (collectively, the "CALLED NOTES") to
transfer the called notes to the issuer on any interest
payment date falling on or after the interest payment date in
[March 2008] for a price equal to the specified amount,
together with any accrued interest on the called notes, or
(z) the issuer may redeem (the "REDEMPTION OPTION") the called
notes on any interest payment date falling on or after the
interest payment date in [March 2008] at the specified
amount, together with any accrued interest on the called
notes.
(ii) The called notes transferred to the issuer pursuant to the purchase
option shall, subject as provided in (iii) below, remain
outstanding until the date on which they would otherwise be
redeemed or cancelled in accordance with the terms and conditions
of the issuer notes.
(iii) The note trustee shall concur in, execute and do all such deeds,
instruments, acts and things, and shall consent to any amendment,
modification or waiver of the provisions of the issuer transaction
documents to which it is a party and of the terms and conditions of
the issuer notes, which may be necessary or desirable to permit and
give effect to the exercise of the purchase option and the transfer
of the called notes to the issuer, including any waiver of
covenants of the issuer and any suspension or termination of the
rights of the holders of the called notes from (and including) the
interest payment date specified for the exercise of the purchase
option, for as long as the called notes have not been transferred
to the issuer, other than the right to receive the price payable
for such transfer.
(iv) Each holder of called notes shall be deemed to have authorised and
instructed Euroclear, or, as the case may be, Clearstream,
Luxembourg to effect the transfer of its called notes on the
relevant interest payment date to the issuer, in accordance with
the rules for the time being of Euroclear, or, as the case may be,
Clearstream, Luxembourg.
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(v) "SPECIFIED AMOUNT" means in respect of any called notes, the
principal amount outstanding of the called notes.
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 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.
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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) 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
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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 C NOTEHOLDERS
The terms described in this number 9(C) will have no effect so long as any
of the class A issuer notes or the class B issuer notes are outstanding. Subject
to that occurrence, the note trustee may in its absolute discretion give notice
(a "CLASS C ISSUER NOTE ACCELERATION NOTICE") of a class C issuer note event of
default (as defined in the following paragraph), and shall give that notice if
it is indemnified and/or secured to its satisfaction and it is:
* required to by the holders of at least one quarter of the aggregate
principal amount outstanding of the class C issuer notes; or
* directed to by an extraordinary resolution of the class C
noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS C ISSUER NOTE EVENT OF DEFAULT":
* the issuer fails to pay for a period of three business days any
amount of interest or principal on the class C issuer notes when
that payment is due and payable in accordance with these
conditions; or
* the occurrence of any of the other events in number 9(A) described
above but provided that any reference to the class A issuer notes
and the class A noteholders shall be read as references to the
class C issuer notes and the class C noteholders.
A class A issuer note acceleration notice, a class B issuer note
acceleration notice and a class C issuer note acceleration notice are alone or
together referred to in this prospectus as an "ISSUER NOTE ACCELERATION NOTICE".
An issuer note acceleration notice is a written notice to the issuer and the
security trustee declaring the issuer notes to be immediately due and payable.
When it is given, all issuer notes will become immediately due and payable at
their principal amount outstanding together with accrued interest without
further action or formality.
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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 or the class C issuer notes
(subject to those restrictions in the issuer trust deed and/or the
issuer deed of charge to protect the interests of any higher
ranking class of noteholders); or
* in the case of the security trustee, it has been so directed by the
note trustee acting on the instructions of an extraordinary
resolution (as described in number 11) of the class A noteholders,
class B noteholders or class C noteholders (subject to those
restrictions in the issuer trust deed and/or the issuer deed of
charge to protect the interests of any higher ranking class of
noteholders); or
* in the case of the security trustee, it is so requested in writing
by any other issuer secured creditor (subject to those restrictions
in the issuer deed of charge to protect the noteholders).
Amounts available for distribution after enforcement of the issuer
security shall be distributed in accordance with the terms of the issuer deed of
charge.
No noteholder may institute any proceedings against the issuer to enforce
its rights under or in respect of the issuer notes or the issuer trust deed
unless (1) the note trustee or the security trustee, as the case may be, has
become bound to institute proceedings and has failed to do so within a
reasonable time and (2) the failure is continuing. Notwithstanding the previous
sentence and notwithstanding any other provision of the issuer trust deed, the
right of any noteholder to receive payment of principal of and interest on its
issuer notes on or after the due date for the principal or interest, or to
institute suit for the enforcement of payment of that interest or principal, may
not be impaired or affected without the consent of that noteholder. In addition,
no class B noteholder or class C noteholder will be entitled to take proceedings
for the winding-up or administration of the issuer unless:
* there are no outstanding issuer notes of a class with higher
priority; or
* if issuer notes of a class with higher priority are outstanding,
there is consent of holders of at least one quarter of the
aggregate principal amount outstanding of the class or classes of
issuer notes with higher priority.
In the event that the issuer security is enforced and the proceeds of that
enforcement (after such proceeds have been distributed) are insufficient, after
payment of all other claims ranking in priority, to pay in full any amount due
on the class B issuer notes and the class C issuer notes under the issuer deed
of charge, the note trustee is required, at the request of Permanent PECOH
Limited, to transfer, for a nominal payment only all of the class B issuer notes
and/or all of the class C issuer notes to Permanent PECOH Limited, pursuant to
the option granted by the note trustee to Permanent PECOH Limited. The option is
granted to acquire all of the class B issuer notes and/or all of the class C
issuer notes, plus accrued interest on them. This is called the
"POST-ENFORCEMENT CALL OPTION". Each class B noteholder and class C noteholder
acknowledges that the note trustee has the authority and the power to bind it in
accordance with the terms and conditions set out in the post-enforcement call
option and, by subscribing for or acquiring the issuer notes, it agrees to be
bound in this way.
11. MEETINGS OF NOTEHOLDERS, MODIFICATIONS AND WAIVER
(A) MEETINGS OF NOTEHOLDERS
The issuer trust deed contains provisions for convening meetings of each
series and/or class of noteholders to consider any matter affecting their
interests, including the modification of any provision of the terms and
conditions of the issuer notes or any of the issuer transaction documents.
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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;
* 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 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
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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.
Similar requirements apply in relation to requests in writing from class A
noteholders, class B noteholders and class C noteholders upon which the note
trustee or security trustee is bound to act.
Subject as provided in the following paragraph, the quorum for any meeting
convened to consider an extraordinary resolution will be two or more persons
holding or representing not less than half of the aggregate principal amount
outstanding of the relevant series, class or classes of issuer notes or, at any
adjourned meeting, one or more noteholders or persons representing noteholders
of the relevant series, class or classes of issuer notes, whatever the total
principal amount outstanding of issuer notes so represented.
Subject to section 316(b) of the 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 C noteholders, except as
mentioned below, shall take effect while any class A issuer notes or class B
issuer notes remain outstanding unless sanctioned by an extraordinary resolution
of the class A noteholders and/or the class B noteholders (as the case may be),
or the note trustee (or, as the case may be, the security trustee) is of the
opinion that it would not be materially prejudicial to the interests of the
class A noteholders and/or the class B noteholders (as the case may be).
An extraordinary resolution of the class A noteholders to sanction a
modification of or any waiver or authorisation of any breach of the terms and
conditions of the issuer notes or of the issuer transaction documents (including
basic terms modifications) (except as provided below) will not be effective
unless it is also sanctioned by extraordinary resolutions of the class B
noteholders and the class C noteholders or the note trustee (in its absolute
discretion) considers that it will not be materially prejudicial to the class B
noteholders and the class C noteholders. If there are no class A issuer notes
outstanding, an extraordinary resolution of the class B noteholders to sanction
a modification of or any waiver or authorisation of any breach of the terms and
conditions of the issuer notes or of the issuer transaction documents (including
basic terms modifications) (except as provided below) will not be effective
unless it is also sanctioned by an extraordinary resolution of the class C
noteholders or the note trustee (in its absolute discretion) considers that it
will not be materially prejudicial to the interests of the class C noteholders.
(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
228
noteholders (and, for the avoidance of doubt, the note trustee shall be entitled
to assume without further investigation or inquiry, that such modification,
waiver or authorisation will not be materially prejudicial to the interests of
the noteholders (or any series and/or class thereof) if each of the rating
agencies has confirmed in writing that the then current ratings of the
applicable series and/or class or classes of notes would not be adversely
affected by such modification, waiver or authorisation) or (2) any modification
of any of the terms and conditions of the issuer notes or any of the issuer
transaction documents which, in the opinion of the note trustee, is of a formal,
minor or technical nature or is to correct a manifest error 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.
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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 offered issuer notes
are outstanding, The New York Times or, if either newspaper ceases to be
published or, if timely publication therein is not practicable, in another
English language newspaper or newspapers approved by the note trustee with
general circulation in the United Kingdom and the United States. However, a
notice will also be treated as having been duly given if the information
contained in that notice appears on the relevant page of the Reuters screen or
other similar service approved by the note trustee and notified to noteholders.
The notice will be deemed given on the date of first publication or when it
first appears on the screen.
While the issuer notes are represented by global issuer notes, notices to
noteholders will be valid if published as described in the previous paragraph or
(at the option of the issuer) if delivered to DTC, in the case of the offered
issuer notes, or Euroclear and/or Clearstream, Luxembourg, in the case of the
other issuer notes.
Any notice delivered to DTC, in the case of the offered issuer notes, or
Euroclear and/or Clearstream, Luxembourg, in the case of the other 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 (which will be governed by the laws of the State of New York) 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
230
(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.
STANDARD
CLASS OF ISSUER NOTES MOODY'S & POOR'S FITCH
- ------------------------------------------------------------ ----------- ----------- ------------
Series 1 class A............................................ [P-1] [A-1+] [F1+]
Series 2 class A............................................ [Aaa] [AAA] [AAA]
Series 3 class A............................................ [Aaa] [AAA] [AAA]
Series 4 class A............................................ [Aaa] [AAA] [AAA]
Series 5 class A1........................................... [Aaa] [AAA] [AAA]
Series 5 class A2........................................... [Aaa] [AAA] [AAA]
Series 1 class B............................................ [Aa3] [AA] [AA]
Series 2 class B............................................ [Aa3] [AA] [AA]
Series 3 class B............................................ [Aa3] [AA] [AA]
Series 4 class B............................................ [Aa3] [AA] [AA]
Series 5 class B............................................ [Aa3] [AA] [AA]
Series 1 class C............................................ [Baa2] [BBB] [BBB]
Series 2 class C............................................ [Baa2] [BBB] [BBB]
Series 3 class C............................................ [Baa2] [BBB] [BBB]
Series 4 class C............................................ [Baa2] [BBB] [BBB]
Series 5 class C............................................ [Baa2] [BBB] [BBB]
The ratings assigned by Standard & Poor's and Fitch 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 ratings assigned
by Moody's to each class of issuer notes address the expected loss in proportion
to the initial principal amount of such class posed to investors by the final
maturity date. In Moody's opinion, the structure allows for timely payment of
interest and principal at par on or before the final maturity date. The ratings
do not address the actual likely rate of prepayments on the mortgage loans. The
rate of prepayments, if different than originally anticipated, could adversely
affect the yield realised on your notes.
Assignment of the expected ratings to the issuer notes of each class will
be a condition to issue of the issuer notes.
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MATURITY AND PREPAYMENT CONSIDERATIONS
The average lives of the series 1 issuer notes and the series 2 issuer
notes 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
and the series 2 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 (i) in the period up to but excluding the
interest payment date in [December 2005] , such that the aggregate
principal amount outstanding of loans in the portfolio at any time
in not less than (pound)[27,000,000,000], (ii) in the period from
and including the interest payment date in [December 2005] to but
excluding the interest payment date in [December 2009] , such that
the aggregate principal amount outstanding of loans in the
portfolio at any time is not less than (pound)[24,000,000,000] or
in each case 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 an increase in its share
of the trust property or 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 [December 2011], Permanent
Financing (No. 6) PLC refinances its outstanding notes on the
interest payment date falling in September 2011, Permanent
Financing (No. 5) PLC refinances its outstanding notes on the
interest payment date falling in June 2011, Permanent Financing
(No. 4) PLC refinances its outstanding notes on the interest
payment date falling in March 2011, 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) there is a balance of (pound)[o] in the cash accumulation ledger at
the closing date; and
(10) the closing date of the transaction is[o] March, 2005,
the approximate average life of the series 1 issuer notes and the series 2
issuer notes, at various assumed rates of repayment of the loans, would be as
follows:
233
POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE
AVERAGE LIFE AVERAGE LIFE AVERAGE LIFE AVERAGE LIFE AVERAGE LIFE AVERAGE LIFE
OF THE SERIES OF THE SERIES OF THE SERIES OF THE SERIES OF THE SERIES OF THE SERIES
1 CLASS A 1 CLASS B 1 CLASS C 2 CLASS A 2 CLASS B 2 CLASS C
CONSTANT REPAYMENT RATE ISSUER NOTES ISSUER NOTES ISSUER NOTES ISSUER NOTES ISSUER NOTES ISSUER NOTES
(% PER ANNUM) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS)
- -------------------------- ------------ ------------ ------------ ------------- ------------- -------------
5%........................ [o] [o] [o] [o] [o] [o]
10%....................... [o] [o] [o] [o] [o] [o]
15%....................... [o] [o] [o] [o] [o] [o]
20%....................... [o] [o] [o] [o] [o] [o]
25%....................... [o] [o] [o] [o] [o] [o]
30%....................... [o] [o] [o] [o] [o] [o]
35%....................... [o] [o] [o] [o] [o] [o]
Assumptions (1), (2), (3), (4), (5), (6), (7) and (10) 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 issuer step-up
date. 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 the 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 the
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 the 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 the 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 the
Land Registry in order to secure priority over any subsequent mortgagee. Prior
to registration, the mortgage will take effect only as an equitable mortgage or
charge. Priority of mortgages over registered land is governed by the date of
235
registration of the mortgage rather than date of creation. However, a
prospective mortgagee is able to obtain a priority period within which to
register his mortgage. If the mortgagee submits a proper application for
registration during this period, its interest will take priority over any
application for registration of another interest which is received by the 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 the
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.
A court order under section 126 of the CCA is necessary to enforce a
mortgage in certain circumstances as described under "REGULATORY CHANGES BY THE
OFFICE OF FAIR TRADING, THE FINANCIAL SERVICES AUTHORITY AND 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".
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
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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 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
the statutory indemnity in respect of such amendments 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
237
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
has been given effect by a declaration of trust by the seller (and the sale on
the closing date and any further 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".
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.
A court order under section 126 of the CCA is necessary to enforce a
mortgage in certain circumstances as described under "REGULATORY CHANGES BY THE
OFFICE OF FAIR TRADING, THE FINANCIAL SERVICES AUTHORITY AND 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".
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.
238
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 LLP, 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% of the Funding 1 available revenue receipts and
that the profit in the issuer's profit and loss account will not exceed 0.01% of
the interest on the 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%, 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.
239
Except as described in the preceding paragraphs (and as further developed
in the corresponding opinions below), UK tax counsel will render no opinions
relating to the issuer notes, the parties to the transaction, or any aspects of
the transaction.
WITHHOLDING TAX
There will be no UK withholding tax in relation to interest payments on
the issuer notes provided that, so far as concerns deduction by the issuer or
its paying agents, the issuer notes are listed on a "recognised stock exchange",
as defined in Section 841 of the Income and Corporation Taxes Act 1988 ("ICTA").
(The London Stock Exchange is currently a recognised stock exchange for this
purpose.) 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%) 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 offered issuer notes
are denominated in US dollars, and the series 4 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
maygive rise to a chargeable gain or an allowable loss for the purposes of the
UK taxation of chargeable gains.
240
It is expected that the series 3 issuer notes and the series 5 issuer
notes will be regarded by the Inland Revenue as constituting "qualifying
corporate bonds" within the meaning of Section 117 of the Taxation of Chargeable
Gains Act 1992. Accordingly, a disposal of any of these issuer notes by such
noteholders as described above is not expected to give rise to a chargeable gain
or an allowable loss for the purposes of the UK taxation of chargeable gains.
A disposal of issuer notes by such noteholders as described above may also
give rise to a charge to tax on income in respect of an amount representing
interest accrued on the issuer notes since the preceding payment date. For
issuer notes which constitute variable rate securities, taxation in respect of
such a disposal will be computed on the basis that such amount as the Inland
Revenue considers to be just and reasonable will be treated as accrued income.
However, the transferee of a variable rate security will not be entitled to any
relief on such amount. All of the issuer notes will constitute variable rate
issuer notes for this purpose.
STAMP DUTY AND STAMP DUTY RESERVE TAX
No UK stamp duty or stamp duty reserve tax is payable on the issue or
transfer of the offered global issuer notes or on the issue or transfer of
definitive issuer notes.
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%, on the
profit reflected in their respective profit and loss accounts as increased by
the amounts of any non-deductible expenses or losses. In respect of Funding 1,
the profit in the profit and loss account will not exceed 0.01% 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% 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.
241
EU SAVINGS TAX DIRECTIVE
The EU has adopted a Directive regarding the taxation of savings income
(the "EU SAVINGS TAX DIRECTIVE") under which EU Member States will be required
from a date not earlier than 1st July, 2005 to provide to the tax authorities of
another EU Member State details of payments of interest (or other similar
income) paid by a person within its jurisdiction to or for the benefit of an
individual resident in that other EU Member State, except that for a
transitional period, Austria, Belgium and Luxembourg will instead be required
(unless during that period they elect otherwise) to operate a withholding system
in relation to such payments (the ending of such transitional period being
dependant upon the conclusion of certain other agreements relating to
information exchange with certain other countries).
Jersey is not subject to 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 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" are 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 is expected to adopt such measures on the same timetable as EU
Member States and other relevant third countries.
242
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 offered issuer
notes. In general, the summary assumes that a holder acquires the offered issuer
notes at original issuance and holds the offered issuer 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 offered issuer
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 offered issuer 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% or more of the voting shares
of the issuer; (viii) persons who hold offered issuer 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 LLP, US tax advisers to the issuer ("US TAX COUNSEL"), has
prepared and reviewed this summary of material US federal income tax
consequences. As described under "TAX STATUS OF THE ISSUER, FUNDING 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
OFFERED ISSUER NOTES", US tax counsel is also of the opinion that, although
there is no authority on the treatment of instruments substantially similar to
the offered issuer notes, and while not free from doubt, the offered issuer
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 offered issuer
notes or the parties to the transaction.
An opinion of US tax counsel is not binding on the US Internal Revenue
Service (the "IRS") or the courts, and no rulings will be sought from the IRS on
any of the issues discussed in this section 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 OFFERED ISSUER
NOTES, INCLUDING THE POSSIBLE APPLICATION OF STATE, LOCAL, NON-US OR OTHER TAX
LAWS, AND OTHER US TAX ISSUES AFFECTING THE TRANSACTION.
As used in this section, the term "UNITED STATES HOLDER" means a
beneficial owner of offered issuer 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 offered
issuer 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 offered issuer notes should consult their own tax advisers.
A "NON-UNITED STATES holder" is a beneficial owner of offered issuer notes that
is not a United States holder.
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TAX STATUS OF THE ISSUER, FUNDING 1, MORTGAGES TRUSTEE AND MORTGAGES TRUST
Under the transaction documents, each of the issuer, Funding 1 and the
mortgages trustee acting in its capacity as trustee of the mortgages trust
covenants not to engage in any activities in the United States (directly or
through agents), not to derive any income from sources within the United States
as determined under US federal income tax principles, and not to hold any
property if doing so would cause it to be engaged or deemed to be engaged in a
trade or business within the United States as determined under US federal income
tax principles. US tax counsel is of the opinion that, assuming compliance with
the transaction documents, none of the issuer, Funding 1 or the mortgages
trustee acting in its capacity as trustee of the mortgages trust will be subject
to US federal income tax. See "UNITED STATES FEDERAL INCOME TAXATION - GENERAL"
for further information regarding this opinion. No elections will be made to
treat the issuer, Funding 1 or the mortgages trustee or any of their assets as a
REMIC or a FASIT (two types of securitisation vehicles having a special tax
status under the Code).
CHARACTERISATION OF THE OFFERED ISSUER NOTES
Although there is no authority regarding the treatment of instruments that
are substantially similar to the offered issuer notes and while it is not free
from doubt, it is the opinion of US tax counsel that the offered issuer 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 offered issuer notes as indebtedness of
the issuer for all purposes, including US tax purposes. The discussion in the
next section assumes this result.
The offered issuer notes will not be qualifying real property loans in the
hands of domestic savings and loan associations, real estate investment trusts,
or REMICs under sections 7701(a)(19)(C), 856(c) or 860G(a)(3) of the Code,
respectively.
TAXATION OF UNITED STATES HOLDERS OF THE OFFERED ISSUER NOTES
QUALIFIED STATED INTEREST AND ORIGINAL ISSUE DISCOUNT
The issuer intends to treat interest on the offered issuer 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 offered
issuer 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 original issue discount ("OID") is
included in income on a pro rata basis as principal payments are made on the
offered issuer notes.
It is possible that interest on the offered issuer notes that are class B
issuer notes or class C issuer notes could be treated as OID because such
interest is subject to deferral in certain limited circumstances. A United
States holder of an offered issuer note (other than a series 1 class A issuer
note) issued with OID must include OID in income over the term of such offered
issuer 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 offered issuer notes that are class B issuer notes or class C issuer notes
and accordingly, the issuer intends to assume that such offered issuer 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
244
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 rateable 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 offered issuer
notes, including stated interest, acquisition discount, OID, de minimis OID,
market discount, de minimis market discount, and unstated interest, as adjusted
by any amortisable bond premium or acquisition premium, using the constant yield
method described above.
Interest income on the offered issuer 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. The foreign tax credit rules are complex, and United States holders
should consult their own tax advisers regarding the availability of a foreign
tax credit under their particular circumstances.
SALES AND RETIREMENT
In general, a United States holder of an offered issuer note will have a
basis in such offered issuer note equal to the cost of the offered issuer note
to such holder, and reduced by any payments thereon other than payments of
stated interest. Upon a sale or exchange of the offered issuer note, a United
States holder will generally recognise gain or loss equal to the difference
between the amount realised (less any accrued interest, which would be taxable
as such) and the holder's tax basis in the offered issuer note. Such gain or
loss will be long-term capital gain or loss if the United States holder has held
the offered issuer 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
OFFERED ISSUER 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 OFFERED ISSUER 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 an offered issuer note and gain from the
sale, redemption or other disposition of an offered issuer 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 an offered issuer 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 OFFERED
ISSUER NOTES.
ALTERNATIVE CHARACTERISATION OF THE OFFERED ISSUER NOTES
The proper characterisation of the arrangement involving the issuer and
the holders of the offered issuer notes is not clear because there is no
authority on transactions comparable to that contemplated herein. The issuer
intends to treat the offered issuer 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 characterisation of the
offered issuer notes for US tax purposes.
One possible alternative characterisation 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
245
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 realised 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 realised 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% of the average
distributions for the three preceding years (or, if shorter, the investor's
holding period). Because the offered issuer 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 offered issuer
notes. In general, under the PFIC rules, a United States holder will be required
to allocate such excess distributions and any gain realised on a sale of its
notes to each day during the United States holder's holding period for the
notes, and will be taxable at the highest rate of taxation applicable to the
notes for the year to which the excess distribution or gain is allocable
(without regard to the United States holder's other items of income and loss for
such taxable year) (the "DEFERRED TAX"). The deferred tax (other than the tax on
amounts allocable to the year of disposition or receipt of the distribution)
will then be increased by an interest charge computed by reference to the rate
generally applicable to underpayments of tax (which interest charge generally
will be a non-deductible interest expense for individual taxpayers).
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding and information reporting requirements may apply to
certain payments on the offered issuer notes and proceeds of the sale or
redemption of the offered issuer 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 an
offered issuer 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% 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% 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 an offered issuer 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
246
beneficial owner otherwise establishes an exemption. Payments of proceeds on the
sale of an offered issuer 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 OFFERED ISSUER 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 OFFERED ISSUER NOTES SHOULD CONSULT THEIR OWN
TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND
DISPOSITION OF THE OFFERED ISSUER 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.
247
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% 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.
248
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- 01 (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
249
invests in an "EQUITY INTEREST" of an entity that is neither a "PUBLICLY-OFFERED
SECURITY" nor a security issued by an investment company registered under the
1940 Act, the Plan's assets include both the equity interest and an undivided
interest in each of the entity's underlying assets, unless one of the exceptions
to such treatment described in the Plan Asset Regulation applies. Under the Plan
Asset Regulation, a security which is in debt form may be considered an "EQUITY
INTEREST" if it has "SUBSTANTIAL EQUITY FEATURES". If the issuer were deemed
under the Plan Asset Regulation to hold plan assets by reason of a Plan's
investment in any of the 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.
250
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.
251
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 year ended 31st December, 2003 have been included in this prospectus, in
reliance upon the report of KPMG Audit Plc, an independent registered public
accounting firm, upon the authority of said firm as experts in accounting and
auditing. The audit report refers to the restatement of certain US GAAP cashflow
information for the period ended 31 December 2002.
The balance sheet of Permanent Financing (No. 7) PLC as of [o], 2005 has
been included in this prospectus, in reliance upon the report of KPMG Audit Plc,
appearing elsewhere herein, an independent registered public accounting firm,
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 LLP. 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 offered
issuer notes will be provided to the issuer and the underwriters by Allen &
Overy LLP. Opinions with respect to United States law will be provided to the
underwriters by Sidley Austin Brown & Wood.
252
UNDERWRITING
UNITED STATES
The issuer has agreed to sell, and [ABN AMRO Bank N.V., London Branch,
Lehman Brothers International (Europe) and Morgan Stanley & Co. Incorporated]
(the "CLASS A LEAD underwriters") and the other underwriters for the series 1
class A issuer notes and the series 2 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 [o] and [o]
(the "CLASS B/C underwriters" and, together with the class A underwriters, the
"UNDERWRITERS") have agreed to purchase, the principal amount of those issuer
notes listed in the following tables (also called the "CLASS B/C OFFERED ISSUER
NOTES" and, together with the class A offered issuer notes, the "OFFERED ISSUER
NOTES"). The terms of these purchases are governed by an underwriting agreement
among the issuer and the underwriters.
PRINCIPAL PRINCIPAL
AMOUNT OF THE AMOUNT OF THE
SERIES 1 CLASS A SERIES 2 CLASS A
UNDERWRITERS ISSUER NOTES ISSUER NOTES
- --------------------------------------------------------------------- ------------------ -------------------
[ABN AMRO Bank N.V., London Branch].................................. $ [o] $ [o]
[Lehman Brothers International (Europe)]............................. $ [o] $ [o]
[Morgan Stanley & Co. Incorporated].................................. $ [o] $ [o]
[o].................................................................. -- --
[o].................................................................. -- --
[o].................................................................. -- --
------------------ -------------------
Total................................................................ $ [o] $ [o]
================== ===================
PRINCIPAL PRINCIPAL
AMOUNT OF THE AMOUNT OF THE
SERIES 1 CLASS B SERIES 2 CLASS B
UNDERWRITERS ISSUER NOTES ISSUER NOTES
- --------------------------------------------------------------------- ------------------ -------------------
[o].................................................................. $ [o] $ [o]
[o].................................................................. $ [o] $ [o]
------------------ -------------------
Total................................................................ $ [o] $ [o]
================== ===================
PRINCIPAL PRINCIPAL
AMOUNT OF THE AMOUNT OF THE
SERIES 1 CLASS C SERIES 2 CLASS C
UNDERWRITERS ISSUER NOTES ISSUER NOTES
- --------------------------------------------------------------------- ------------------ -------------------
[o].................................................................. $ [o] $ [o]
[o].................................................................. $ [o] $ [o]
------------------ -------------------
Total................................................................ $ [o] $ [o]
================== ===================
The class A underwriters or affiliates of certain of the class A
underwriters have also agreed to pay and subscribe for the series 3 class A
issuer notes, the series 4 class A issuer notes and the series 5 class A2 issuer
notes, none of which are being offered pursuant to this prospectus, on the
closing date.
253
The class B/C underwriters or affiliates of certain of the class
B/C underwriters have also agreed to pay and subscribe for the series 3 class B
issuer notes, the series 3 class C issuer notes, the series 4 class B issuer
notes, the series 4 class C issuer notes, the series 5 class B issuer notes and
the series 5 class C issuer notes, none of which are being offered pursuant to
this prospectus, on the closing date. HBOS Treasury Services plc have agreed to
pay and subscribe for the series 5 class A1 issuer notes, which are not being
offered pursuant to this prospectus, on the closing date.
[ABN AMRO Bank N.V., London Branch],[Lehman Brothers International
(Europe)] and [Morgan Stanley & Co. Incorporated] 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 each class of offered
issuer notes a selling commission and a management and underwriting fee in the
percentages indicated in the table below. The underwriters for each class of
offered issuer notes have advised the issuer that such underwriters propose
initially to offer the relevant class of offered issuer notes to the public at
the public offering price stated on the cover page of this prospectus, and to
some dealers at such price less a concession of up to the percentage indicated
in the table below for each offered issuer note. The underwriters for each class
of offered issuer notes may allow, and those dealers may re-allow, concessions
of up to the percentage indicated in the table below of the principal balance of
the relevant class of offered issuer notes to some brokers and dealers.
MANAGEMENT
SELLING AND CONCESSION
COMMISSION AS UNDERWRITING ALLOWED AS A %
% OF THE FEE AS % OF THE OF THE
AGGREGATE AGGREGATE CONCESSION BY PRINCIPAL
PRINCIPAL PRINCIPAL UNDERWRITER FOR BALANCE OF
AMOUNT OF THE AMOUNT OF THE EACH NOTE OF CLASS OF ISSUER
CLASS CLASS OF NOTES CLASS OF NOTES THAT CLASS NOTES
- -------------------------------- ------------------ ------------------- ------------------ -------------------
series 1 class A................ [o]% [o]% [o]% [o]%
series 1 class B................ [o]% [o]% [o]% [o]%
series 1 class C................ [o]% [o]% [o]% [o]%
series 2 class A................ [o]% [o]% [o]% [o]%
series 2 class B................ [o]% [o]% [o]% [o]%
series 2 class C................ [o]% [o]% [o]% [o]%
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 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 issuer 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$[o], which will be
paid partly by the seller and partly paid by the underwriters 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.
254
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 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/C underwriter (with respect to the class B/C offered
issuer notes only) will represent and agree that:
* in relation to any offered issuer notes which have a maturity of
one year or more and which are to be admitted to the official list
maintained by the UK Listing Authority, it has not offered or sold,
and will not offer or sell, offered issuer notes to persons in the
United Kingdom prior to admission of such offered issuer notes to
listing in accordance with Part VI of the FSMA except to persons
whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for
the purposes of their businesses, or otherwise in circumstances
which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995, as amended, or the FSMA;
* it has 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
* 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.
255
THE NETHERLANDS
Each underwriter has represented to and agreed with the Issuer that the
Issuer:
(a) must verify that all Dutch Residents (as defined below) purchasers
of offered issuer notes (including rights representing an interest
in a global note) issued by it directly to such purchasers on or
before the closing date or issued by it in circumstances where it
is reasonably able to identify the holders as Dutch Residents on or
before the closing date are Professional Market Parties (as defined
below); and
(b) shall agree (or procure that the relevant underwriter agrees) with
each such purchaser that any offered issuer notes acquired by it
may not be offered, sold, transferred or delivered by any such
purchaser, except in accordance with the restrictions referred to
the following paragraph.
This prospectus may not be distributed and the offered issuer notes
(including rights representing an interest in a global note) may not be offered,
sold, transferred or delivered as part of their initial distribution or at any
time thereafter, directly or indirectly, to individuals or legal entities who or
which are established, domiciled or have their residence in The Netherlands
("DUTCH RESIDENTS") other than to the following entities, provided that such
entities trade or invest in securities in the conduct of a business or
profession (the following such entities hereinafter referred to as "PROFESSIONAL
MARKET PARTIES" or "PMPS") and provided further that they acquire the offered
issuer notes for their own account or for the account of another such PMP:
(i) banks, insurance companies, securities firms, collective investment
institutions or pension funds that are supervised or licensed under
Dutch law;
(ii) banks or securities firms licensed or supervised in a European
Economic Area member state (other than The Netherlands) and
registered with the Dutch Central Bank (De Nederlandsche Bank N.V.:
DNB) or the Dutch Authority for the Financial Markets (Stichting
Autoriteit Financiele Markten) acting through a branch office in
The Netherlands;
(iii) Netherlands collective investment institutions which offer their
shares or participations exclusively to professional investors and
are not required to be supervised or licensed under Dutch law;
(iv) the Dutch government (de Staat der Nederlanden), DNB, Dutch
regional, local or other decentralised governmental institutions,
or any international treaty organisations and supranational
organisations located in The Netherlands;
(v) Netherlands enterprises or entities with total assets of at least
(euro)500,000,000 (or the equivalent thereof in another currency)
according to their balance sheet at the end of the financial year
preceding the date they purchase or acquire the offered issuer
notes;
(vi) Netherlands enterprises, entities or individuals with net equity
(eigen vermogen) of at least (euro)10,000,000 (or the equivalent
thereof in another currency) according to their balance sheet at
the end of the financial year preceding the date they purchase or
acquire the offered issuer notes and who or which have been active
in the financial markets on average twice a month over a period of
at least two consecutive years preceding such date;
(vii) Netherlands subsidiaries of the entities referred to under (i)
above provided such subsidiaries are subject to prudential
supervision;
(viii) Netherlands enterprises or entities that have a credit rating from
an approved rating agency or whose securities have such a rating;
and
(ix) such other Netherlands entities designated by the competent
Netherlands authorities after the date hereof by any amendment of
the applicable regulations.
The offered issuer notes (whether or not offered to Dutch Residents) shall
bear the following legend:
THIS NOTE (OR ANY INTEREST HEREIN) MAY NOT BE OFFERED, SOLD, TRANSFERRED
OR DELIVERED AS PART OF ITS INITIAL DISTRIBUTION OR AT ANY TIME THEREAFTER,
DIRECTLY
256
OR INDIRECTLY, TO INDIVIDUALS OR LEGAL ENTITIES WHO ARE ESTABLISHED, DOMICILED
OR HAVE THEIR RESIDENCE IN THE NETHERLANDS ("DUTCH RESIDENTS") OTHER THAN TO
PROFESSIONAL MARKET PARTIES WITHIN THE MEANING OF THE EXEMPTION REGULATION
PURSUANT TO THE DUTCH ACT ON THE SUPERVISION OF THE CREDIT SYSTEM 1992 ("PMPS").
EACH DUTCH RESIDENT BY PURCHASING THIS NOTE (OR ANY INTEREST HEREIN), WILL
BE DEEMED TO HAVE REPRESENTED AND AGREED FOR THE BENEFIT OF THE ISSUER THAT IT
IS SUCH A PMP AND IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT
OF A PMP.
EACH HOLDER OF THIS NOTE (OR ANY INTEREST HEREIN), BY PURCHASING THIS NOTE
(OR ANY INTEREST HEREIN), WILL BE DEEMED TO HAVE REPRESENTED AND AGREED FOR THE
BENEFIT OF THE ISSUER THAT (1) THIS NOTE (OR ANY INTEREST HEREIN) MAY NOT BE
OFFERED, SOLD, TRANSFERRED OR DELIVERED TO DUTCH RESIDENTS OTHER THAN TO A PMP
ACQUIRING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A PMP AND THAT (2) THE
HOLDER WILL PROVIDE NOTICE OF THE TRANSFER RESTRICTIONS DESCRIBED HEREIN TO ANY
SUBSEQUENT TRANSFEREE.
HONG KONG
Each underwriter has represented and agreed that:
(a) it has not offered or sold and will not offer or sell in Hong Kong,
by means of any document, any issuer notes other than (i) to
persons whose ordinary business it is to buy or sell shares or
debentures (whether as principal or agent) or (ii) in circumstances
which do not constitute an offer to the public within the meaning
of the Companies Ordinance (Cap.32) of Hong Kong; and
(b) it has not issued or had in its possession for the purposes of
issue and will not issue or have in its possession for the purposes
of issue any advertisement, invitation or document relating to the
issuer notes, whether in Hong Kong or elsewhere, which is directed
at, or the contents of which are likely to be accessed or read by,
the public in Hong Kong (except if permitted to do so under the
securities laws of Hong Kong) other than with respect to issuer
notes which are or are intended to be disposed of only to persons
outside Hong Kong or only to "professional investors" within the
meaning of the Securities and Futures Ordinance (Cap. 571) and any
rules made thereunder.
JAPAN
The issuer notes have not been and will not be registered under the
Securities and Exchange Law. Each underwriter has agreed that it has not offered
or sold and will not offer or sell any issuer notes, directly or indirectly, in
Japan or to, or for the benefit of, any resident of Japan (which term as used
herein means any person resident in Japan, including any corporation or other
entity organised under the laws of Japan) or to others for re-offering or
resale, directly or indirectly, in Japan or to, or for the benefit of, any
resident of Japan, except pursuant to an exemption from the registration
requirements of, and otherwise in compliance with, the Securities and Exchange
Law and any other applicable laws, regulations and ministerial guidelines of
Japan.
SINGAPORE
This prospectus has not been registered as a prospectus with the Monetary
Authority of Singapore under the Securities and Futures Act, Chapter 289 of
Singapore (the SECURITIES AND FUTURES ACT). Accordingly, the issuer notes may
not be offered or sold or made the subject of an invitation for subscription or
purchase nor may this prospectus or any other document or material in connection
with the offer or sale or invitation for subscription or purchase of such issuer
notes be circulated or distributed, whether directly or indirectly, to the
public or any member of the public in Singapore other than (1) to an
institutional investor or other person falling within section 274 of the
Securities and Futures Act, (2) to a sophisticated investor (as defined in
section 275 of the Securities and Futures Act) and in accordance with the
conditions specified in section 275 of the Securities and Futures Act or (3)
otherwise than pursuant to, and in accordance with the conditions of, any other
applicable provision of the Securities and Futures Act.
257
SPAIN
The proposed offer of the series 1 issuer notes and the series 2 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
with the requirements of Law 24/1988, of 28th July (as amended by Law 37/1998,
of 16th November), on the Spanish Securities Market and the Royal Decree
291/1992, of 27th March (as amended by the Royal Decree 2590/1998, of 7th
December), on issues and public offers for the sale of securities.
GENERAL
The offered issuer notes are a new issue of securities, and there is
currently no established trading market for the offered issuer notes. The class
A underwriters have advised us that they intend to make a market in the class A
offered issuer notes and the class B/C underwriters have advised us that they
intend to make a market in the class B/C offered issuer notes, but they are not
obligated to do so. The underwriters may discontinue any market making in the
offered issuer notes at any time in their sole discretion. Accordingly, we
cannot assure you that a liquid trading market will develop for the offered
issuer notes.
Certain of the underwriters and their affiliates perform various financial
advisory, investment banking and commercial banking services from time to time
for us and our affiliates.
258
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) the class B/C underwriters and their
affiliates for offers and sales related to market-making transactions in the
class B/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. [o], [o] and [o] are among the underwriters participating in the initial
distribution of the offered notes.
AFFILIATIONS
[o], which is acting as the series 4 issuer swap provider, is an affiliate
of[o], one of the underwriters/managers for the issuer notes. HBOS Treasury
Services plc, which is acting as lead manager for the series 5 class A1 issuer
notes, is the arranger for the issuance of the notes.
259
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[o] March,
2005 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 offered issuer notes, in dollars, in the case of the series 4 issuer
notes, in euro, and in the case of the series 3 issuer notes and the series 5
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 agreements.
Since[o], 2005 (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.
The issue of the issuer notes was authorised pursuant to a resolution of
the board of directors of the issuer passed on or about[o] March, 2005.
260
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.................................... [o] [o] [o]
Series 1 class B.................................... [o] [o] [o]
Series 1 class C.................................... [o] [o] [o]
Series 2 class A.................................... [o] [o] [o]
Series 2 class B.................................... [o] [o] [o]
Series 2 class C.................................... [o] [o] [o]
Copies of the following documents may be inspected at the offices of Allen
& Overy LLP 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[o], 2005 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 underwriting agreement;
* the issuer subscription agreements;
* 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 Scottish declaration of trust;
* the issuer deed of accession to the Funding 1 deed of charge;
* the Funding 1 deed of charge (as amended);
* the second supplemental Funding 1 deed of charge;
* 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 issuer swap guarantees;
* 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;
261
* 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 issuer 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 LLP as to validity;
(G) the opinion of Allen & Overy LLP as to UK tax matters;
(H) the opinion of Allen & Overy LLP as to US tax matters; and
(I) the opinion of Shepherd + Wedderburn as to Scots law matters.
262
GLOSSARY
Principal terms used in this prospectus are defined as follows:
$, US$, US DOLLARS and the lawful currency for the time being of the
dollars United States of America
(EURO), 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
(POUND), POUNDS and STERLING the lawful currency for the time being of the
United Kingdom of Great Britain and Northern
Ireland
A PRINCIPAL DEFICIENCY a sub-ledger on the principal deficiency
SUB-LEDGER ledger which specifically records any
principal deficiency in respect of any term A
advances
AA PRINCIPAL DEFICIENCY a sub-ledger on the principal deficiency
SUB-LEDGER ledger which specifically records any
principal deficiency in respect of any term
AA advances
AAA PRINCIPAL DEFICIENCY a sub-ledger on the principal deficiency
SUB-LEDGER 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
ADDITIONAL FUNDING 1 security created under and/or pursuant to the
SECURITY second supplemental Funding 1 deed of charge
ADJUSTED GENERAL RESERVE FUND the sum of:
LEVEL
(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
[[o] ISSUER SWAP GUARANTOR [o].]
[[o] ISSUER SWAP GUARANTEE the guarantee of the obligations of the
series 2 issuer swap provider under the
relevant issuer swaps by the [o] issuer swap
guarantor]
ALTERNATIVE INSURANCE requirements which vary the insurance
REQUIREMENTS provisions of the mortgage conditions
263
ANTICIPATED CASH the anticipated number of months required to
ACCUMULATION PERIOD 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,
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 the initial
closing date 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 a sub-ledger on the principal deficiency
SUB-LEDGER 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
264
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, namely those term advances of
the issuer and each previous issuer
designated as a `bullet term advance' in the
table under the caption "THE MORTGAGES TRUST
- CASH MANAGEMENT OF TRUST PROPERTY -
PRINCIPAL RECEIPTS" and any term advance
which is referred to as such in the
prospectus relating to any new issuer.
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
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
265
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 means at any time the amount standing to the
AMOUNT 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
the initial closing date 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 edgers on
behalf of the mortgages trustee, Funding 1
and the security trustee
CASHBACK the agreement by the seller to pay an amount
to the relevant borrower on the completion of
the relevant loan
CLASS A ISSUER NOTES the series 1 class A issuer notes, the series
2 class A issuer notes, the series 3 class A
issuer notes, the series 4 class A issuer
notes and the series 5 class A issuer notes
266
CLASS A LEAD UNDERWRITERS [ABN AMRO Bank N.V., London Branch], [Lehman
Brothers International (Europe)] and [Morgan
Stanley & Co. Incorporated]
CLASS A OFFERED ISSUER NOTES the series 1 class A notes and the series 2
class A notes
CLASS A PREVIOUS NOTES any previous notes containing the designation
`class A', `class A1' or `class A2'
CLASS A UNDERWRITERS the class A lead underwriters and[o],[o] and
[o]
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 B/C OFFERED ISSUER NOTES the series 1 class B issuer notes, the series
1 class C issuer notes, the series 2 class B
issuer notes and the series 2 class C issuer
notes,
CLASS B/C UNDERWRITERS [o] and [o]
CLASS B PREVIOUS NOTES any previous notes containing the designation
`class B'
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 C PREVIOUS NOTES any previous notes containing the designation
`class C'
CLASS M PREVIOUS NOTES any previous notes containing the designation
`class M'
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[o] March, 2005
CML Council of Mortgage Lenders
CODE United States Internal Revenue Code of 1986,
as amended
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
COMMON DEPOSITARY Citibank, N.A. at 5 Carmelite Street, London
EC4Y 0PA
CORE TERMS the main subject matter of the contract
CORPORATE SERVICES PROVIDER (a) in respect of Funding 1, Holdings, the
post-enforcement call option holder and
the issuer, means Structured Finance
Management Limited or such other person
or persons for the time being acting as
corporate services provider to (i)
267
Funding 1, Holdings and the
post-enforcement call option holder
under the Funding 1 corporate services
agreement and (ii) the issuer under the
issuer corporate services agreement;
and
(b) in respect of the mortgages trustee,
means SFM Offshore Limited or such
other person or persons for the time
being acting as corporate services
provider to the mortgages trustee under
the mortgages trustee corporate
services agreement
CPR on any calculation date means the annualised
principal repayment rate of all the loans
comprised in the trust property during the
previous calculation period calculated as
follows:
1 - ((1 - R) ^ 12)
where "R" equals the result (expressed as a
percentage) of the total principal receipts
received during the period of one month (or,
if shorter, from and including the closing
date) ending on that calculation date divided
by the aggregate outstanding principal
balance of the loans comprised in the trust
property as at the first day of that period
CRYSTALLISE when a floating charge becomes a fixed charge
CURRENT 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 in relation to a current swap agreement an
TERMINATION AMOUNT 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
268
CURRENT SWAP PROVIDER the occurrence of an event of default (as
DEFAULT 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 PROVIDER means the occurrence of an additional
DOWNGRADE TERMINATION termination event following the failure by
EVENT any of the current swap providers to comply
with the requirements of the ratings
downgrade provisions set out in the relevant
swap agreement
CURRENT SWAP PROVIDERS the issuer swap providers and the previous
swap providers
DELAYED CASHBACK means in relation to any loan, the agreement
by the seller to pay an amount to the
relevant borrower after a specified period of
time following completion of the relevant
loan
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
DTC The Depository Trust Company
DUE AND PAYABLE has the meaning set out in "CASHFLOWS -
DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL
RECEIPTS - DUE AND PAYABLE DATES OF ISSUER
TERM ADVANCES"
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 GENERAL RESERVE FUND (a) prior to the occurrence of a trigger
PRINCIPAL REPAYMENTS event:
(i) repayments of principal which are
then due and payable in respect
of original bullet term advances;
and
(ii) repayments of principal in
respect of original scheduled
amortisation term advances on
their respective final maturity
dates only; and
(b) on or after the occurrence of a
non-asset trigger event or an asset
trigger event, repayments of principal
in respect of original bullet term
advances and original scheduled
amortisation term advances on their
respective final maturity dates only,
in each case prior to the service of an
intercompany loan acceleration notice on
Funding 1
269
ELIGIBLE LIQUIDITY FACILITY (a) prior to the occurrence of a trigger
PRINCIPAL REPAYMENTS event:
(i) repayments of principal which are
then due and payable in respect
of 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 LIQUIDITY FUND which are:
PRINCIPAL REPAYMENTS
(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 issuer original
bullet term advances; and
(b) repayments of principal in
respect of previous original
scheduled amortisation term
advances and issuer original
scheduled amortisation term
advances on their respective
final maturity dates only; and
(ii) following the occurrence of a non-asset
event or an asset trigger event,
repayments of principal in respect of
previous original bullet term advances,
issuer original scheduled amortization
term advances and issuer original
scheduled amortization 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
ENGLISH LOAN a loan secured by an English mortgage
270
ENGLISH MORTGAGE a mortgage secured over a property in England
and Wales
ENGLISH MORTGAGE the mortgage conditions applicable to English
CONDITIONS loans
EQUIVALENT NET in relation to notes issued by a relevant
ISSUE PROCEEDS issuer, means the net proceeds in sterling of
such notes (in each case where the relevant
class of notes is denominated in US dollars
or euro after making appropriate currency
exchanges under the relevant swaps)
ERISA the US Employee Retirement Income Security
Act of 1974. See further "ERISA
CONSIDERATIONS"
EURIBOR EURIBOR will be determined by the agent bank
on the following basis:
(1) on the applicable interest
determination date applicable to the
series 4 issuer notes, the 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
two-week and one-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 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
271
(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
FIFTH ISSUER Permanent Financing (No. 5) PLC
FINAL MATURITY DATE in respect of each class of issuer notes
means the interest payment date falling in
the month indicated for such class in
"SUMMARY OF PROSPECTUS - SUMMARY OF THE
ISSUER NOTES"
FINAL REPAYMENT DATE in respect of the issuer intercompany loan
means the interest payment date falling in
June 2042
FIRST ISSUER Permanent Financing (No. 1) PLC
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 ISSUER Permanent Financing (No. 4) PLC
FSA the Financial Services Authority
FSMA the Financial Services and Markets Act 2000
272
FUNDING 1 Permanent Funding (No. 1) Limited
FUNDING 2 Permanent Funding (No. 2) PLC
FUNDING 1 AVAILABLE has the meaning set out under "CASHFLOWS -
PRINCIPAL RECEIPTS DISTRIBUTION OF FUNDING 1 AVAILABLE PRINCIPAL
RECEIPTS"
FUNDING 1 AVAILABLE has the meaning set out under "CASHFLOWS -
REVENUE RECEIPTS DISTRIBUTION OF FUNDING 1 AVAILABLE REVENUE
RECEIPTS"
FUNDING 1 CORPORATE an agreement entered into on the initial
SERVICES AGREEMENT closing date between an 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 the
initial closing date 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 issuer start-up loan
provider on the closing date and includes
(except where the context otherwise requires)
the second supplemental Funding 1 deed of
charge
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 the guaranteed investment contract entered
INVESTMENT CONTRACT into on the initial closing date 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 in relation to the issuer term advances, the
PAYMENT DATE 10th day of March, June, September and
December in each year
FUNDING 1 LIQUIDITY FACILITY the liquidity facility provided for Funding 1
pursuant to the Funding 1 liquidity facility
agreement
FUNDING 1 LIQUIDITY FACILITY the liquidity facility agreement entered into
AGREEMENT on the initial closing date as previously
amended and restated from time to time 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
(pound)[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"
273
FUNDING 1 LIQUIDITY FACILITY a drawing (other than a liquidity facility
stand-by drawing) under the DRAWING Funding 1
liquidity facility
FUNDING 1 LIQUIDITY FACILITY JPMorgan Chase Bank, N.A.
PROVIDER
FUNDING 1 LIQUIDITY FACILITY the designated bank account of Funding 1 into
STAND-BY ACCOUNT 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 the sum of (i) any additional amounts due to
SUBORDINATED AMOUNTS 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 the order in which, following the enforcement
PRIORITY OF PAYMENTS 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 the order in which, prior to enforcement of
PRINCIPAL PRIORITY OF PAYMENTS 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 the order in which, prior to enforcement of
REVENUE PRIORITY OF PAYMENTS 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
274
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 the initial Funding 1 security, except where
the context requires otherwise, and the
additional Funding 1 security
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 the ledger of such name maintained by the
LEDGER 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 the initial closing
date 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 in relation to the Funding 1 swap agreement
TERMINATION AMOUNT 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
275
(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 the occurrence of an event of default (as
DEFAULT 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 means the occurrence of an additional
DOWNGRADE TERMINATION EVENT 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
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 an amount equal to (pound)[o]
REQUIRED AMOUNT
GENERAL RESERVE FUND the lesser of:
THRESHOLD
(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 of 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 each start-up loan, and other withdrawals
and deposits in respect of the general
reserve fund
GLOBAL ISSUER NOTES the issuer notes (other than the series 3
class A issuer notes in definitive registered
form) in global form
276
HALIFAX Halifax plc (see "HALIFAX PLC ")
HIGH LOAN-TO-VALUE FEE a fee incurred by a borrower as a result of
taking out a loan with an LTV ratio in excess
of a certain percentage specified in the
offer
HIGHER VARIABLE RATE LOANS loans subject to an interest rate at a margin
above HVR 1, HVR 2 or the mortgages trustee
variable base rate, as applicable
HOLDINGS Permanent Holdings Limited
HVR 1 the variable mortgage rate set by the seller
which applies to certain loans beneficially
owned by the seller on the seller's
residential mortgage book
HVR 2 the second variable base rate that was made
available to borrowers between 1st March,
2001 and 1st February, 2002
ICTA the UK Income and Corporation Taxes Act 1988
IN ARREARS in respect of a mortgage account, occurs when
one or more monthly payments in respect of a
mortgage account have become due and unpaid
by a borrower
INDUSTRY CPR a constant prepayment rate which is
calculated by dividing the amount of
mortgages repaid in a quarter by the
quarterly balance of mortgages outstanding
for building societies in the UK
INITIAL CLOSING DATE 14th June, 2002
INITIAL FUNDING 1 SECURITY security created by Funding 1 pursuant to the
Funding 1 deed of charge
INITIAL LOANS the loans sold by the seller to the mortgages
trustee on the initial closing date 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(i)(a), (b), (c)
or (d) of the Insolvency Act 1986 (as
amended) or becomes unable to pay its
debts as they fall due or the value of
its assets falls to less than the
amounts of its liabilities (taking into
account, for both these purposes,
contingent and prospective liabilities)
or otherwise becomes insolvent; or
(c) proceedings (including, but not limited
to, presentation of 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
277
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 a previous intercompany loan acceleration
ACCELERATION NOTICE 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 the previous intercompany loan agreements,
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 LOAN TERMS the standard terms and conditions
AND CONDITIONS incorporated into each intercompany loan
agreement, signed for the purposes of
identification on the initial closing date by
Funding 1, the security trustee and the agent
bank
INTERCOMPANY LOANS the previous intercompany loans, the issuer
intercompany loan and all new intercompany
loans, each an "INTERCOMPANY LOAN"
INTEREST DETERMINATION DATE (a) in respect of the series 1 issuer notes
and the series 2 issuer notes means the
date which is two London business days
before the first day of the interest
period for which the rate will apply;
(b) in respect of the series 4 issuer notes
means the date which is two TARGET
business days before the first day of
the interest period for which the rate
will apply;
(c) in respect of the series 3 issuer notes
and the series 5 class issuer notes,
means the first day of the interest
period for which the rate will apply;
278
(d) in respect of the issuer term advances,
means, in respect of the first interest
period, the closing date and, in
respect of subsequent interest periods,
the first day of the interest period
for which the rate will apply;
INTEREST PAYMENT 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 [December
2005], (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
(b) 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 [December
2005], 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; and
(b) in all other cases, 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
and intended to provide 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
279
ISSUER BANK ACCOUNT the agreement to be entered into on the
AGREEMENT 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 ADVANCE the issuer series 1 term AAA advance
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 an agreement to be entered into on the
AGREEMENT 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 SWAP means the issuer euro currency swap provider
PROVIDERS and the issuer dollar currency swap providers
ISSUER CURRENCY SWAPS means the issuer euro currency swap and the
issuer dollar currency swaps
ISSUER DEED OF ACCESSION means the deed of accession to the Funding 1
deed of charge to be entered into by, amongst
others, Funding 1 and the issuer dated on or
about the closing date
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 the rate at which US dollars are converted to
EXCHANGE RATE 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 collectively, the ISDA master agreements,
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)
280
ISSUER DOLLAR CURRENCY SWAP the series 1 issuer swap provider and the
PROVIDERS ISSUER DOLLAR series 2 issuer swap provider, or any one of
CURRENCY SWAPS them, as the case may be 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 offered 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 the rate at which euro is converted to
EXCHANGE RATE 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 collectively, the ISDA master agreements,
AGREEMENTS schedules and confirmations relating to the
issuer euro currency swaps to be entered into
on or before the 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 the series 4 issuer swap provider
PROVIDER
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, 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 an acceleration notice served by the security
ACCELERATION NOTICE 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 the issuer intercompany loan agreement to be
AGREEMENT entered into on the closing date between
Funding 1, the issuer and the security
trustee
ISSUER INTERCOMPANY LOAN an event of default under the issuer
EVENT OF DEFAULT intercompany loan agreement
ISSUER NOTE ACCELERATION an acceleration notice served by the note
NOTICE 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 and the class C issuer
notes
281
ISSUER PAYING AGENT AND the agreement to be entered into on the
AGENT BANK AGREEMENT 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 the agreement to be entered into on the
OPTION AGREEMENT closing date under which the note trustee
agrees on behalf of the holders of the class
B issuer notes and the class C issuer notes,
that following enforcement of the issuer
security, the post-enforcement call option
holder may call for the class B issuer notes
and the class C issuer notes (as amended,
restated, supplemented and/or novated from
time to time)
ISSUER POST-ENFORCEMENT the order in which, following enforcement of
PRIORITY OF PAYMENTS 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 THE ISSUER AND THE
SERVICE OF AN INTERCOMPANY LOAN ACCELERATION
NOTICE ON FUNDING 1"
ISSUER PRE-ENFORCEMENT the order in which, prior to enforcement of
PRINCIPAL PRIORITY OF PAYMENTS 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 the order in which, prior to enforcement of
PRIORITY OF PAYMENTS 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 authorized 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 (i) the return or transfer of
any excess swap collateral as set out
under any of the issuer swap agreements
and (ii) in respect of each issuer swap
282
provider, prior to the designation of
an early termination date under the
relevant issuer swap agreement and the
resulting application of the collateral
by way of netting or set-off, an amount
equal to the value of all collateral
(other than excess swap collateral)
provided by such issuer swap provider
to the issuer pursuant to the relevant
issuer swap agreement (and any interest
or distributions in respect thereof));
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
ADVANCE the issuer deed of charge in favour of the
issuer secured creditors
ISSUER SERIES 1 TERM AAA the advance made by the issuer to Funding 1
ADVANCE under the issuer intercompany loan agreement
from the proceeds of the issue of the series
1 class A notes
ISSUER SERIES 2 TERM AAA the advance made by the issuer to Funding 1
ADVANCE under the issuer intercompany loan agreement
from the proceeds of the issue of the series
2 class A notes
ISSUER SERIES 3 TERM AAA the advance made by the issuer to Funding 1
ADVANCE under the issuer intercompany loan agreement
from the proceeds of the issue of the series
3 class A notes
ISSUER SERIES 4 TERM AAA the advance made by the issuer to Funding 1
ADVANCE under the issuer intercompany loan agreement
from the proceeds of the issue of the series
4 class A notes
ISSUER SERIES 5A1 TERM AAA the advance made by the issuer to Funding 1
ADVANCE under the issuer intercompany loan agreement
from the proceeds of the issue of the series
5 class A1 notes
ISSUER SERIES 5A2 TERM AAA the advance made by the issuer to Funding 1
ADVANCE under the issuer intercompany loan agreement
from the proceeds of the issue of the series
5 class A2 notes
ISSUER SERIES 5 TERM AAA the issuer series 5A1 term AAA advance and
ADVANCES the issuer series 5A2 term AAA advance
ISSUER STEP-UP DATE the interest payment date falling in
[December 2011]
ISSUER START-UP LOAN the loan made by the issuer start-up loan
provider to Funding 1 under the issuer
start-up loan agreement
283
ISSUER START-UP LOAN AGREEMENT the agreement to be entered into on the
closing date between the issuer start-up loan
provider and Funding 1 under which the issuer
start-up loan will be made by the issuer
start-up loan provider to Funding 1
ISSUER START-UP LOAN PROVIDER Halifax plc, in its capacity as provider of
the issuer start-up loan under the issuer
start-up loan agreement
ISSUER SUBSCRIPTION AGREEMENTS a subscription agreement in relation to the
series 3 issuer notes, the series 4 issuer
notes and the series 5 issuer notes (other
than the series 5 class A1 issuer notes)
between, inter alios, the issuer and the
Managers (as defined therein) and a
subscription agreement in relation to the
series 5 class A1 issuer notes between, inter
alios, the issuer and HBOS Treasury Services
plc
ISSUER SWAP AGREEMENTS the issuer dollar currency swap agreements
and the issuer euro currency swap agreements
ISSUER SWAP EXCLUDED in relation to an issuer swap agreement an
TERMINATION AMOUNT 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
[ISSUER SWAP GUARANTEES means the [o] issuer swap guarantee and the
[o] issuer swap guarantee]
ISSUER SWAP PROVIDER as the context may require, the occurrence of
DEFAULT 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 means the occurrence of an additional
DOWNGRADE TERMINATION EVENT termination event following the failure by
an issuer swap provider to comply with the
requirements of the ratings downgrade
provisions set out in the relevant issuer
swap agreement
ISSUER SWAP PROVIDERS the issuer dollar currency swap provider and
the issuer euro currency swap provider or any
of them as the context requires
ISSUER SWAPS the issuer dollar currency swaps and the
issuer euro currency swap
ISSUER TERM AA ADVANCES those advances designated by "AA" made by the
issuer to Funding 1 under the issuer
intercompany loan agreement from the proceeds
of issue of the class B issuer notes
284
ISSUER TERM AAA ADVANCES those advances designated by "AAA" made by
the issuer to Funding 1 under the issuer
intercompany loan agreement from the proceeds
of issue of the class A issuer notes
ISSUER TERM ADVANCES the divisions into which the advance to
Funding 1 under the issuer intercompany loan
will be split, being the issuer series 1 term
AAA advance, the issuer series 2 term AAA
advance, the issuer series 3 term AAA
advance, the issuer series 4 term AAA
advance, the issuer series 5 term AAA
advances, the issuer series 1 term AA
advance, the issuer series 2 term AA advance,
the issuer series 3 term AA advance, the
issuer series 4 term AA advance, the issuer
series 5 term AA advance, the issuer series 1
term BBB advance, the issuer series 2 term
BBB advance, the issuer series 3 term BBB
advance, the issuer series 4 term BBB advance
and the issuer series 5 term BBB advance
ISSUER TERM BBB ADVANCES those advances designated by "BBB" made by
the issuer to Funding 1 under the issuer
intercompany loan agreement from the proceeds
of issue of the class C issuer notes
ISSUER TRANSACTION the documents listed in paragraph (D) in
DOCUMENTS "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 the agreement to be entered into on or about
AGREEMENT the date of this prospectus between the
underwriters and the issuer relating to the
sale of the offered issuer notes
LENDING CRITERIA the criteria applicable to the granting of an
offer of a mortgage to a borrower, as may be
amended from time to time and as further
described in "THE LOANS - CHARACTERISTICS OF
THE LOANS - LENDING CRITERIA"
LIBOR OR STERLING LIBOR the London Interbank Offered Rate for
sterling deposits, as determined by the agent
bank on the following basis:
(1) on the applicable interest
determination date, the agent bank will
determine the arithmetic mean, rounded
upwards to five decimal places, of the
offered quotations to leading banks in
the London inter-bank market for
sterling deposits for the relevant
period (or, in the case of the first
interest period, the linear
interpolation of the arithmetic mean of
such offered quotations for two-week
and one-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.
285
In each of these cases, the
determination will be made as at or
about 11.00 a.m., London time, on that
date. This is called the screen rate
for LIBOR or sterling LIBOR;
(2) if, on any such interest determination
date, the screen rate is unavailable,
the agent bank will:
* request the principal London
office of each of the reference
banks to provide the agent bank
with its offered quotation to
leading banks for sterling
deposits of the equivalent
amount, and for the relevant
period, in the London inter-bank
market as at or about 11.00 a.m.
(London time); and
* calculate the arithmetic mean,
rounded upwards to five decimal
places, of those quotations;
(3) if, on any such interest determination
date, the screen rate is unavailable
and only two or three of the reference
banks provide offered quotations, the
relevant rate for that interest period
will be the arithmetic mean of the
quotations as calculated in (2); and
(4) if, on any such interest determination
date, fewer than two reference banks
provide quotations, the agent bank will
consult with the note trustee and the
issuer for the 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
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 means the seller's long-term, unsecured,
RATING EVENT unsubordinated and unguaranteed debt
obligations are rated below A3 by Moody's or
A- by Fitch (unless the relevant rating
agency confirms that its then current ratings
of the issuer notes will not be adversely
affected as a consequence of such rating of
the seller)
LIQUIDITY RESERVE FUND on any Funding 1 interest payment date, an
REQUIRED AMOUNT amount equal to 3% of the aggregate
outstanding balance of the issuer notes on
that date
LIQUIDITY RESERVE LEDGER a ledger maintained by the cash manager to
record the withdrawals and deposits in
respect of the liquidity reserve fund
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
286
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
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
LOSSES the realised losses experienced on the loans
in the portfolio
LOSSES LEDGER the ledger of such name created and
maintained by the cash manager pursuant to
the cash management agreement to record the
losses on the portfolio
LTV RATIO OR LOAN-TO-VALUE the ratio of the outstanding balance of a
RATIO loan to the value of the mortgaged property
securing that loan
LTV TEST a test which assigns a credit enhancement
value to each loan in the portfolio based on
its current loan-to-value ratio and the
amount of mortgage indemnity cover on that
loan. The weighted average credit enhancement
value for the portfolio is then determined
MANAGERS [[ABN AMRO Bank N.V., London Branch, Lehman
Brothers International (Europe), Morgan
Stanley & Co. Incorporated and o]
MASTER DEFINITIONS AND together, the amended and restated master
CONSTRUCTION SCHEDULE definitions and construction schedule and the
issuer master definitions and construction
schedule, which are schedules of definitions
used in the issuer transaction documents
MCOB mortgages: conduct of business sourcebook
MIG POLICIES mortgage indemnity guarantee policies
MINIMUM RATE LOANS loans subject to a minimum rate of interest
287
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
(pound)[o]
MOODY'S Moody's Investors Service Limited and any
successor to its ratings business
MORTGAGE the legal charge or standard security
securing a loan
MORTGAGE ACCOUNT all loans secured on the same property will
be incorporated in the same mortgage account
MORTGAGE 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
the initial closing date 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 the amount that will be standing to the
PRINCIPAL RECEIPTS credit of the principal ledger on the
relevant calculation date as described
further in "THE MORTGAGES TRUST"
MORTGAGES TRUST AVAILABLE an amount equal to the sum of:
REVENUE RECEIPTS
(a) revenue receipts on the loans (but
excluding principal receipts); and
(b) interest payable to the mortgages
trustee on the mortgages trustee GIC
account; less
(c) third party amounts
as described further in "THE MORTGAGES TRUST"
MORTGAGES TRUST DEED the mortgages trust deed made by the
mortgages trustee, Funding 1 and the seller
on 13th June, 2002, as amended and/or
restated from time to time and as further
described in "THE MORTGAGES TRUST"
MORTGAGES TRUSTEE Permanent Mortgages Trustee Limited
MORTGAGES TRUSTEE ACCOUNT the mortgages trustee GIC account
288
MORTGAGES TRUSTEE CORPORATE the agreement entered into on the initial
SERVICES AGREEMENT closing date 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 the account in the name of the mortgages
ACCOUNT 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 Bank of Scotland at 116 Wellington Street,
PROVIDER Leeds LS1 4LT
MORTGAGES TRUSTEE GUARANTEED the guaranteed investment contract entered
INVESTMENT CONTRACT into on the initial closing CONTRACT date
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 the variable base rates which apply to the
BASE RATE 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 a new Funding 1 swap to be entered into by
FUNDING 1 SWAP PROVIDER 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 a loan of a new issuer term advance made by a
NEW INTERCOMPANY LOAN new issuer to Funding 1 under a new
AGREEMENT intercompany loan agreement entered into by
Funding 1 with a new issuer
NEW ISSUE the issue of new notes to investors by a new
issuer to fund a new intercompany loan
NEW ISSUER a new wholly-owned subsidiary of Holdings
that is not established as at the closing
date and which, if established, will make a
new intercompany loan to Funding 1
NEW LOANS loans 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
289
NEW START-UP LOAN AND NEW a new start-up loan to be made available to
START-UP LOAN PROVIDER 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" or
its equivalent
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" or
its equivalent
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" or
its equivalent
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" or
its equivalent
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 (i) during the period from and
including the closing date to but
excluding the interest payment date in
[December 2005] is less than
(pound)[27,000,000,000] or (ii) during
the period from and including the
interest payment date in [December
2005] to but excluding the interest
payment date in [December 2009] is less
than (pound)[24,000,000,000]
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
290
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
NOTEHOLDERS the holders of issuer notes, or any of them
as the context requires
OFFER CONDITIONS the terms and conditions applicable to a
specific loan as set out in the relevant
offer letter to the borrower
OFFERED ISSUER NOTES the series 1 issuer notes and the series 2
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 a term advance which at the time it was
TERM ADVANCE advanced was a pass-through term advance
ORIGINAL SCHEDULED that part of a term advance which at any time
AMORTISATION INSTALMENT has been a scheduled amortisation instalment
(even if that part of that term advance has
subsequently become a pass-through term
advance)
ORIGINAL SCHEDULED a term advance which at any time has been a
AMORTISATION TERM ADVANCE 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 means at any time on a Funding 1 interest
RESTRICTIONS 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 those term advances of the
issuer and
291
each previous issuer designated as a
`pass-through' term advance in the table
under the caption "THE MORTGAGES TRUST - CASH
MANAGEMENT OF TRUST PROPERTY - PRINCIPAL
RECEIPTS".
If a trigger event occurs or the Funding 1
security or issuer security is enforced, then
the bullet term advances (other than the
issuer series 1 term AAA advance and the
previous series 1 term AAA advances) and the
scheduled amortisation term advances will be
deemed to be pass-through term advances
PAYING AGENTS the principal paying agent and the US paying
agent
PAYMENT HOLIDAY a period during which a borrower may suspend
payments under a mortgage loan without
penalty
PERMITTED REDEMPTION DATES in respect of any class of issuer notes, the
interest payment date on which those notes
may be redeemed by the issuer pursuant to the
terms and conditions of the issuer notes (as
further described in "TERMS AND CONDITIONS OF
THE OFFERED ISSUER NOTES")
PORTFOLIO at any time the loans and their related
security 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 and the class C issuer notes
under the issuer post-enforcement call option
agreement
POST-ENFORCEMENT CALL Permanent PECOH Limited
OPTION HOLDER
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; in
respect of Permanent Financing (No. 3) PLC,
25th November, 2003; in respect of Permanent
Financing (No. 4) PLC, 12th March, 2004; in
respect of Permanent Financing (No. 5) PLC,
22nd July, 2004, and in respect of Permanent
Financing (No. 6) PLC, 18th November, 2004
PREVIOUS INTERCOMPANY LOAN the previous intercompany loan agreement
AGREEMENT entered into on each previous closing date
between Funding 1, the relevant previous
issuer and security trustee
PREVIOUS INTERCOMPANY LOAN an acceleration notice served by the security
ACCELERATION NOTICE trustee on Funding 1 following an
intercompany loan event of default under the
previous intercompany loan agreement
PREVIOUS INTERCOMPANY LOAN an event of default under a previous
EVENT OF DEFAULT intercompany loan
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 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)
292
PLC, Permanent Financing (No. 3) PLC,
Permanent Financing (No. 4) PLC, Permanent
Financing (No. 5) PLC and Permanent Financing
(No. 6) 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 any notes issued by a previous issuer
PREVIOUS SERIES 1 TERM any series 1 term AAA advance made by a
AAA ADVANCE previous issuer to Funding 1 under the
applicable previous intercompany loan
agreement
PREVIOUS SERIES 2 TERM any series 2 term AAA advance made by a
AAA ADVANCE previous issuer to Funding 1 under the
applicable previous intercompany loan
agreement
PREVIOUS SERIES 3 TERM any series 3 term AAA advance made by a
AAA ADVANCE previous issuer to Funding 1 under the
applicable previous intercompany loan
agreement
PREVIOUS SERIES 4 TERM any series 4 term AAA advance (including any
AAA ADVANCE series 4A1 term AAA advance or series 4A2
term AAA advance) made by a previous issuer
to Funding 1 under the applicable previous
intercompany loan agreement
PREVIOUS SERIES 5 TERM any series 5 term AAA advance (including any
AAA ADVANCE series 5A1 term AAA advance or series 5A2
term AAA advance) made by a previous issuer
to Funding 1 under the applicable previous
intercompany loan agreement
PREVIOUS START-UP LOANS each loan made by a previous start-up loan
provider to Funding 1 under a previous
start-up loan agreement
PREVIOUS START-UP LOAN each agreement entered into on a previous
AGREEMENTS closing date between a previous start-up loan
provider and Funding 1 under which a start-up
loan was made by the relevant previous
start-up loan provider to Funding 1
PREVIOUS START-UP LOAN Halifax plc, in its capacities as provider
PROVIDER of each previous start-up loan under the
relevant previous 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 means in respect of (i) the first issuer,
JPMorgan Chase Bank, N.A., Banque AIG or
Credit Suisse First Boston International;
(ii) the second issuer, CDC IXIS Capital
Markets, JPMorgan Chase Bank, N.A. or Banque
AIG; (iii) the third issuer, Credit Suisse
First Boston International, JPMorgan Chase
Bank, N.A., Banque AIG or HBOS Treasury
Services plc; (iv) the fourth issuer,
Westdeutsche Landesbank Girozentrale AG, HBOS
Treasury Services plc, Citibank N.A, Banque
AIG or Swiss Re Financial Products
Corporation; (v) the fifth issuer, Banque
AIG, HBOS Treasury Services plc, Swiss Re
Financial Products Corporation or UBS
Limited; and (vi) the sixth issuer, Swiss Re
293
Financial Products Corporation, Banque AIG
and Citibank N.A., London Branch, or in each
case such other swap provider appointed from
time to time in respect of the relevant
previous notes issued by the relevant
previous issuer
PREVIOUS SWAP the dollar currency swaps, euro currency
swaps and interest rate swaps entered into by
the previous issuers under the previous swap
agreements
PREVIOUS TERM A 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 M previous notes, the series 2
class M previous notes, the series 3 class M
previous notes, the series 4 class M previous
notes and the series 5 class M previous notes
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.
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
294
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% 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 a reasonably prudent prime residential
LENDER 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]
REFERENCE DATE [o], 2005
295
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 the amount of funds to be accumulated over a
AMOUNT cash accumulation period in order to
repay a bullet term advance or a scheduled
amortisation instalment on its scheduled
repayment date (as further described in "THE
MORTGAGES TRUST - CASH MANAGEMENT OF TRUST
PROPERTY - PRINCIPAL receipts") 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 means the calculation date at the start of
DATE the most recently 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 AMORTIZATION in respect of each term advance of the issuer
INSTALMENT and each previous issuer designated as a
`scheduled amortisation term advance' in the
table under the caption "THE MORTGAGES TRUST
- CASH MANAGEMENT OF TRUST PROPERTY -
PRINCIPAL RECEIPTS", the instalment amounts
and repayment dates set out in such table,
and in respect of each term advance of a new
issuer designated as a `scheduled
amortisation term advance', the instalment
amounts and repayment dates set out in the
prospectus relating to such new issuer
SCHEDULED AMORTIZATION means at any time on a Funding 1 interest
REPAYMENT RESTRICTIONS payment date:
296
(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
amortization 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 those term advances of the issuer and each
ADVANCE previous issuer designated as a `scheduled
amortisation term advance' in the table under
the caption "THE MORTGAGES TRUST - CASH
MANAGEMENT OF TRUST PROPERTY - PRINCIPAL
RECEIPTS" and any term advance which is
referred to as such in the 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 (a) in respect of the series 1 class A
DATES issuer notes, the interest payment
date in [December 2005];
(b) in respect of the series 2 class A
issuer notes, the interest payment date
in [ June, September and December 2007
and March 2008];
297
(c) in respect of the series 3 class A
issuer notes, the interest payment
dates in [ March, June, September and
December 2008]
(d) in respect of the series 4 class A
issuer notes, the interest payment
dates in [March and June 2010]
SCHEDULED REPAYMENT (a) in respect of the issuer series 1 term
DATES AAA advance, the interest payment date
in [December 2005];
(b) in respect of the issuer series 2 term
AAA advance, the interest payment dates
falling in [June, September and
December 2007 and March 2008];
(c) in respect of the issuer series 3 term
AAA advance, the interest payment dates
in [March, June, September and December
2008];
(d) in respect of the issuer series 4 term
AAA advance, the interest payment dates
in [March and June 2010];
(e) in respect of each previous term
advance made by a previous issuer, the
interest payment date falling in the
month indicated for such previous term
advance in"DESCRIPTION OF THE PREVIOUS
ISSUER, THE PREVIOUS NOTES AND THE
PREVIOUS INTERCOMPANY LOAN";
(f) 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
(g) 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 the declarations of trust to be granted
TRUST by the seller in favour of themortgages
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
SCOTTISH MORTGAGE a mortgage secured over a property in
Scotland
SCOTTISH MORTGAGE the mortgage conditions applicable to
CONDITIONS Scottish loans
SEC The United States Securities and Exchange
Commission
SECOND ISSUER Permanent Financing (No. 2) PLC
SECOND SUPPLEMENTAL the deed entered into on 12th March, 2004
FUNDING 1 DEED OF CHARGE between, among others, Funding 1 and the
security trustee
SECURITY TRUSTEE The Bank of New York
298
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 X CLASS Y ISSUER NOTES the issuer notes with such series and class
designation described in the tables under
"SUMMARY OF PROSPECTUS - SUMMARY OF THE
ISSUER NOTES" provided that a reference to
series X class A issuer notes includes a
reference to class A1 and class A2 notes, if
any, of that series
SERIES X CLASS Y PREVIOUS any previous notes with such series and class
ISSUER NOTES designation; provided that a reference to
series X class A previous issuer notes
includes a reference to class A1 and class
A2 previous notes, if any, of that series
SERIES X CLASS Y ISSUER SWAP the issuer dollar currency or euro currency
or interest rate swap entered into in
relation to the series X class Y issuer notes
SERIES 1 ISSUER SWAP [o], or such other swap provider appointed
PROVIDER from time to time in relation to the series
1 issuer notes
SERIES 2 ISSUER SWAP [o], or such other swap provider appointed
PROVIDER from time to time in relation to the series
2 issuer notes
SERIES 4 ISSUER SWAP [o], or such other swap provider appointed
PROVIDER from time to time in relation to the series
4 issuer notes
SERIES 1 ISSUER NOTES the series 1 class A issuer notes, the series
1 class B issuer notes and the series 1 class
C issuer notes
SERIES 2 ISSUER NOTES the series 2 class A issuer notes, the series
2 class B issuer notes and the series 2 class
C issuer notes
SERIES 3 ISSUER NOTES the series 3 class A issuer notes, the series
3 class B issuer notes and the series 3 class
C issuer notes
SERIES 4 ISSUER NOTES the series 4 class A issuer notes, the series
4 class B issuer notes and the series 4 class
C issuer notes
SERIES 5 ISSUER NOTES the series 5 class A issuer notes, the series
5 class B issuer notes and the series 5 class
C issuer notes
299
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 the initial
closing date (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
SIXTH ISSUER Permanent Financing (No. 6) PLC
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 plc, a non-life
insurance company incorporated on 15th
September, 2003, whose office is at St
Andrew's House, Portsmouth Road, Esher,
Surrey
START-UP LOAN AGREEMENTS each previous start-up loan agreement, the
issuer start-up loan agreement and any new
start-up loan agreements
START-UP LOAN PROVIDER Halifax plc, in its capacities as provider of
each start-up loan
START-UP LOANS each previous start-up loan, the issuer
start-up loan and any new 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 a circumstance in which a swap agreement can
EVENT be terminated prior to itsscheduled
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
[[o] ISSUER SWAP GUARANTOR [o]]
[[o] ISSUER SWAP GUARANTEE the guarantee of the obligations of the
series 1 issuer swap provider under the
relevant issuer swaps by the [o] issuer swap
guarantor]
TARGET BUSINESS DAY a day on which the Trans-European Automated
Real-time Gross settlement Express Transfer
(TARGET) System is open
300
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 class of notes
TERM A ADVANCES the previous 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
TERM AA ADVANCES the previous term AA advances, the issuer
term AA advances and any new term AA advance
made by a new issuer to Funding 1 that has a
term advance rating of "AA" or its equivalent
TERM AAA ADVANCES the previous term AAA advances, the issuer
term AAA advances and any new term AAA
advance made by a new issuer to Funding 1
that has a term advance rating of "AAA" or
its equivalent
TERM ADVANCES the term AAA advances, the term AA advances
and the term BBB advances outstanding from
time to time
TERM BBB ADVANCES the previous term BBB advances, the issuer
term BBB advances and any new term BBB
advance made by a new issuer to Funding 1
that has a term advance rating of "BBB" or
its equivalent
TERRACED a house in a row of houses built in one block
in a uniform style
THIRD ISSUER Permanent Financing (No. 3) PLC
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
TRACKER RATE the rate of interest applicable to a tracker
rate loan (before applying any cap or minimum
rate)
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
TRANSACTION DOCUMENTS the issuer transaction documents and other
documents relating to the issuer notes, the
previous intercompany loan agreements, the
previous start-up loan agreements, the
previous swap agreements,
301
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 (pound)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/C
underwriters
302
UNITED STATES HOLDER a beneficial owner of offered issuer 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 more US persons have the
authority to control all substantial
decisions of the trust
US PAYING AGENT Citibank, N.A. at 14th Floor, 388 Greenwich
Street, New York, New York 10013
USD-LIBOR the London Interbank Offered Rate for dollar
deposits, as determined by the agent bank on
the following basis:
(a) on the applicable interest
determination date applicable to the
series 1 issuer notes and the series 2
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 the linear
interpolation of the arithmetic mean of
such offered quotations for two-week
and one-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 and the series 2 issuer notes;
(b) 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;
303
(c) 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 (b); and
(d) 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 (b). 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 (a) or (b) was
applicable
VALUATION a methodology for determining the value of a
property which would meet the standards of a
reasonable, prudent mortgage lender (as
referred to under "THE SERVICING AGREEMENT -
UNDERTAKINGS BY THE SERVICER")
VALUATION FEE a fee incurred by borrowers as a result of
the seller or servicer obtaining a valuation
of the property
VARIABLE BASE RATES HVR 1, HVR 2 or the mortgages trustee
variable base rate, as applicable
VARIABLE MORTGAGE RATE the rate of interest which determines the
amount of interest payable each month on a
variable rate loan
VARIABLE RATE LOAN a loan where the interest rate payable by the
borrower varies in accordance with a
specified variable mortgage rate
VAT Value added tax
WE and US the issuer
WITHHOLDING TAX a tax levied under UK law, as further
described in "UNITED KINGDOM TAXATION -
WITHHOLDING TAX"
304
ANNEXE A
The following is an extract from the most recent reports on Form 6-K for
Permanent Financing (No. 1) PLC, Permanent Financing (No. 2) PLC, Permanent
Financing (No. 3) PLC, Permanent Financing (No. 4) PLC, Permanent Financing
(No. 5), Permanent Financing (No. 6) PLC, Permanent Funding (No. 1) Limited
and Permanent Mortgages Trustee Limited, as filed with the SEC on 8 December,
2004. The extract describes certain aspects of the mortgage loans in the
mortgages trust during the period from 10th September, 2004 to 10th December,
2004.
The monthly reports filed with the SEC on behalf of each of the above
entities may be accessed by investors (see - "WHERE INVESTORS CAN FIND MORE
INFORMATION").
QUARTER 10TH SEPTEMBER, TO 10TH DECEMBER, 2004
MONTHLY REPORT - NOVEMBER 2004
DATE OF REPORT 3RD DECEMBER, 2004
- --------------------------------- -------------------
MORTGAGES
Number of Mortgages in Pool 508,742
Current Principal Balance [GBP]32,877,011,571
Opening Trust Assets [GBP]100
Total [GBP]32,877,011,671
Notes Outstanding [GBP]25,450,805,291
Funding Share [GBP]23,942,646,291
Cash Accumulation Balance [GBP]1,508,159,000
Funding Share Percentage 72.82489 %
Seller Share [GBP]8,934,365,279
Seller Share Percentage 27.17511 %
Minimum Seller Share (Amount) [GBP]1,643,850,579
Minimum Seller Share (% of Total) 5.00000 %
ARREARS ANALYSIS NUMBER PRINCIPAL ARREARS % BY PRINCIPAL
Less than 1 month 502,560 [GBP]32,434,017,986.35 [GBP]2,914,983.81 98.65%
1 < 2 months 4,115 [GBP]303,644,860.62 [GBP]2,221,383.11 0.92%
2 < 3 months 839 [GBP]60,478,146.25 [GBP]882,767.72 0.18%
3 < 6 months 867 [GBP]56,116,180.82 [GBP]1,494,876.43 0.17%
6 < 12 months 311 [GBP]20,098,564.26 [GBP]943,836.51 0.06%
12 months + 50 [GBP]2,655,832.41 [GBP]219,134.56 0.01%
------- ---------------------- ----------------- --------------
TOTAL 508,742 [GBP]32,877,011,570.71 [GBP]8,676,982.14 100.00%
======= ====================== ================= ==============
PROPERTIES IN POSSESSION NUMBER BALANCE AMOUNT IN ARREARS
------- ----------------- -----------------
Total 11 [GBP]1,223,334.09 [GBP]71,812.82
======= ================= =================
305
PROPERTIES IN POSSESSION (THIS MONTH)
- --------------------------------------------------------------- --------------
Number Brought Forward 5
Repossessed 7
Sold 1
Number Carried Forward 11
Average Time from Possession to Sale in days 73
Average Arrears at Sale [GBP]8,717.21
MIG Claims submitted 0
MIG Claims Outstanding 0
Average Time from Claim to Payment in days 0
- -----------------------
Note: The arrears analysis and repossession information is as at the end of the
report month
SUBSTITUTION NUMBER PRINCIPAL
------- ----------------------
Substituted this period (this month) 0 [GBP] ---
Substituted to date (since 14/06/2002)* 203,962 [GBP]14,162,131,295.91
- -----------------------
* On 18th November 2004, Permanent 6 closed. The Permanent Trust was topped-up
by 104,569 accounts (to value: [GBP]9,582,315,929.58). These are not included
above.
CPR ANALYSIS MONTHLY ANNUALISED
------- ----------
(includes redemptions and repurchases)
Current 1 Month CPR Rate 3.63% 35.86%
Previous 3 Month CPR Rate 3.70% 36.40%
Previous 12 Month CPR Rate 3.97% 38.48%
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) 32.16
Average Loan Size [GBP]64,624.13
Weighted Average Current HPI LTV (by value) 46.93%
Weighted Average Current LTV (by value) 65.44%
YIELD NET OF FUNDING SWAP OVER 3 MONTH STERLING LIBOR
Current Month 0.734%
EXCESS SPREAD
Current Month 0.463%
October 2004 0.474%
September 2004 0.498%
PRODUCT BREAKDOWN
Fixed Rate % 31.76%
Tracker Rate % 49.70%
Other Variable Rate % 18.53%
306
LTV LEVELS BREAKDOWN* NUMBER VALUE % OF TOTAL
------- ---------------------- ----------
0-30% 82,555 [GBP] 2,054,901,993.75 6.25%
30-35% 21,194 [GBP] 956,432,544.30 2.91%
35-40% 23,554 [GBP] 1,203,175,891.78 3.66%
40-45% 25,675 [GBP] 1,439,389,948.64 4.38%
45-50% 28,585 [GBP] 1,759,737,230.34 5.35%
50-55% 30,607 [GBP] 2,045,732,418.87 6.22%
55-60% 32,666 [GBP] 2,386,759,344.54 7.26%
60-65% 34,130 [GBP] 2,649,938,969.29 8.06%
65-70% 37,381 [GBP] 3,095,499,232.57 9.42%
70-75% 44,747 [GBP] 4,248,498,478.76 12.92%
75-80% 30,266 [GBP] 2,437,323,280.94 7.41%
80-85% 30,962 [GBP] 2,217,185,306.39 6.74%
85-90% 34,689 [GBP] 2,660,884,850.83 8.09%
90-95% 31,015 [GBP] 2,150,964,307.94 6.54%
95-100% 18,692 [GBP] 1,428,716,665.09 4.35%
100% + 2,024 [GBP] 141,871,106.67 0.43%
------- --------------------- --------
Totals 508,742 [GBP]32,877,011,570.70 100.00%
======= ====================== =======
- ------------
* Using Latest Valuation
HPI LTV LEVELS BREAKDOWN** NUMBER VALUE % OF TOTAL
------- ----------------------- ----------
0-30% 178,755 [GBP] 6,222,164,238.70 18.93%
30-35% 49,348 [GBP] 2,790,580.121.19 8.49 %
35-40% 53,734 [GBP] 3,320,485,644.04 10.10%
40-45% 49,304 [GBP] 3,338,627,427.29 10.15%
45-50% 40,282 [GBP] 3,140,159,383.75 9.55%
50-55% 33,746 [GBP] 2,954,856,054.82 8.99%
55-60% 29,716 [GBP] 2,804,613,076.17 8.53%
60-65% 24,643 [GBP] 2,587,657,775.34 7.87%
65-70% 17,514 [GBP] 2,029,888,392.13 6.17%
70-75% 11,984 [GBP] 1,314,702,243.23 4.00%
75-80% 8,329 [GBP] 935,206,972.77 2.84%
80-85% 5,862 [GBP] 725,252,074.55 2.21%
85-90% 3,761 [GBP] 487,270,538.58 1.48%
90-95% 1,383 [GBP] 178,337,648.90 0.54%
95-100% 373 [GBP] 46,302,192.09 0.14%
100% + 8 [GBP] 907,787.15 0.00%
------- ---------------------- -------
Totals 508,742 [GBP] 32,877,011,570.70 100.00%
======= ====================== =======
- ---------
** Using Latest Valuation Adjusted for changes in the HPI index
Current HVR1 Rate 6.75%
Effective Date of Change 9/1/2004
Current HVR2 Rate 6.00%
Effective Date of Change 9/1/2004
307
Notes DEAL RATING MOODY'S/S&P/ FITCH) OUTSTANDING REFERENCE RATE MARGIN
------------------------ -------------------------- --------------------- -------------- --------
Series 1 Class A Permanent Financing No.3 P-1 / A-1+ / F1+ $1,100,000,000.00 2.08688 % -0.040 %
Series 1 Class A Permanent Financing No.4 P-1 / A-1+ / F1+ $1,500,000,000.00 2.08688 % -0.050 %
Series 1 Class A Permanent Financing No.5 P-1 / A-1+ / F1+ $1,250,000,000.00 2.08688 % -0.020 %
Series 1 Class A Permanent Financing No.6 P-1 / A-1+ / F1+ $1,000,000,000.00 2.10458 % -0.030 %
Series 1 Class B Permanent Financing No.3 Aa3 / AA / AA $38,000,000.00 1.86250 % 0.180 %
Series 1 Class B Permanent Financing No.4 Aa3 / AA / AA $78,100,000.00 1.86250 % 0.140 %
Series 1 Class B Permanent Financing No.5 Aa3 / AA / AA $53,000,000.00 1.86250 % 0.140 %
Series 1 Class B Permanent Financing No.6 Aa3 / AA / AA $35,800,000.00 2.10458 % 0.100 %
Series 1 Class M Permanent Financing No.4 A2/A/A $56,500,000.00 1.86250 % 0.230 %
Series 1 Class C Permanent Financing No.3 Baa2 / BBB / BBB $38,000,000.00 1.86250 % 0.950 %
Series 1 Class C Permanent Financing No.5 Baa2 / BBB / BBB $44,400,000.00 1.86250 % 0.500 %
Series 1 Class C Permanent Financing No.6 Baa2 / BBB / BBB $34,700,000.00 2.10458 % 0.350 %
Series 2 Class A Permanent Financing No.1 Aaa / AAA / AAA $750,000,000.00 4.200 %
Series 2 Class A Permanent Financing No.2 Aaa / AAA / AAA $1,750,000,000.00 1.86250 % 0.150 %
Series 2 Class A Permanent Financing No.3 Aaa / AAA / AAA $1,700,000,000.00 1.86250 % 0.110 %
Series 2 Class A Permanent Financing No.4 Aaa / AAA / AAA $2,400,000,000.00 1.86250 % 0.070 %
Series 2 Class A Permanent Financing No.5 Aaa / AAA / AAA $1,300,000,000.00 1.86250 % 0.110 %
Series 2 Class A Permanent Financing No.6 Aaa / AAA / AAA $1,000,000,000.00 2.10458 % 0.090 %
Series 2 Class B Permanent Financing No.1 Aa3 / AA / AA $26,000,000.00 1.86250 % 0.280 %
Series 2 Class B Permanent Financing No.2 Aa3 / AA / AA $61,000,000.00 1.86250 % 0.330 %
Series 2 Class B Permanent Financing No.3 Aa3 / AA / AA $59,000,000.00 1.86250 % 0.250 %
Series 2 Class B Permanent Financing No.4 Aa3 / AA / AA $100,700,000.00 1.86250 % 0.180 %
Series 2 Class B Permanent Financing No.5 Aa3 / AA / AA $56,400,000.00 1.86250 % 0.180 %
Series 2 Class B Permanent Financing No.6 Aa3 / AA / AA $35,800,000.00 2.10458 % 0.140 %
Series 2 Class M Permanent Financing No.4 A2/A/A $59,900,000.00 1.86250 % 0.330 %
Series 2 Class C Permanent Financing No.1 Baa2 / BBB / BBB $26,000,000.00 1.86250 % 1.180 %
Series 2 Class C Permanent Financing No.2 Baa2 / BBB / BBB $61,000,000.00 1.86250 % 1.450 %
Series 2 Class C Permanent Financing No.3 Baa2 / BBB / BBB $59,000,000.00 1.86250 % 1.050 %
Series 2 Class C Permanent Financing No.4 Baa2 / BBB / BBB $82,200,000.00 1.86250 % 0.720 %
Series 2 Class C Permanent Financing No.5 Baa2 / BBB / BBB $46,200,000.00 1.86250 % 0.650 %
Series 2 Class C Permanent Financing No.6 Baa2 / BBB / BBB $34,700,000.00 2.10458 % 0.450 %
Series 3 Class A Permanent Financing No.1 Aaa / AAA / AAA $1,100,000,000.00 1.86250 % 0.125 %
Series 3 Class A Permanent Financing No.2 Aaa / AAA / AAA [e]1,250,000,000.00 2.11500 % 0.230 %
Series 3 Class A Permanent Financing No.3 Aaa / AAA / AAA $1,500,000,000.00 1.86250 % 0.180 %
Series 3 Class A Permanent Financing No.4 Aaa / AAA / AAA $1,700,000,000.00 1.86250 % 0.140 %
Series 3 Class A Permanent Financing No.5 Aaa / AAA / AAA $750,000,000.00 1.86250 % 0.160 %
Series 3 Class A Permanent Financing No.6 Aaa / AAA / AAA [GBP]1,000,000,000.00 4.80292 % 0.125 %
Series 3 Class B Permanent Financing No.1 Aa3 / AA / AA $38,500,000.00 1.86250 % 0.300 %
Series 3 Class B Permanent Financing No.2 Aa3 / AA / AA [e]43,500,000.00 2.11500 % 0.430 %
Series 3 Class B Permanent Financing No.3 Aa3 / AA / AA $52,000,000.00 1.86250 % 0.350 %
Series 3 Class B Permanent Financing No.4 Aa3 / AA / AA $75,800,000.00 1.86250 % 0.230 %
Series 3 Class B Permanent Financing No.5 Aa3 / AA / AA $32,500,000.00 1.86250 % 0.260 %
Series 3 Class B Permanent Financing No.6 Aa3 / AA / AA [GBP]35,300,000.00 4.80292 % 0.230 %
Series 3 Class M Permanent Financing No.4 A2/A/A $40,400,000.00 1.86250 % 0.370 %
Series 3 Class C Permanent Financing No.1 Baa2 / BBB / BBB $38,500,000.00 1.86250 % 1.200 %
Series 3 Class C Permanent Financing No.2 Baa2 / BBB / BBB [e]43,500,000.00 2.11500 % 1.450 %
Series 3 Class C Permanent Financing No.3 Baa2 / BBB / BBB $52,000,000.00 1.86250 % 1.150 %
308
Notes DEAL RATING MOODY'S/S&P/ FITCH) OUTSTANDING REFERENCE RATE MARGIN
------------------------ -------------------------- --------------------- -------------- --------
Series 3 Class C Permanent Financing No.4 Baa2 / BBB / BBB $55,400,000.00 1.86250 % 0.800 %
Series 3 Class C Permanent Financing No.5 Baa2 / BBB / BBB $27,000,000.00 1.86250 % 0.820 %
Series 3 Class C Permanent Financing No.6 Baa2 / BBB / BBB [GBP]34,200,000.00 4.80292 % 0.680 %
Series 4 Class A1 Permanent Financing No.1 Aaa / AAA / AAA [e]750,000,000.00 5.100 %
Series 4 Class A1 Permanent Financing No.3 Aaa / AAA / AAA [e]700,000,000.00 2.11500 % 0.190 %
Series 4 Class A Permanent Financing No.2 Aaa / AAA / AAA $1,750,000,000.00 1.86250 % 0.220 %
Series 4 Class A Permanent Financing No.4 Aaa / AAA / AAA [e]1,500,000,000.00 2.11500 % 0.150 %
Series 4 Class A Permanent Financing No.5 Aaa / AAA / AAA [e]1,000,000,000.00 2.11500 % 0.170 %
Series 4 Class A Permanent Financing No.6 Aaa / AAA / AAA [e]750,000,000.00 2.09800 % 0.140 %
Series 4 Class A2 Permanent Financing No.1 Aaa / AAA / AAA [GBP]1,000,000,000.00 4.94875 % 0.180 %
Series 4 Class A2 Permanent Financing No.3 Aaa / AAA / AAA [GBP]750,000,000.00 4.94875 % 0.190 %
Series 4 Class B Permanent Financing No.1 Aa3 / AA / AA [GBP]52,000,000.00 4.94875 % 0.300 %
Series 4 Class B Permanent Financing No.2 Aa3 / AA / AA [e]56,500,000.00 2.11500 % 0.450 %
Series 4 Class B Permanent Financing No.3 Aa3 / AA / AA [e]62,000,000.00 2.11500 % 0.390 %
Series 4 Class B Permanent Financing No.4 Aa3 / AA / AA [e]85,000,000.00 2.11500 % 0.352 %
Series 4 Class B Permanent Financing No.5 Aa3 / AA / AA [e]43,500,000.00 2.11500 % 0.330 %
Series 4 Class B Permanent Financing No.6 Aa3 / AA / AA [e]26,100,000.00 2.09800 % 0.230 %
Series 4 Class M Permanent Financing No.4 A2 / A / A [e]62,500,000.00 2.11500 % 0.534 %
Series 4 Class C Permanent Financing No.1 Baa2 / BBB / BBB [GBP]52,000,000.00 4.94875 % 1.200 %
Series 4 Class C Permanent Financing No.2 Baa2 / BBB / BBB [e]56,500,000.00 2.11500 % 1.450 %
Series 4 Class C Permanent Financing No.3 Baa2 / BBB / BBB [e]62,000,000.00 2.11500 % 1.180 %
Series 4 Class C Permanent Financing No.5 Baa2 / BBB / BBB [e]36,000,000.00 2.11500 % 0.780 %
Series 4 Class C Permanent Financing No.6 Baa2 / BBB / BBB [e]25,300,000.00 2.09800 % 0.680 %
Series 5 Class A1 Permanent Financing No.4 Aaa / AAA / AAA [e]750,000,000.00 3.9615 %
Series 5 Class A1 Permanent Financing No.5 Aaa / AAA / AAA [GBP]500,000,000.00 5.625 %
Series 5 Class A1 Permanent Financing No.6 Aaa / AAA / AAA [GBP]500,000,000.00 4.80292 % 0.150 %
Series 5 Class A Permanent Financing No.2 Aaa / AAA / AAA [GBP]750,000,000.00 4.94875 % 0.250 %
Series 5 Class A Permanent Financing No.3 Aaa / AAA / AAA [GBP]400,000,000.00 5.521 %
Series 5 Class A2 Permanent Financing No.4 Aaa / AAA / AAA [GBP]1,100,000,000.00 4.94875 % 0.170 %
Series 5 Class A2 Permanent Financing No.5 Aaa / AAA / AAA [GBP]750,000,000.00 4.94875 % 0.190 %
Series 5 Class A2 Permanent Financing No.6 Aaa / AAA / AAA [GBP]500,000,000.00 4.80292 % 0.160 %
Series 5 Class B Permanent Financing No.2 Aa3 / AA / AA [GBP] 26,000,000.00 4.94875 % 0.450 %
Series 5 Class B Permanent Financing No.3 Aa3 / AA / AA [e] 20,000,000.00 2.11500 % 0.450 %
Series 5 Class B Permanent Financing No.4 Aa3 / AA / AA [GBP]43,000,000.00 4.94875 % 0.330 %
Series 5 Class B Permanent Financing No.5 Aa3 / AA / AA [GBP]47,000,000.00 4.94875 % 0.350 %
Series 5 Class B Permanent Financing No.6 Aa3 / AA / AA [GBP]34,800,000.00 4.80292 % 0.310 %
Series 5 Class M Permanent Financing No.4 A2 / A / A [GBP]32,000,000.00 4.94875 % 0.500 %
Series 5 Class C Permanent Financing No.2 Baa2 / BBB / BBB [GBP]26,000,000.00 4.94875 % 1.450 %
Series 5 Class C Permanent Financing No.3 Baa2 / BBB / BBB [e]20,000,000.00 2.11500 % 1.230 %
Series 5 Class C Permanent Financing No.4 Baa2 / BBB / BBB [GBP]54,000,000.00 4.94875 % 0.900 %
Series 5 Class C Permanent Financing No.5 Baa2 / BBB / BBB [GBP]39,000,000.00 4.94875 % 0.850 %
Series 5 Class C Permanent Financing No.6 Baa2 / BBB / BBB [GBP]33,700,000.00 4.80292 % 0.800 %
309
Funding Level Reserve Fund Requirement [GBP]460,000,000.00
Balance brought forward [GBP]311,791,814.40
Drawings this period [GBP]-
Top-up this period* [GBP]-
Current Balance [GBP]311,791,814.40
Liquidity Facility Original Amount [GBP]150,000,000.00
Balance brought forward [GBP]150,000,000.00
Drawings this period [GBP]-
Liquidity Repaid this period [GBP]-
Closing balance for period [GBP]150,000,000.00
- -------------------
* Top-ups only occur at the end of each quarter.
TRIGGER EVENTS:
Non-asset trigger events:
If the Seller suffers an Insolvency Event.
If the role of the Seller as Servicer is terminated and a new servicer
is not appointed within 60 days.
If the current Seller's Share is equal to or less than the Minimum
Seller Share.
If the outstanding principal balance of the trust property is less
than [GBP]21,500,000,000 to 9th June 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 2004 [GBP] 24,057,931,158.53 [GBP] 20,089,629,291.41 [GBP] 3,968,301,867.12 83.50522 % 16.49478 %
October 2004 [GBP] 24,980,285,014.68 [GBP] 20,089,629,291.41 [GBP] 4,890,655,723.27 80.42194 % 19.57806 %
September 2004 [GBP] 26,058,106,954.12 [GBP] 20,939,288,291.41 [GBP] 5,118,818,662.71 80.35614 % 19.64386 %
PRINCIPAL LEDGER
MONTH PRINCIPAL RECEIVED FURTHER ADVANCES SUB TOTAL
--------------------- ------------------- ---------------------
November 2004 [GBP]692,434,099.17 [GBP]181,604,366.89 [GBP]874,038,466.06
October 2004 [GBP]635,350,728.80 [GBP]195,278,611.26 [GBP]830,629,340.06
September 2004 [GBP]863,864,813.47 [GBP]216,672,069.10 [GBP]1,080,536,882.57
--------------------- ------------------- ---------------------
[GBP]2,191,649,641.44 [GBP]593,555,047.25 [GBP]2,785,204,688.69
===================== =================== =====================
310
PRINCIPAL DISTRIBUTION
MONTH FUNDING SELLER
-------------------- ---------------------
November 2004 [GBP]-- [GBP]874,038,466.06
October 2004 [GBP]-- [GBP]830,629,340.06
September 2004 [GBP]849,659,000.00 [GBP]230,877,882.57
-------------------- ---------------------
[GBP]849,659,000.00 [GBP]1,935,545,688.69
==================== ====================
REVENUE LEDGER
MONTH REVENUE RECEIVED GIC INTEREST AUTHORISED INVESTMENT INCOME SUB TOTAL
------------------- ----------------- ---------------------------- -------------------
November 2004 [GBP]122,097,711.54 [GBP]2,157,959.12 [GBP]-- [GBP]124,255,670.66
October 2004 [GBP]110,259,558.93 [GBP]2,497,391.45 [GBP]-- [GBP]112,756,950.38
September 2004 [GBP]112,840,103.02 [GBP]2,906,904.22 [GBP]-- [GBP]115,747,007.24
------------------- ----------------- ---------------------------- -------------------
[GBP]345,197,373.49 [GBP]7,562,254.79 [GBP]-- [GBP]352,759,628.28
=================== ================= ============================ ===================
PAID TO
MONTH MORTGAGES TRUSTEE ADMINISTRATOR AVAILABLE REVENUE
----------------- ------------------ --------------------
November 2004 [GBP] 2,783.35 [GBP] 454,252.31 [GBP] 123,798,635.00
October 2004 [GBP] - [GBP] 1,083,217.04 [GBP] 111,673,733.34
September 2004 [GBP] 1,218.38 [GBP] 1,048,274.56 [GBP] 114,697,514.30
----------------- ------------------ --------------------
[GBP] 4,001.73 [GBP] 2,585,743.91 [GBP] 350,169,882.64
================= ================== ====================
REVENUE DISTRIBUTION
MONTH FUNDING SELLER
-------------------- -------------------
November 2004 [GBP] 104,055,684.55 [GBP] 19,742,950.45
October 2004 [GBP] 90,492,646.58 [GBP] 21,181,086.76
September 2004 [GBP] 92,920,584.35 [GBP] 21,776,929.95
-------------------- -------------------
[GBP] 287,468,915.48 [GBP] 62,700,967.16
==================== ===================
LOSSES LEDGER
MONTH LOSSES
--------------
Balance b/fwd [GBP] 4,850.41
November 2004 [GBP] 3,245.80
October 2004 [GBP]9,891.82
September 2004 [GBP]-
Closing Balance [GBP] 8,096.21
311
LOSSES DISTRIBUTION
MONTH FUNDING SELLER RECONCILIATION
-------------- -------------- --------------
November 2004 [GBP] 2,359.81 [GBP] 885.99 [GBP]-
October 2004 [GBP]7,703.33 [GBP] 2,188.49 [GBP]-
September 2004 [GBP]- [GBP]- [GBP]-
-------------- -------------- --------------
[GBP] 5,343.52 [GBP] 1,302.50 [GBP]-
============== ============== ==============
CPR ANALYSIS
MONTH 1 MONTH CPR 3 MONTHS CPR 12 MONTHS CPR
----------- -------------- --------------
November 2004 3.63 % 3.70 % 3.97 %
October 2004 3.33 % 3.84 % 4.11 %
September 2004 4.15 % 4.22 % 4.30 %
312
REGIONAL ANALYSIS
HALIFAX MAPPED REGION NUMBER VALUE % OF TOTAL
------- ----------------------- ----------
London & South East 101,259 [GBP] 9,905,329,045.76 30.13 %
Midlands & East Anglia 111,495 [GBP] 7,237,111,572.11 22.01 %
North 95,606 [GBP] 4,456,654,004.03 13.56 %
North West 76,259 [GBP] 3,835,353,651.79 11.67 %
South Wales & West 73,211 [GBP] 4,853,826,096.39 14.76 %
Scotland 46,370 [GBP] 2,259,498,486.50 6.87 %
Unknown 4,542 [GBP] 329,238,714.13 1.00 %
------- ----------------------- ----------
Totals 508,742 [GBP] 32,877,011,570.71 100.00 %
======= ======================= ==========
313
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 in 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, 2004]. 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, 2005] and annually on the last day
of December thereafter.
During the period from incorporation on[o], 2005 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 section titled
"THE ISSUER". Consequently, during this period, the issuer has neither made a
profit nor loss and no profit and loss account nor cashflow statement has been
prepared.
INDEX OF APPENDICES
Appendix A................. Report of Independent Registered Public
Accounting Firm for Permanent Financing (No. 7)
PLC
Appendix B................. Financial Statement of Permanent Financing (No.
7) PLC and notes thereto
Appendix C................. Report of Independent Registered Public
Accounting Firm for Permanent Funding (No. 1)
Limited
Appendix D................. Financial Statements of Permanent Funding (No. 1)
Limited and notes thereto
Appendix E................. Unaudited Financial Statements of Permanent
Funding (No. 1) Limited and notes thereto
314
APPENDIX A
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS' OF PERMANENT FINANCING (NO. 7) PLC
We have audited the accompanying balance sheet of Permanent Financing (No.
7) PLC ("THE COMPANY") as of[o], 2005. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting amounts and disclosures in the
financial statement. 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 audit 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[o], 2005
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. Information relating to the nature and effect of
such differences is presented in Note 5 to the financial statement.
KPMG Audit Plc
Chartered Accountants
Date:[o], 2005
1, The Embankment
Neville Street
Leeds LS1 4DW
England
315
APPENDIX B
PERMANENT FINANCING (NO. 7) PLC (A WHOLLY-OWNED SUBSIDIARY OF PERMANENT HOLDINGS
LIMITED)
Balance Sheet as at[o], 2005
NOTE (POUND)
- ------------------------------------------------------------------------------------------- ---------- ------------
ASSETS
Cash.................................................................................... 12,501.50
-------------
12,501.50
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities 0.00
Share capital (Authorised: 50,000 shares, .00 par value: Issued and
outstanding: 50,000 shares comprising 2 fully paid and 49,998 partly paid
to 25 pence each)...................................................................... 3 12,501.50
-------------
Total liabilities and shareholders' equity.............................................. 12,501.50
=============
See "NOTES TO THE FINANCIAL STATEMENT"
316
PERMANENT FINANCING (NO. 7) 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 ((pound)), 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[o], 2005. 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 audited statutory 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 share capital of
(pound)50,000 comprising 50,000 ordinary shares of (pound)1 each.
On incorporation, 1 subscriber share was subscribed for by each of
Permanent Holdings Limited and SFM Corporate Services Limited. On[o],
2005, the subscriber shares were fully paid up, and 49,998 ordinary shares
were partly paid to 25 pence by Permanent Holdings Limited.
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 are concerned, there are no material
differences from generally accepted accounting principles in the United
States of America.
317
APPENDIX C
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDER 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, 2003 and 31st December,
2002, and the related profit and loss accounts and cash flow statements for the
year ended 31st December, 2003 and for the period 14th June, 2002 to 31st
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 the standards of the Public
Company Accounting Oversight Board (United States). 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, 2003 and 31st December, 2002, and the results of its operations and
its cash flows for the year ended 31st December, 2003 and for the period 14th
June, 2002 to 31st 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 ("US GAAP"). Information related to the nature and
effect of such differences is presented in Note 19 to the financial statements.
As described in Note 19(i), the Company has restated certain US GAAP cash flow
information for the period ended 31st December, 2002.
KPMG Audit Plc
Chartered Accountants
Date: 3rd March, 2004
1, The Embankment
Neville Street
Leeds LS1 4DW
England
318
APPENDIX D
FINANCIAL STATEMENTS OF PERMANENT FUNDING (NO. 1) LIMITED AND NOTES THERETO
PERMANENT FUNDING (NO. 1) LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2003
FROM
14 JUNE TO
31 DECEMBER
2003 2002
NOTE (POUND) (POUND)
------------------------- ----------------
Interest receivable and similar income............................ 3 404,427,164 101,595,155
Interest payable and similar charges.............................. 4 (339,265,416) (94,411,957)
NET INTEREST INCOME............................................... 65,161,748 7,183,198
Operating expenses................................................ (65,102,573) (7,173,038)
PROFIT ON ORDINARY ACTIVITIES BEFORE
TAXATION...................................................... 5 59,175 10,160
Tax on profit on ordinary activities.............................. 6 (11,213) (1,930)
PROFIT ON ORDINARY ACTIVITIES AFTER
---------------- ----------------
TAXATION...................................................... 7, 15 47,962 8,230
================ ================
A statement of the movement on reserves is shown in note 7 to the
financial statements.
The Company had no recognised gains or losses in the period other than the
profit for the financial period shown above.
The profit shown above is derived from continuing operations.
Notes 1 to 19 form part of these financial statements.
319
PERMANENT FUNDING (NO. 1) LIMITED
BALANCE SHEET
AS AT 31 DECEMBER 2003
2003 2002
NOTE (POUND) (POUND)
---------------------------- ------------------
CURRENT ASSETS
Debtors - amounts falling due within one year................ 9 1,303,935,007 514,434,650
Cash at bank and in hand..................................... 11 1,483,495,320 242,952,114
------------------- ------------------
2,787,430,327 757,386,764
CREDITORS: amounts falling due within one year............... 12 (2,565,279,548) (673,449,486)
------------------- ------------------
NET CURRENT ASSETS........................................... 222,150,779 83,937,278
DEBTORS: amounts falling due after more than
one year................................................. 10 10,900,188,280 2,968,961,579
------------------- ------------------
CREDITORS: amounts falling due after more than
one year................................................. 13 (11,122,282,866) (3,052,890,626)
NET ASSETS................................................... 56,193 8,231
=================== ==================
CAPITAL AND RESERVES
Called up share capital...................................... 14 1 1
Profit and loss account...................................... 56,192 8,230
------------------- ------------------
EQUITY SHAREHOLDER'S FUNDS................................... 15 56,193 8,231
=================== ==================
Notes 1 to 19 form part of these financial statements.
320
PERMANENT FUNDING (NO. 1) LIMITED
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2003
FROM
14 JUNE TO
31 DECEMBER
2003 2002
NOTE (POUND) (POUND)
--------------------------- -------------------
NET CASH INFLOW FROM OPERATING
ACTIVITIES................................................ 16 1,057,113,329 145,453,012
RETURNS ON INVESTMENTS AND SERVICING
OF FINANCE................................................
Interest received on mortgage portfolio....................... 376,848,634 98,178,973
Bank interest received........................................ 27,578,530 3,416,182
Swap and loan interest paid................................... (308,961,736) (83,559,585)
------------------ -------------------
95,465,428 18,035,570
================== ===================
TAXATION
UK corporation tax paid....................................... (1,594) --
CAPITAL EXPENDITURE AND FINANCIAL
INVESTMENT................................................
Purchase of beneficial interest in mortgage portfolio
held on trust............................................. (9,262,015,000) (3,478,576,310)
Redemptions................................................... 544,948,019 --
------------------ -------------------
(8,717,066,981) (3,478,576,310)
================== ===================
FINANCING
Intercompany loan............................................. 8,717,066,981 3,478,576,310
Start-up loan................................................. 87,966,043 79,463,532
------------------ -------------------
8,805,033,024 3,558,039,842
================== ===================
INCREASE IN CASH IN THE PERIOD................................ 1,240,543,206 242,952,114
================== ===================
Notes 1 to 19 form part of these financial statements.
321
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003
1. GENERAL INFORMATION
Permanent Funding (No.1) Limited ("the COMPANY") was incorporated in
England and Wales on 9 August 2001 as Alnery No.2225 Limited. The Company's name
was changed to Permanent Funding (No.1) Limited on 21 March 2002 and commenced
operations on 14 June 2002. The first set of financial statements covered the
period from 14 June 2002 to 31 December 2002. These amounts are shown as
comparatives in the financial statements for the year ended 31 December 2003.
Permanent Funding (No.1) Limited is a wholly owned subsidiary of Permanent
Holdings Limited, a company registered in England and Wales. The statutory
financial statements of Permanent Funding (No.1) Limited, prepared in accordance
with UK generally accepted accounting principles, have been included in the
consolidated accounts of Permanent Holdings Limited as at 31 December 2003.
The principal activity of the Company is to acquire and hold beneficial
interests in a mortgage portfolio and enter into all financial arrangements in
that connection. No further changes in activity are envisaged.
The Company invests in beneficial interests in the assets of Permanent
Mortgages Trustee Limited ("the Trust"), these assets comprise mortgage loans
secured on residential property in England, Wales and Scotland originated by
Halifax plc. The Company receives a share of income from the Trust in proportion
to its share of the total mortgage assets of the Trust.
The Company funds purchases of beneficial interests, in part through
direct borrowing from Halifax plc, but primarily through the issuance of loans
through special purpose companies (established to issue loan notes to investors)
collateralised by the Company's beneficial interest in the mortgages held in
trust.
During the year ended 31 December 2003 the Company purchased further
beneficial interests in the assets of the Trust, which amounted to (pound)4.8
billion on 6 March 2003 and (pound)4.5 billion on 25 November 2003. These
purchases were financed by loans from Permanent Financing (No. 2) PLC and
Permanent Financing (No. 3) PLC respectively. Permanent Financing (No. 2) PLC
and Permanent Financing (No. 3) PLC are wholly owned subsidiaries of Permanent
Holdings Limited.
THE TRUST
The Trust is a special purpose company, whose purpose is to hold the trust
property. The Trust holds the trust property on trust for the benefit of Halifax
plc and the Company pursuant to the mortgages trust deed initially entered into
on 13 June 2002.
The trust property includes the portfolio, which consists of the loans,
their related security, any accrued interest on the loans and other amounts
derived from the loans and their related security.
On 14 June 2002 Halifax plc sold the initial loans and, on several
subsequent dates (including, 6 March 2003 and 3 October 2003), Halifax plc has
sold further loans, in each case together with their related security, to the
mortgages trustee pursuant to a mortgage sale agreement. Additionally, Halifax
plc sold a portion of its share in the trust property to the Company pursuant to
the terms of the mortgages trust deed so that the Company's portion of the trust
property was of sufficient size for the purposes of securitisation transactions.
As at 31 December 2003 the Trust portfolio amounted to
(pound)17,583,832,949 (of which the Company's interest amounted to
(pound)12,195,643,291). Halifax plc and the Company 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.
The Trust distributes interest on the loans to the Company based on the share
that the Company has in the trust property expressed as a percentage (or if
less, the amount that the Company needs to meet its obligations to pay interest
on the intercompany loans and other amounts on the date of distribution). The
Trust distributes the rest of the interest on the loans to Halifax plc. The
Trust distributes losses on the
322
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
loans to Halifax plc and the Company in accordance with the share that each of
them has in the trust property, expressed as a percentage. At 31 December 2003
the Company held an entitlement to a share amounting to 69.4% of the loans in
the Trust, (31 December 2002: 40.2%), with the remaining entitlement of the
loans in Trust due to Halifax plc.
The entire issued share capital of the Trust is held beneficially on trust
by SFM Offshore Limited, a corporate services provider not affiliated with
Halifax plc, under the terms of a discretionary trust for the benefit of one or
more charities. Any profits received by the Trust, after payment of the costs
and expenses of the Trust, will be paid for the benefit of charities and
charitable purposes selected at the discretion of SFM Offshore Limited. The
payments on the issuer notes will not be affected by this arrangement.
The Trust 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 Trust, acting as trustee of the Trust, the issue of
the loan notes, the authorisation of transaction documents surrounding the
securitisation to which it is or will be a party, obtaining a standard licence
under the Consumer Credit Act 1974, filing a notification under the Data
Protection Act 1998 and other matters which are incidental or ancillary to the
foregoing.
The Trust has no employees and no subsidiaries.
Neither Halifax plc nor the noteholders have any direct interest in the
underlying mortgages of the Trust, although Halifax plc has a shared security
interest under the deed of charge in the Company's share of the trust property.
ISSUER INTERCOMPANY LOAN AGREEMENTS
Permanent Financing (No. 1) PLC, Permanent Financing (No. 2) PLC, and
Permanent Financing (No. 3) PLC (together, the "Financing Companies ") sold
issuer notes to investors and then lent the proceeds to the Company under the
issuer intercompany loan agreements.
The Company uses 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
Financing companies under the issuer intercompany loan agreements. The Company's
obligations to the Financing Companies under the issuer intercompany loan
agreements are secured under a deed of charge by the Company's share of the
trust property.
If the Company 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 Halifax
plc by the Trust.
2. ACCOUNTING POLICIES
The following accounting policies have been applied consistently in
dealing with items that are considered material in relation to the Company's
financial statements (with the exception of certain US disclosures referred to
in Note 19).
BASIS OF PREPARATION
These are not the Company's statutory financial statements. The statutory
financial statements of Permanent Funding (No.1) Limited, prepared in accordance
with UK generally accepted accounting principles, at 31 December 2003 are
included in the consolidated accounts of Permanent Holdings Limited as at 31
December 2003. Those accounts contained an unqualified audit report.
These non-statutory financial statements have been prepared in accordance
with applicable accounting standards generally accepted in the United Kingdom
("UK GAAP"), and have been drawn up under the historical cost convention and on
a going concern basis. These principles differ in certain respects from
generally accepted accounting principles in the United States ("US GAAP").
Application of
323
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
US GAAP would have affected net income and shareholder's funds as detailed in
note 19 to the financial statements.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingencies at the balance sheet date and the
reported amounts of revenues and expenses in the reporting period. Actual
results may differ from the estimates used in the financial statements.
BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO
The beneficial interest in the mortgage portfolio is recorded at book
value net of provision for bad and doubtful debts.
These financial statements are prepared on the basis that the Company has
a beneficial interest in the mortgages held by the Trust. The financial
statements reflect the fact that the Company has credit exposure to any losses
incurred on these loans and that there is no recourse to Halifax plc in the
event of losses being realised.
Interest receivable is calculated on an accruals basis on the contractual
interest payment terms of mortgage loans comprising the beneficial interest.
Where cash has been accumulated by the Company to fund the future
repayment of the intercompany loans, the Company's share of the interest arising
on the mortgage portfolio is adjusted.
MORTGAGE LOAN PREMIUM
A loan premium has been recognised for the difference between the book
value of the beneficial interest in the mortgage portfolio and its fair value at
the date of acquisition. This premium is charged to the profit and loss account
over the estimated average life of the underlying mortgages in the Trust.
PROVISION FOR BAD AND DOUBTFUL DEBTS
Provisions are made to reduce the carrying value of the beneficial
interest in the mortgage portfolio to reflect the amount of the underlying
mortgage loans and advances, within the Trust, likely to be recoverable.
Specific provision is made where the property is in possession or where the
account is in arrears and it is considered likely that the property will be
taken into possession. A general provision, to cover advances that are latently
bad or doubtful, but not yet identified as such, is also maintained.
DEFERRED CONSIDERATION
Under the terms of the securitisation the Company retains the right to a
maximum of 0.01% of available revenue receipts from the beneficial interest in
the mortgage portfolio. Available revenue receipts are defined by the
securitisation agreements and include mortgage interest received, interest
received on the bank accounts and the amounts standing to the credit of the
reserve ledger. Profits in excess of 0.01% accrue to Halifax plc, the originator
of the underlying mortgages. Accordingly, a creditor ("deferred consideration")
for amounts payable to Halifax plc has been recognised at the year end. The
payments of deferred consideration are strictly governed by the priority of
payments, which sets out how cash can be utilised.
DEFERRED EXPENDITURE
Issue costs in respect of the loan finance have been deferred and are
being charged to the profit and loss account over a five-year period, being the
estimated average life of the underlying loan notes.
324
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
FINANCIAL INSTRUMENTS
The Company's financial instruments, other than derivatives, comprise
borrowings, cash and liquid resources, and various items, such as debtors and
creditors, that arise directly from its operations. The main purpose of these
financial instruments is to raise finance for the Group operations.
The Company also enters into derivative transactions (principally interest
rate swaps). The purpose of such transactions is to manage the interest rate
risks arising from the Company's operations and its sources of finance.
It is, and has been throughout the year under review, the Company's policy
that no trading in financial instruments shall be undertaken.
Interest rate risk associated with the portfolio is managed by means of an
interest rate swap with Halifax plc, which requires the Company to pay the
effective yield on the mortgage portfolio and receive payments based on a rate
linked to the three month sterling LIBOR.
DERIVATIVES
Transactions are undertaken in derivative financial instruments
("derivatives"), which include interest rate swaps. Derivatives are entered into
for the purpose of eliminating risk from potential movements in interest rates
inherent in the Company's non-trading assets and liabilities. Non-trading assets
and liabilities are those intended for use on a continuing basis in the
activities of the Company.
A derivative is designated as non-trading where there is an offset between
the effects of potential movements in market rates of the derivative and the
designated asset or liability being hedged. Non-trading derivatives are reviewed
regularly for their effectiveness as hedges. Non-trading derivatives are
accounted for on an accruals basis, consistent with the asset or liability being
hedged. Income and expense on non-trading derivatives are recognised as they
accrue over the life of the instruments as an adjustment to interest receivable
or payable.
The cost of interest rate swaps which are used to hedge on balance sheet
assets and liabilities are included in interest payable and similar charges.
VALUE ADDED TAX
Value added tax is not recoverable by the Company and is included with its
related cost.
TAXATION
The charge for taxation takes into account all timing differences in the
accounting and taxation treatment of certain items.
DEFERRED TAXATION
Deferred tax is recognised, without discounting, in respect of all timing
differences between the treatment of certain items for taxation and accounting
purposes which have arisen but not reversed out by the balance sheet date,
except as otherwise required by FRS 19. Deferred tax assets are only recognised
when it is more likely than not that the asset will be recoverable in the
foreseeable future out of suitable taxable profits from which the timing
differences and tax losses can be deducted.
325
3. INTEREST RECEIVABLE AND SIMILAR INCOME
2003 2002
(POUND) (POUND)
------------------- -------------------
Income from beneficial interest in mortgage portfolio................. 376,848,634 98,178,973
Bank interest......................................................... 27,578,530 3,416,182
------------------- -------------------
404,427,164 101,595,155
=================== ===================
4. INTEREST PAYABLE AND SIMILAR CHARGES E
2003 2002
(POUND) (POUND)
----------------- ----------------
Interest on loans from Group undertaking.................................. 299,751,906 81,594,486
Swap interest............................................................. 34,492,299 11,285,334
Start-up loan interest.................................................... 5,021,211 1,532,137
----------------- ----------------
339,265,416 94,411,957
================= ================
5. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
2003 2002
(POUND) (POUND)
-------------- ----------------
Profit on ordinary activities before taxation is stated after charging:
Auditors' remuneration including expenses for audit work..................... 75,813 7,000
Deferred consideration....................................................... 46,557,219 4,465,515
Amortisation of loan premium................................................. 6,781,186 --
============== ================
Auditors' remuneration for non audit work of (pound)221,661 (2002:
(pound)249,560) is included in the deferred costs. These costs are being charged
to the profit and loss account over a five-year period, being the estimated
average life of the underlying loan notes.
326
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
6. TAX ON PROFIT ON ORDINARY ACTIVITIES
2003 2002
(POUND) (POUND)
------------ ----------
THE MOVEMENT ON DEFERRED TAX WAS AS FOLLOWS:
Balance brought forward.............................................................. -- --
------------ ----------
Current year charge.................................................................. -- --
Balance carried forward.............................................................. -- --
============ ==========
DEFERRED TAXATION COMPRISES
General provisions................................................................... -- --
------------ ----------
TAX ON PROFIT ON ORDINARY ACTIVITIES
The charge for the year based on a corporation tax rate of 19% comprises:
UK corporation tax................................................................... 11,243 1,930
Prior year corporation tax........................................................... (30) --
------------ ----------
11,213 1,930
============ ==========
FACTORS AFFECTING THE CURRENT TAX CHARGE FOR THE YEAR:
The tax assessed for the year is lower than the standard rate of
corporation tax in the UK of 30%
The differences are explained below
Profit on ordinary activities before taxation........................................ 59,175 10,160
------------ ----------
Profit on ordinary activities multiplied by the standard rate of
corporation tax in the UK............................................................ 17,752 3,048
------------ ----------
EFFECTS OF:
Small companies rate................................................................. (6,509) (1,118)
Adjustments to tax in respect of previous periods.................................... (30) --
------------ ----------
11,213 1,930
============ ==========
7. PROFIT AND LOSS ACCOUNT
2003 2002
(POUND) (POUND)
------------ ----------
At 1 January (2002: at incorporation)................................................ 8,230 --
Transfer to reserves................................................................. 47,962 8,230
------------ ----------
At 31 December....................................................................... 56,192 8,230
============ ==========
327
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
8. BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO
MORTGAGE LOSS
MORTGAGES PROVISION PREMIUM TOTAL
(POUND) (POUND) (POUND) (POUND)
------------------- ----------------- ---------------- ----------------
At 1 January....................... 3,478,576,310 (8,009,803) 8,009,803 3,478,576,310
Acquisitions....................... 9,262,015,000 (16,850,592) 16,850,592 9,262,015,000
Redemptions........................ (544,948,019) 1,254,803 (1,254,803) (544,948,019)
Amortisation....................... -- -- (5,526,383) (5,526,383)
Provision release.................. -- 1,452,593 -- 1,452,593
------------------- ----------------- ---------------- ----------------
At 31 December..................... 12,195,643,291 (22,152,999) 18,079,209 12,191,569,501
=================== ================= ================ ================
The mortgage portfolio in which the Company holds a beneficial interest is
held on trust for the Company and the originator of the mortgage loans by
Permanent Mortgages Trustee Limited. The mortgage loans are secured on
residential property in England, Wales and Scotland.
The beneficial interests acquired by Permanent Funding (No.1) Limited on 6
March 2003 and 25 November 2003 amounted to (pound)24,762,015,000 and
(pound)4,500,000,000 respectively (14 June 2002: (pound)3,478,576,310).
Permanent Funding (No.1) Limited is A wholly-owned subsidiary of Permanent
Holdings Limited, the parent company of Permanent Financing (No.1) PLC,
Permanent Financing (No.2) PLC and Permanent Financing (No.3) PLC.
Redemptions relate to a reduction in the beneficial interest in the
mortgage portfolio resulting from repayment of amounts from the Trust.
Mortgages in the pool have to fulfil certain criteria. If they fail to do
so they are removed from the pool and the pool is replenished. When the mortgage
pool was created there were no accounts in arrears and therefore no specific
loss provision was required. There were no specific provisions held at 31
December 2003. A general provision, to cover advances that are latently bad or
doubtful, but not yet identified as such was allocated to the pool. A premium
was also paid for the mortgages in a like amount.
9. DEBTORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
2003 2002
(POUND) (POUND)
------------------- ------------------
Beneficial interest in mortgage portfolio (note 8).................... 1,291,381,221 509,614,731
Amount owed from Group undertaking.................................... 1 1
Deferred expenditure.................................................. 12,545,356 4,816,626
Other debtors......................................................... 8,429 3,292
------------------- ------------------
1,303,935,007 514,434,650
=================== ===================
Deferred expenditure includes (pound)7,680,920 relating to underwriting
expenses paid during the year (2002: (pound)2,782,861).
328
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
10. DEBTORS - AMOUNTS FALLING DUE AFTER ONE YEAR
2003 2002
(POUND) (POUND)
------------------- ------------------
Beneficial interest in mortgage portfolio (note 8).................... 10,900,188,280 2,968,961,579
=================== ==================
11. CASH AT BANK AND IN HAND
The Company holds deposits at banks that pay interest based on LIBOR.
The deposit account held by Permanent Funding (No.1) Limited is placed
with the provider of a guaranteed investment contract. Withdrawals from this
account are restricted by detailed priority of payments set out in the
transaction agreements. The Company earns a variable rate of interest of 0.25
percent per annum below LIBOR for three-month sterling deposits, which is
recorded as interest income in the profit and loss account. In addition the
Company has included its share of the cash balances within the Trust's
guaranteed investment contract in cash at bank and hand, reflecting the
Company's beneficial interest in this contract.
12. CREDITORS AMOUNTS FALLING DUE WITHIN ONE YEAR
2003 2002
(POUND) (POUND)
------------------- ------------------
Interest payable to Group undertaking................................. 39,761,600 8,775,233
Swap interest payable................................................. 911,400 1,918,769
Interest payable on start-up loans.................................... 483,052 158,370
Fees payable to Halifax plc........................................... 343,714 252,554
Amount owed to Trustee................................................ 1,231,885,583 152,697,614
Loans from Group undertakings......................................... 1,291,812,734 509,614,731
Accruals.............................................................. 69,916 30,285
Taxation.............................................................. 11,549 1,930
------------------- ------------------
2,565,279,548 673,449,486
=================== ==================
The intercompany loan agreement provides that the Financing Companies will
lend amounts in sterling equivalent to the proceeds of issuer notes. The final
repayment date of each issuer term advance will be the final maturity date of
the corresponding class of issuer notes.
The amount owed to Trustee represents cash movements on the guaranteed
investment contract account, which arise as part of the cash distribution
governed by the transaction documents. This amount will remain a liability to
the Trustee until such time as the loan notes are redeemed.
Interest payable on the loans from Group undertakings is based on LIBOR.
Amounts due within one year are paid when cash is available after other
commitments have been fulfilled, in order of priority.
On 14 June 2002 an agreement was entered into with JP Morgan Chase for the
provision of a liquidity facility for the Company. The facility is in place to
allow the Company to meet its obligations should there be a shortfall in the
revenue or principal received from the non-recourse loan to Halifax plc. At the
balance sheet date, the limit on this facility was (pound)150,000,000 (2002:
(pound)60,000,000). The agreement is updated each time the Company is party to a
further term advance in conjunction with a note issuanCe. A fee is charged on
the undrawn balance, currently set at 0.08%. This fee would increase to 0.38% on
any drawn balance. No amounts have been drawn under the facility since
inception.
329
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
13. CREDITORS AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
2003 2002
(POUND) (POUND)
------------------- ------------------
Loans from Group undertakings......................................... 10,903,830,557 2,968,961,579
Start-up loans........................................................ 167,429,575 79,463,532
Deferred consideration................................................ 51,022,734 4,465,515
------------------- ------------------
11,122,282,866 3,052,890,626
=================== ==================
The amounts are repayable as follows:
2003 2002
(POUND) (POUND)
------------------- ------------------
Due 2 - 5 years....................................................... 2,365,929,542 509,614,731
Due over 5 years...................................................... 8,756,353,324 2,543,275,895
------------------- ------------------
11,122,282,866 3,052,890,626
=================== ==================
Interest payable on the loans from Group undertakings and the start-up
loan is based on LIBOR.
Amounts due over 5 years are paid when cash is available after other
commitments have been fulfilled, in order of priority.
Amounts due to Group undertakings relate to obligations to pay interest
and principal amounts due to the issuers under the intercompany loan agreement.
The Company's obligations under the intercompany loan agreement are secured
under a deed of charge by the Company's beneficial interest in the mortgage
portfolio held in Trust.
14. CALLED UP SHARE CAPITAL
2003 2002
(POUND) (POUND)
------------- ------------
AUTHORISED
100 ordinary shares of (pound)1 each.............................................. 100 100
============= ============
ISSUED AND OUTSTANDING SHARE CAPITAL
1 ordinary share of (pound)1...................................................... 1 1
============= ============
15. RECONCILIATION OF MOVEMENTS IN SHAREHOLDER'S FUNDS
2003 2002
(pound) (POUND)
------------- ------------
Opening shareholder's funds....................................................... 8,231 --
Share capital called up in the period............................................. -- 1
Transfer to reserves.............................................................. 47,962 8,230
------------- ------------
Closing shareholder's funds....................................................... 56,193 8,231
============= ============
330
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
16. RECONCILIATION OF OPERATING PROFIT ON ORDINARY ACTIVITIES TO NET CASH
INFLOW FROM OPERATING ACTIVITIES
2003 2002
(POUND) (POUND)
----------------- ----------------
Operating profit......................................................... 59,175 10,160
Interest receivable...................................................... (404,427,164) (101,595,155)
Interest payable......................................................... 339,265,416 83,559,585
Movement in loss provision............................................... 14,143,196 8,009,803
Movement in premium...................................................... (10,069,406) (8,009,803)
Decrease in debtors...................................................... (7,733,867) (4,819,918)
Increase in creditors.................................................... 1,125,875,979 168,298,340
----------------- ----------------
Net cash inflow from operating activities................................ 1,057,113,329 145,453,012
================= ================
17. RELATED PARTY TRANSACTIONS
Under FRS 8 "Related Party Disclosures", the Company is exempt from the
requirements to disclose transactions with other companies within the Permanent
Holdings Limited group. However the following information is provided to
facilitate further understanding of the Company's trading relationships.
The Company is a special purpose company controlled by its Board of
Directors, which comprises three directors. Two of the Company's three directors
are provided by Structured Finance Management Limited, the third director is an
employee of HBOS plc (the parent undertaking of Halifax plc, the mortgage loan
administrator). The Company pays a corporate services fee to Structured Finance
Management Limited in connection with its provision of corporate management
services. The fees payable to these directors for providing their services are
immaterial in the context of these financial statements. During the period, the
Company undertook the following transactions (set out below) with companies
within the Permanent Holdings Limited group, the Trust and Halifax plc, the
mortgage administrator.
The Company pays cash management and mortgage loan administration
servicing fees to Halifax plc in connection with its provision of services
defined under the securitisation agreements.
Halifax plc has provided the Company with start-up loans and is the
counterparty to interest rate swap agreements, on which there is an associated
interest expense.
331
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
17. RELATED PARTY TRANSACTIONS - (CONTINUED)
PERMANENT
MORTGAGES PERMANENT PERMANENT PERMANENT HBOS PLC AND
PERMANENT TRUSTEE FINANCING FINANCING FINANCING SUBSIDIARY
HOLDINGS LTD LIMITED (NO. 1) PLC (NO. 2) PLC (NO. 3) PLC UNDERTAKINGS
2003 (POUND) (POUND) (POUND) (POUND) (POUND) (POUND)
- -------------------------- -------- ----------- ---------- ---------- ---------- ---------
INTEREST RECEIVABLE AND SIMILAR
INCOME
Income from beneficial interest
in mortgage portfolio........ 376,848,634
Bank interest................... 8,751,355 18,827,175
INTEREST PAYABLE AND SIMILAR
CHARGES
Interest on loans from Group
undertaking.................. 125,745,988 153,874,672 20,131,246
Swap interest................... 34,492,299
Start-up loan interest.......... 5,021,211
OPERATING EXPENSES
Deferred consideration.......... 46,557,219
Administration and cash
management services.......... -- 6,280 11,846,274
CURRENT ASSETS
Debtors - amounts falling due
within one year.............. 1
Beneficial interest in mortgage
portfolio.................... 1,291,381,221
Cash at bank and in hand........ 657,389,778 826,105,542
Debtors - amounts falling due
after more than one year
Beneficial interest in mortgage
portfolio.................... 10,900,188,280
CREDITORS AMOUNTS FALLING DUE
WITHIN ONE YEAR
Interest payable on loan notes.. 7,466,194 12,164,160 20,131,246
Swap interest payable........... 911,400
Start-up loan interest.......... 483,052
Fees payable to Halifax plc..... 343,714
Amount owed to Trustee.......... 1,231,885,583
Loans from Group undertakings... -- 633,312,734 658,500,000
CREDITORS AMOUNTS FALLING DUE
AFTER MORE THAN ONE YEAR
Loans from Group undertakings... 2,933,628,291 4,128,702,266 3,841,500,000
Start-up loans.................. 167,429,575
Deferred consideration.......... 51,022,734
332
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
17. RELATED PARTY TRANSACTIONS - (CONTINUED)
PERMANENT
MORTGAGES PERMANENT HBOS PLC AND
PERMANENT TRUSTEE FINANCING SUBSIDIARY
HOLDINGS LTD LIMITED (NO.1) PLC UNDERTAKINGS
2002 (POUND) (POUND) (POUND) (POUND)
- --------------------------------- ----------- ----------- ----------- -----------
INTEREST RECEIVABLE AND SIMILAR INCOME
Income from beneficial interest in mortgage
portfolio................................ 98,178,973
Bank interest............................... 1,841,726 1,574,456
INTEREST PAYABLE AND SIMILAR CHARGES
Interest on loans from Group undertaking.... 81,594,486
Swap interest............................... 11,285,334
Start-up loan interest...................... 1,532,137
OPERATING EXPENSES
Deferred consideration...................... 4,465,515
Administration and cash management services. 1,610 1,805 2,063,320
CURRENT ASSETS
Debtors - amounts falling due within one year 1
Beneficial interest in mortgage portfolio... 509,614,731
Cash at bank and in hand.................... 152,697,614 90,254,500
Debtors - amounts falling due after more than
one year
Beneficial interest in mortgage portfolio... 2,968,961,579
CREDITORS AMOUNTS FALLING DUE WITHIN ONE YEAR
Interest payable on loan notes.............. 8,775,233
Swap interest payable....................... 1,918,769
Start-up loan interest...................... 158,311
Fees payable to Halifax plc................. 252,554
Amount owed to Trustee...................... 152,697,614
Loans from Group undertakings............... 509,614,731
CREDITORS AMOUNTS FALLING DUE AFTER MORE THAN
ONE YEAR
Loans from Group undertakings............... 2,968,961,579
Start-up loans.............................. 79,463,532
Deferred consideration...................... 4,465,515
18 ULTIMATE PARENT UNDERTAKING
The Company's immediate parent undertaking is Permanent Holdings Limited,
a company registered in England and Wales. Copies of the consolidated accounts
of Permanent Holdings Limited may be obtained from The Company Secretary at
Blackwell House, Guildhall Yard, London, EC2V 5AE.
The ultimate parent undertaking is SFM Corporate Services Limited.
333
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
The management, operations, accounting and financial reporting functions
of the Company are performed by Halifax plc. Copies of the accounts of Halifax
plc may be obtained from The Mound, Edinburgh, EH1 1YZ.
19. SUPPLEMENTARY US GAAP INFORMATION
(A) SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK AND US GAAP
U.K. GAAP U.S. GAAP
DERIVATIVES DERIVATIVES
Under UK GAAP where interest rate Financial Accounting Standards Board SFAS No 133,
derivatives are deemed to be effective "Accounting for Derivative Instruments and Hedging
economic hedges the underlying assets and Activities" (SFAS No. 133) as amended by SFAS No.
liabilities are recorded in the balance 138, "Accounting for Certain Derivative Instruments
sheet at cost (or net realisable value if and Certain Hedging Activities, an amendment of SFAS
lower) and interest is recognised on an No. 133", establishes accounting and reporting
accruals basis. Changes in the fair standards for derivative financial instruments,
value of instruments used as hedges are including certain derivatives used for hedging
not recognised in the financial activities and derivatives embedded in other
statements until the hedged position contracts. SFAS No. 133 requires all derivatives
matures. to be recognised on the balance sheet at fair
value. The recognition of the changes in
the fair value of a derivative depends upon its
intended use. Derivatives that do not qualify
for hedging treatment under SFAS No. 133 must
be adjusted to fair value through earnings.
For fair value hedges that qualify under
SFAS No 133, the changes in fair values of the
derivatives will be recognised in earnings together
with the change in fair value of the hedged item
attributable to the risk being hedged. For cash
flow hedges that qualify under SFAS No. 133, the
changes in the fair value of the derivatives will
be recognised in other comprehensive income until the
hedged item affects earnings. For all hedging
activities, the ineffective portion of a derivative's
change in fair value will be immediately recognised in
earnings. The Company has adopted SFAS No. 133 with effect
from inception.
Under SFAS No. 133 there is a requirement for contemporaneous
hedge documentation before it is possible to qualify for
hedging treatment. In the absence of such documentation it
is necessary to record changes in the fair value of
the derivatives in the income statement (with the associated
asset or liability being reflected in other assets or
liabilities in the balance sheet). As such documentation is
not in place, the interest rate swaps do not qualify as hedges
for US GAAP.
334
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO (REVISED)
Under UK GAAP an initial loan premium The directors have reconsidered, during the year, the
was recognised on acquisition of the appropriate US GAAP accounting for the acquisitions
beneficial interest in the mortgage of beneficial interests in the mortgage portfolio by
portfolio, representing the difference the Company. Previously these acquisitions were
between the principal value of the treated as a sale from Halifax plc's perspective in
beneficial interest in the mortgage accordance with SFAS 140 "Accounting for Transfers
portfolio less an adjustment to take and Servicing of Financial Assets and Extinguishments
account of credit losses inherent in of Liabilities" and accordingly the Company
the portfolio at the date of acquisition, recognised the acquisitions of beneficial
and the fair value of this asset. interests in the mortgage portfolio on its
balance sheet at 31 December 2002. Given the restrictions
imposed on the Company with respect to the beneficial
interests in the mortgage portfolio, the directors now
consider these acquisitions would be more appropriately
reflected as Collateralised financing transactions,
whereby the Company has, in effect, granted
non-recourse loans to Halifax plc.
The interest receivable on the non-recourse loans is
determined by the securitisation agreements and is
calculated with reference to the interest earned
on the beneficial interest in the mortgage
portfolio less the residual interest due to
Halifax plc. Accordingly the interest
receivable on these non-recourse loans would be
disclosed within a US GAAP income statement at an
amount equivalent to the net of `interest
receivable and similar income: Income from
beneficial interest in mortgage portfolio' and
'deferred consideration' under UK GAAP
(2003: 2002: (pound)330,291,415, 2002:
(pound)93,713,458).
The non-recourse loans have been initially
accounted for at cost and are subject to
ongoing impairment reviews. The criteria for
recognising loan loss allowances, as set out in
SFAS 114 "Accounting by Creditors for
Impairment of a Loan" has been applied to these
non-recourse loans and currently the directors
consider that no impairment exists.
335
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
CASH FLOW CASH FLOW
Under UK GAAP, cash flows are presented Under US GAAP, cash flows are reported as operating,
for operating activities, returns on investing and financing activities. Cash flows from
investment and servicing of finance, taxation and returns and servicing of finance would,
taxation paid, capital expenditure, with the exception of ordinary dividends paid, be
acquisitions, dividends paid and included as operating activities. The payment of
financing activities. Under UK GAAP, dividends would be included under financing
cash includes cash in hand and cash on activities.
deposit, net of bank overdrafts.
Cash and cash equivalents would include cash and
short-term investments with original maturities of
three months or less. However, the Company's
beneficial interest in the cash balances
within the Trust (and the associated liability to the
Trust) are not recognised on the US GAAP balance
sheet (2003: (pound)657,389,778, 2002:
(pound)152,697,614).
LEGALLY RESTRICTED CASH LEGALLY RESTRICTED CASH
Under UK GAAP there is no concept of restricted cash and Under US GAAP where cash can only be used to meet
all cash balances are disclosed as "cash at bank" on certain specific liabilities and is not available to
the face of the balance sheet. be used with discretion, it is disclosed as
"Restricted Cash" on the face of the Balance Sheet.
All of the Company's cash would be disclosed as
Restricted Cash under US GAAP as there are clearly
defined restrictions on the use of such cash.
DEFERRED TAX DEFERRED TAX
Deferred tax is recognised, without discounting, in As provided by SFAS No. 109 "Accounting for Income
respect of all timing differences between the treatment Taxes ", deferred tax liabilities and assets are
of certain items for taxation and accounting purposes recognised in respect of all temporary differences. A
which have arisen but not reversed out by the balance valuation allowance is raised against any deferred
sheet date, except as otherwise required by FRS 19. tax asset where it is more likely than not that the
Deferred tax assets are only recognised when it is more asset, or part thereof, will not be realised.
likely than not that the asset will be recoverable in the
foreseeable future out of suitable taxable profits from
which the timing differences and tax losses can be
deducted.
336
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
(B) UK TO US GAAP RECONCILIATION
The following table summarises the adjustments to the profit attributable
to ordinary shareholders and shareholders' funds that would result from the
application of US GAAP instead of UK GAAP where applicable:
NET INCOME
2003 2002
NOTE (POUND) (POUND)
----- ---------- ----------
Profit attributable to shareholder (UK GAAP) ............................ 47,962 8,230
Reversal of adjustment to loan loss reserve ............................. (ii) (1,452,593) --
Reversal of amortisation of premium on beneficial interest
in mortgage portfolio ................................................... (ii) 5,526,383 --
Unrealised gain/(loss) on derivatives ................................... (iii) 21,396,100 (23,393,629)
Deferred taxation on reconciling items at 19%, net of
valuation allowance ..................................................... (iv) (394,490) --
Total US adjustments (net) .............................................. 25,075,400 (23,393,629)
---------- ----------
Net income/(loss) attributable to shareholder (US GAAP) ................. 25,123,362 (23,385,399)
=============== ==============
SHAREHOLDER'S FUNDS
2003 2002
NOTE (POUND) (POUND)
----- ---------- ----------
Shareholder's funds (UK GAAP) ........................................... 56,193 8,231
Adjustment to loan loss reserve ......................................... (ii) 22,152,999 8,009,803
Adjustment to premium on beneficial interest in mortgage
portfolio ......................................................... (ii) (18,079,209) (8,009,803)
Unrealised loss on derivatives .......................................... (iii) (1,997,529) (23,393,629)
Deferred tax, net of valuation allowance ................................ (iv) (394,490) --
Total US GAAP adjustment (net) .......................................... 1,681,771 (23,393,629)
---------- ----------
Shareholder's equity/(deficit) (US GAAP) ................................ 1,737,964 (23,385,398)
========== ==========
The aggregate effect of the disclosed US GAAP adjustments (including those
adjustments in respect of cash balances within the Trust) would result in a
decrease in total assets and total liabilities (including shareholder's equity)
of (pound)652,660,665 (2002: (pound)176,091,243) from those amounts stated under
UK GAAP. Total assets and total liabilities (including shareholder's equity) on
a US GAAP basis would be (pound)13,034,957,942 and ((pound)13,034,957,942)
respectively (2002: (pound)3,550,257,100 and ((pound)3,550,257,100)
REsPECTIvely).
337
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
(C) CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003
Set out below for illustrative purposes, are summary cash flows under US
GAAP:
2002
2003 (RESTATED)
(POUND) (POUND)
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) after tax................................................ 25,123,362 (23,385,399)
Increase in other assets................................................... (7,733,867) (4,819,919)
Increase in accrued interest payable....................................... 30,303,680 10,852,372
Increase in other liabilities.............................................. 600,191,824 28,143,914
----------------- -----------------
Adjustments to reconcile net profit to cash provided by operating
activities:................................................................ 622,761,637 34,176,367
----------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 647,884,999 10,790,968
----------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES...................................... (8,717,066,981) (3,478,576,310)
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. 8,805,033,024 3,558,039,842
----------------- -----------------
CHANGE IN CASH AND CASH EQUIVALENTS........................................ 735,851,042 90,254,500
----------------- -----------------
Cash and cash equivalents at the beginning of period - restricted
cash....................................................................... 90,254,500 --
----------------- -----------------
Cash and cash equivalents at the end of period - restricted cash........... 826,105,542 90,254,500
----------------- -----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for taxation................................... 1,594 --
Cash paid during the period for interest................................... 298,109,364 83,559,585
(I) RESTATEMENT OF 2002 US GAAP CASH FLOW INFORMATION
The directors have reconsidered the US GAAP treatment of cash balances
presented under UK GAAP that represent the Company's beneficial interest in the
Trust's guaranteed investment contracts. An amount of (pound)152,697,614
previously included in restricted CASH under US GAAP in respect of such
balances, and a corresponding credit of (pound)152,697,614, have been removed
from the Company's US GAAP balance sheet at 31 December 2002 as the directors no
longer consider that these amounts qualify as assets or liabilities of the
Company under US GAAP. This adjustment has no effect on previously reported net
income or shareholder's equity under US GAAP but has the effect of reducing both
previously reported US GAAP net cash provided by operating activities for the
year ended 31 December 2002 and restricted cash and cash equivalents held at 31
December 2002 by (pound)152,697,614.
(II) RECLASSIFICATIONS IN 2002 US GAAP INFORMATION
The directors have reconsidered during the year the appropriate US GAAP
accounting for the acquisitions of beneficial interests in the mortgage
portfolio by the Company in accordance with SFAS 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities".
Previously these acquisitions were treated as a sale from Halifax plc's
perspective and accordingly, the Company recognised the acquisitions of
beneficial interests in the mortgage portfolio on its balance sheet at the 31
December 2002.
338
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
No premium is recognised on acquisition of the non-recourse loan under US
GAAP. Accordingly, the UK to US GAAP reconciliation includes adjustments to the
recognition of loan loss reserves and acquisition premiums to restate on a US
GAAP basis.
These reclassifications have no impact on previously reported net income
or shareholder's equity under US GAAP.
(III) UNREALISED LOSS ON DERIVATIVES
The income received by the Company on its non-recourse loan is based in
part on the variable and fixed rates of interest charged by Halifax plc on the
related portfolio of mortgages held in trust by Permanent Mortgages Trustee
Limited. The Company has entered into interest rate swaps to convert this income
into a LIBOR based cash flow to match the interest payable on the loan to
Permanent Financing (No.1) PLC, Permanent Financing (No.2) PLC and Permanent
Financing (No.3) PLC. These swaps are amortising swaps with a maximum life of 40
years, in line with the underlying mortgages.
(IV) TAXATION
2003 2002
(POUND) (POUND)
------------- -------------
DEFERRED TAX ASSETS:
Relating to unrealised loss on derivatives........................................ 379,531 4,678,726
Relating to loan loss reserves.................................................... 275,992 --
Less: valuation allowance......................................................... -- (4,678,726)
------------- -------------
Deferred tax asset, net of valuation allowance.................................... 655,523 --
============= =============
DEFERRED TAX LIABILITIES:
Relating to the premium arising on the beneficial interest in the
mortgage portfolio................................................................ (1,050,013) --
------------- -------------
Deferred tax liability............................................................ (394,490) --
------------- -------------
Net deferred tax (liability)/asset................................................ (394,490) --
============= =============
The deferred tax liability in 2003 arises due to differences between the
US GAAP carrying value and UK tax basis of derivatives, loan loss reserves and
the premium arising on acquisition of the beneficial interest in the mortgage
portfolio. The deferred tax liability is recognised at a rate of 19%, being the
UK small companies corporation tax rate. The directors consider that the
reversal of these timing differences will result in a net tax liability, which
will crystallise at the UK small companies corporation tax rate. The directors
also consider that the majority of these timing differences will not reverse
within the next 12 months and, as such, do not consider the deferred tax
liability as being a current liability.
The deferred tax asset in 2002 represents the deferred tax effect of the
recognition of the loss on the swap in the US GAAP income statement. A full
valuation allowance was reflected against this deferred tax asset based on the
director's assessment that it is more likely than not that the deferred tax
asset would not be recoverable through the future earnings of the Company.
339
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
(V) SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Credit risk exists in relation to a number of counter parties of the
Company, whereby economic or other conditions may lead these counterparties to
default on accounts owed to the Company or breach existing contractual
relationships.
Key concentrations of credit risk to the company are in respect of the
beneficial interest in the mortgage portfolio (treated as a non-recourse loan to
Halifax plc under US GAAP) and, more generally, to HBOS plc (the parent of
Halifax plc) in its role as the mortgage loan administrator, cash manager
(including the provision of guaranteed investment contracts to the Company and
the Trust) and interest rate swap provider.
The mortgage loans in the Trust are secured on residential properties in
the UK and have a weighted average loan-to-value ratio of 67% (2002: 69%). For
the purposes of determining the UK GAAP provisions for bad and doubtful debts
each individual mortgage loan in the Trust is considered for impairment, whereas
for US GAAP purposes the mortgage loans are considered in the aggregate in
determining whether the loan to Halifax plc is impaired. The directors consider
that the Company's share of mortgage loans in the Trust will be sufficient to
recover the full amount of this loan.
To the extent that these mortgage loans do not provide sufficient funds to
recover the Company's investment in the mortgage portfolio, the Company has no
claim on the assets of Halifax plc. The Company's maximum gross exposure to
credit loss is therefore equal to the fair value of its investment in the
mortgage portfolio (subject to mitigation resulting from reduction in or
elimination of any obligation to pay deferred consideration to Halifax plc).
In respect of other amounts owed by Halifax plc, the directors consider
that, as Halifax plc is a registered UK Bank (and accordingly subject to
supervision by the Financial Services Authority), the risk of default is
minimal. The interest rate swaps have been provided on the basis of an
International Swap Dealers Association agreement and, as a result, the Company
is allowed, in the event of default, to close out and offset its rights and
obligations under each swap. Under the agreement, Halifax plc is not required to
post collateral when a positive fair value arises on the swap agreement. The
Company's maximum gross exposure to credit loss is therefore equal to the fair
value of all amounts due from Halifax plc (including swaps with a positive fair
value but subject to mitigation resulting from the Company's ability to offset
the fair value of swaps with a negative fair value in the event of default).
(VI) FASB INTERPRETATION NO. 46R "CONSOLIDATION OF VARIABLE INTEREST ENTITIES,
AN INTERPRETATION OF ARB NO. 51"
This interpretation ("FIN 46R") replaces a preceding interpretation No. 46
with the same title and clarifies the application of Accounting Research
Bulletin No. 51 "Consolidated Financial Statements" to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional financial support. Such entities, as further
defined in this interpretation, are referred to as variable interest entities.
Under the interpretation, an enterprise is required to consolidate a
variable interest entity if it has a variable interest that will absorb the
majority of an entity's expected losses or expected residual returns ("the
primary beneficiary"). This revised interpretation will require the Company to
apply the consolidation provisions therein to any special purpose entity for
which it is determined to be the primary beneficiary.
At 31 December 2003 the Company has identified that the Trust and the
Financing Companies meet the definition of FIN 46R as variable interest
entities. The Company's involvement with the Trust and the Financing Companies
is described in Note 1 and, after consideration of the involvement with these
entities, the Company does not believe it is probable that it will meet the
definition of a primary beneficiary for these entities.
340
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
(VII) LONG TERM DEBT
The Company's obligations under the intercompany loan agreements (the
"term advances") with the Financing Companies are secured under a deed of charge
by the Company's beneficial interest in the mortgage portfolio (treated as a
non-recourse loan to Halifax plc under US GAAP) held in Trust.
The Company's ability to pay interest and principal under each
intercompany loan is dependent upon the Company receiving from the Trust payment
of interest and principal under the beneficial interest in the mortgage
portfolio.
The term advances are payable in no order of priority between the
Financing Companies but in proportion to the respective amounts due. Payments on
the term advances are governed by a detailed priority of payments as set out in
the transaction agreements. Payment of interest and principal due and payable is
paid-down first, on the term AAA advances; second, on the term AA advances; and
third, on the term BBB advances.
Neither the Company nor the Trust has the ability to sell or pledge the
assets securing the term advances except under the conditions set out in the
legal documentation surrounding the securitisation transactions.
(A) TERM ADVANCES MADE BY PERMANENT FINANCING (NO. 1) PLC
MARGIN OVER 31 DECEMBER 31 DECEMBER
LIBOR 2003 2002
------------------ ------------------ ------------------
Series 1 Term AAA Advance due June 2003................. -0.04030% -- (pound)509,614,731
Series 1 Term AA Advance due June 2042.................. 0.28760% -- (pound)17,666,644
Series 1 Term BBB Advance due June 2042................. 1.13060% -- (pound)17,666,644
Series 2 Term AAA Advance due June 2007................. 0.16834% (pound)509,614,731 (pound)509,614,731
Series 2 Term AA Advance due June 2042.................. 0.29420% (pound)17,666,644 (pound)17,666,644
Series 2 Term BBB Advance due June 2042................. 1.26850% (pound)17,666,644 (pound)17,666,644
Series 3 Term AAA Advance due December 2007............. 0.12810% (pound)748,299,320 (pound)748,299,320
Series 3 Term AA Advance due June 2042.................. 0.33100% (pound)26,190,476 (pound)26,190,476
Series 3 Term BBB Advance due June 2042................. 1.27940% (pound)26,190,476 (pound)26,190,476
Series 4A1 Term AAA Advance due June 2009............... 0.22000% (pound)484,000,000 (pound)484,000,000
Series 4A2 Term AAA Advance due June 2042............... 0.18000% (pound)1,000,000,000 (pound)1,000,000,000
Series 4 Term AA Advance due June 2042.................. 0.30000% (pound)52,000,000 (pound)52,000,000
Series 4 Term BBB Advance due June 2042................. 1.20000% (pound)52,000,000 (pound)52,000,000
------------------ ------------------
Total................................................... (pound)2,933,628,291 (pound)3,478,576,310
================== ==================
The term advances are subject to variable rates of interest. Interest is
payable on the term advances based on sterling 3 month LIBOR. At the balance
sheet date, the rate in force was 4.0125% for sterling 3 month LIBOR. The next
reprice date after the balance sheet date is 10 March 2004.
341
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
(B) TERM ADVANCES MADE BY PERMANENT FINANCING (NO. 2) PLC
MARGIN OVER 31 DECEMBER 31 DECEMBER
LIBOR 2003 2002
------------------ ----------------- -----------------
Series 1 Term AAA Advance due March 2004................ -0.04930% (pound)633,312,000 --
Series 1 Term AA Advance due June 2042.................. 0.25050% (pound)21,533,000 --
Series 1 Term BBB Advance due June 2042................. 1.36080% (pound)21,533,000 --
Series 2 Term AAA Advance due September 2007 0.15830% (pound)1,108,016,000 --
Series 2 Term AA Advance due June 2042.................. 0.35660% (pound)38,622,000 --
Series 2 Term BBB Advance due June 2042................. 1.55060% (pound)38,622,000 --
Series 3 Term AAA Advance due December 2032............. 0.23310% (pound)854,375,000 --
Series 3 Term AA Advance due June 2042.................. 0.44595% (pound)29,732,000 --
Series 3 Term BBB Advance due June 2042................. 1.55880% (pound)29,732,000 --
Series 4 Term AAA Advance due December 2009............. 0.22360% (pound)1,107,250,000 --
Series 4 Term AA Advance due June 2042.................. 0.48380% (pound)38,644,000 --
Series 4 Term BBB Advance due June 2042................. 1.53690% (pound)38,644,000 --
Series 5 Term AAA Advance due June 2009................. 0.25000% (pound)750,000,000 --
Series 5 Term AA Advance due June 2042.................. 0.45000% (pound)26,000,000 --
Series 5 Term BBB Advance due June 2042................. 1.45000% (pound)26,000,000 --
----------------- -----------------
Total................................................... (pound)4,762,015,000 --
================= =================
The term advances are subject to variable rates of interest. Interest is
payable on the term advances based on sterling 3 month LIBOR. At the balance
sheet date, the rate in force was 4.0125% for sterling 3 month LIBOR. The next
reprice date after the balance sheet date is 10 March 2004.
(C) TERM ADVANCES MADE BY PERMANENT FINANCING (NO.3) PLC
MARGIN OVER 31 DECEMBER 31 DECEMBER
LIBOR 2003 2002
-------------- ------------------ -------------
Series 1 Term AAA Advance due December 2004..................... -0.41000% (pound)658,500,000 --
Series 1 Term AA Advance due June 2042.......................... 0.20700% (pound)22,900,000 --
Series 1 Term BBB Advance due June 2042......................... 1.09000% (pound)22,900,000 --
Series 2 Term AAA Advance due September 2010.................... 1.28000% (pound)1,018,000,000 --
Series 2 Term AA Advance due June 2042.......................... 0.28500% (pound)35,400,000 --
Series 2 Term BBB Advance due June 2042......................... 1.21500% (pound)35,400,000 --
Series 3 Term AAA Advance due September 2033.................... 0.20613% (pound)898,250,000 --
Series 3 Term AA Advance due June 2042.......................... 0.41184% (pound)31,200,000 --
Series 3 Term BBB Advance due June 2042......................... 1.27224% (pound)31,200,000 --
Series 4A1 Term AAA Advance due September 2033.................. 0.21200% (pound)482,750,000 --
Series 4A2 Term AAA Advance due September 2033.................. 0.19000% (pound)750,000,000 --
Series 4 Term AA Advance due June 2042.......................... 0.43450% (pound)42,850,000 --
Series 4 Term BBB Advance due June 2042......................... 1.30400% (pound)42,850,000 --
Series 5 Term AAA Advance due June 2042......................... 0.21700% (pound)400,000,000 --
Series 5 Term AA Advance due June 2042.......................... 0.51022% (pound)13,900,000 --
Series 5 Term BBB Advance due June 2042......................... 1.35876% (pound)13,900,000 --
------------------ -------------
Total........................................................... (pound)4,500,000,000 --
================== =============
342
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
The term advances are subject to variable rates of interest. Interest is
payable on the notes based on sterling 3 month LIBOR. At the balance sheet date,
the rate in force was 4.01634% for sterling 3 month LIBOR. This 3 month rate has
been interpolated from the closing date on 25 November 2003 for the quarter
ending 9 March 2004. The next reprice date after the balance sheet date is 10
March 2004.
YEARS TO MATURITY FROM 31 DECEMBER 2003
(POUND)
------------------
Less than 1 year............................................................................... 1,291,812,000
>1 less than 2 years........................................................................... --
>2 less than 3 years........................................................................... --
>3 less than 4 years........................................................................... --
>4 less than 5 years........................................................................... 2,365,930,051
6 to 10 years.................................................................................. 3,359,250,000
11 to 15 years................................................................................. --
16 to 20 years................................................................................. --
21 to 25 years................................................................................. --
26 to 30 years................................................................................. 2,985,375,000
31 to 35 years................................................................................. --
36 to 40 years................................................................................. 2,193,276,240
------------------
12,195,643,291
==================
The table above is based on the stated, fixed maturities. However, it is
envisaged that the term advances will be repaid prior to these dates since
earlier repayment is required to the extent that the underlying mortgages are
prepaid.
(VIII) FAIR VALUES OF FINANCIAL INSTRUMENTS
The disclosures in the table below are in accordance with SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments".
Fair values have been estimated using quoted market prices where
applicable. For most of the Company's assets and liabilities ready markets do
not exist and hence, quoted market prices are not available, appropriate
techniques are therefore used to estimate fair values that take into account the
characteristics of the instruments, including the expected future cashflows,
market interest rates and prices available for similar instruments. The fair
value of other assets and liabilities approximate to cost given their relatively
short maturity.
343
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
FOR THE YEAR ENDED 31 DECEMBER 2003
31 DECEMBER 31 DECEMBER 31 DECEMBER
2003 2003 2003
CARRYING VALUE FAIR VALUE DIFFERENCE
------------------ ------------------ -----------------
(POUND) (POUND) (POUND)
NON-TRADING ASSETS
Cash and cash equivalents 1,483,495,320 1,483,495,320 --
Beneficial interest in mortgage portfolio 12,191,569,501 12,197,640,820 6,071,319
Other assets 8,429 8,429 --
NON-TRADING LIABILITIES
Intercompany loans (12,363,072,866) (12,363,072,866) --
Deferred consideration (51,022,734) (55,096,524) (4,073,790)
Other liabilities (1,272,555,414) (1,272,555,414) --
DERIVATIVES (911,400) (2,908,929) (1,997,529)
================== ================== =================
31 DECEMBER 31 DECEMBER 31 DECEMBER
2002 2002 2002
CARRYING VALUE FAIR VALUE DIFFERENCE
------------------ ------------------ -----------------
(POUND) (POUND) (POUND)
NON-TRADING ASSETS
Cash and cash equivalents 242,952,114 242,952,114 --
Beneficial interest in mortgage portfolio 3,478,576,310 3,500,051,170 21,474,860
Other assets 4,819,919 4,819,919 --
NON-TRADING LIABILITIES
Intercompany loans (3,558,039,842) (3,558,039,842) --
Deferred consideration (4,465,515) (4,465,515) --
Other liabilities (166,381,501) (166,381,501) --
DERIVATIVES (1,918,769) (23,393,629) (21,474,860)
================== ================== =================
At 31 December 2003, the fair value of the swaps not recognised under UK
GAAP was calculated by discounting the expected future cash flows and was
estimated to be (pound)1,997,500 (2002: ((pound)23,393,629)). The total nominal
value of the swaps was (pound)12,195.6M.
The Company had no trading assets or liabilities at 31 December 2003 or at
31 December 2002.
20. SUBSEQUENT EVENT (UNAUDITED)
On 12th March, 2004 the company increased its beneficial interests in the
mortgage portfolio by (pound)6,122,000,000 and recogniSED A corresponding
increase in loans to group undertakings for the same amount as a result of an
additional investment in the mortgage portfolio held in trust by Permanent
Mortgages Trustee Limited.
On 22 July 2004, the Company increased its beneficial interests in the
mortgage portfolio by (pound)3,956,000,000 and recognised A corresponding
increase in loans to group undertakings for the same amount as a result of an
additional investment in the mortgage portfolio held in trust by Permanent
Mortgages Trustee Limited.
344
APPENDIX E
UNAUDITED FINANCIAL STATEMENTS OF PERMANENT FUNDING (NO. 1) LIMITED AND NOTES
THERETO
PERMANENT FUNDING (NO. 1) LIMITED
UNAUDITED PROFIT AND LOSS ACCOUNT
FOR THE 6 MONTHS TO 30 JUNE 2004
6 MONTHS 6 MONTHS
TO TO
30 JUNE 30 JUNE
2004 2003
NOTE (POUND) (POUND)
------- ----------------- ---------------
Interest receivable and similar income....................... 3 401,118,454 186,529,306
Interest payable and similar charges......................... 4 (349,276,185) (149,154,855)
NET INTEREST INCOME.......................................... 51,842,269 37,374,451
Operating expenses........................................... (51,776,394) (37,355,798)
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION................ 5 65,875 18,653
Tax on profit on ordinary activities......................... 6 (12,516) (3,544)
----------------- ---------------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION................. 7, 15 53,359 15,109
================= ===============
A statement of the movement on reserves is shown in note 7 to the
financial statements.
The Company had no recognised gains or losses in the period other than the
profit for the financial period shown above.
The profit shown above is derived from continuing operations. Notes 1 to
20 form part of these financial statements.
345
PERMANENT FUNDING (NO. 1) LIMITED
UNAUDITED BALANCE SHEET
AS AT 30 JUNE 2004
30 JUNE 31 DECEMBER
2004 2003
NOTE (POUND) (POUND)
------ ---------------- ------------------
CURRENT ASSETS
Debtors - amounts falling due within one year................. 9 1,483,886,843 1,303,935,007
Cash at bank and in hand...................................... 11 1,616,513,281 1,483,495,320
---------------- ------------------
3,100,400,124 2,787,430,327
CREDITORS: amounts falling due within one year................ 12 (2,771,050,946) (2,565,279,548)
---------------- ------------------
NET CURRENT ASSETS............................................ 329,349,178 222,150,779
DEBTORS: amounts falling due after more than one year 10 16,172,750,532 10,900,188,280
CREDITORS: amounts falling due after more than one year...... 13 (16,501,990,158) (11,122,282,866)
---------------- ------------------
NET ASSETS.................................................... 109,552 56,193
CAPITAL AND RESERVES
Called up share capital....................................... 14 1 1
Profit and loss account....................................... 7 109,551 56,192
---------------- ------------------
EQUITY SHAREHOLDERS' FUNDS.................................... 15 109,552 56,193
================ ==================
Notes 1 to 20 form part of these financial statements.
346
PERMANENT FUNDING (NO. 1) LIMITED
UNAUDITED CASH FLOW STATEMENT
FOR 6 MONTHS ENDED 30 JUNE 2004
6 MONTHS TO 6 MONTHS TO
30 JUNE 2004 30 JUNE 2003
NOTE (POUND) (POUND)
---------------- ------------------
NET CASH INFLOW FROM OPERATING ACTIVITIES................... 16 6,573,597 90,923,416
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE..............
Interest received on mortgage portfolio...................... 379,854,598 173,329,871
Bank interest received....................................... 20,926,736 12,108,548
Swap and loan interest paid.................................. (340,992,083) (138,420,279)
---------------- ------------------
59,789,251 47,018,140
================ ==================
TAXATION
UK corporation tax paid...................................... -- --
================ ==================
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of beneficial interest in mortgage portfolio held on
trust................................................... (6,122,075,000) (4,762,015,000)
Redemptions.................................................. 676,378,000 509,614,731
---------------- ------------------
(5,445,697,000) (4,252,400,269)
================= ===============
FINANCING
Intercompany loan............................................ 5,445,697,000 4,252,400,269
Start-up loan................................................ 66,655,113 55,298,321
---------------- ------------------
5,512,352,113 4,307,698,590
================= ===============
INCREASE IN CASH IN THE PERIOD............................... 133,017,961 193,239,877
================= ===============
Notes 1 to 20 form part of these financial statements.
347
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
FOR THE 6 MONTHS ENDED 30 JUNE 2004
1. GENERAL INFORMATION
Permanent Funding (No.1) Limited (the "COMPANY ") was incorporated in
England and Wales on 9th August, 2001 as Alnery No.2225 Limited. The Company's
name was changed to Permanent Funding (No.1) Limited on 21 March 2002 and
commenced operations on 14 June 2002.
Permanent Funding (No.1) Limited is a wholly owned subsidiary of Permanent
Holdings Limited, a company registered in England and Wales. The statutory
financial statements of Permanent Funding (No.1) Limited, prepared in accordance
with UK generally accepted accounting principles, have been included in the
consolidated accounts of Permanent Holdings Limited as at 31 December 2003.
There have been no consolidated accounts produced for Permanent Holdings Limited
covering the period from 1 January 2004 to 30 June 2004.
The principal activity of the Company is to acquire and hold beneficial
interests in a mortgage portfolio and enter into all financial arrangements in
that connection. No further changes in activity are envisaged.
The Company invests in beneficial interests in the assets of Permanent
Mortgages Trustee Limited ("the Trust"), these assets comprise mortgage loans
secured on residential property in England, Wales and Scotland originated by
Halifax plc. The Company receives a share of income from the Trust in proportion
to its share of the total mortgage assets of the Trust.
The Company funds purchases of beneficial interests, in part through
direct borrowing from Halifax plc, but primarily through the issuance of loans
through special purpose companies (established to issue loan notes to investors)
collateralised by the Company's beneficial interest in the mortgages held in
trust.
During the six month period ended 30 June 2004 the Company purchased
further beneficial interests in the assets of the Trust, which amounted to
(pound)6.1 billion on 12 March 2004. This purchase was financed by loans from
Permanent Financing (No. 4) PLC. Permanent Financing (No 4) PLC is a wholly
owned subsidiary of Permanent Holdings Limited.
THE TRUST
The Trust is a special purpose company, whose purpose is to hold the trust
property. The Trust holds the trust property on trust for the benefit of Halifax
plc and the Company pursuant to the mortgages trust deed initially entered into
on 13 June 2002.
The trust property includes the portfolio, which consists of the loans,
their related security, any accrued interest on the loans and other amounts
derived from the loans and their related security.
On 14 June 2002 Halifax plc assigned the initial loans and, on several
subsequent dates (including 6 March 2003, 25 November 2003 and 12 March 2004),
Halifax plc has sold further loans, in each case together with their related
security, to the Trust pursuant to a mortgage sale agreement. Halifax plc sold
portions of its share in the trust property to the Company pursuant to the terms
of the mortgages trust deed so that the Company's portion of the trust property
was of sufficient size for the purposes of securitisation transactions.
As at 30 June 2004 the Trust portfolio amounted to (pound)24,539,684,260
(of which the Company's interest amounted to (pound)17,641,340,291). Halifax plc
and the Company 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.
The Trust allocates interest on the loans to the Company based on the
share that the Company has in the trust property expressed as a percentage (or
if less, the amount that the Company needs to meet its obligations to pay
interest on the intercompany loans and other amounts on the date of
distribution). The Trust distributes the rest of the interest on the loans to
Halifax plc. The Trust distributes losses on the loans to Halifax plc and the
Company in accordance with the share that each of them has in the trust
property, expressed as a percentage.
348
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS - (continued)
FOR THE 6 MONTHS ENDED 30 JUNE 2004
At 30 June 2004 the Company held an entitlement to a share amounting to
71.9% of the loans in the Trust, (31 December 2003: 69.4%), with the remaining
entitlement of the loans in Trust due to Halifax plc.
The entire issued share capital of the Trust is held beneficially on trust
by SFM Offshore Limited, a corporate services provider not affiliated with
Halifax plc, under the terms of a discretionary trust for the benefit of one or
more charities. Any profits received by the Trust, after payment of the costs
and expenses of the Trust, will be paid for the benefit of charities and
charitable purposes selected at the discretion of SFM Offshore Limited. The
payments on the issuer notes will not be affected by this arrangement.
The Trust 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 Trust, acting as trustee of the Trust, the
authorisation of transaction documents surrounding the securitisation to which
it is or will be a party, obtaining a standard licence under the Consumer Credit
Act 1974, filing a notification under the Data Protection Act 1998 and other
matters which are incidental or ancillary to the foregoing.
The Trust has no employees and no subsidiaries.
Neither Halifax plc nor the noteholders have any direct interest in the
underlying mortgages of the Trust, although Halifax plc has a shared security
interest under the deed of charge in the Company's share of the trust property.
ISSUER INTERCOMPANY LOAN AGREEMENTS
Permanent Financing (No. 1) PLC, Permanent Financing (No. 2) PLC,
Permanent Financing (No. 3) PLC and Permanent Financing (No.4) PLC (together,
the "Financing Companies ") sold issuer notes to investors and then lent the
proceeds to the Company under the issuer intercompany loan agreements.
The Company uses 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
Financing companies under the issuer intercompany loan agreements. The Company's
obligations to the Financing Companies under the issuer intercompany loan
agreements are secured under a deed of charge by the Company's share of the
trust property.
If the Company 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 Halifax
plc by the Trust.
2. ACCOUNTING POLICIES
The following accounting policies have been applied consistently in
dealing with items that are considered material in relation to the Company's
financial statements.
BASIS OF PREPARATION
These are not the Company's statutory financial statements. The statutory
financial statements of Permanent Funding (No.1) Limited, prepared in accordance
with UK generally accepted accounting principles, at 31 December 2003 are
included in the consolidated accounts of Permanent Holdings Limited as at 31
December 2003. The Company's statutory financial statements contained an
unqualified audit report and have been delivered to the registrar.
These non-statutory financial statements have been prepared in accordance
with applicable accounting standards generally accepted in the United Kingdom
("UK GAAP"), and have been drawn up under the historical cost convention and on
a going concern basis. These principles differ in certain respects from
generally accepted accounting principles in the United States ("US GAAP").
Application of US GAAP would have affected net income and shareholder's
funds as detailed in note 20 to the financial statements.
349
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS - (continued)
FOR THE 6 MONTHS ENDED 30 JUNE 2004
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingencies at the balance sheet date and the
reported amounts of revenues and expenses in the reporting period. Actual
results may differ from the estimates used in the financial statements.
BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO
The beneficial interest in the mortgage portfolio is recorded at book
value net of provision for bad and doubtful debts.
These financial statements are prepared on the basis that the Company has
a beneficial interest in the mortgages held by the Trust. The financial
statements reflect the fact that the Company has credit exposure to any losses
incurred on these loans and that there is no recourse to Halifax plc in the
event of losses being realised.
Interest receivable is calculated on an accruals basis on the contractual
interest payment terms of mortgage loans comprising the beneficial interest.
Where cash has been accumulated by the Company to fund the future
repayment of the intercompany loans, the Company's share of the interest arising
on the mortgage portfolio is adjusted.
MORTGAGE LOAN PREMIUM
A loan premium has been recognised for the difference between the book
value of the beneficial interest in the mortgage portfolio and its fair value at
the date of acquisition. This premium is charged to the profit and loss account
over the estimated average life of the underlying mortgages in the Trust.
PROVISION FOR BAD AND DOUBTFUL DEBTS
Provisions are made to reduce the carrying value of the beneficial
interest in the mortgage portfolio to reflect the amount of the underlying
mortgage loans and advances, within the Trust, likely to be recoverable.
Specific provision is made where the property is in possession or where the
account is in arrears and it is considered likely that the property will be
taken into possession. A general provision, to cover advances that are latently
bad or doubtful, but not yet identified as such, is also maintained.
DEFERRED CONSIDERATION
Under the terms of the securitisation the Company retains the right to a
maximum of 0.01% of available revenue receipts from the beneficial interest in
the mortgage portfolio. Available revenue receipts are defined by the
securitisation agreements and include mortgage interest received, interest
received on the bank accounts and the amounts standing to the credit of the
reserve ledger. Profits in excess of 0.01% accrue to Halifax plc, the originator
of the underlying mortgages. Accordingly, a creditor ("deferred consideration")
for amounts payable to Halifax plc has been recognised. The payments of deferred
consideration are strictly governed by the priority of payments, which sets out
how cash can be utilised.
DEFERRED EXPENDITURE
Issue costs in respect of the loan finance have been deferred and are
being charged to the profit and loss account over a five-year period, being the
estimated average life of the underlying loan notes.
350
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS - (continued)
FOR THE 6 MONTHS ENDED 30 JUNE 2004
FINANCIAL INSTRUMENTS
The Company's financial instruments, other than derivatives, comprise
borrowings, cash and liquid resources, and various items, such as debtors and
creditors, that arise directly from its operations. The main purpose of these
financial instruments is to raise finance for the Company's operations.
The Company also enters into derivative transactions (principally interest
rate swaps). The purpose of such transactions is to manage the interest rate
risks arising from the Company's operations and its sources of finance.
It is, and has been throughout the year under review, the Company's policy
that no trading in financial instruments shall be undertaken.
Interest rate risk associated with the portfolio is managed by means of an
interest rate swap with Halifax plc, which requires the Company to pay the
effective yield on the mortgage portfolio and receive payments based on a rate
linked to the three-month sterling LIBOR.
DERIVATIVES
Transactions are undertaken in derivative financial instruments
("derivatives"), which include interest rate swaps. Derivatives are entered into
for the purpose of reducing risk from potential movements in interest rates
inherent in the Company's non-trading assets and liabilities. Non-trading assets
and liabilities are those intended for use on a continuing basis in the
activities of the Company.
A derivative is designated as non-trading where there is an offset between
the effects of potential movements in market rates of the derivative and the
designated asset or liability being hedged. Non-trading derivatives are reviewed
regularly for their effectiveness as hedges. Non-trading derivatives are
accounted for on an accruals basis, consistent with the asset or liability being
hedged. Income and expense on non-trading derivatives are recognised as they
accrue over the life of the instruments as an adjustment to interest receivable
or payable.
The benefit of interest rate swaps which are used to hedge on balance
sheet assets and liabilities are included in interest receivable and similar
income.
VALUE ADDED TAX
Value added tax is not recoverable by the Company and is included with its
related cost.
TAXATION
The charge for taxation takes into account all timing differences in the
accounting and taxation treatment of certain items.
DEFERRED TAXATION
Deferred tax is recognised, without discounting, in respect of all timing
differences between the treatment of certain items for taxation and accounting
purposes which have arisen but not reversed out by the balance sheet date,
except as otherwise required by FRS 19. Deferred tax assets are only recognised
when it is more likely than not that the asset will be recoverable in the
foreseeable future out of suitable taxable profits from which the timing
differences and tax losses can be deducted.
351
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS - (continued)
FOR THE 6 MONTHS ENDED 30 JUNE 2004
3. INTEREST RECEIVABLE AND SIMILAR INCOME
6 MONTHS TO 6 MONTHS TO
30 JUNE 30 JUNE
2004 2003
(POUND) (POUND)
-------------- --------------
Income from beneficial interest in mortgage portfolio.................... 379,854,598 173,329,871
Bank interest............................................................ 20,926,736 13,199,435
Swap interest............................................................ 337,120 --
-------------- --------------
401,118,454 186,529,306
============== ==============
4. INTEREST PAYABLE AND SIMILAR CHARGES
6 MONTHS TO 6 MONTHS TO
30 JUNE 30 JUNE
2004 2003
(POUND) (POUND)
-------------- --------------
Interest on loans from Group undertaking................................. 344,702,027 126,476,185
Swap interest............................................................ -- 20,504,541
Start-up loan interest................................................... 4,574,158 2,174,129
-------------- --------------
349,276,185 149,154,855
============== ==============
5. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
6 MONTHS TO 6 MONTHS TO
30 JUNE 30 JUNE
2004 2003
(POUND) (POUND)
-------------- --------------
Profit on ordinary activities before taxation is stated after charging:
Auditors' remuneration including expenses for audit work................ 43,838 21,006
Deferred consideration.................................................. 37,901,445 33,924,899
Amortisation of loan premium............................................ 4,362,704 --
============== ==============
Auditors' remuneration for non audit work of (pound)389,377 (6 months to
June 2003: (pound)260,451) is included in the deferred costS. These costs are
being charged to the profit and loss account over a five-year period, being the
estimated average life of the underlying loan notes.
352
PERMANENT FUNDING (NO. 1) LIMITED
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS - (continued)
FOR THE 6 MONTHS ENDED 30 JUNE 2004
6. TAX ON PROFIT ON ORDINARY ACTIVITIES
6 MONTHS TO 6 MONTHS TO
30 JUNE 2004 JUNE 2003
(POUND) (POUND)
---------------- ----------------
THE MOVEMENT ON DEFERRED TAX WAS AS FOLLOWS:
Balance brought forward...................................................... -- --
---------------- ----------------
Current year charge.......................................................... -- --
Balance carried forward...................................................... -- --
================ ================
DEFERRED TAXATION COMPRISES
General provisions -- --
---------------- ----------------
TAX ON PROFIT ON ORDINARY ACTIVITIES
The charge for the period based on a corporation tax rate of 19% comprises:
UK corporation tax........................................................... 12,516 3,544
Prior year corporation tax................................................... -- --
---------------- ----------------
12,516 3,544
================ ================
FACTORS AFFECTING THE CURRENT TAX CHARGE FOR THE YEAR:
The tax assessed for the period is lower than the standard rate of
corporation tax in the UK of 30%
The differences are explained below
Profit on ordinary activities before taxation................................ 65,875 18,653
---------------- ----------------
Profit on ordinary activities multiplied by the standard rate of corporation
tax in the UK........................................................... 19,762 5,596
---------------- ---------------
EFFECTS OF:
Small companies rate......................................................... (7,246) (2,052)
Adjustments to tax in respect of previous periods............................ -- --
---------------- ----------------
12,516 3,544
================ ================
7. PROFIT AND LOSS ACCOUNT
6 MONTHS TO YEAR ENDED
30 JUNE 31 DECEMBER
2004 2003
(POUND) (POUND)
---------------- ----------------
At 1 January................................................................. 56,192 8,230
Transfer to reserves......................................................... 53,359 47,962
---------------- ----------------
At 30 June/ 31 December...................................................... 109,551 56,192
================ ================
353
8 BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO
MORTGAGE LOSS
MORTGAGES PROVISION PREMIUM TOTAL
(POUND) (POUND) (POUND) (POUND)
------------------ ----------------- ----------------- ------------------
At 1 January 2004................ 12,195,643,21 (22,152,999) 18,079,209 12,191,569,501
Acquisitions..................... 6,122,075,000 (10,900,560) 10,900,560 6,122,075,000
Redemptions...................... (676,378,000) 1,228,619 (1,228,619) (676,378,000)
Amortisation..................... -- -- (3,134,085) (3,134,085)
Provision release................ -- 413,940 -- 413,940
------------------ ----------------- ----------------- ------------------
At 30 June 2004.................. 17,641,340,291 (31,411,000) 24,617,065 17,634,546,356
================== ================= ================= ==================
The mortgage portfolio in which the Company holds a beneficial interest is
held on trust for the Company and the originator of the mortgage loans by
Permanent Mortgages Trustee Limited (the Trust). The mortgage loans are secured
on residential property in England, Wales and Scotland.
The beneficial interests acquired by Permanent Funding (No.1) Limited on
12 March 2004 amounted to (pound)6,122,075,000 (6 March 2003 and 25 November
2003 (pound)4,762,015,000 and (pound)4,500,000,000 respectively). Permanent
Funding (No.1) Limited is a wholly-owned subsidiary of Permanent Holdings
Limited, the parent company of Permanent Financing (No.1) PLC, Permanent
Financing (No.2) PLC, Permanent Financing (No.3) PLC, and Permanent Financing
(No.4) PLC.
Redemptions relate to a reduction in the beneficial interest in the
mortgage portfolio resulting from repayment of amounts from the Trust.
Mortgages in the pool have to fulfil certain criteria. If they fail to do
so they are removed from the pool and the pool is replenished. When the mortgage
pool was created there were no accounts in arrears and therefore no specific
loss provision was required. There were no specific provisions held at 30 June
2004. A general provision, to cover advances that are latently bad or doubtful,
but not yet identified as such was allocated to the pool. A premium was also
paid for the mortgages in a like amount.
9. DEBTORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
30 JUNE 31 DECEMBER
2004 2003
(POUND) (POUND)
------------------- --------------------
Beneficial interest in mortgage portfolio (note 8)..................... 1,461,795,824 1,291,381,221
Amount owed from Group undertaking..................................... 1 1
Deferred expenditure................................................... 20,063,725 12,545,356
Swap Interest receivable............................................... 2,018,865 --
Other debtors.......................................................... 8,428 8,429
------------------- --------------------
1,483,886,843 1,303,935,007
=================== ====================
Deferred expenditure includes (pound)5,842,110 relating to underwriting
expenses paid during the period (31 December 2003: (pound)7,680,920).
354
10. DEBTORS - AMOUNTS FALLING DUE AFTER ONE YEAR
30 JUNE 31 DECEMBER
2004 2003
(POUND) (POUND)
------------------ -------------------
Beneficial interest in mortgage portfolio (note 8)....................... 16,172,750,532 10,900,188,280
================== ===================
11. CASH AT BANK AND IN HAND
The Company holds deposits at banks that pay interest based on LIBOR.
The deposit account held by Permanent Funding (No.1) Limited is placed
with the provider of a guaranteed investment contract. Withdrawals from this
account are restricted by detailed priority of payments set out in the
transaction agreements. The Company earns a variable rate of interest of 0.25
percent per annum below LIBOR for three-month sterling deposits, which is
recorded as interest income in the profit and loss account. In addition the
Company has included its share of the cash balances within the Trust's
guaranteed investment contract in cash at bank and hand, reflecting the
Company's beneficial interest in this contract.
12. CREDITORS AMOUNTS FALLING DUE WITHIN ONE YEAR
30 JUNE 31 DECEMBER
2004 2003
(POUND) (POUND)
------------------ -------------------
Interest payable to Group undertaking.................................... 50,519,801 39,761,600
Swap interest payable.................................................... -- 911,400
Interest payable on start-up loans....................................... 602,097 483,052
Fees payable to Halifax plc.............................................. 1,533,105 343,714
Amount owed to Trust..................................................... 1,255,970,974 1,231,885,583
Loans from Group undertakings............................................ 1,462,359,000 1,291,812,734
Accruals................................................................. 41,904 69,916
Taxation................................................................. 24,065 11,549
------------------ -------------------
2,771,050,946 2,565,279,548
================== ===================
The intercompany loan agreement provides that the Financing Companies will
lend amounts in sterling equivalent to the proceeds of issuer notes. The final
repayment date of each issuer term advance will be the final maturity date of
the corresponding class of issuer notes.
The amount owed to Trustee represents cash movements on the guaranteed
investment contract account, which arise as part of the cash distribution
governed by the transaction documents. This amount will remain a liability to
the Trustee until such time as the loan notes are redeemed.
Interest payable on the loans from Group undertakings is based on LIBOR.
Amounts due within one year are paid when cash is available after other
commitments have been fulfilled, in order of priority.
On 14 June 2002 an agreement was entered into with JP Morgan Chase for the
provision of a liquidity facility for the Company. The facility is in place to
allow the Company to meet its obligations should there be a shortfall in the
revenue or principal received from the beneficial interest in the mortgage
portfolio. At the balance sheet date, the limit on this facility was
(pound)150,000,000 (2003: (pound)150,000,000).
355
The agreement is updated each time the Company is party to a further term
advance in conjunction with a note issuance. A fee is charged on the undrawn
balance, currently set at 0.08% per annum. This fee would increase to 0.38% per
annum on any drawn balance. No amounts have been drawn under the facility since
inception.
13. CREDITORS AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
30 JUNE 31 DECEMBER
2004 2003
(POUND) (POUND)
------------------ -------------------
Loans from Group undertakings............................................ 16,178,981,291 10,903,830,557
Start-up loans........................................................... 234,084,688 167,429,575
Deferred consideration................................................... 88,924,179 51,022,734
------------------ -------------------
16,501,990,158 11,122,282,866
================== ===================
The amounts are repayable as follows:
30 JUNE 31 DECEMBER
2004 2003
(POUND) (POUND)
------------------ -------------------
Greater than 1 year less than 5 years.................................... 4,136,104,050 2,365,929,542
Greater than 5 years..................................................... 12,365,886,108 8,756,353,324
------------------ -------------------
16,501,990,158 11,122,282,866
================== ===================
Interest payable on the loans from Group undertakings and the start-up
loan is based on LIBOR.
Amounts due over 5 years are paid when cash is available after other
commitments have been fulfilled, in order of priority.
Amounts due to Group undertakings relate to obligations to pay interest
and principal amounts due to the issuers under the intercompany loan agreement.
The Company's obligations under the intercompany loan agreement are secured
under a deed of charge by the Company's beneficial interest in the mortgage
portfolio held by the Trust.
14. CALLED UP SHARE CAPITAL
30 JUNE 31 DECEMBER
2004 2003
(POUND) (POUND)
----------------- -----------------
AUTHORISED
100 ordinary shares of (pound)1 each........................................ 100 100
================= =================
ISSUED AND OUTSTANDING SHARE CAPITAL
1 ordinary share of (pound)1................................................ 1 1
================= =================
356
15. RECONCILIATION OF MOVEMENTS IN SHAREHOLDER'S FUNDS
6 MONTHS TO YEAR ENDED
30 JUNE 31 DECEMBER
2004 2003
(POUND) (POUND)
----------------- -----------------
Opening shareholder's funds................................................ 56,193 8,231
Share capital called up in the period...................................... -- --
Transfer to reserves....................................................... 53,359 47,962
----------------- -----------------
Closing shareholder's funds................................................ 109,552 56,193
================= =================
16. RECONCILIATION OF PROFIT ON ORDINARY ACTIVITIES TO NET CASH INFLOW FROM
OPERATING ACTIVITIES
6 MONTHS TO 6 MONTHS TO
30 JUNE 30 JUNE
2004 2003
(POUND) (POUND)
------------------ ------------------
Operating profit....................................................... 65,875 18,653
Interest receivable.................................................... (401,118,454) (185,438,419)
Interest payable....................................................... 349,276,185 138,420,279
Movement in loss provision............................................. 9,258,001 --
Movement in premium.................................................... (6,537,856) --
Increase in debtors.................................................... (7,518,368) (6,245,793)
Increase in creditors.................................................. 63,148,214 144,168,696
------------------ ------------------
Net cash inflow from operating activities.............................. 6,573,597 90,923,416
================== ==================
17. RELATED PARTY TRANSACTIONS
Under FRS 8 "Related Party Disclosures", the Company is exempt from the
requirements to disclose transactions with other companies within the Permanent
Holdings Limited group. However the following information is provided to
facilitate further understanding of the Company's trading relationships.
The Company is a special purpose company controlled by its Board of
Directors, which comprises three directors. Two of the Company's three directors
are provided by Structured Finance Management Limited, the third director is an
employee of HBOS plc (the parent undertaking of Halifax plc, the mortgage loan
administrator). The Company pays a corporate services fee to Structured Finance
Management Limited in connection with its provision of corporate management
services. The fees payable to these directors for providing their services are
immaterial in the context of these financial statements. During the period, the
Company undertook the following transactions (set out below) with companies
within the Permanent Holdings Limited group, the Trust and Halifax plc, the
mortgage loan administrator.
The Company pays cash management and mortgage loan administration
servicing fees to Halifax plc in connection with its provision of services
defined under the securitisation agreements.
Halifax plc has provided the Company with start-up loans and is the
counterparty to interest rate swap agreements, on which there is an associated
interest benefit.
357
17. RELATED PARTY TRANSACTIONS - (CONTINUED)
PERMANENT HBOS PLC
PERMANENT MORTGAGES PERMANENT PERMANENT PERMANENT PERMANENT AND
HOLDINGS TRUSTEE FINANCING FINANCING FINANCING FINANCING SUBSIDIARY
2004 LTD LIMITED (NO.1) PLC (NO.2) PLC (NO.3) PLC (NO.4) PLC UNDERTAKINGS
6 MONTHS TO 30 JUNE 2004 (POUND) (POUND) (POUND) (POUND) (POUND) (POUND) (POUND)
----------- ------------- ------------- ------------- ------------- ------------- -------------
INTEREST RECEIVABLE AND
SIMILAR INCOME
Income from beneficial
interest in mortgage
portfolio 379,854,598
Bank interest............ 8,035,776 12,890,960
Swap interest............ 337,120
INTEREST PAYABLE AND
SIMILAR CHARGES
Interest on loans from
Group undertaking.... 64,979,011 96,692,910 98,320,927 84,709,179
Start-up loan interest... 4,574,158
OPERATING EXPENSES
Deferred consideration... 37,901,445
Administration and cash
management services.. 1,061 8,710,653
AS AT 30 JUNE 2004
CURRENT ASSETS
Debtors - amounts falling
due within one year.. 1
Beneficial interest in
mortgage portfolio... 1,461,795,824
Cash at bank and in hand. 695,729,731 920,783,550
Swap interest receivable. 2,018,865
DEBTORS - AMOUNTS FALLING
DUE AFTER MORE THAN
ONE YEAR
Beneficial interest in
mortgage portfolio... 16,172,750,532
CREDITORS AMOUNTS FALLING
DUE WITHIN ONE YEAR
Interest payable to Group
undertakings......... 8,399,031 11,819,580 12,832,466 17,468,724
Start-up loan interest... 602,097
Fees payable to Halifax
plc...................... 1,533,105
Amount owed to Trust..... 1,255,970,974
Loans from Group
undertakings............. 658,500,000 803,859,000
CREDITORS AMOUNTS FALLING
DUE AFTER MORE THAN
ONE YEAR
Loans from Group
undertakings............. 2,933,628,29 14,085,637,000 3,841,500,000 5,318,216,000
Start-up loans........... 234,084,688
Deferred consideration... 88,924,179
358
17. RELATED PARTY TRANSACTIONS - (CONTINUED)
PERMANENT
MORTGAGES PERMANENT PERMANENT PERMANENT HBOS PLC AND
PERMANENT TRUSTEE FINANCING FINANCING FINANCING SUBSIDIARY
2003 HOLDINGS LTD LIMITED (NO.1) PLC (NO.2) PLC (NO.3) PLC UNDERTAKINGS
6 MONTHS TO 30 JUNE 2003
------------- ------------- ------------- ------------- ------------- --------------
INTEREST RECEIVABLE AND SIMILAR
INCOME
Income from beneficial interest in
mortgage portfolio........... 173,329,871
Bank interest.................... 3,297,983 9,901,452
INTEREST PAYABLE AND SIMILAR
CHARGES
Interest on loans from Group
undertaking...................... 67,322,595 59,153,590
Swap interest.................... 20,504,541
Start-up loan interest........... 2,174,129
OPERATING EXPENSES
Deferred consideration........... 33,924,889
AS AT 31 DECEMBER 2003
CURRENT ASSETS
Debtors - amounts falling due
within one year.............. 1
Beneficial interest in mortgage
portfolio........................ 1,291,381,221
Cash at bank and in hand......... 657,389,778 826,105,542
DEBTORS - AMOUNTS FALLING DUE
AFTER MORE THAN ONE YEAR
Beneficial interest in mortgage
portfolio........................ 10,900,188,280
CREDITORS AMOUNTS FALLING DUE
WITHIN ONE YEAR
Interest payable to Group
undertakings..................... 7,466,194 12,164,160 20,131,246
Swap interest payable............ 911,400
Start-up loan interest........... 483,052
Fees payable to Halifax plc ..... 343,714
Amount owed to Trust ............ 1,231,885,583
Loans from Group undertakings.... 633,312,734 658,500,000
CREDITORS AMOUNTS FALLING DUE
AFTER MORE THAN ONE YEAR
Loans from Group undertakings.... 2,933,628,291 4,128,702,266 3,841,500,000
Start-up loans................... 167,429,575
Deferred consideration........... 51,022,734
18. ULTIMATE PARENT UNDERTAKING
The Company's immediate parent undertaking is Permanent Holdings Limited,
a company registered in England and Wales. Copies of the consolidated accounts
of Permanent Holdings Limited may be obtained from The Company Secretary at
Blackwell House, Guildhall Yard, London, EC2V 5AE.
The ultimate parent undertaking is SFM Corporate Services Limited.
The operations, accounting and financial reporting functions of the
Company are performed by Halifax plc. Copies of the accounts of Halifax plc may
be obtained from The Mound, Edinburgh, EH1 1YZ.
19. SUBSEQUENT EVENT
On 22 July 2004, the Company increased its beneficial interests in the
mortgage portfolio by (pound)3,956,000,000 and recogniseD A corresponding
increase in loans to group undertakings for the same amount as a result of an
additional investment in the mortgage portfolio held in trust by Permanent
Mortgages Trustee Limited.
359
20. SUPPLEMENTARY US GAAP INFORMATION
(A) SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK AND US GAAP
U.K. GAAP U.S. GAAP DERIVATIVES
DERIVATIVES DERIVATIVES
Under UK GAAP where interest rate derivatives are Financial Accounting Standards Board SFAS No 133,
deemed to be effective economic hedges the underlying "Accounting for Derivative Instruments and Hedging
assets and liabilities are recorded in the balance Activities" (SFAS No. 133) as amended by SFAS No. 138,
sheet at cost (or net realisable value if lower) and "Accounting for Certain Derivative Instruments and
interest is recognised on an accruals basis. Changes in Certain Hedging Activities, an amendment of SFAS No.
the fair value of instruments used as hedges are not 133" and SFAS No. 149, "Amendment of Statement 133 on
recognised in the financial statements until the hedged Derivative Instruments and Hedging Activities ",
position matures. establishes accounting and reporting standards for
derivative financial instruments, including certain
derivatives used for hedging activities and derivatives
embedded in other contracts. SFAS No. 133 requires all
derivatives to be recognised on the balance sheet at fair
value. The recognition of the changes in the fair
value of a derivative depends upon its intended use.
Derivatives that do hedging treatment under SFAS No. 133
must be adjusted to fair value through earnings. For fair
value hedges that qualify under SFAS No 133, the changes in
fair values of the derivatives will be recognised in
earnings together with the change in fair value of the
hedged item attributable to the risk being hedged.
For cash flow hedges that qualify under SFAS No. 133, the
changes in the fair value of the derivatives will be
recognised in other comprehensive income until the hedged item
affects earnings. For all hedging activities, the
ineffective portion change in fair value will be immediately
recognised in earnings. The Company has adopted SFAS No.
133 with effect from inception.
Under SFAS No. 133 there is a requirement for
contemporaneous hedge documentation before it is possible to
qualify for hedging treatment. In the absence of such
documentation it is necessary to record changes in the fair
value of the derivatives in the income statement
(with the associated asset or liability being reflected in
other assets or liabilities in the balance sheet). As
such documentation is not in place, the interest rate swaps
do not
360
U.K. GAAP U.S. GAAP
DERIVATIVES DERIVATIVES
qualify as hedges for US GAAP.
BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO
Under UK GAAP an initial loan premium was Under US GAAP, the acquisitions of beneficial interests
recognised on acquisition of the beneficial in the mortgage portfolio by the Company are considered
interest in the mortgage portfolio, representing collateralised financing transactions, whereby the
the difference between the principal value of Company has, in effect, granted non-recourse loans to
the beneficial interest in the mortgage portfolio Halifax plc.
less an adjustment to take account of credit losses
inherent in the portfolio at the date of acquisition,
and the fair value of this asset. The interest receivable on the non-recourse loans is
determined by the securitisation agreements and is
calculated with reference to the interest earned on the
beneficial interest in the mortgage portfolio less the
residual interest due to Halifax plc. Accordingly the
interest receivable on these non-recourse loans would
be disclosed within a US GAAP income statement at an
amount equivalent to the net of 'interest receivable
and similar income: Income from beneficial interest in
mortgage portfolio' and 'deferred consideration' under
UK GAAP (2004: (pound)341,953,153, 6 months to 30 June 2003:
(pound)139,404,972).
The non-recourse loans have been initially accounted for at
cost and are subject to ongoing impairment reviews. The criteria
for recognising loan loss allowances, as set out in SFAS 114
"Accounting by Creditors for Impairment of a Loan" has been applied
to these non-recourse loans and currently the directors
consider that no impairment exists.
The directors reconsidered, in the second half of 2003, the
appropriate US GAAP accounting for the acquisitions of beneficial
interests in the mortgage portfolio by the Company. Previously
these acquisitions were treated as a sale from Halifax
plc's perspective in accordance with SFAS 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" and accordingly the Company recognised
the acquisitions of beneficial interests in the mortgage
portfolio on its balance sheet. Where necessary comparative
30 June 2003 amounts have been reclassified to match
the presentation adopted at 31 December 2003 and 30 June 2004.
361
CASH FLOW CASH FLOW
Under UK GAAP, cash flows are presented for operating Under US GAAP, cash flows are reported as operating,
activities, returns on investment and servicing of investing and financing activities. Cash flows from
finance, taxation paid, capital expenditure, taxation and returns on investment and servicing of
acquisitions, dividends paid and financing finance would, with the exception of ordinary dividends
activities. Under UK GAAP, cash includes cash in hand paid, be included as operating activities. The payment
and cash on deposit, net of bank overdrafts. of dividends would be included under financing activities.
Cash and cash equivalents would include cash and
short-term investments with original maturities
of three months or less. However, the Company's beneficial
interest in the cash balances within the Trust (and the
associated liability to the Trust) are not recognised on the
US GAAP balance sheet (30 June 2004: (pound)695,729,731,
31 December 2003: (pound)657,389,778).
LEGALLY RESTRICTED CASH LEGALLY RESTRICTED CASH
Under UK GAAP there is no concept of restricted cash Under US GAAP where cash can only be used to meet
and all cash balances are disclosed as "cash at bank" certain specific liabilities and is not available to be used
on the face of the balance sheet. with discretion, it is disclosed as "Restricted Cash" on the
face of the Balance Sheet. All of the Company's
cash would be disclosed as Restricted Cash under
US GAAP as there are clearly defined restrictions on the
use of such cash.
DEFERRED TAX DEFERRED TAX
Deferred tax is recognised, without discounting, in As provided by SFAS No. 109 "Accounting for Income
respect of all timing differences between the treatment Taxes ", deferred tax liabilities and assets are
of certain items for taxation and accounting purposes recognised in respect of all temporary differences. A
which have arisen but not reversed by the balance sheet valuation allowance is raised against any deferred tax
date, except as otherwise required by FRS 19. Deferred asset where it is more likely than not that the asset,
tax assets are only recognised when it is more likely or part thereof, will not be realised.
than not that the asset will be recoverable in the
foreseeable future out of suitable taxable profits from
which the timing differences and tax losses can be
deducted.
362
(B) UK TO US GAAP RECONCILIATION
The following table summarises the adjustments to the profit attributable
to ordinary shareholders and shareholders' funds that would result from the
application of US GAAP instead of UK GAAP where applicable:
NET INCOME
6 MONTHS TO 6 MONTHS TO
30 JUNE 30 JUNE
2004 2003
NOTE (POUND) (POUND)
----- ------------ ------------
Profit attributable to shareholder (UK GAAP) ............................ 53,359 15,109
Reversal of adjustment to loan loss reserve ............................. (ii) (413,940) --
Reversal of amortisation of premium on beneficial interest in mortgage
portfolio ........................................................... (ii) 3,134,085 --
Unrealised gain/(loss) on derivatives ................................... (iii) 48,984,136 (33,148,732)
Deferred taxation on reconciling items at 19%, net of valuation allowance (iv) (9,823,813) --
------------ ------------
Total US adjustments (net) .............................................. 41,880,468 (33,148,732)
------------ ------------
Net income/(loss) attributable to shareholder (US GAAP) ................. 41,933,827 (33,133,623)
============ ============
SHAREHOLDER'S FUNDS
30 JUNE 31 DECEMBER
2004 2003
NOTE (POUND) (POUND)
----- ------------ --------------
Shareholder's funds (UK GAAP) ....................................... 109,552 56,193
Adjustment to loan loss reserve ..................................... (ii) 31,411,000 22,152,999
Adjustment to premium on beneficial interest in mortgage portfolio .. (ii) (24,617,065) (18,079,209)
Unrealised gain/(loss) on derivatives ............................... (iii) 46,986,607 (1,997,529)
Deferred tax, net of valuation allowance ............................ (iv) (10,218,303) (394,490)
------------ --------------
Total US GAAP adjustment (net) ...................................... 43,562,239 1,681,771
------------ --------------
Shareholder's equity (US GAAP) ...................................... 43,671,791 1,737,964
============ ==============
The aggregate effect of the disclosed US GAAP adjustments (including those
adjustments in respect of cash balances within the Trust) would result in a
decrease in total assets and total liabilities (including shareholder's equity)
of (pound)688,857,147 at 30 JUNE 2004 (31 December 2003: (pound)652,660,465)
from those amounts stated under UK GAAP. Total assets and total liabilities
(including shareholder's equity) on a US GAAP basis would be
(pound)18,584,293,509 and ((pound)18,584,293,509) respectively at 30 June 2004
(31 DECEMber 2003: (pound)13,034,958,142 and ((pound)13,034,958,142)
respectively).
363
C) CASH FLOW STATEMENT
Set out below for illustrative purposes, are summary cash flows under US
GAAP:
RESTATED
30 JUNE 2004 30 JUNE 2003
(POUND) (POUND)
-------------- --------------
Cash flows from operating activities:
Net income /(loss) after tax............................................... 41,933,827 (33,133,623)
-------------- --------------
Increase in accrued interest receivable.................................... (2,018,865) (1,090,887)
Increase in other assets................................................... (7,518,368) (5,154,906)
Increase in accrued interest payable....................................... 9,965,846) 10,734,577
(Decrease) increase / in other liabilities................................. (14,339,545) 50,772,885
-------------- --------------
Adjustments to reconcile net income to cash provided by operating activities: (13,910,932) 55,261,669
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 28,022,895 22,128,046
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES...................................... (5,445,697,000) (4,252,400,269)
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. 5,512,352,113 4,307,698,590
-------------- --------------
CHANGE IN CASH AND CASH EQUIVALENTS........................................ 94,678,008 77,426,367
Cash and cash equivalents at the beginning of period -- restricted cash..... 826,105,542 90,254,500
-------------- --------------
Cash and cash equivalents at the end of period -- restricted cash........... 920,783,550 167,680,867
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for taxation................................... -- --
Cash paid during the period for interest................................... 299,836,032 127,567,906
============== ==============
(I) RESTATEMENT OF JUNE 2003 US GAAP CASH FLOW INFORMATION
The directors have reconsidered the US GAAP treatment of cash balances
presented under UK GAAP that represent the Company's beneficial interest in the
Trust's guaranteed investment contracts. An amount of (pound)268,511,124
previously included in restricted CASH under US GAAP in respect of such
balances, and a corresponding creditor of (pound)268,511,124 have been removed
from the Company's US GAAP balance sheet at 30 June 2003 as the directors no
longer consider that these amounts qualify as assets or liabilities of the
Company under US GAAP. This adjustment has no effect on previously reported net
income or shareholder's equity under US GAAP but has the effect of reducing both
previously reported US GAAP net cash provided by operating activities for the
period ended 30 June 2003 and restricted cash and cash equivalents held at 30
June 2003 by (pound)268,511,124.
(II) BENEFICIAL INTEREST IN MORTGAGE PORTFOLIO NON-RECOURSE LOAN ADJUSTMENT
Under UK GAAP, the beneficial interest in the mortgage portfolio takes
account of an adjustment for
364
credit losses inherent in the portfolio. Under US GAAP, this interest is treated
as non-recourse loans accounted for at cost and subject to ongoing impairment
reviews. The criteria for recognising loan loss allowances, as set out in SFAS
114 "Accounting by Creditors forImpairment of a Loan" has been applied to these
non-recourse loans and currently the directors consider that no impairment
exists.
No premium is recognised on acquisition of the non-recourse loans under US
GAAP. Accordingly, the UK to US GAAP reconciliation includes adjustments to the
recognition of loan loss reserves and acquisition premiums to restate on a US
GAAP basis.
(III) UNREALISED GAIN / LOSS ON DERIVATIVES
The income received by the Company on its non-recourse loans is based in
part on the variable and fixed rates of interest charged by Halifax plc on the
related portfolio of mortgages held in trust by Permanent Mortgages Trustee
Limited. The Company has entered into interest rate swaps to convert this income
into a LIBOR based cash flow to match the interest payable on the loan to the
Financing Companies. These swaps are amortising swaps with a maximum life of 40
years, in line with the underlying mortgages - see note 20(a) - Derivatives.
(IV) TAXATION
30 JUNE 31 DECEMBER
2004 2003
(POUND) (POUND)
------------ ------------
DEFERRED TAX ASSETS:
Relating to unrealised loss on derivatives...................................... -- 379,531
Relating to loan loss reserves.................................................. 78,649 275,992
------------ ------------
Deferred tax asset.............................................................. 78,649 655,523
------------ ------------
DEFERRED TAX LIABILITIES:
Relating to unrealised gain on derivatives...................................... (9,306,986) --
Relating to the premium arising on the beneficial interest in the mortgage
portfolio....................................................................... (595,476) (1,050,013)
------------ ------------
Deferred tax liability.......................................................... (9,902,462) (1,050,013)
------------ ------------
Net deferred tax liability...................................................... (9,823,813) (394,490)
============ ============
The deferred tax liabilities at 30 June 2004 and 31 December 2003 arise
due to differences between the US GAAP carrying value and UK tax basis of
derivatives, loan loss reserves and the premium arising on acquisition of the
beneficial interest in the mortgage portfolio. The deferred tax liability is
recognised at a rate of 19%, being the UK small companies corporation tax rate.
The directors consider that the reversal of these temporary differences will
result in a net tax liability, which will crystallise at the UK small companies
corporation tax rate.
(V) SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Credit risk exists in relation to a number of counterparties of the
Company, whereby economic or other conditions may lead these counterparties to
default on accounts owed to the Company or breach existing contractual
relationships.
Key concentrations of credit risk to the company are in respect of the
beneficial interest in the
365
mortgage portfolio (treated as non-recourse loans to Halifax plc under US GAAP)
and, more generally, to HBOS plc (the parent of Halifax plc) in its role as the
mortgage loan administrator, cash manager (including the provision of guaranteed
investment contracts to the Company and the Trust) and interest rate swap
provider.
The mortgage loans in the Trust are secured on residential properties in
the UK and have a weighted average loan-to-value ratio of 66% (31 December 2003:
67%). For the purposes of determining the UK GAAP provisions for bad and
doubtful debts each individual mortgage loan in the Trust is considered for
impairment, whereas for US GAAP purposes the mortgage loans are considered in
the aggregate in determining whether the loans to Halifax plc are impaired. The
directors consider that the Company's share of mortgage loans in the Trust will
be sufficient to recover the full amount of this loan.
To the extent that these mortgage loans do not provide sufficient funds to
recover the Company's investment in the mortgage portfolio, the Company has no
claim on the assets of Halifax plc. The Company's maximum gross exposure to
credit loss is therefore equal to the fair value of its investment in the
mortgage portfolio (subject to mitigation resulting from reduction in or
elimination of any obligation to pay deferred consideration to Halifax plc).
In respect of other amounts owed by Halifax plc, the directors consider
that, as Halifax plc is a registered UK Bank (and accordingly subject to
supervision by the Financial Services Authority), the risk of default is
minimal. The interest rate swaps have been provided on the basis of an
International Swap Dealers Association agreement and, as a result, the Company
is allowed, in the event of default, to close out and offset its rights and
obligations under each swap. Under the agreement, Halifax plc is not required to
post collateral when a positive fair value arises on the swap agreement. The
Company's maximum gross exposure to credit loss is therefore equal to the fair
value of all amounts due from Halifax plc (including swaps with a positive fair
value but subject to mitigation resulting from the Company's ability to offset
the fair value of swaps with a negative fair value in the event of default).
(VI) FASB INTERPRETATION NO. 45 "GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS"
This interpretation ("FIN 45") elaborates on the disclosures to be made by
a guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognise, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee, except that
guarantees issued between corporations under common control are exempt from this
provision.
Under the Financing Companies intercompany loan agreements, the Company is
obliged to make a termination payment to any of the Financing Companies should
one of their currency / interest rate swaps terminate, provided that the Company
has sufficient resources to meet all its other obligations in priority. The
amount of the termination payment will be based upon the market value of that
swap on the date of such termination.
As the termination payment is based upon market value, the maximum amount
of potential future payments under this guarantee is unlimited. Whilst this
valuation would depend on future interest and foreign exchange rates as
applicable, and so cannot be accurately estimated, it is likely that any cost
would be substantially less than the principal amounts of the swaps of,
(pound)17,641,340,291 (31 December 2003: (pound)12,195,643,291).
No liability for this contingent guarantee has been recognised in the
financial statements as the likelihood of the Company having to make any
payments under the guarantee is remote. Any payments made by the Company to the
Financing Companies under this guarantee would be made without recourse.
366
(VII) FASB INTERPRETATION NO. 46R "CONSOLIDATION OF VARIABLE INTEREST ENTITIES,
AN INTERPRETATION OF ARB NO. 51"
This interpretation ("FIN 46R") replaces a preceding interpretation No. 46 with
the same title and clarifies the application of Accounting Research Bulletin No.
51 "Consolidated Financial Statements" to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional financial support. Such entities, as further defined in this
interpretation, are referred to as variable interest entities.
Under the interpretation, an enterprise is required to consolidate a
variable interest entity if it has a variable interest that will absorb the
majority of an entity's expected losses or expected residual returns ("the
primary beneficiary"). This revised interpretation requires the Company to apply
the consolidation provisions therein to variable interest entity for which it is
determined to be the primary beneficiary.
At 30 June 2004 the Company has identified that the Trust and the
Financing Companies meet the definition of FIN 46R as variable interest
entities. The Company's involvement with the Trust and the Financing Companies
is described in Note 1 and, after consideration of the involvement with these
entities, we conclude that the Company does not meet the definition of a primary
beneficiary for these entities.
Information is disclosed on these identified variable interest entities.
The nature, size and activities of the Trust, its date of involvement with the
Company and its potential exposure as a result of the Company's involvement with
the Trust and financing companies are described in Note 1 `General information'
and Notes 20 (v), (vi) and (viii).
(VIII) LONG TERM DEBT
The Company's obligations under the intercompany loan agreements (the
"term advances") with the Financing Companies are secured under a deed of charge
by the Company's beneficial interest in the mortgage portfolio (treated as
non-recourse loans to Halifax plc under US GAAP) held in Trust.
The Company's ability to pay interest and principal under each
intercompany loan is dependent upon the Company receiving from the Trust payment
of interest and principal under the beneficial interest in the mortgage
portfolio.
The term advances are payable in no order of priority between the
Financing Companies but in proportion to the respective amounts due. Payments on
the term advances are governed by a detailed priority of payments as set out in
the transaction agreements. Payment of interest and principal due and payable is
paid-down first, on the term AAA advances; second, on the term AA advances;
third, on the term A advances; and fourth, on the term BBB advances.
Neither the Company nor the Trust has the ability to sell or pledge the
assets securing the term advances except under the conditions set out in the
legal documentation surrounding the securitisation transactions.
367
A) TERM ADVANCES MADE BY PERMANENT FINANCING (NO. 1) PLC
MARGIN OVER 30 JUNE, 31 DECEMBER,
LIBOR PA 2004 2003
---------- ------------------- -------------------
Series 1 Term AAA Advance due June 2003...................... -0.04030% -- --
Series 1 Term AA Advance due June 2042....................... 0.28760% -- --
Series 1 Term BBB Advance due June 2042...................... 1.13060% -- --
Series 2 Term AAA Advance due June 2007...................... 0.16834% (pound)509,614,731 (pound)509,614,731
Series 2 Term AA Advance due June 2042....................... 0.29420% (pound)17,666,644 (pound)17,666,644
Series 2 Term BBB Advance due June 2042...................... 1.26850% (pound)17,666,644 (pound)17,666,644
Series 3 Term AAA Advance due December 2007.................. 0.12810% (pound)748,299,320 (pound)748,299,320
Series 3 Term AA Advance due June 2042....................... 0.33100% (pound)26,190,476 (pound)26,190,476
Series 3 Term BBB Advance due June 2042...................... 1.27940% (pound)26,190,476 (pound)26,190,476
Series 4A1 Term AAA Advance due June 2009.................... 0.22000% (pound)484,000,000 (pound)484,000,000
Series 4A2 Term AAA Advance due June 2042.................... 0.18000% (pound)1,000,000,000 (pound)1,000,000,000
Series 4 Term AA Advance due June 2042....................... 0.30000% (pound)52,000,000 (pound)52,000,000
Series 4 Term BBB Advance due June 2042...................... 1.20000% (pound)52,000,000 (pound)52,000,000
------------------- -------------------
Total........................................................ (pound)2,933,628,291 (pound)2,933,628,291
=================== ===================
The term advances are subject to variable rates of interest. Interest is
payable on the term advances based on sterling 3 month LIBOR. At the balance
sheet date, the sterling 3 month LIBOR rate in force was 4.76625 pa (31 December
2003 : 4.0125 pa). The next reprice date after the balance sheet date is 10
September 2004.
B) TERM ADVANCES MADE BY PERMANENT FINANCING (NO. 2) PLC
MARGIN OVER 30 JUNE, 31 DECEMBER,
LIBOR PA 2004 2003
---------- ------------------- -------------------
Series 1 Term AAA Advance due March 2004................... -0.04930% -- (pound)633,312,000
Series 1 Term AA Advance due June 2042..................... 0.25050% -- (pound)21,533,000
Series 1 Term BBB Advance due June 2042.................... 1.36080% -- (pound)21,533,000
Series 2 Term AAA Advance due September 2007............... 0.15830% (pound)1,108,016,000 (pound)1,108,016,000
Series 2 Term AA Advance due June 2042..................... 0.35660% (pound)38,622,000 (pound)38,622,000
Series 2 Term BBB Advance due June 2042.................... 1.55060% (pound)38,622,000 (pound)38,622,000
Series 3 Term AAA Advance due December 2032................ 0.23310% (pound)854,375,000 (pound)854,375,000
Series 3 Term AA Advance due June 2042..................... 0.44595% (pound)29,732,000 (pound)29,732,000
Series 3 Term BBB Advance due June 2042.................... 1.55880% (pound)29,732,000 (pound)29,732,000
Series 4 Term AAA Advance due December 2009................ 0.22360% (pound)1,107,250,000 (pound)1,107,250,000
Series 4 Term AA Advance due June 2042..................... 0.48380% (pound)38,644,000 (pound)38,644,000
Series 4 Term BBB Advance due June 2042.................... 1.53690% (pound)38,644,000 (pound)38,644,000
Series 5 Term AAA Advance due June 2042.................... 0.25000% (pound)750,000,000 (pound)750,000,000
Series 5 Term AA Advance due June 2042..................... 0.45000% (pound)26,000,000 (pound)26,000,000
Series 5 Term BBB Advance due June 2042.................... 1.45000% (pound)26,000,000 (pound)26,000,000
------------------- -------------------
Total (pound)4,085,637,000 (pound)4,762,015,000
=================== ===================
The term advances are subject to variable rates of interest. Interest is
payable on the term advances
368
based on sterling 3 month LIBOR. At the balance
sheet date, the sterling 3 month LIBOR rate in force was 4.76625 pa (31 December
2003 : 4.0125 pa). The next reprice date after the balance sheet date is 10
September 2004.
C) TERM ADVANCES MADE BY PERMANENT FINANCING (NO.3) PLC
MARGIN OVER 30 JUNE, 31 DECEMBER,
LIBOR PA 2004 2003
---------- ------------------- -------------------
Series 1 Term AAA Advance due December 2004.................. -0.41000% (pound)658,500,000 (pound)658,500,000
Series 1 Term AA Advance due June 2042....................... 0.20700% (pound)22,900,000 (pound)22,900,000
Series 1 Term BBB Advance due June 2042...................... 1.09000% (pound)22,900,000 (pound)22,900,000
Series 2 Term AAA Advance due September 2010................. 1.28000% (pound)1,018,000,000 (pound)1,018,000,000
Series 2 Term AA Advance due June 2042....................... 0.28500% (pound)35,400,000 (pound)35,400,000
Series 2 Term BBB Advance due June 2042...................... 1.21500% (pound)35,400,000 (pound)35,400,000
Series 3 Term AAA Advance due September 2033................. 0.20613% (pound)898,250,000 (pound)898,250,000
Series 3 Term AA Advance due June 2042....................... 0.41184% (pound)31,200,000 (pound)31,200,000
Series 3 Term BBB Advance due June 2042...................... 1.27224% (pound)31,200,000 (pound)31,200,000
Series 4A1 Term AAA Advance due September 2033............... 0.21200% (pound)482,750,000 (pound)482,750,000
Series 4A2 Term AAA Advance due September 2033............... 0.19000% (pound)750,000,000 (pound)750,000,000
Series 4 Term AA Advance due June 2042....................... 0.43450% (pound)42,850,000 (pound)42,850,000
Series 4 Term BBB Advance due June 2042...................... 1.30400% (pound)42,850,000 (pound)42,850,000
Series 5 Term AAA Advance due June 2042...................... 0.21700% (pound)400,000,000 (pound)400,000,000
Series 5 Term AA Advance due June 2042....................... 0.51022% (pound)13,900,000 (pound)13,900,000
Series 5 Term BBB Advance due June 2042...................... 1.35876% (pound)13,900,000 (pound)13,900,000
------------------- -------------------
Total........................................................ (pound)4,500,000,000 (pound)4,500,000,000
=================== ===================
The term advances are subject to variable rates of interest. Interest is
payable on the term advances based on sterling 3 month LIBOR. At the balance
sheet date, the sterling 3 month LIBOR rate in force was 4.76625 pa (31 December
2003 : 4.0125 pa). The next reprice date after the balance sheet date is 10
September 2004.
369
D) ____ TERM ADVANCES MADE BY PERMANENT FINANCING (NO. 4) PLC
MARGIN OVER 30 JUNE, 31 DECEMBER,
LIBOR PA 2004 2003
---------- ------------------- -------------------
Series 1 Term AAA Advance due March 2005..................... 0.00273% (pound)803,859,000 --
Series 1 Term AA Advance due June 2042....................... 0.21490% (pound)41,855,000 --
Series 1 Term A Advance due June 2042........................ 0.31805% (pound)30,279,000 --
Series 2 Term AAA Advance due March 2009..................... 0.14300% (pound)1,286,174,000 --
Series 2 Term AA Advance due June 2042....................... 0.25900% (pound)53,966,000 --
Series 2 Term A Advance due June 2042........................ 0.41800% (pound)32,101,000 --
Series 2 Term BBB Advance due June 2042...................... 0.83100% (pound)44,052,000 --
Series 3 Term AAA Advance due March 2024..................... 0.22147% (pound)911,040,000 --
Series 3 Term AA Advance due June 2042....................... 0.34054% (pound)40,622,000 --
Series 3 Term A Advance due June 2042........................ 0.49576% (pound)21,651,000 --
Series 3 Term BBB Advance due June 2042...................... 0.96215% (pound)29,690,000 --
Series 4 Term AAA Advance due March 2034..................... 0.21300% (pound)999,751,000 --
Series 4 Term AA Advance due June 2042....................... 0.35200% (pound)56,653,000 --
Series 4 Term A Advance due June 2042........................ 0.53400% (pound)41,657,000 --
Series 5A1 Term AAA Advance due June 2042.................... 0.27695% (pound)499,725,000 --
Series 5A2 Term AAA Advance due June 2042.................... 0.17000% (pound)1,100,000,000 --
Series 5 Term AA Advance due June 2042....................... 0.33000% (pound)43,000,000 --
Series 5 Term A Advance due June 2042........................ 0.50000% (pound)32,000,000 --
Series 5 Term BBB Advance due June 2042...................... 0.90000% (pound)54,000,000 --
------------------- -------------------
Total........................................................ (pound)6,122,075,000 --
=================== ===================
The term advances are subject to variable rates of interest. Interest is
payable on the term advances based on sterling 3 month LIBOR. At the balance
sheet date, the sterling 3 month LIBOR rate in force was 4.76625 pa (31 December
2003 : 4.0125 pa). The next reprice date after the balance sheet date is 10
September 2004.
370
YEARS TO MATURITY FROM 30 JUNE 2004
30 JUNE 31 DECEMBER
2004 2003
-------------------- -------------------
(POUND) (POUND)
Less than 1 year...................................................... 1,462,359,000 1,291,812,000
>1 less than 2 years.................................................. -- --
>2 less than 3 years.................................................. 509,614,731 --
>3 less than 4 years.................................................. 1,856,315,320 --
>4 less than 5 years.................................................. 1,770,174,000 2,365,930,051
6 to 10 years......................................................... 2,125,250,000 3,359,250,000
11 to 15 years........................................................ -- --
16 to 20 years........................................................ 911,040,000 --
21 to 25 years........................................................ -- --
26 to 30 years........................................................ 3,985,126,000 2,985,375,000
31 to 35 years........................................................ -- --
36 to 40 years........................................................ 5,021,461,240 2,193,276,240
------------------- -------------------
17,641,340,291 12,195,643,291
=================== ===================
The table above is based on the stated, fixed maturities. However, it is
envisaged that the term advances will be repaid prior to these dates since
earlier repayment is required to the extent that the underlying mortgages are
prepaid.
(IX) FAIR VALUES OF FINANCIAL INSTRUMENTS
The disclosures in the table below are in accordance with SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments".
Fair values have been estimated using quoted market prices where
applicable. For most of the Company's assets and liabilities ready markets do
not exist and hence, quoted market prices are not available. Appropriate
techniques are therefore used to estimate fair values that take into account the
characteristics of the instruments, including the expected future cashflows,
market interest rates and prices available for similar instruments. The fair
value of other assets and liabilities approximate to cost given their relatively
short maturity.
30 JUNE 2004 30 JUNE 2004 30 JUNE 2004
CARRYING VALUE FAIR VALUE DIFFERENCE
--------------- --------------- ---------------
(POUND) (POUND) (POUND)
NON-TRADING ASSETS
Cash and cash equivalents........................... 1,616,513,281 1,616,513,281 --
Beneficial interest in mortgage portfolio........... 17,634,546,356 17,590,279,893 (44,266,463)
Other assets........................................ 8,428 8,428 --
NON-TRADING LIABILITIES
Intercompany loans.................................. (17,875,424,979) (17,875,424,979) --
Deferred consideration.............................. (88,924,179) (91,644,324) (2,270,145)
Other liabilities................................... (1,308,691,946) (1,308,691,946) --
DERIVATIVES......................................... 2,018,865 49,005,473 46,986,608
=============== =============== ===============
371
31 DECEMBER 31 DECEMBER 31 DECEMBER
2003 2003 2003
CARRYING VALUE FAIR VALUE DIFFERENCE
--------------- --------------- ---------------
(POUND) (POUND) (POUND)
NON-TRADING ASSETS
Cash and cash equivalents........................... 1,483,495,320 1,483,495,320 --
Beneficial interest in mortgage portfolio........... 12,191,569,501 12,197,640,820 6,071,319
Other assets........................................ 8,429 8,429 --
NON-TRADING LIABILITIES
Intercompany loans.................................. (12,363,072,866) (12,363,072,866) --
Deferred consideration.............................. (51,022,734) (55,096,524) (4,073,790)
Other liabilities................................... (1,272,555,414) (1,272,555,414) --
DERIVATIVES......................................... (911,400) (2,908,929) (1,997,529)
=============== =============== ===============
At 30 June 2004, the fair value of the swaps not recognised under UK GAAP
was calculated by discounting the expected future cash flows and was estimated
to be (pound)46,986,607 (31 December 2003: ((pound)1,997,529)). The total
nominal value of the swaps was (pound)17,641.3m.
The Company had no trading assets or liabilities at 30 June 2004 or at 31
December 2003.
372
ISSUER
PERMANENT FINANCING (NO. 7) PLC
Blackwell House
Guildhall Yard
London EC2V 5AE
SERVICER
HALIFAX PLC
Trinity Road
Halifax
West Yorkshire
HX1 2RG
AGENT BANK, PRINCIPAL PAYING AGENT,
REGISTRAR AND TRANSFER AGENT US PAYING AGENT
CITIBANK, N.A. CITIBANK, N.A.
5 Carmelite Street 14th Floor
London EC4Y 0PA 388 Greenwich Street
New York, New York 10013
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 LLP
Woolgate Exchange 25 Basinghall Street One New Change
London EC2V 5HA London EC4M 9QQ
as to Scots law as to Scots law
TODS MURRAY LLP SHEPHERD + WEDDERBURN
66 Queen Street Saltire Court
Edinburgh EH2 4NE 20 Castle Terrace
Edinburgh EH1 2ET
LEGAL ADVISERS TO THE LEGAL ADVISERS TO THE NOTE TRUSTEE
MORTGAGES 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
[o]
[o]
Through and including[o], 2005 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. 7) PLC
$[1,000,000,000] SERIES 1 CLASS A FLOATING RATE ISSUER NOTES DUE [DECEMBER 2005]
$[o] SERIES 1 CLASS B FLOATING RATE ISSUER NOTES DUE [JUNE 2042]
$[o] SERIES 1 CLASS C FLOATING RATE ISSUER NOTES DUE [JUNE 2042]
$[1,000,000,000] SERIES 2 CLASS A FLOATING RATE ISSUER NOTES DUE [MARCH 2012]
$[o] SERIES 2 CLASS B FLOATING RATE ISSUER NOTES DUE [JUNE 2042]
$[o] SERIES 2 CLASS C FLOATING RATE ISSUER NOTES DUE [JUNE 2042]
-----------------------------------------------
PRELIMINARY PROSPECTUS
-----------------------------------------------
ARRANGER
HBOS TREASURY SERVICES PLC
JOINT LEAD UNDERWRITERS FOR THE SERIES 1 CLASS A ISSUER NOTES AND
SERIES 2 CLASS A ISSUER NOTES
[ABN AMRO] [LEHMAN BROTHERS] [MORGAN STANLEY]
CO-UNDERWRITERS FOR THE SERIES 1 CLASS A ISSUER NOTES AND
SERIES 2 CLASS A ISSUER NOTES
[O] [O] [O]
JOINT LEAD UNDERWRITERS FOR THE SERIES 1 CLASS B AND CLASS C ISSUER NOTES
AND SERIES 2 CLASS B AND CLASS C ISSUER NOTES
[O] [O]
Preliminary Prospectus dated[o] February, 2005
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)*), 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............. $[235,400.00]
Fees and expenses of qualification under state securities laws
(including legal fees)........................................ $[*]**
Printing and engraving expenses................................. $[*]**
Legal fees and expenses......................................... $[*]**
Accounting fees and expenses.................................... $[*]**
Trustee's fees and expenses..................................... $[*]**
Rating agency fees.............................................. $[*]**
Miscellaneous................................................... $[*]**
Total........................................................... $[*]**
===============
- --------------------
* All amounts except the SEC registration fee are estimates.
** To be provided by amendment.
ITEM 32. SALES TO SPECIAL PARTIES
Not applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
PERMANENT FINANCING (NO. 7) PLC (THE "ISSUER")
Subject to the provisions of the United Kingdom 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 United Kingdom 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. 7) 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(4)
3.1.1 Memorandum and Articles of Association of Permanent Financing (No. 7) PLC(4)
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(2) and
Form of Loan Confirmation Seventh Issuer Intercompany Loan Agreement(4)
4.2 Form of Amended and Restated Mortgages Trust Deed(4)
4.3 Form of Amended and Restated Mortgage Sale Agreement(4)
4.4 Form of Seventh Issuer Deed of Charge(4)
4.5 Sixth Deed of Accession to Funding 1 Deed of Charge(4)
4.6 Form of Seventh Issuer Trust Deed(4)
4.7 Form of Seventh Issuer Paying Agent and Agent Bank Agreement(4)
4.8 Form of Amended and Restated Cash Management Agreement(3)
4.9 Form of Seventh Issuer Cash Management Agreement(4)
4.10 Form of Amended and Restated Servicing Agreement(4)
4.11 Form of Seventh Issuer Post-Enforcement Call Option Agreement(4)
4.12 Form of Seventh Issuer Bank Account Agreement(4)
5.1 Opinion of Allen & Overy LLP as to validity(4)
8.1 Opinion of Allen & Overy LLP as to US tax matters(4)
8.2 Opinion of Allen & Overy LLP as to UK tax matters(4)
8.3 Opinion of Mourant du Feu & Jeune as to Jersey tax matters(4)
10.1 Form of Amended and Restated Funding 1 Liquidity Facility Agreement(4)
10.2.1 Form of series 1 Class A Dollar Currency Swap Agreement(4)
10.2.2 Form of series 1 Class B Dollar Currency Swap Agreement(4)
10.2.3 Form of series 1 Class C Dollar Currency Swap Agreement(4)
10.2.4 Form of series 2 Class A Dollar Currency Swap Agreement(4)
10.2.5 Form of series 2 Class B Dollar Currency Swap Agreement(4)
10.2.6 Form of series 2 Class C Dollar Currency Swap Agreement(4)
10.3 Form of Amended and Restated Funding 1 Swap Agreement(4)
10.4 Form of Seventh Start-up Loan Agreement(4)
10.5.1 Form of Amended and Restated Master Definitions and Construction Schedule(4)
10.5.2 Form of Seventh Issuer Master Definitions and Construction Schedule(4)
10.6.1 Form of Seventh Issuer Corporate Services Agreement(4)
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)(4)
23.2 Consent of Mourant du Feu & Jeune (included in Exhibit 8.3) (4)
23.3 Consent of auditors(4)
24.1 Power of Attorney (included on signature page)
25.1 Statement of Eligibility of Trustee (Form T-1)(4)
(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) Incorporated by reference from the Form S-11 filed by Permanent Financing
(No. 4) PLC (File No. 333-111850) which became effective on March 1, 2004.
(4) 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 21,
2005.
PERMANENT FINANCING (NO. 7) PLC
By: /s/ Jonathan Keighley
-----------------------------------------
Name: SFM Directors Limited by its
authorized person Jonathan
Keighley 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
By: /s/ David Balai
-----------------------------------------
Name: David Balai
Title: Director
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
David Balai, Gavin Parker and Malcolm Ryan, and each of them severally, his true
and lawful attorneys-in-fact and agents with power of substitution and
resubstitution for and in his name, place and stead, in any and all capacities,
to sign any and all amendments, including post-effective amendments, and
supplements to this registration statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they or he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment thereto has been signed by the following
persons in the capacities and on the dates indicated below.
PERMANENT FINANCING (NO. 7) PLC
SIGNATURE TITLE DATE
- ------------------------------------------------------ ---------------- ------------
By: /s/ Jonathan Keighley
-------------------------------------------------
Name: SFM Directors Limited by its authorized Director 1/21/05
person Jonathan Keighley for and on its
behalf
By: /s/ James Macdonald
-------------------------------------------------
Name: SFM Directors (No. 2) Limited by its Director 1/21/05
authorized person James Macdonald for and on
its behalf
By: /s/ David Balai
-------------------------------------------------
Name: David Balai Director 1/21/05
PERMANENT FUNDING (NO. 1) LIMITED
SIGNATURE TITLE DATE
- ----------------------------------------------------- ---------------- ------------
By: /s/ Jonathan Keighley
-------------------------------------------------
Name: SFM Directors Limited by its authorized person Director 1/21/05
Jonathan Keighley for and on its behalf
By: /s/ James Macdonald
-------------------------------------------------
Name: SFM Directors (No. 2) Limited by its Director 1/21/05
authorized person James Macdonald for and on
its behalf
By: /s/ David Balai
-------------------------------------------------
Name: David Balai Director 1/21/05
PERMANENT MORTGAGES TRUSTEE LIMITED
SIGNATURE TITLE DATE
- ------------------------------------------------------ ---------------- ------------
By: /s/ Michael George Best
-------------------------------------------------
Name: Michael George Best Director 1/21/05
By: /s/ Peter John Richardson
-------------------------------------------------
Name: Peter John Richardson Director 1/21/05
By: /s/ David Balai
-------------------------------------------------
Name: David Balai Director 1/21/05
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
PERMANENT FINANCING (NO. 7) PLC
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Permanent Financing (No.
7) PLC, has signed this registration statement or amendment thereto in New York,
New York on January 21, 2005.
/s/ Donald J. Puglisi
By: -------------------------------------------------
Donald J. Puglisi
Name: -------------------------------------------------
Authorized Representative in the United States
Office: -------------------------------------------------
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 21, 2005.
/s/ Donald J. Puglisi
By: -------------------------------------------------
Donald J. Puglisi
Name: -------------------------------------------------
Authorized Representative in the United States
Office: -------------------------------------------------
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 21, 2005.
/s/ Donald J. Puglisi
By: -------------------------------------------------
Donald J. Puglisi
Name: -------------------------------------------------
Authorized Representative in the United States
Office: -------------------------------------------------