As filed with the Securities and Exchange Commission on August 19, 2005
Registration No. 333-119671
=========================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------------------------------
POST-EFFECTIVE AMENDMENT No. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------------------------
GRANITE MASTER ISSUER PLC
(Exact name of Registrant 1 as specified in its charter)
England and Wales
(State or other jurisdiction of incorporation or organization)
Fifth Floor, 100 Wood Street, London EC2V 7EX, United Kingdom
(011 44 20) 7606 5451
(Address and telephone number of Registrant 1's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8600
(Name, address and telephone number of Registrant 1's agent for service)
GRANITE FINANCE FUNDING 2 LIMITED
(Exact name of Registrant 2 as specified in its charter)
England and Wales
(State or other jurisdiction of incorporation or organization)
Fifth Floor, 100 Wood Street, London EC2V 7EX, United Kingdom
(011 44 20) 7606 5451
(Address and telephone number of Registrant 2's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8600
(Name, address and phone number of Registrant 2's agent for service)
GRANITE FINANCE TRUSTEES LIMITED
(Exact name of Registrant 3 as specified in its charter)
Jersey, Channel Islands
(State or other jurisdiction of incorporation or organization)
22 Grenville Street, St Helier, Jersey JE4 8PX, Channel Islands
(011 44 1534) 609892
(Address and telephone number of Registrant 3's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8600
(Name, address and phone number of Registrant 3's agent for service)
-------------------------------------------------
Copies to:
Phil Robinson Michael Durrer, Esq. Christopher Bernard, Esq.
Northern Rock plc Sidley Austin Brown & Wood Allen & Overy LLP
Northern Rock House Woolgate Exchange One New Change
Gosforth 25 Basinghall Street London EC4M 9QQ
Newcastle upon Tyne NE3 4PL London EC2V 5HA United Kingdom
United Kingdom United Kingdom
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. /_ /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
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, please 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, please check the following box. /_ /
=========================================================
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
Title of securities Amount to be Proposed Proposed Amount of
to be registered registered maximum maximum registration
offering price aggregate fee(2)
per unit(1) offering price(1)
- --------------------------------------------------------------------------------------------------------------------
Mortgage Backed Notes $12,000,000,100 100% $12,000,000,000 $1,520,400
- --------------------------------------------------------------------------------------------------------------------
Global intercompany loan(3) - - - -
- --------------------------------------------------------------------------------------------------------------------
Funding 2 interest in the mortgages trust(3) - - - -
- --------------------------------------------------------------------------------------------------------------------
Total $12,000,000,100 100% $12,000,000,000 $1,520,400
- --------------------------------------------------------------------------------------------------------------------
1 Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act, as amended.
2 The entire registration fee of $1,520,400 has been paid in connection with
the initial filing of this Registration Statement on Form S-3 on October
12, 2004.
3 These items are not being offered directly to investors. Granite Finance
Trustees Limited is the registrant for Granite Finance Funding 2
Limited's interest in the mortgages trust and is holding that interest in
the mortgages trust on behalf of Granite Finance Funding 2 Limited. The
interest of Granite Finance Funding 2 Limited in the mortgages trust will
be the primary source of payment on the global intercompany loan listed.
Granite Finance Funding 2 Limited is the registrant for the global
intercompany loan. The global intercompany loan will be the primary
source of payments on the notes. Granite Master Issuer plc is the
registrant for the notes.
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, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
EXPLANATORY NOTE
This Registration Statement includes (i) a base prospectus and (ii) an
illustrative form of prospectus supplement for use in the offering of each
series of mortgage-backed notes. Appropriate modifications will be made to the
form of prospectus supplement to disclose the specific terms of any particular
series of notes, the specific classes of notes to be offered thereby, and the
terms of the related offering. Each base prospectus used (in either
preliminary or final form) will be accompanied by a prospectus supplement.
Each of the Registrants has filed this Registration Statement on Form S-3 with
the Securities and Exchange Commission staff's permission based in part on the
staff's experience with prior, similar filings and Northern Rock plc's and
Granite Master Issuer plc's undertakings and representations.
PROSPECTUS SUPPLEMENT DATED MAY 23, 2005
(TO PROSPECTUS DATED JANUARY 19, 2005)
GRANITE MASTER ISSUER PLC
ISSUER
$975,000,000 SERIES 2005-2 CLASS A1 NOTES
$800,000,000 SERIES 2005-2 CLASS A4 NOTES
$1,250,000,000 SERIES 2005-2 CLASS A6 NOTES
$90,000,000 SERIES 2005-2 CLASS B1 NOTES
$95,000,000 SERIES 2005-2 CLASS M1 NOTES
$90,000,000 SERIES 2005-2 CLASS C1 NOTES
The offering in respect of this series 2005-2 comprises the following classes
of notes:
INITIAL PRINCIPAL AMOUNT CLASS INTEREST RATE ISSUE PRICE FINAL MATURITY DATE
$975,000,000 Class A1 One-month USD LIBOR + 0.04% p.a. 100% June 2030
$800,000,000 Class A4 Three-month USD LIBOR + 0.08% p.a. 100% December 2054
$1,250,000,000 Class A6 Three-month USD LIBOR + 0.13% p.a. 100% December 2054
$90,000,000 Class B1 Three-month USD LIBOR + 0.14% p.a. 100% December 2054
$95,000,000 Class M1 Three-month USD LIBOR + 0.24% p.a. 100% December 2054
$90,000,000 Class C1 Three-month USD LIBOR + 0.50% p.a. 100% December 2054
The series 2005-2 class A1 notes, series 2005-2 class A4 notes, series 2005-
2 class A6 notes, series 2005-2 class B1 notes, series 2005-2 class M1 notes
and the series 2005-2 class C1 notes (the "OFFERED NOTES") are part of the
series 2005-2 issuance of notes by Granite Master Issuer plc.
YOU SHOULD REVIEW AND CONSIDER THE DISCUSSION UNDER "RISK FACTORS" BEGINNING
ON PAGE 27 OF THE ACCOMPANYING PROSPECTUS BEFORE YOU PURCHASE ANY NOTES.
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the Financial
Services and Markets Act 2000 for the notes to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for such notes to be admitted to trading on the
London Stock Exchange's market for listed securities.
The notes are not insured or guaranteed by any United States, United Kingdom
or any other governmental agency or instrumentality. The notes are obligations
of Granite Master Issuer plc only and are not obligations of any other person
or entity. The primary asset securing the notes is a loan made by Granite
Master Issuer plc to Granite Finance Funding 2 Limited, which in turn is
secured by a beneficial interest in a portfolio of residential mortgage loans
secured by properties located in England and Wales and Scotland.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the offered notes or determined that
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
LEAD UNDERWRITERS
LEHMAN BROTHERS MERRILL LYNCH & CO. UBS INVESTMENT BANK
UNDERWRITERS
BARCLAYS CAPITAL CITIGROUP JPMORGAN MORGAN STANLEY
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PAGE PROSPECTUS SUPPLEMENT PAGE
Summary.......................S-4 Summary of prospectus...........6
US dollar presentation.......S-12 Risk factors...................27
Controlled redemption Defined terms..................55
dates......................S-13 The issuer.....................56
Maturity and repayment Use of proceeds................57
considerations.............S-14 The Northern Rock Group........58
The issuer swap provider.....S-16 Funding 2......................59
Underwriting.................S-17 The mortgages trustee..........60
Legal Matters................S-21 Holdings.......................61
Annex A.......................A-1 GPCH Limited...................62
The cut-off date mortgage Issuance of Notes..............63
portfolio.....................A-1 The Mortgage Loans.............68
Characteristics of the Certain characteristics of
United Kingdom the United Kingdom
residential mortgage residential mortgage
market........................A-9 market.......................91
Annex B.......................B-1 The administrator and the
Annex C.......................C-1 administration agreement.....97
Assignment of the mortgage
loans and related
security....................108
The mortgages trust...........119
The global intercompany
loan agreement..............138
Cashflows.....................143
Credit structure..............168
The swap agreements...........178
Cash management for the
mortgages trustee
and Funding 2...............183
Cash Management for the issuer187
Security for Funding 2's
obligations.................189
Security for the Issuer's
obligations.................194
Description of the trust
deed........................198
The notes.....................200
Description of the US notes...205
Material legal aspects of
the mortgage loans and the
related security............231
Material United Kingdom tax
consequences................237
Material Jersey (Channel
Islands) tax
considerations..............240
ERISA Considerations..........246
Enforcement of foreign
judgments in England
and Wales...................249
United States legal investment
considerations..............250
Legal matters.................251
Underwriting..................252
Reports to noteholders........255
Listing and general
information.................256
Glossary......................259
S-2
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about these offered notes in two separate
documents that progressively provide more detail: this prospectus supplement
and the accompanying prospectus. This prospectus supplement provides the
specific terms of these offered notes. The prospectus provides general
information about each series and class of notes issued by Granite Master
Issuer plc, including information on the mortgages trust and the global
intercompany loan which is essential to understanding how principal of and
interest on the offered notes is expected to be paid. Most of the information
provided in the prospectus does not appear in this prospectus supplement. This
prospectus supplement may supplement disclosure in the accompanying prospectus.
Consequently, you should carefully read both the prospectus and the prospectus
supplement before you purchase any of these offered notes.
If the description of the terms of the offered notes varies between this
prospectus supplement and the prospectus, you should rely on the information in
this prospectus supplement.
In deciding whether to purchase these offered notes you should rely solely
on the information in this prospectus supplement and the accompanying
prospectus. We have not authorized anyone to give you different information
about these offered notes. The information in this prospectus supplement and
the accompanying prospectus is only accurate as of the dates on their
respective covers.
This prospectus supplement may be used to offer and sell these offered notes
only if accompanied by the prospectus.
Neither this prospectus supplement nor the prospectus contains all of the
information included in the registration statement. The registration statement
also includes copies of the various contracts and documents referred to in this
prospectus supplement and the prospectus. You may obtain copies of these
documents for review. See "INCORPORATION BY REFERENCE" and "WHERE YOU CAN FIND
MORE INFORMATION" in the prospectus.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The preceding Table of Contents and the Table of
Contents included in the accompanying prospectus provide the pages on which
these captions are located.
You can find definitions of capitalized terms used in this prospectus
supplement and the accompanying prospectus under the caption "GLOSSARY" in the
accompanying prospectus.
References in this prospectus supplement to "we" or "us" mean the issuer and
references to "you" mean potential investors in the offered notes.
S-3
SUMMARY
This summary does not contain all the information you may need to make an
informed investment decision. You shall need this entire prospectus supplement
and the accompanying prospectus before you purchase any notes.
SECURITIES OFFERED $975,000,000 series 2005-2 class A1 notes,
$800,000,000 series 2005-2 class A4 notes,
$1,250,000,000 series 2005-2 class A6 notes,
$90,000,000 series 2005-2 class B1 notes, $95,000,000
series 2005-2 class M1 notes and $90,000,000 series
2005-2 class C1 notes (collectively, the "OFFERED
NOTES").
The offered notes are part of our series 2005-2
issuance of notes. The offered notes are issued by us
and are solely our obligations. The series 2005-2
notes also includes other sub-classes of class A
notes, class B notes, class M notes and class C notes
which are not being offered hereby. Only the offered
notes are being offered pursuant to the prospectus and
this prospectus supplement.
We expect to issue other series of notes in the future
of various classes. These notes, including additional
class A notes, class B notes, class M notes and class
C notes, may have interest rates, note payment dates,
repayment terms and other characteristics that differ
from the offered notes. You will not receive notice of
any future issuance of notes and will not be asked for
your consent to any such issuance.
NOTE PAYMENT DATES (i) In respect of the series 2005-2 class A1 notes,
each monthly payment date in each year up to and
including the final maturity date; and (ii) in respect
of all other classes of offered notes, the monthly
payment dates falling in February, May, August and
November in each year up to and including the final
maturity date, or following the earlier to occur of
the step-up date (if any) and a pass-through trigger
event, each monthly payment date up to and including
the final maturity date (or, in each case, if such day
is not a business day, the next succeeding business
day).
FIRST NOTE PAYMENT For the series 2005-2 class A1 notes, the note payment
DATE date falling in June 2005.
For all other classes of offered notes, the note
payment date falling in August 2005.
CLOSING DATE May 25, 2005.
INTEREST Interest on the offered notes will be paid on each
note payment date up to and including the final
maturity date.
The offered notes will accrue interest at the annual
rate specified on the cover of this prospectus
supplement up to (but excluding) the note payment date
falling in May 2010 (the "STEP-UP DATE"). From (and
including) the step-up date, the offered notes will
accrue interest at an annual rate equal to: (i) one-
month USD LIBOR + 0.08% in respect of the series 2005-
2 class A1 notes, (ii) three-month USD LIBOR + 0.16%
in respect of the series 2005-2 class A4 notes, (iii)
three-month USD LIBOR + 0.26% in respect of the series
2005-2 class A6 notes, (iv) three-month USD
S-4
LIBOR + 0.28% in respect of the series 2005-2 class B1
notes, (v) three-month USD LIBOR + 0.48% in respect of
the series 2005-2 class M1 notes and three-month USD
LIBOR + 1.00% in respect of the series 2005-2 class C1
notes.
Interest on the offered notes will accrue from May 25,
2005 and will be calculated on the basis of a day
count fraction of actual/360.
On each interest determination date, the rate of
interest payable in respect of each class of offered
notes will be determined by the agent bank on the
following basis:
(a) in respect of the first interest period, (i) for
the series 2005-2 class A1 notes, the linear
interpolation of the arithmetic mean of the offered
quotations to leading banks for two-week dollar
deposits and the arithmetic mean of the offered
quotations to leading banks for one-month dollar
deposits in the London inter-bank market, and (ii)
for all other classes of offered notes, the linear
interpolation of the arithmetic mean of the offered
quotations to leading banks for two-month dollar
deposits and the arithmetic mean of the offered
quotations to leading banks for three-month dollar
deposits (rounded upwards, if necessary, to five
decimal places); and
(b) in respect of subsequent interest periods, for each
class of offered notes, the offered quotations to
leading banks for US dollar deposits for a period
equal to relevant interest period or following the
earlier to occur of the step-up date (if any) and a
pass-through trigger event, one-month USD LIBOR,
in each case by reference to the display as quoted on
the Dow Jones/Telerate Monitor at Telerate Page 3750.
If Telerate Page No. 3750 stops providing these
quotations, a replacement page for the purposes of
displaying this information will be used. If the
replacement page stops displaying the information,
another service as determined by us (with the approval
of the note trustee, in its sole discretion) will be
used. This is called the "SCREEN RATE" for the
respective classes of offered notes. The "INTEREST
DETERMINATION DATE" for the offered notes means the
second London business day before the first day of an
interest period.
PRINCIPAL We expect to repay the principal amount outstanding of
each class of the offered notes on the controlled
redemption dates for each such class in an amount up
to the controlled amortization amount. See "CONTROLLED
REDEMPTION DATES" in this prospectus supplement. We
are obliged to make such payments if we have funds
available for that purpose. If the principal amount
outstanding of any class of the offered notes is not
repaid in full on the final controlled redemption date
for such class, noteholders generally will not have
any remedies against us until the final maturity date
of the offered notes. In that case, any such class of
notes, subject to the principal payment rules
described
S-5
under "CASHFLOWS --- DISTRIBUTION OF FUNDING 2
PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT OF THE
FUNDING 2 SECURITY" in the prospectus, will receive
payments of principal to the extent of the shortfall
on each note payment date thereafter in the amounts,
and to the extent available, until repaid in full.
Principal of the offered notes may be repaid earlier
than expected if a trigger event or an event of
default occurs in respect of these notes. See
"MATURITY AND REPAYMENT CONSIDERATIONS" below and "THE
MORTGAGES TRUST --- MORTGAGES TRUST ALLOCATION AND
DISTRIBUTION OF MORTGAGES TRUSTEE PRINCIPAL RECEIPTS
ON OR AFTER THE OCCURRENCE OF A TRIGGER EVENT" in the
prospectus.
REDEMPTION/PAYMENT All offered notes are controlled amortization notes.
BASIS
CONTROLLED REDEMPTION In respect of each class of offered notes, the note
DATES payment dates on which principal repayments are
scheduled to be made, as set out in "Controlled
redemption dates" in this prospectus supplement.
SUBORDINATION AND The class A required subordinated percentage is
CREDIT ENHANCEMENT 11.60%, the class B required subordinated percentage
is 8.30%, the class M required subordinated percentage
is 5.11% and the class C required subordinated
percentage is 1.85%. Payments of principal of and
interest on the junior classes of the series 2005-2
notes are subordinated to payments of principal of and
interest on the more senior classes of the series
2005-2 notes, including amounts of principal to be
credited to the cash accumulation sub-ledgers of those
more senior classes of notes. In addition, amounts of
principal otherwise available to pay principal of the
junior classes of the series 2005-2 notes may be used
to pay interest on more senior classes of notes. See
"CREDIT STRUCTURE --- USE OF FUNDING 2 PRINCIPAL
RECEIPTS TO PAY FUNDING 2 INCOME DEFICIENCY" in the
prospectus.
Payments of principal of the offered notes will be
deferred on the note payment dates on which such
principal payment is scheduled to be made at a time
when they are needed to provide the required
subordination for more senior classes of notes. Any
such deferral of principal repayment will continue
until the required subordination for such senior
classes is restored through repayment of the senior
classes or the issuance of sufficient additional
subordinate notes. See "RISK FACTORS --- PAYMENTS OF
CLASS B, CLASS M, CLASS C AND CLASS D NOTES MAY BE
DELAYED OR REDUCED IN CERTAIN CIRCUMSTANCES" in the
prospectus.
The issuer may at any time, subject to certain
conditions, change the required subordinated
percentage for the class A notes or any other class of
notes, or the method of calculating the amounts of
subordination, without your consent or the consent of
any other noteholders if the rating agencies confirm
that such change will not negatively affect the
ratings of outstanding notes. See "RISK FACTORS ---
THE REQUIRED SUBORDINATION FOR A CLASS OF NOTES MAY BE
CHANGED" in the prospectus.
S-6
TARGET RESERVE
REQUIRED AMOUNT
[GBP]139,000,000
PROGRAM RESERVE 1.65%
REQUIRED PERCENTAGE
ARREARS OR STEP-UP item (i) Funding 2 reserve fund increased
TRIGGER EVENT amount [GBP]8,000,000
item (ii) Funding 2 reserve fund
increased amount [GBP]8,000,000
item (i) and (ii) Funding 2 reserve fund
increased amount [GBP]16,000,000
LOSSES Losses on the mortgage loans may reduce the amount of
principal available to repay principal of the series
2005-2 notes. Losses on the mortgage loans will be
allocated to the classes of notes in inverse order of
seniority, beginning with the class C notes. No losses
will be allocated to the series 2005-2 class A notes
until the aggregate amount of losses exceeds the
principal amount outstanding of each class of notes
junior to the series 2005-2 class A notes. See "THE
MORTGAGES TRUST --- LOSSES" and "CREDIT STRUCTURE ---
PRINCIPAL DEFICIENCY LEDGER" in the prospectus.
OPTIONAL REDEMPTION BY We have the right to redeem the offered notes at their
THE ISSUER aggregate principal amount outstanding, together with
any accrued and unpaid interest in respect thereof on
the following dates:
* on any note payment date on which the aggregate
principal amount outstanding of the offered notes
and all other classes of the series 2005-2 notes is
less than 10% of the initial outstanding principal
amount of the offered notes and all other classes
of the series 2005-2 notes; or
* on the note payment date falling in May 2010 and on
any note payment date thereafter.
Further, we may redeem the offered notes for tax and
other reasons and in certain other circumstances as
more fully described under "DESCRIPTION OF THE NOTES
--- 5. REDEMPTION, PURCHASE AND CANCELLATION" in the
prospectus.
SECURITY FOR THE NOTES The offered notes are secured primarily by our rights
under the global intercompany loan agreement. In
addition, we have granted security for the benefit of
noteholders over our bank accounts. See "SECURITY FOR
THE ISSUER'S OBLIGATIONS" in the prospectus.
THE SERIES 2005-2 LOAN We have entered into a global intercompany loan
TRANCHES agreement with Funding 2. The proceeds of the offered
notes will fund the relevant series 2005-2 loan
tranches. The principal terms of such series 2005-2
loan tranches are set out in Annex B to this
prospectus supplement. A description of the global
intercompany loan is set forth in the prospectus under
"THE GLOBAL INTERCOMPANY LOAN AGREEMENT".
S-7
EVENTS OF DEFAULT The offered notes are subject to certain events of
default described under "DESCRIPTION OF THE US NOTES"
in the prospectus.
LIMITED RECOURSE The only sources of payment for principal of or
interest on the offered notes are:
* repayments of principal of the relevant series
2005-2 loan tranches of the global intercompany
loan;
* funds in the issuer transaction account that are
allocable to the offered notes; and
* amounts available to be drawn under the issuer
reserve fund, subject to the limits and conditions
on the purposes for which the issuer reserve fund
may be utilized.
THE MORTGAGES TRUST Each series 2005-2 loan tranche is a tranche of the
global intercompany loan and made by us to Funding 2.
Funding 2 will secure its obligation to repay the
global intercompany loan by granting security over its
beneficial interest in the mortgages trust. The assets
of the mortgages trust consist primarily of mortgage
loans originated by Northern Rock plc secured over
residential property located in England, Wales and
Scotland. The mortgage loans included in the trust
property are randomly selected from the seller's
portfolio of mortgage loans that meet eligibility
criteria for inclusion in the mortgages trust. These
criteria are discussed in the prospectus under
"ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED
SECURITY". For a description of the types of mortgage
loans originated by the seller as well as the seller's
lending criteria and related matters, see "THE
MORTGAGE LOANS" in the prospectus.
The aggregated outstanding current balance of mortgage
loans in the mortgages trust as at March 31, 2005 was
[GBP]32,847,426,890.54. See ANNEX A to this prospectus
supplement for detailed statistical and other
information on the mortgage loans.
ISSUER ACCOUNTS The issuer transaction account and the issuer GIC
account.
OTHER ISSUER NOTES The series 2005-2 notes are the second series of notes
issued by us. Only the offered notes are being offered
by this prospectus supplement and the accompanying
prospectus. As of the closing date, the aggregate
principal amount outstanding of notes issued by us
(converted, where applicable, into dollars at the
applicable specified currency exchange rate),
including the offered notes, will be:
class A $13,893,274,347
class B $495,705,586
class M $501,095,605
class C $545,064,309
As used herein, "SPECIFIED CURRENCY EXCHANGE RATE"
means, in relation to a series and class of notes, the
exchange rate specified in the issuer swap agreement
S-8
relating to such series and class of notes or, if the
issuer swap agreement has been terminated, the
applicable spot rate.
USE OF PROCEEDS The gross proceeds from the issue of the series 2005-2
notes will equal approximately $7,718,228,399 and
(after exchanging, where applicable the proceeds of
the notes for sterling, calculated by reference to the
applicable specified currency exchange rate) will be
used by the issuer to make available loan tranches to
Funding 2 pursuant to the terms of the global
intercompany loan agreement. Funding 2 will use the
gross proceeds of each loan tranche to make a further
contribution to the mortgages trustee.
STOCK EXCHANGE LISTING Application has been made to the Financial Services
Authority in its capacity as competent authority for
the purposes of Part VI of the Financial Services and
Markets Act 2000 for notes issued during the period of
twelve months from the date of the prospectus to be
admitted to the official list maintained by the UK
Listing Authority. Application has also been made to
the London Stock Exchange plc for such notes to be
admitted to trading on the London Stock Exchange's
market for listed securities.
RATINGS The series 2005-2 class A1 notes, series 2005-2 class
A4 notes and series 2005-2 class A6 notes are expected
to be assigned an "AAA" rating by Standard & Poor's,
an "Aaa" rating by Moody's and an "AAA" rating by
Fitch on the closing date. The series 2005-2 class B1
notes are expected to be assigned an "AA" rating by
Standard & Poor's, an "Aa3" rating by Moody's and an
"AA" rating by Fitch on the closing date. The series
2005-2 class M1 notes are expected to be assigned an
"A" rating by Standard & Poor's, an "A2" rating by
Moody's and an "A" rating by Fitch on the closing
date. The series 2005-2 class C1 notes are expected to
be assigned a "BBB" rating by Standard & Poor's, a
"Baa2" rating by Moody's and a "BBB" rating by Fitch
on the closing date. See "SUMMARY --- RATINGS ON THE
NOTES" and "RISK FACTORS --- RATINGS ASSIGNED TO THE
NOTES MAY BE LOWERED OR WITHDRAWN AFTER YOU PURCHASE
THE NOTES, WHICH MAY LOWER THE MARKET VALUE OF THE
NOTES" in the prospectus.
ISSUER SWAPS In respect of each class of offered notes, we will
enter into a currency swap transaction with an issuer
swap provider in order to hedge against any variance
between the interest received by us under the global
intercompany loan agreement, which will be related to
sterling LIBOR and paid in sterling, and the interest
which is payable on the offered notes, and to hedge
against fluctuations in the exchange rate in respect
of principal received under the global intercompany
loan agreement, which will be paid in sterling, and
principal which we are obliged to repay in dollars on
the offered notes. See "THE SWAP AGREEMENTS --- THE
ISSUER SWAPS" in the prospectus and "THE ISSUER SWAP
PROVIDERS" in this prospectus supplement.
S-9
START-UP LOAN We have entered into a start-up loan agreement with
Northern Rock plc. On the closing date, Northern Rock
plc will make available to us a start-up loan tranche,
the principal terms of which are set out in ANNEX C to
this prospectus supplement.
DENOMINATIONS The offered notes will be issued in minimum
denominations of $100,000 and integral multiples of
$1,000 in excess thereof.
MATERIAL UNITED STATES As more fully discussed in the accompanying
TAX CONSEQUENCES prospectus, and while not free from doubt, in the
opinion of Sidley Austin Brown & Wood LLP, our US
federal income tax advisers, the offered notes will be
treated as debt for US federal income tax purposes.
Further, in the opinion of our US federal income tax
advisers, assuming compliance with the transaction
documents, the mortgages trustee acting in its
capacity as trustee of the mortgages trust, Funding 2
and the issuer will not be subject to US federal
income tax. See "MATERIAL UNITED STATES FEDERAL INCOME
TAX CONSEQUENCES" in the prospectus.
ERISA CONSIDERATIONS The offered notes will be eligible for purchase by
FOR INVESTORS employee benefit and other plans subject to Section
406 of ERISA or Section 4975 of the Code and by
governmental plans that are subject to any state,
local or other federal law of the United States that
is substantially similar to Section 406 of ERISA or
Section 4975 of the Code, subject to consideration of
the issues described in the prospectus under "ERISA
CONSIDERATIONS".
UNITED STATES LEGAL None of the offered notes is a "MORTGAGE RELATED
INVESTMENT SECURITY" under the United States Secondary Mortgage
CONSIDERATIONS Market Enhancement Act of 1984, as amended. See
"UNITED STATES LEGAL INVESTMENT CONSIDERATIONS" in the
prospectus.
PAYMENT AND DELIVERY No later than 10:00 a.m. (Eastern Standard Time) on
the Closing Date, we will (a) cause the global note
certificate for each of the offered notes to be
registered in the name of Cede & Co. as nominee for
DTC for credit on the closing date to the account of
the lead underwriters with DTC or to such other
account with DTC as the lead underwriters may direct,
and (b) deliver the global note certificate for each
of the offered notes duly executed on our behalf and
authenticated in accordance with the issuer paying
agent and agent bank agreement to Citibank N.A., as
custodian for DTC.
Against delivery of the offered notes (i) the
underwriters will pay to the lead underwriters the
gross underwriting proceeds for the offered notes and
(ii) the lead underwriters will pay to us or to a
third party, as directed by us, the gross underwriting
proceeds for the offered notes.
S-10
CLEARING AND The offered notes have been accepted for clearance
SETTLEMENT through DTC, Clearstream Luxembourg and Euroclear
under the following CUSIP numbers, common codes and
ISINs:
CLASS OF NOTES CUSIP ISIN COMMON CODE
- ------------------------------------------------------------------
series 2005-2 class A1 notes 38741YAF6 US38741YAF60 22020951
- ------------------------------------------------------------------
series 2005-2 class A4 notes 38741YAG4 US38741YAG44 22020935
- ------------------------------------------------------------------
series 2005-2 class A6 notes 38741YAH2 US38741YAH27 22020919
- ------------------------------------------------------------------
series 2005-2 class B1 notes 38741YAJ8 US38741YAJ82 22020846
- ------------------------------------------------------------------
series 2005-2 class M1 notes 38741YAK5 US38741YAK55 22020862
- ------------------------------------------------------------------
series 2005-2 class C1 notes 38741YAL3 US38741YAL39 22056247
S-11
US DOLLAR PRESENTATION
Translations of pounds sterling into US dollars, unless otherwise stated in
this prospectus supplement, have been made at the rate of [GBP]0.5295 = $1.00,
which reflects the noon buying rate in the City of New York for cable transfers
in sterling per US$1.00 as certified for customs purposes by the Federal
Reserve Bank on March 31, 2005. Use of this rate does not mean that pound
sterling amounts actually represent those US dollar amounts or could be
converted into US dollars at that rate at any particular time.
References throughout this prospectus supplement to "[GBP]", "POUNDS" or
"STERLING" are to the lawful currency for the time being of the United Kingdom
of Great Britain and Northern Ireland.
References in this prospectus supplement to "US$", "USD", "$", "US DOLLARS"
or "DOLLARS" are to the lawful currency of the United States of America.
STERLING/US DOLLAR EXCHANGE RATE HISTORY*
JANUARY 1, YEARS ENDED DECEMBER 31
2005 THROUGH --------------------------------------
MAY 19, 2005 2004 2003 2002 2001 2000
------------ ------ ------ ------ ------ ------
Last(1) 1.8376 1.9181 1.7858 1.6100 1.4546 1.4930
Average(2) 1.8890 1.8334 1.6358 1.5038 1.4407 1.5160
High 1.9291 1.9467 1.7858 1.6100 1.5038 1.6537
Low 1.8337 1.7559 1.5541 1.4082 1.3727 1.3977
------------ ------ ------ ------ ------ ------
Notes
(1) Last is the closing exchange rate on the last operating business day of
each of the periods indicated, years commencing from January 1 or the next
operating business day.
(2) Average is the average daily exchange rate during the period.
MAY 1, 2005
THROUGH
MAY 19,
2005 APRIL 2005 MARCH 2005 FEBRUARY 2005 JANUARY 2005 DECEMBER 2004
- --------- ----------- ----------- ----------- -------------- ------------- --------------
High 1.9068 1.9193 1.9291 1.9210 1.9044 1.9467
Low 1.8337 1.8697 1.8667 1.8547 1.8595 1.9147
* Source: Bloomberg
S-12
CONTROLLED REDEMPTION DATES
The "CONTROLLED AMORTIZATION AMOUNT" for each class of offered notes for any
note payment date set forth below is an amount equal to the amount which we
would be required to repay in respect of such class of offered notes so that on
that note payment date the aggregate principal amount outstanding of such class
of offered notes has been reduced to (but is not less than) the stated amount
or "TARGET BALANCE" set out in the following table:
[GBP]($*) TARGET BALANCE [GBP]($*) TARGET BALANCE [GBP]($*) TARGET BALANCE [GBP]($*) TARGET
FOR FOR FOR BALANCE FOR
NOTE PAYMENT SERIES 2005-2 CLASS A1 SERIES 2005-2 CLASS A4 SERIES 2005-2 CLASS A6 SERIES 2005-2 CLASS B1
DATE OCCURRING IN: NOTES NOTES NOTES NOTES
- ------------------ ------------------------ ------------------------ -------------------------- ----------------------
([GBP]) $ ([GBP]) $ ([GBP]) $ ([GBP]) $
----------- ----------- ----------- ----------- ----------- ------------- ---------- ----------
August 2005 444,560,497 817,102,194 435,255,713 800,000,000 680,087,051 1,250,000,000 48,966,268 90,000,000
November 2005 358,046,562 658,089,582 435,255,713 800,000,000 680,087,051 1,250,000,000 48,966,268 90,000,000
February 2006 275,893,878 507,092,947 435,255,713 800,000,000 680,087,051 1,250,000,000 48,966,268 90,000,000
May 2006 200,426,435 368,383,788 435,255,713 800,000,000 680,087,051 1,250,000,000 48,966,268 90,000,000
August 2006 126,219,532 231,991,500 435,255,713 800,000,000 680,087,051 1,250,000,000 48,966,268 90,000,000
November 2006 55,753,471 102,474,879 435,255,713 800,000,000 680,087,051 1,250,000,000 48,966,268 90,000,000
February 2007 0 0 410,315,400 754,159,705 680,087,051 1,250,000,000 48,966,268 90,000,000
May 2007 0 0 373,602,538 686,681,465 680,087,051 1,250,000,000 0 0
August 2007 0 0 238,531,225 438,420,392 680,087,051 1,250,000,000 0 0
November 2007 0 0 110,268,987 202,674,398 680,087,051 1,250,000,000 0 0
February 2008 0 0 0 0 673,721,540 1,238,300,190 0 0
May 2008 0 0 0 0 638,283,191 1,173,164,505 0 0
August 2008 0 0 0 0 577,566,564 1,061,567,344 0 0
November 2008 0 0 0 0 519,910,720 955,595,903 0 0
February 2009 0 0 0 0 465,161,362 854,966,584 0 0
May 2009 0 0 0 0 414,867,279 762,526,058 0 0
August 2009 0 0 0 0 365,413,262 671,629,575 0 0
November 2009 0 0 0 0 318,452,269 585,315,271 0 0
February 2010 0 0 0 0 273,858,625 503,352,153 0 0
May 2010 0 0 0 0 0 0 0 0
August 2010 0 0 0 0 0 0 0 0
November 2010 0 0 0 0 0 0 0 0
February 2011 0 0 0 0 0 0 0 0
May 2011 0 0 0 0 0 0 0 0
August 2011 0 0 0 0 0 0 0 0
November 2011 0 0 0 0 0 0 0 0
February 2012 0 0 0 0 0 0 0 0
May 2012 0 0 0 0 0 0 0 0
[GBP]($*) TARGET [GBP]($*) TARGET
BALANCE FOR BALANCE FOR
NOTE PAYMENT SERIES 2005-2 CLASS M1 SERIES 2005-2 CLASS C1
DATE OCCURRING IN: NOTES NOTES
- ------------------ ---------------------- ----------------------
([GBP]) $ ([GBP]) $
---------- ---------- ---------- ----------
August 2005 51,686,616 95,000,000 48,966,268 90,000,000
November 2005 51,686,616 95,000,000 48,966,268 90,000,000
February 2006 51,686,616 95,000,000 48,966,268 90,000,000
May 2006 51,686,616 95,000,000 48,966,268 90,000,000
August 2006 51,686,616 95,000,000 48,966,268 90,000,000
November 2006 51,686,616 95,000,000 48,966,268 90,000,000
February 2007 51,686,616 95,000,000 48,966,268 90,000,000
May 2007 0 0 48,966,268 90,000,000
August 2007 0 0 48,966,268 90,000,000
November 2007 0 0 48,966,268 90,000,000
February 2008 0 0 48,966,268 90,000,000
May 2008 0 0 0 0
August 2008 0 0 0 0
November 2008 0 0 0 0
February 2009 0 0 0 0
May 2009 0 0 0 0
August 2009 0 0 0 0
November 2009 0 0 0 0
February 2010 0 0 0 0
May 2010 0 0 0 0
August 2010 0 0 0 0
November 2010 0 0 0 0
February 2011 0 0 0 0
May 2011 0 0 0 0
August 2011 0 0 0 0
November 2011 0 0 0 0
February 2012 0 0 0 0
May 2012 0 0 0 0
- ----------
* The target balances for the offered notes which are stated in US dollars in
the above table have been calculated based upon the specified currency
exchange rate under the issuer swaps for the offered notes of [GBP]1 =
$1.8380.
S-13
MATURITY AND REPAYMENT CONSIDERATIONS
The average lives of each class of the offered notes cannot be stated
because the actual rate of repayment of the mortgage loans and redemption of
the mortgage loans and a number of other relevant factors are unknown.
Calculations of the possible average lives of each class of the offered notes
can be made, however, based on certain assumptions. The assumptions used to
calculate the possible average lives of each class of the offered notes in the
following table include that:
(1) each series and class of notes is repaid in full by its final
maturity date;
(2) neither the issuer security nor the Funding 2 security is enforced;
(3) the aggregate current balance of mortgage loans in the mortgages
trust will not fall below an amount equal to the product of 1.05
and the principal amount outstanding of all notes of the issuer at
any time after giving effect to principal distributions;
(4) no asset trigger event or non-asset trigger event occurs;
(5) no event occurs (including, but not limited to, the failure to
comply with the repayment tests), that would cause payments on each
class of the offered notes to be deferred;
(6) the issuer exercises its option to redeem each class of the offered
notes on the step-up date, if any, relating to such notes;
(7) the offered notes are issued on May 25, 2005;
(8) each payment made by the issuer to the noteholders is paid on the
20th day of the relevant month in which such payment is payable,
regardless of whether such date is a business day;
(9) no interest or fees are paid from mortgages trustee principal
receipts, Funding 2 available principal receipts or issuer
available principal receipts;
(10) the mortgage loans are not subject to any defaults or losses, and
no mortgage loan falls into arrears; and
(11) the long-term, unsecured, unsubordinated and unguaranteed debt
obligations of the seller continue to be rated at least "A2" by
Moody's, "A+" by Fitch and "A" by Standard & Poor's.
Assumptions (1), (6) and (7) reflect the issuer's current expectations,
although no assurance can be given that repayment of the notes will occur as
described. Assumptions (2) through (5) and (9) through (11) relate to
unpredictable circumstances.
Based upon the foregoing assumptions, the approximate average lives of the
offered notes, at various constant payment rates for the mortgage loans, would
be as follows:
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
2005-2 CLASS 2005-2 CLASS 2005-2 CLASS 2005-2 CLASS 2005-2 CLASS 2005-2 CLASS
CONSTANT PAYMENT RATE A1 NOTES A4 NOTES A6 NOTES B1 NOTES M1 NOTES C1 NOTES
(% PER ANNUM) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS)
- --------------------- ------------- ------------- ------------- ------------- ------------- -------------
5% 1.92 4.15 4.97 4.99 4.99 4.99
10% 1.03 2.40 4.30 2.30 2.85 2.99
15% 0.93 2.39 4.30 1.99 1.99 2.99
20% 0.93 2.39 4.30 1.99 1.99 2.99
25% 0.93 2.39 4.30 1.99 1.99 2.99
The average lives of each class of the offered notes are subject to factors
largely outside the control of the issuer and consequently no assurance can be
given that these assumptions and estimates are realistic. They must therefore
be viewed with considerable caution. For more information relating to the risks
involved in the use of these estimated
S-14
average lives, see "RISK FACTORS --- THE YIELD TO MATURITY OF THE NOTES MAY BE
ADVERSELY AFFECTED BY PREPAYMENTS OR REDEMPTIONS ON THE MORTGAGE LOANS OR
REPURCHASES OF MORTGAGE LOANS BY THE SELLER" in the prospectus.
S-15
THE ISSUER SWAP PROVIDER
BARCLAYS BANK PLC
Barclays Bank PLC ("BARCLAYS BANK") is the issuer swap provider in respect
of the series 2005-2 class A1 notes, the series 2005-2 class A4 notes, the
series 2005-2 class A6 notes, the series 2005-2 class B1 notes, the series
2005-2 class M1 notes and the series 2005-2 class C1 notes. Barclays Bank is a
public limited company registered in England and Wales under number 1026167.
The liability of the members of Barclays Bank is limited. It has its registered
and head office at 54 Lombard Street, London EC3P 3AH. As from 31 May 2005 the
registered address will change to 1 Churchill Place, London, E14 5HP. Barclays
Bank was incorporated on 7 August 1925 under the Colonial Bank Act 1925 and on
4 October 1971 was registered as a company limited by shares under the
Companies Act 1948 to 1967. Pursuant to The Barclays Bank Act 1984, on 1
January 1985, Barclays Bank was re-registered as a public limited company and
its name was changed from "Barclays Bank International Limited" to "Barclays
Bank PLC".
Barclays Bank and its subsidiary undertakings (together, the "BARCLAYS
GROUP") is a major global financial services provider engaged in retail and
commercial banking, credit cards, investment banking, wealth management and
investment management services. It is one of the largest financial services
companies in the world by market capitalisation. Operating in over 60 countries
and employing over 78,000 people, it moves, lends, invests and protects money
for over 18 million customers and clients worldwide. The whole of the issued
ordinary share capital of Barclays Bank is beneficially owned by Barclays PLC,
which is the ultimate holding company of the Barclays group.
The short term unsecured obligations of Barclays Bank are rated A-1+ by S&P,
P-1 by Moody's and F1+ by Fitch and the long-term obligations of Barclays Bank
are rated AA by S&P, Aa1 by Moody's and AA+ by Fitch.
As at 31 December 2004, the Barclays group had total assets of [GBP]522,253
million (2003: [GBP]443,373 million), total net loans and advances of
[GBP]330,077 million (2003: [GBP]288,743 million), total deposits of
[GBP]328,742 million (2003: [GBP]278,960 million) and equity shareholders funds
of [GBP]17,581 million (2003: [GBP]16,485 million). The profit before taxation
of the Barclays group in respect of the year ended 31 December 2004 was
[GBP]4,612 million (2003: [GBP]3,845 million) after charging net provisions for
bad and doubtful debts of [GBP]1,091 million (2003: [GBP]1,347 million).
Except for the information provided in the preceding four paragraphs,
Barclays Bank and the Barclays group have not been involved in the preparation
of, and do not accept responsibility for, this prospectus supplement.
S-16
UNDERWRITING
UNITED STATES
We have agreed to sell, and Lehman Brothers Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and UBS Limited (the "LEAD UNDERWRITERS") and the
other underwriters for the notes listed in the following table have agreed to
purchase, the principal amount of those offered notes listed in that table. The
terms of these purchases are governed by an underwriting agreement among us,
the lead underwriters and the underwriters. The underwriters or affiliates of
certain of the underwriters have also agreed to pay and subscribe for the other
classes of notes not being offered pursuant to this prospectus on the closing
date.
PRINCIPAL AMOUNT
OF THE SERIES
2005-2 CLASS
UNDERWRITERS OF THE SERIES 2005-2 CLASS A1 NOTES A1 NOTES
- ------------------------------------------------ ----------------
Barclays Capital Inc. USD26,098,304
Citigroup Global Markets Limited USD26,098,304
J.P. Morgan Securities Inc. USD26,098,304
Lehman Brothers Inc. USD290,202,262
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD290,202,261
Morgan Stanley & Co. Incorporated USD26,098,304
UBS Limited USD290,202,261
----------------
Total USD975,000,000
================
PRINCIPAL AMOUNT
OF THE SERIES
2005-2 CLASS
UNDERWRITERS OF THE SERIES 2005-2 CLASS A4 NOTES A4 NOTES
- ------------------------------------------------ ----------------
Barclays Capital Inc. USD12,653,723
Citigroup Global Markets Limited USD12,653,723
J.P. Morgan Securities Inc. USD12,653,723
Lehman Brothers Inc. USD249,795,036
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD249,795,036
Morgan Stanley & Co. Incorporated USD12,653,723
UBS Limited USD249,795,036
----------------
Total USD800,000,000
================
PRINCIPAL AMOUNT
OF THE SERIES
2005-2 CLASS
UNDERWRITERS OF THE SERIES 2005-2 CLASS A6 NOTES A6 NOTES
- ------------------------------------------------ -----------------
Barclays Capital Inc. USD19,771,442
Citigroup Global Markets Limited USD19,771,442
J.P. Morgan Securities Inc. USD19,771,442
Lehman Brothers Inc. USD390,304,744
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD390,304,744
Morgan Stanley & Co. Incorporated USD19,771,442
UBS Limited USD390,304,744
-----------------
Total USD1,250,000,000
=================
S-17
PRINCIPAL AMOUNT
OF THE SERIES
2005-2 CLASS
UNDERWRITERS OF THE SERIES 2005-2 CLASS B1 NOTES B1 NOTES
- ------------------------------------------------ ----------------
Lehman Brothers Inc. USD30,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD30,000,000
UBS Limited USD30,000,000
----------------
Total USD90,000,000
================
PRINCIPAL AMOUNT
OF THE SERIES
2005-2 CLASS
UNDERWRITERS OF THE SERIES 2005-2 CLASS M1 NOTES M1 NOTES
- ------------------------------------------------ ----------------
Lehman Brothers Inc. USD31,666,666
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD31,666,667
UBS Limited USD31,666,667
----------------
Total USD95,000,000
================
PRINCIPAL AMOUNT
OF THE SERIES
2005-2 CLASS
UNDERWRITERS OF THE SERIES 2005-2 CLASS C1 NOTES C1 NOTES
- ------------------------------------------------ ----------------
Lehman Brothers Inc. USD30,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD30,000,000
UBS Limited USD30,000,000
----------------
Total USD90,000,000
================
The price to the public as a percentage of the principal balance of the
offered notes will be 100%.
We have agreed to pay to the underwriters of the series 2005-2 class A1
notes a selling commission of 0.04117% of the aggregate principal amount of the
series 2005-2 class A1 notes and a management and underwriting fee of 0.02058%
of the aggregate principal amount of the series 2005-2 class A1 notes. We have
also agreed to pay to the underwriters of the series 2005-2 class A4 notes a
selling commission of 0.06967% of the aggregate principal amount of the series
2005-2 class A4 notes and a management and underwriting fee of 0.03483% of the
aggregate principal amount of the series 2005-2 class A4 notes. We have also
agreed to pay to the underwriters of the series 2005-2 class A6 notes a selling
commission of 0.06967% of the aggregate principal amount of the series 2005-2
class A6 notes and a management and underwriting fee of 0.03483% of the
aggregate principal amount of the series 2005-2 class A6 notes. We have also
agreed to pay to the underwriters of the series 2005-2 class B1 notes a selling
commission of 0.13933% of the aggregate principal amount of the series 2005-2
class B1 notes and a management and underwriting fee of 0.06967% of the
aggregate principal amount of the series 2005-2 class B1 notes. We have also
agreed to pay to the underwriters of the series 2005-2 class M1 notes a selling
commission of 0.19000% of the aggregate principal amount of the series 2005-2
class M1 notes and a management and underwriting fee of 0.09500% of the
aggregate principal amount of the series 2005-2 class M1 notes. We have also
agreed to pay to the underwriters of the series 2005-2 class C1 notes a selling
commission of 0.25333% of the aggregate principal amount of the series 2005-2
class C1
S-18
notes and a management and underwriting fee of 0.12667% of the aggregate
principal amount of the series 2005-2 class C1 notes.
The lead underwriters of the offered notes have advised us that the
underwriters propose initially to offer the offered notes to the public at the
offering price stated on the cover page of this prospectus supplement, and to
some dealers at that price, less a concession not in excess of 0.04117% per
series 2005-2 class A1 note, 0.06967% per series 2005-2 class A4 note, 0.06967%
per series 2005-2 class A6 note, 0.13933% per series 2005-2 class B1 note,
0.19000% per series 2005-2 class M1 note and 0.25333% per series 2005-2 class
C1 note. The underwriters may allow, and those dealers may re-allow, a
concession not in excess of 0.02058% per series 2005-2 class A1 note, 0.03483%
per series 2005-2 class A4 note, 0.3483% per series 2005-2 class A6 note,
0.06967% per series 2005-2 class B1 note, 0.09500% per series 2005-2 class M1
note and 0.12667% per series 2005-2 class C1 note to certain other brokers and
dealers.
Additional out-of-pocket expenses (other than underwriting discounts and
commissions stated above) solely in relation to the offered notes are estimated
to be approximately $4,627,000.
JAPAN
The offered notes may not be resold to any person other than "qualified
institutional investors", as defined under the Securities and Exchange Law of
Japan (the "SECURITIES AND EXCHANGE LAW").
Each underwriter has agreed that, 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, it will not, directly or indirectly, offer or sell any
offered notes 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 organized under the laws of Japan) or to any person
or entity for re-offering or resale, directly or indirectly, in Japan or to or
for the benefit of a resident of Japan.
KOREA
Each underwriter has represented and agreed that offered notes have not been
and will not be offered, delivered or sold directly or indirectly in Korea or
to any resident of Korea or to others for re-offering or resale directly or
indirectly in Korea or to any resident of Korea except as otherwise permitted
under applicable Korean laws and regulations. Each underwriter has undertaken
to ensure that any securities dealer to which it sells offered notes confirms
that it is purchasing such offered notes as principal and agrees with such
underwriter that it will comply with the restrictions described above.
HONG KONG
Each underwriter has represented and agreed that:
(1) it has not offered or sold, and will not offer or sell, in Hong
Kong, by means of any document, any offered notes other than (i) in
circumstances which do not constitute an offer to the public within
the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong),
or (ii) to "professional investors" within the meaning of the
Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and
any rules made thereunder, or (iii) in other circumstances which do
not result in the document being a "prospectus" within the meaning
of the Companies Ordinance (Cap.32, Laws of Hong Kong); and
(2) it has not issued, or had in its possession for the purpose of
issue (in each case whether in Hong Kong or elsewhere), any
advertisement, invitation, or document relating to the offered
notes 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
S-19
do so under the laws of Hong Kong) other than with respect to the
offered 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 Securites and Futures Ordinance (Cap.
571, Laws of Hong Kong) and any rules made thereunder.
SINGAPORE
This prospectus supplement 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 offered
notes may not be offered or sold or made the subject of an invitation for
subscription or purchase nor may this prospectus supplement or any other
document or material in connection with the offer or sale or invitation for
subscription or purchase of such offered 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.
S-20
LEGAL MATTERS
Certain matters of English law and United States law regarding the notes,
including matters relating to the validity of the issuance of the notes, will
be passed upon for the issuer by Sidley Austin Brown & Wood, London. Certain
matters of United States law regarding matters of United States federal income
tax law with respect to the offered notes will be passed upon for the issuer by
Sidley Austin Brown & Wood LLP, New York. Certain matters of English law and
United States law will be passed upon for the underwriters by Allen & Overy
LLP, London.
S-21
ANNEX A
THE CUT-OFF DATE MORTGAGE PORTFOLIO
The statistical and other information contained in this prospectus
supplement has been compiled by reference to the mortgage loans in the cut-off
date mortgage portfolio. The U.S. dollar figures set forth in the tables below
have been calculated based on the currency exchange rate of [GBP]1 = $1.8886
and have been rounded to the nearest cent following their conversion from
pounds sterling. Columns stating percentage amounts may not add to 100% due to
rounding. A mortgage loan will have been removed from any additional mortgage
portfolio (which comprises a portion of the cut-off date portfolio) if, in the
period up to (and including) the assignment date related to such additional
mortgage portfolio, the mortgage loan is repaid in full or if the mortgage loan
does not comply with the terms of the mortgage sale agreement on or about the
applicable assignment date. Once such mortgage loans are removed, the seller
will then randomly select from the mortgage loans remaining in the additional
mortgage portfolio those mortgage loans to be assigned on the applicable
assignment date once the determination has been made as to the anticipated
principal balances of the notes to be issued and the corresponding size of the
trust that would be required ultimately to support payments on the notes. It is
not expected that the characteristics of the mortgage portfolio as of the
closing date will differ materially from the characteristics of the cut-off
date mortgage portfolio.
251,728 of the mortgages securing the mortgage loans in the cut-off date
mortgage portfolio (or 75.77% of the aggregate current balance of the mortgage
loans as of the cut- off date) were on freehold properties or heritable
properties (being the Scots law equivalent of freehold) and 95,857 of the
mortgages securing the mortgage loans in the cut-off date mortgage portfolio
(or 24.23% of the aggregate current balance of the mortgage loans as of the
cut-off date) were on leasehold or long lease (being the Scots law equivalent
of leasehold) properties.
It is not expected that the characteristics of the mortgage portfolio as of
the closing date will differ materially from the characteristics of the cut-off
date mortgage portfolio. Unless indicated otherwise, the following description
relates to types of mortgage loans that could be included in the mortgage
portfolio as of the closing date or on any subsequent date.
The cut-off date mortgage portfolio was drawn up as at March 31, 2005 (the
"CUT-OFF DATE") and comprised 347,585 mortgage loans having an aggregate
current balance of [GBP]32,847,426,891 as at that date. The seller originated
the mortgage loans in the cut-off date mortgage portfolio between July 1, 1995
and March 31, 2005 (save for the Scottish mortgage loans in the cut-off date
mortgage portfolio, which were originated by the seller between July 1, 2001
and January 31, 2005).
The borrowers in respect of 315,262 of the mortgage loans in the cut-off
date mortgage portfolio (or 90.59% of the aggregate current balance of the
mortgage loans as of the cut-off date) have agreed to have their monthly
mortgage payments to the seller directly debited from their bank accounts.
161,656 mortgage loans in the cut-off date mortgage portfolio (or 54.53% of
the aggregate current balance of the mortgage loans as of the cut-off date)
were fixed rate mortgage loans. The remaining 185,929 of the mortgage loans in
the cut-off date mortgage portfolio (or 45.47% of the aggregate current balance
of the mortgage loans as of the cut-off date) were standard variable rate
mortgage loans, discounted variable rate mortgage loans, "Together", "Together
Connections", "Connections" and flexible capped rate mortgage loans, as
described below.
297,916 of the mortgage loans in the cut-off date mortgage portfolio (or
89.03% of the aggregate current balance of the mortgage loans as of the cut-off
date) were flexible mortgage loans, 101,532 mortgage loans (or 22.12% of the
aggregate current balance of the mortgage loans as of the cut-off-date) of
which were Together mortgage loans.
A-1
As of the cut-off date, the seller's standard variable rate for existing and
new borrowers was 6.84% per annum.
TYPES OF PROPERTY
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
BALANCE BALANCE % OF TOTAL MORTGAGE
TYPE OF PROPERTY ([GBP]) (US$) LOANS LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
Detached Bungalow 1,021,803,121.09 1,929,777,374.49 3.11% 9,352 2.69%
Detached House 7,991,536,270.07 15,092,815,399.65 24.33% 59,162 17.02%
Flat 3,964,233,649.88 7,486,851,671.16 12.07% 44,855 12.90%
Masionette 500,468,285.08 945,184,403.20 1.52% 4,706 1.35%
Not Known 447,474,459.23 845,100,263.70 1.36% 4,765 1.37%
New Property 13,990,786.72 26,422,999.80 0.04% 109 0.03%
Other 119,063,805.72 224,863,903.48 0.36% 884 0.25%
Semi Detached Bungalow 429,097,584.51 810,393,698.11 1.31% 5,388 1.55%
Purpose Built Flat 53,877,040.59 101,752,178.86 0.16% 972 0.28%
Semi Detached House 8,640,670,183.61 16,318,769,708.77 26.31% 96,588 27.79%
Terraced House 9,665,211,704.04 18,253,718,824.25 29.42% 120,804 34.76%
----------------- ----------------- ---------- --------- ----------
TOTAL 32,847,426,890.54 62,035,650,425.47 100.00% 347,585 100.00%
================= ================= ========== ========= ==========
EXPECTED SEASONING OF MORTGAGE LOANS AT CLOSING
The following table shows length of time since the mortgage loans were
originated as of the closing date.
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
AGE OF MORTGAGE LOANS BALANCE BALANCE MORTGAGE
(MONTHS) ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- --------------------- ----------------- ----------------- ---------- --------- ----------
0 to 6 2,584,717,354.86 4,881,497,196.39 7.87% 22,012 6.33%
6 to 12 7,894,430,674.87 14,909,421,772.56 24.03% 70,511 20.29%
12 to 18 4,972,039,069.24 9,390,192,986.17 15.14% 47,352 13.62%
18 to 24 5,368,341,296.83 10,138,649,373.19 16.34% 54,096 15.56%
24 to 30 3,864,175,748.37 7,297,882,318.37 11.76% 41,242 11.87%
30 to 36 2,291,429,517.18 4,327,593,786.15 6.98% 28,097 8.08%
36 to 42 1,579,471,475.79 2,982,989,829.18 4.81% 19,859 5.71%
42 to 48 1,076,146,250.40 2,032,409,808.51 3.28% 14,985 4.31%
48 to 54 665,172,944.22 1,256,245,622.45 2.03% 9,526 2.74%
54 to 60 463,025,333.07 874,469,644.04 1.41% 7,003 2.01%
60 to 66 390,133,485.94 736,806,101.55 1.19% 5,960 1.71%
66 to 72 334,835,132.07 632,369,630.43 1.02% 4,870 1.40%
72 to 78 282,354,552.47 533,254,807.79 0.86% 4,318 1.24%
78 to 84 278,425,552.17 525,834,497.83 0.85% 3,835 1.10%
84 to 90 300,549,078.15 567,616,988.99 0.92% 4,347 1.25%
90 to 96 137,066,451.84 258,863,700.95 0.42% 2,262 0.65%
96 to 102 102,829,680.37 194,204,134.35 0.31% 2,001 0.58%
102 to 108 104,643,219.56 197,629,184.46 0.32% 2,043 0.59%
108 to 114 91,132,425.22 172,112,698.27 0.28% 1,867 0.54%
114 to 120 66,507,647.92 125,606,343.86 0.20% 1,399 0.40%
----------------- ----------------- ---------- --------- ----------
TOTAL 32,847,426,890.54 62,035,650,425.47 100.00% 347,585 100.00%
================= ================= ========== ========= ==========
The weighted average seasoning of mortgage loans as of the closing date is
expected to be 24.07 months and the maximum seasoning of mortgage loans as of
the closing date is expected to be 118.83 months. The minimum seasoning of the
mortgage loans as of the closing date is expected to be 3.86 months.
A-2
YEARS TO MATURITY AT CLOSING
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
YEARS TO MATURITY ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ----------------- ----------------- ----------------- ---------- --------- ----------
Less than zero 1,201,842.24 2,269,799.25 0.00% 32 0.01%
0 to 5 194,092,660.43 366,563,398.49 0.59% 4,295 1.24%
5 to 10 1,680,045,738.69 3,172,934,382.09 5.11% 23,810 6.85%
10 to 15 3,188,437,931.06 6,021,683,876.60 9.71% 38,588 11.10%
15 to 20 5,999,743,441.85 11,331,115,464.28 18.27% 63,932 18.39%
20 to 25 19,201,332,321.71 36,263,636,222.78 58.46% 191,230 55.02%
25 to 30 2,247,687,815.72 4,244,983,208.77 6.84% 22,729 6.54%
30 to 35 334,815,134.46 632,331,862.94 1.02% 2,968 0.85%
35 to 40 70,004.38 132,210.27 0.00% 1 0.00%
----------------- ----------------- ---------- --------- ----------
TOTAL 32,847,426,890.54 62,035,650,425.47 100.00% 347,585 100.00%
================= ================= ========== ========= ==========
The weighted average remaining term of the mortgage loans as of the closing
date is expected to be 20.76 years and the maximum remaining term as of the
closing date is expected to be 35.34 years. The minimum remaining term as of
the closing date is expected to be less than one month.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
The following table shows the spread of mortgaged properties securing the
mortgage loans throughout England, Wales and Scotland as of the cut-off date.
No properties are situated outside England, Wales and Scotland. The
geographical location of a property has no impact upon the seller's lending
criteria and credit scoring tests.
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
REGION ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ------------------- ----------------- ----------------- ---------- --------- ----------
East Anglia 655,485,161.13 1,237,949,275.31 2.00% 6,862 1.97%
East Midlands 2,082,927,704.16 3,933,817,262.08 6.34% 24,388 7.02%
Greater London 6,434,237,192.97 12,151,700,362.64 19.59% 41,956 12.07%
North 2,300,425,651.75 4,344,583,885.90 7.00% 36,660 10.55%
North West 3,551,521,456.48 6,707,403,422.71 10.81% 46,446 13.36%
Scotland 3,064,931,754.26 5,788,430,111.10 9.33% 44,552 12.82%
South East
(excluding London) 6,641,896,260.14 12,543,885,276.90 20.22% 51,608 14.85%
South West 2,373,486,210.73 4,482,566,057.58 7.23% 22,395 6.44%
Wales 1,093,258,850.07 2,064,728,664.24 3.33% 14,303 4.12%
West Midlands 2,034,876,349.49 3,843,067,473.65 6.19% 22,752 6.55%
Yorkshire 2,614,380,299.36 4,937,518,633.37 7.96% 35,663 10.26%
----------------- ----------------- ---------- --------- ----------
TOTAL 32,847,426,890.54 62,035,650,425.47 100.00% 347,585 100.00%
================= ================= ========== ========= ==========
A-3
CURRENT LOAN-TO-VALUE RATIOS
The following table shows the range of current loan-to-value, or LTV,
ratios, which express the outstanding balance of a mortgage loan as at the cut-
off date divided by the value of the mortgaged property securing that mortgage
loan at the same date. The seller has not revalued any of the mortgaged
properties since the date of the origination of the related mortgage loan,
other than in respect of a mortgaged property of a related borrower that has
remortgaged its property or to which the seller has made a further advance, as
described in the prospectus under "THE MORTGAGE LOANS --- CHARACTERISTICS OF
THE MORTGAGE LOANS --- MAXIMUM LTV RATIO".
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
CURRENT LTV ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ----------- ----------------- ----------------- ---------- --------- ----------
0% to 25% 502,672,355.51 949,347,010.62 1.53% 12,373 3.56%
25% to 50% 3,236,607,608.43 6,112,657,129.28 9.85% 42,032 12.09%
50% to 55% 1,245,532,856.28 2,352,313,352.37 3.79% 13,345 3.84%
55% to 60% 1,430,825,195.75 2,702,256,464.69 4.36% 14,538 4.18%
60% to 65% 1,725,542,148.99 3,258,858,902.58 5.25% 16,719 4.81%
65% to 70% 2,098,967,031.00 3,964,109,134.75 6.39% 20,196 5.81%
70% to 75% 2,769,109,579.63 5,229,740,352.09 8.43% 26,549 7.64%
75% to 80% 3,138,855,200.42 5,928,041,931.51 9.56% 27,069 7.79%
80% to 85% 4,782,487,521.72 9,032,205,933.52 14.56% 42,954 12.36%
85% to 90% 4,249,558,410.30 8,025,716,013.69 12.94% 42,423 12.21%
90% to 95% 5,269,451,825.05 9,951,886,716.79 16.04% 62,041 17.85%
95% to 100% 2,372,627,195.41 4,480,943,721.25 7.22% 26,946 7.75%
> 100% 25,189,962.05 47,573,762.33 0.08% 400 0.12%
----------------- ----------------- ---------- --------- ----------
TOTAL 32,847,426,890.54 62,035,650,425.47 100.00% 347,585 100.00%
================= ================= ========== ========= ==========
The weighted average current loan-to-value ratio of the mortgage loans at
the cut-off date was 75.05%.
CURRENT INDEXED LOAN-TO-VALUE RATIOS
The following table shows the range of current indexed loan-to-value, or
LTV, ratios, which express the outstanding balance of a mortgage loan as of the
cut-off date divided by the indexed value of the mortgaged property securing
that mortgage loan as of the same date (calculated using the Halifax House
Price Index).
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
CURRENT INDEXED LTV ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ------------------- ----------------- ----------------- ---------- --------- ----------
No Valuation 1,099,388,823.23 2,076,305,731.55 3.35% 9,268 2.67%
0% to 25% 1,161,515,679.52 2,193,638,512.34 3.54% 25,593 7.36%
25% to 50% 5,653,281,020.56 10,676,786,535.43 17.21% 76,510 22.01%
50% to 55% 1,621,092,717.31 3,061,595,705.91 4.94% 17,505 5.04%
55% to 60% 1,844,274,566.58 3,483,096,946.44 5.61% 19,425 5.59%
60% to 65% 2,159,485,373.92 4,078,404,077.19 6.57% 21,795 6.27%
65% to 70% 2,611,034,347.99 4,931,199,469.61 7.95% 26,276 7.56%
70% to 75% 3,221,569,379.61 6,084,255,930.33 9.81% 30,434 8.76%
75% to 80% 3,051,286,476.76 5,762,659,640.01 9.29% 27,311 7.86%
80% to 85% 3,603,877,054.04 6,806,282,204.26 10.97% 30,692 8.83%
85% to 90% 2,610,269,670.50 4,929,755,299.71 7.95% 21,166 6.09%
90% to 95% 2,340,194,092.85 4,419,690,563.76 7.12% 22,747 6.54%
95% to 100% 1,547,280,901.35 2,922,194,710.29 4.71% 15,339 4.41%
>100% 322,876,786.32 609,785,098.64 0.98% 3,524 1.01%
----------------- ----------------- ---------- --------- ----------
TOTAL 32,847,426,890.54 62,035,650,425.47 100.00% 347,585 100.00%
================= ================= ========== ========= ==========
The weighted average current indexed loan-to-value ratio of the mortgage
loans as of the cut-off date was 65.34%.
A-4
OUTSTANDING CURRENT BALANCES
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
RANGE OF CURRENT PRINCIPAL BALANCE BALANCE MORTGAGE
BALANCE ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- -------------------------- ----------------- ----------------- ---------- --------- ----------
0 to 25,000 232,808,693.79 439,682,499.09 0.71% 12,743 3.67%
25,000 to 50,000 2,700,708,027.05 5,100,557,179.89 8.22% 69,700 20.05%
50,000 to 75,000 5,280,710,582.35 9,973,150,005.83 16.08% 84,925 24.43%
75,000 to 100,000 5,414,278,545.59 10,225,406,461.20 16.48% 62,616 18.01%
100,000 to 125,000 4,593,950,273.06 8,676,134,485.70 13.99% 41,120 11.83%
125,000 to 150,000 3,567,907,747.97 6,738,350,572.82 10.86% 26,121 7.52%
150,000 to 175,000 2,634,646,983.61 4,975,794,293.25 8.02% 16,333 4.70%
175,000 to 200,000 1,938,236,851.43 3,660,554,117.61 5.90% 10,391 2.99%
200,000 to 225,000 1,475,284,237.99 2,786,221,811.87 4.49% 6,994 2.01%
225,000 to 250,000 1,117,364,444.46 2,110,254,489.81 3.40% 4,725 1.36%
250,000 to 275,000 813,374,671.97 1,536,139,405.48 2.48% 3,111 0.90%
275,000 to 300,000 631,815,834.28 1,193,247,384.62 1.92% 2,202 0.63%
300,000 to 325,000 515,790,292.38 974,121,546.19 1.57% 1,659 0.48%
325,000 to 350,000 419,295,042.29 791,880,616.87 1.28% 1,244 0.36%
350,000 to 375,000 375,306,263.38 708,803,409.02 1.14% 1,040 0.30%
375,000 to 400,000 278,934,604.42 526,795,893.91 0.85% 722 0.21%
400,000 to 425,000 287,418,080.62 542,817,787.06 0.88% 701 0.20%
425,000 to 450,000 186,172,721.71 351,605,802.22 0.57% 426 0.12%
450,000 to 475,000 208,932,251.71 394,589,450.58 0.64% 454 0.13%
475,000 to 500,000 174,490,740.48 329,543,212.47 0.53% 358 0.10%
----------------- ----------------- ---------- --------- ----------
TOTAL 32,847,426,890.54 62,035,650,425.47 100.00% 347,585 100.00%
================= ================= ========== ========= ==========
The largest mortgage loan had a current balance as of the cut-off date of
[GBP]499,972.89 or $944,248.80. The average current balance as of the cut-off
date was approximately [GBP]94,501.85 or $178,476.20.
MORTGAGE LOAN PRODUCTS
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
MORTGAGE LOAN PRODUCTS ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
Tracker 1,140,964,585.85 2,154,825,716.84 3.47% 9,431 2.71%
Variable 3,667,413,011.35 6,926,276,213.24 11.17% 49,405 14.21%
Capped 179,052,274.83 338,158,126.24 0.55% 2,654 0.76%
Discount 2,683,077,870.92 5,067,260,867.02 8.17% 22,907 6.59%
Fixed 17,912,534,457.67 33,829,612,576.76 54.53% 161,656 46.51%
Together Connections 221,977,595.24 419,226,886.37 0.68% 3,755 1.08%
Together 7,042,407,094.68 13,300,290,039.01 21.44% 97,777 28.13%
----------------- ----------------- ---------- --------- ----------
TOTAL 32,847,426,890.54 62,035,650,425.47 100.00% 347,585 100.00%
================= ================= ========== ========= ==========
EMPLOYMENT STATUS
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
EMPLOYMENT STATUS ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ----------------- ----------------- ----------------- ---------- --------- ----------
Full Time 26,961,923,212.48 50,920,288,179.09 82.08% 302,858 87.13%
Part Time 295,811,732.39 558,670,037.79 0.90% 4,471 1.29%
Retired 15,379,073.28 29,044,917.80 0.05% 473 0.14%
Self Employed 5,408,517,500.98 10,214,526,152.35 16.47% 36,500 10.50%
Other 165,795,371.41 313,121,138.44 0.50% 3,283 0.94%
----------------- ----------------- ---------- --------- ----------
TOTAL 32,847,426,890.54 62,035,650,425.47 100.00% 347,585 100.00%
================= ================= ========== ========= ==========
Approximately 41.11% of the aggregate current balance of the mortgage loans
as of the cut-off date were made to borrowers under the seller's non-verified
income program as described in the prospectus under "THE MORTGAGE LOANS ---
CHARACTERISTICS OF THE MORTGAGE LOANS --- LENDING CRITERIA".
A-5
DISTRIBUTION OF FIXED RATE MORTGAGE LOANS
Fixed rate mortgage loans remain at the relevant fixed rate for a period of
time as specified in the offer of advance, after which they move to the
seller's standard variable rate or some other rate as specified in the offer of
advance.
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
FIXED RATE % ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ------------- ----------------- ----------------- ---------- --------- ----------
0 --- 2.99 939,471,543.91 1,774,285,957.83 5.24% 8,315 5.14%
3.00 --- 3.99 2,615,950,536.64 4,940,484,183.50 14.60% 18,719 11.58%
4.00 --- 4.99 8,995,520,062.37 16,988,939,189.79 50.22% 76,658 47.42%
5.00 --- 5.99 5,095,959,521.41 9,624,229,152.14 28.45% 54,522 33.73%
6.00 --- 6.99 264,341,037.71 499,234,483.82 1.48% 3,416 2.11%
7.00 --- 7.99 1,291,755.63 2,439,609.68 0.01% 26 0.02%
----------------- ----------------- ---------- --------- ----------
TOTAL 17,912,534,457.67 33,829,612,576.76 100.00% 161,656 100.00%
================= ================= ========== ========= ==========
MONTH/YEAR IN WHICH FIXED RATE PERIOD ENDS
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
MONTH/YEAR IN WHICH FIXED BALANCE BALANCE MORTGAGE
RATE PERIOD ENDS ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ------------------------- ----------------- ----------------- ------------- --------- ----------
April 2005 8,259,619.42 15,599,117.24 0.05% 80 0.05%
May 2005 1,328,888,143.85 2,509,738,148.48 7.42% 10,911 6.75%
June 2005 785,720,181.48 1,483,911,134.74 4.39% 6,916 4.28%
July 2005 155,689.03 294,034.30 0.00% 5 0.00%
August 2005 552,673,125.27 1,043,778,464.39 3.09% 4,694 2.90%
September 2005 616,682,077.42 1,164,665,771.42 3.44% 5,009 3.10%
October 2005 902,514,955.09 1,704,489,744.18 5.04% 7,232 4.47%
November 2005 197,693,132.66 373,363,250.34 1.10% 1,813 1.12%
December 2005 41,756,406.02 78,861,148.41 0.23% 612 0.38%
January 2006 389,873,120.76 736,314,375.87 2.18% 3,445 2.13%
February 2006 40,448.40 76,390.85 0.00% 1 0.00%
March 2006 903,021,662.19 1,705,446,711.21 5.04% 7.239 4.48%
April 2006 438,251,714.86 827,682,188.68 2.45% 3,508 2.17%
May 2006 791,079,254.52 1,494,032,280.09 4.42% 6,873 4.25%
June 2006 1,976,594,677.29 3,732,996,707.53 11.03% 15,398 9.53%
July 2006 350,002,494.72 661,014,711.53 1.95% 2,412 1.49%
August 2006 1,659,735,971.95 3,134,577,356.63 9.27% 13,371 8.27%
September 2006 651,206,495.78 1,229,868,587.93 3.64% 6,336 3.92%
October 2006 301,762,275.33 569,908,233.19 1.68% 3,075 1.90%
November 2006 872,076,165.80 1,647,003,046.73 4.87% 7,365 4.56%
January 2007 1,057,962,209.68 1,998,067,429.20 5.91% 8,606 5.32%
February 2007 177,801,018.15 335,795,002.88 0.99% 1,592 0.98%
March 2007 12,494,252.38 23,596,645.04 0.07% 153 0.09%
April 2007 175,654,025.98 331,740,193.47 0.98% 1,975 1.22%
May 2007 18,610,458.59 35,147,712.09 0.10% 219 0.14%
June 2007 119,841,688.06 226,333,012.07 0.67% 1,449 0.90%
July 2007 84,930.29 160,399.35 0.00% 4 0.00%
August 2007 164,317,486.25 310,330,004.53 0.92% 1,989 1.23%
September 2007 100,890,925.97 190,542,602.79 0.56% 1,240 0.77%
October 2007 55,125,180.34 104,109,415.59 0.31% 736 0.46%
November 2007 96,574,983.77 182,391,514.35 0.54% 1,174 0.73%
December 2007 132,879,337.12 250,955,916.08 0.74% 1,486 0.92%
January 2008 142,818,474.14 269,726,970.26 0.80% 1,783 1.10%
February 2008 188,034,156.05 355,121,307.12 1.05% 1,959 1.21%
March 2008 170,591,053.65 203,196,463.92 0.60% 1,315 0.81%
April 2008 7,456,106.42 14,081,602.58 0.04% 78 0.05%
May 2008 194,519,476.95 367,369,484.17 1.09% 2,171 1.34%
June 2008 84,126,242.67 158,880,821.91 0.47% 949 0.59%
July 2008 6,930,063.03 13,088,117.04 0.04% 102 0.06%
August 2008 86,482,254.54 163,330,385.92 0.48% 1,054 0.65%
September 2008 78,917,023.66 149,042,690.88 0.44% 1,084 0.67%
October 2008 111,703,559.38 210,963,342.25 0.62% 1,185 0.73%
November 2008 35,398,086.59 66,852,826.33 0.20% 454 0.28%
January 2009 99,266,793.07 187,475,265.39 0.55% 1,134 0.70%
February 2009 29,737,540.12 56,162,318.27 0.17% 387 0.24%
March 2009 18,696,584.05 35,310,368.64 0.10% 192 0.12%
April 2009 107,015,694.58 202,109,840.78 0.60% 1,294 0.80%
A-6
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
MONTH/YEAR IN WHICH FIXED BALANCE BALANCE MORTGAGE
RATE PERIOD ENDS ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ------------------------- ----------------- ----------------- ------------- --------- ----------
May 2009 22,292,225.47 42,101,097.02 0.12% 252 0.16%
June 2009 118,073,281.43 222,993,199.31 0.66% 1,295 0.80%
August 2009 161,661,683.15 305,314,254.80 0.90% 1,723 1.07%
September 2009 159,260,871.03 300,780,081.03 0.89% 1,672 1.03%
October 2009 61,873,069.71 116,853,479.45 0.35% 734 0.45%
November 2009 49,839,847.32 94,127,535.65 0.28% 546 0.34%
December 2009 191,367,971.08 361,417,550.18 1.07% 2,185 1.35%
January 2010 154,347,586.08 291,500,851.07 0.86% 1,755 1.09%
February 2010 154,158,951.65 291,144,596.09 0.86% 1,582 0.98%
March 2010 22,661,255.11 42,798,046.40 0.13% 278 0.17%
April 2010 13,221,350.49 24,969,842.54 0.07% 134 0.08%
May 2010 121,521,780.69 229,506,035.01 0.68% 1,408 0.87%
June 2010 54,974,661.41 103,825,145.54 0.31% 637 0.39%
August 2010 20,453,053.72 38,627,637.26 0.11% 254 0.16%
September 2010 20,680,236.71 39,056,695.05 0.12% 280 0.17%
October 2010 34,530,719.61 65,214,717.06 0.19% 402 0.25%
November 2010 9,146,048.93 17,273,228.01 0.05% 115 0.07%
January 2011 24,088,071.35 45,492,731.55 0.13% 297 0.18%
March 2011 6,729,923.61 12,710,133.73 0.04% 84 0.05%
April 2011 5,706,614.14 10,777,511.46 0.03% 75 0.05%
May 2011 2,874,137.54 5,428,096.16 0.02% 33 0.02%
June 2011 9,960,022.00 18,810,497.55 0.06% 123 0.08%
August 2011 8,498,395.87 16,050,070.44 0.05% 119 0.07%
September 2011 21,405,373.73 40,426,188.83 0.12% 244 0.15%
October 2011 12,350,012.49 23,324,233.59 0.07% 142 0.09%
November 2011 14,541,776.34 27,463,598.80 0.08% 166 0.10%
January 2012 11,535,786.98 21,786,487.29 0.06% 145 0.09%
February 2012 14,638,719.52 27,646,685.69 0.08% 164 0.10%
April 2012 594,462.20 1,122,701.31 0.00% 8 0.00%
May 2012 490,384.43 926,140.03 0.00% 7 0.00%
November 2012 127,528.03 240,849.44 0.00% 3 0.00%
December 2012 724,455.03 1,368,205.77 0.00% 11 0.01%
January 2013 2,341,006.48 4,421,224.84 0.01% 46 0.03%
February 2013 1,864.73 3,521.73 0.00% 1 0.00%
March 2013 2,313,861.81 4,369,959.41 0.01% 42 0.03%
May 2013 1,219,969.30 2,304,034.02 0.01% 23 0.01%
June 2013 772,279.54 1,458,527.14 0.00% 17 0.01%
August 2013 471,086.13 889,693.27 0.00% 8 0.00%
September 2013 524,660.81 990,874.41 0.00% 11 0.01%
October 2013 1,015,889.98 1,918,609.82 0.01% 19 0.01%
April 2014 4,870,317.46 9,198,081.55 0.03% 59 0.04%
May 2014 2,012,815.73 3,801,403.79 0.01% 29 0.02%
June 2014 9,584,943.39 18,102,124.09 0.05% 122 0.08%
August 2014 6,489,931.64 12,256,884.90 0.04% 80 0.05%
September 2014 17,953,584.74 33,907,140.14 0.10% 196 0.12%
October 2014 7,299,323.86 13,785,503.04 0.04% 91 0.06%
November 2014 12,359,751.82 23,342,627.29 0.07% 143 0.09%
January 2015 11,488,491.56 21,697,165.16 0.06% 147 0.09%
February 2015 20,276,699.61 38,294,574.88 0.11% 214 0.13%
April 2015 1,763,360.27 3,330,282.21 0.01% 21 0.01%
May 2015 550,810.59 1,040,260.88 0.00% 7 0.00%
January 2017 100,005.97 188,871.27 0.00% 3 0.00%
November 2017 178,109.72 336,378.02 0.00% 2 0.00%
December 2017 285,041.99 538,330.30 0.00% 4 0.00%
January 2018 4,174,490.17 7,883,942.14 0.02% 70 0.04%
February 2018 87,995.58 166,188.45 0.00% 3 0.00%
March 2018 3,335,330.45 6,299,105.09 0.02% 53 0.03%
May 2018 3,942,162.34 7,445,167.80 0.02% 72 0.04%
June 2018 2,339,443.55 4,418,273.09 0.01% 35 0.02%
August 2018 170,855.59 322,677.87 0.00% 3 0.00%
September 2018 1,141,986.95 2,156,756.55 0.01% 13 0.01%
October 2018 652,301.15 1,231,935.95 0.00% 12 0.01%
April 2019 4,812,029.74 9.087.999.37 0.03% 52 0.03%
May 2019 4,351,674.73 8,218,572.90 0.02% 41 0.03%
June 2019 13,456,915.68 25,414,730.95 0.08% 127 0.08%
August 2019 11,839,871.36 22,360,781.05 0.07% 122 0.08%
September 2019 15,660,019.62 29,575,513.05 0.09% 174 0.11%
October 2019 8,114,993.92 15,325,977.52 0.05% 95 0.06%
November 2019 12,985,895.09 24,525,161.47 0.07% 152 0.09%
January 2020 16,053,416.64 30,318,482.67 0.09% 173 0.11%
A-7
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
MONTH/YEAR IN WHICH FIXED BALANCE BALANCE MORTGAGE
RATE PERIOD ENDS ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ------------------------- ----------------- ----------------- ------------- --------- ----------
February 2020 20,384,963.87 38,499,042.76 0.11% 219 0.14%
April 2020 1,208,455.57 2,282,289.19 0.01% 15 0.01%
May 2020 700,374.37 1,322,727.04 0.00% 8 0.00%
----------------- ----------------- ------------- --------- ----------
TOTAL 17,912,534,457.67 33,829,612,576.76 100.00% 161,656 100.00%
================= ================= ============= ========= ==========
REPAYMENT TERMS
AGGREGATE CURRENT AGGREGATE CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
TYPE OF REPAYMENT PLANS ([GBP]) (US$) % OF TOTAL LOANS % OF TOTAL
- ----------------------- ----------------- ----------------- ---------- --------- ----------
Endowment 1,933,068,720.02 3,650,793,584.63 5.89% 24,898 7.16%
Interest Only 8,968,735,143.21 16,938,353,191.47 27.30% 61,069 17.57%
Pension Policy 62,607,511.90 118,240,546.97 0.19% 599 0.17%
Personal Equity Plan 83,221,130.45 157,171,426.97 0.25% 1,102 0.32%
Repayment 21,799,794,384.96 41,171,091,675.44 66.37% 259,917 74.78%
----------------- ----------------- ---------- --------- ----------
TOTAL 32,847,426,890.54 62,035,650,425.47 100.00% 347,585 100.00%
================= ================= ========== ========= ==========
A-8
CHARACTERISTICS OF THE UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET
CPR RATES
The quarterly constant payment rate ("CPR") data presented below was
calculated by dividing the amount of scheduled and unscheduled repayments of
mortgage loans in a quarter by the quarterly balance of mortgage loans
outstanding for building societies in the UK. These quarterly scheduled and
unscheduled repayment rates were then annualized using standard methodology.
The CPR data presented below and in the prospectus understates the seller's
historical CPR data for mortgage loans originated by the seller (and therefore
the expected CPR for mortgage loans included in the mortgages trust) as the
data presented below and in the prospectus is based upon a percentage of the
total UK residential mortgage market and as the seller's CPR data (which
calculates the amount of scheduled and unscheduled repayments on a monthly
basis) includes the effect of product switches, which results in a higher CPR.
The following table shows the actual annualized CPR experience of the
mortgage loans that have been assigned to the mortgages trustee between March
26, 2001 and March 2005. It should be noted that the table covers a relatively
short period of time and that the actual annualized CPR experience of the
seller may differ over time from the data presented below. Since the seller may
assign new mortgage loans and their related security to the mortgages trustee
after the Funding 2 program date, it should be noted that the actual annualized
CPR experience of any new mortgage loans assigned to the mortgages trustee
after the closing date may also differ from the data presented below and in the
prospectus.
MONTH ANNUALIZED CPR MONTH ANNUALIZED CPR
- -------------- -------------- -------------- --------------
April 2001 25.94% April 2003 44.77%
May 2001 27.72% May 2003 49.23%
June 2001 28.23% June 2003 48.24%
July 2001 32.05% July 2003 44.96%
August 2001 31.87% August 2003 42.03%
September 2001 28.84% September 2003 38.12%
October 2001 29.28% October 2003 44.14%
November 2001 28.40% November 2003 42.70%
December 2001 27.76% December 2003 45.04%
January 2002 31.34% January 2004 35.49%
February 2002 33.33% February 2004 37.16%
March 2002 27.52% March 2004 54.19%
April 2002 41.78% April 2004 46.85%
May 2002 41.90% May 2004 44.67%
June 2002 33.57% June 2004 49.41%
July 2002 44.13% July 2004 44.04%
August 2002 44.89% August 2004 46.16%
September 2002 38.65% September 2004 44.04%
October 2002 42.50% October 2004 42.82%
November 2002 44.26% November 2004 57.89%
December 2002 43.42% December 2004 50.35%
January 2003 37.28% January 2005 34.48%
February 2003 48.30% February 2005 48.38%
March 2003 44.60% March 2005 41.72%
- ----------
Source: Northern Rock Investor Report
A-9
Over the past 41 years, quarterly CPR experienced in respect of residential
mortgage loans made by building societies have been between 9.5% and 14.0% for
approximately 68.9% of that time. See "CERTAIN CHARACTERISTICS OF THE UNITED
KINGDOM RESIDENTIAL MORTGAGE MARKET" in the prospectus.
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE
QUARTERS QUARTERS QUARTERS QUARTERS QUARTERS
OVER 41 OVER 41 OVER 41 OVER 41 OVER 41
CPR (%) YEARS CPR (%) YEARS CPR (%) YEARS CPR (%) YEARS CPR (%) YEARS
- ------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
7.0 0 10.5 17 14.0 6 17.5 1 21.0 0
7.5 0 11.0 18 14.5 2 18.0 2 21.5 3
8.0 4 11.5 16 15.0 3 18.5 1 22.0 1
8.5 1 12.0 19 15.5 2 19.0 2 22.5 2
9.0 6 12.5 13 16.0 4 19.5 2 23.0 0
9.5 9 13.0 10 16.5 2 20.0 3 23.5 0
10.0 10 13.5 4 17.0 1 20.5 1 24.0 0
- ----------
Source of repayment and outstanding mortgage information: Bank of England
Over the past 41 years, the highest single quarter CPR experienced in
respect of residential mortgage loans made by building societies was recorded
in September 2002 at a level of 22.41%. The lowest level was 7.94% in June and
March of 1974. The highest four quarter rolling average CPR over the same 41
year period was 21.13%. The lowest was 8.84%. For the four quarter rolling
average CPR between March 1964 and December 2003, see "CERTAIN CHARACTERISTICS
OF THE UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET" in the prospectus. The
following table sets forth the four quarter rolling CPR from (but excluding)
December 2003.
CPR FOR THE FOUR QUARTER
QUARTER ROLLING
DATE (%) AVERAGE (%)
- -------------- ----------- ------------
March 2004 20.00 20.80
June 2004 21.50 21.13
September 2004 21.49 21.08
December 2004 18.78 20.44
March 2005 17.80 19.89
- ----------
Source of repayment and outstanding mortgage information: Bank of England
The prior two CPR tables present the historical CPR experience only of
building societies in the UK. During the late 1990's, a number of former
building societies (including Northern Rock) converted to stock form UK banks,
and the CPR experience of these banks is therefore not included in the
foregoing building society CPR data. According to the Council of Mortgage
Lenders, the four quarter rolling average CPR experience of banks during 1998
was 14.85%, during 1999 was 16.08%, during 2000 was 15.34%, during 2001 was
18.69%, during 2002 was 21.81%, during 2003 was 23.82% and during 2004 was
22.88%.
A-10
REPOSSESSION RATE
The repossession rate of residential mortgaged properties in the UK has
steadily declined since 1991.
REPOSSESSIONS REPOSSESSIONS REPOSSESSIONS
YEAR (%) YEAR (%) YEAR (%)
- --------- ------------- ---- ------------- ---- -------------
1982 0.11 1989 0.17 1997 0.31
1983 0.12 1990 0.47 1998 0.31
1984 0.17 1991 0.77 1999 0.27
1985 0.25 1992 0.69 2000 0.20
1986 0.30 1993 0.58 2001 0.16
1987 0.32 1994 0.47 2002 0.11
1988 0.22 1995 0.47 2003 0.07
1996 0.40 2004 0.05
- ----------
Source: Council of Mortgage Lenders
In January 2005, the Council of Mortgage Lenders published arrears figures
for the year ended 2004, which showed that repossessions in the United Kingdom
had fallen to a 25-year low. In 2004, the repossession rate in the United
Kingdom was 0.05%. No assurance can be given as to whether, or for how long,
this downward trend will continue.
ARREARS INFORMATION
The percentage of mortgage loans in arrears in the UK has steadily declined
since 1993.
ARREARS 6-12 ARREARS 12 ARREARS 6-12 ARREARS 12
MONTHS MONTHS + MONTHS MONTHS +
YEAR (%) (%) YEAR (%) (%)
- --------- ------------ ---------- ---- ------------ ----------
1985 0.74 0.17 1995 1.20 0.81
1986 0.64 0.16 1996 0.95 0.63
1987 0.67 0.18 1997 0.69 0.42
1988 0.50 0.12 1998 0.68 0.32
1989 0.73 0.15 1999 0.52 0.27
1990 1.31 0.38 2000 0.43 0.19
1991 1.87 0.93 2001 0.38 0.18
1992 2.07 1.48 2002 0.30 0.15
1993 1.62 1.50 2003 0.25 0.11
1994 1.28 1.12 2004 0.23 0.10
- ----------
Source: Council of Mortgage Lenders
The arrears table above shows the number of mortgage loans in arrears at the
end of the period as a percentage of the total number of mortgage loans
outstanding at the end of the period.
A-11
HOUSE PRICE TO EARNINGS RATIO
The following table shows the ratio for any one year of the average annual
value of houses (sourced from the DETR/CML Survey of Mortgage Lenders) compared
to the average annual salary in the UK as calculated from the weekly earnings
in April of the same year of male employees whose earnings were not affected by
their absence from work (as recorded by the Department for Education and
Employment). While this is a good indication of house affordability, it does
not take into account the fact that the majority of households have more than
one income to support a mortgage loan.
HOUSE PRICE TO HOUSE PRICE TO
YEAR EARNINGS RATIO YEAR EARNINGS RATIO
- --------- -------------- ---- --------------
1994 3.42 2000 4.44
1995 3.37 2001 4.51
1996 3.40 2002 5.09
1997 3.62 2003 5.64
1998 3.86 2004 6.00
1999 4.08
- ----------
Source: Council of Mortgage Lenders
HOUSE PRICE INDEX
UK residential property prices, as measured by the Nationwide House Price
Index and Halifax House Price Index (collectively the "HOUSING INDICES"), have
generally followed the UK Retail Price Index over an extended period.
Nationwide is a UK building society and Halifax is a UK bank.
The housing market has been through three economic cycles since 1976. High
year to year increases in the Housing Indices occurred in the late 1970s and
late 1980s with greatest decrease in the early 1990s. The Housing Indices have
generally increased since 1996. The Housing Indices between 1973 and 2003 are
presented in the section "CERTAIN CHARACTERISTICS OF THE UNITED KINGDOM
RESIDENTIAL MORTGAGE MARKET" in the prospectus.
NATIONWIDE
UK RETAIL HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
--------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------- ----- -------- ----- -------- ----- --------
2004 Q1 184.6 2.6 279.7 16.9 480.3 18.9
2004 Q2 186.8 3.0 298.7 19.4 509.6 21.6
2004 Q3 188.1 3.1 308.8 19.3 523.6 20.5
2004 Q4 189.9 3.5 306.8 14.8 524.4 15.2
2005 Q1 190.5 3.2 307.4 9.9 527 9.7
- ----------
1 The percentage annual change is calculated in accordance with the following
formula:
In (x/y) where ''X" is equal to the current quarter's index value and "Y" is
equal to the index value of the previous year's corresponding quarter.
Source: Office for National Statistics, Nationwide, Halifax.
ARREARS EXPERIENCE
The following table summarizes, in respect of Northern Rock's overall
mortgage portfolio, Northern Rock's experience administering mortgage loans in
arrears and its repossession experience for residential mortgage loans that
were originated by the seller. The information set forth below includes
information in respect of Northern Rock's experience in administering mortgage
loans secured by mortgaged properties located in England, Wales and Scotland.
The mortgage loans used for statistical purposes in the table below are
administered in accordance with Northern Rock's administration policies. The
method by which Northern Rock classifies mortgage loans as being in arrears is
described in the prospectus under "THE ADMINISTRATOR AND THE ADMINISTRATION
AGREEMENT --- ARREARS AND DEFAULT
A-12
PROCEDURES" and is important in helping to understand Northern Rock's arrears
and repossession experience as set forth in the following table.
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- -------------------------- --------------------------
US$ US$ US$
[GBP] (MLS) (MLS) % [GBP] (MLS) (MLS) % [GBP] (MLS) (MLS) %
- ------------------------ ----------- ------- ---- ----------- ------- ---- ----------- ------- ----
Current balance 10,515 5,568 n/a 12,119 6,417 n/a 13,720 7,265 n/a
Number of mortgage
loans outstanding 292,222 292,222 n/a 315,184 315,184 n/a 327,088 327,088 n/a
Current balance of
loans in arrears
1 to 2 months 231.3 122.5 2.20 283.4 150.1 2.34 244.4 129.4 1.78
2 to 3 months 82.0 43.4 0.78 71.2 37.7 0.59 101.8 53.9 0.74
3 to 6 months 93.5 49.5 0.89 78.1 41.4 0.64 93.7 49.6 0.68
6 to 12 months 83.5 44.2 0.79 56.3 29.8 0.46 51.2 27.1 0.37
Over 12 months 96.9 51.3 0.92 45.1 23.9 0.37 37.5 19.9 0.27
Total current balance of
mortgage loans in
arrears 587.2 310.9 5.58 534.1 282.8 4.41 528.6 279.9 3.85
Number of mortgage
loans outstanding in
arrears
1 to 2 months 6,136 6,136 2.10 6,922 6,922 2.20 6,040 6,040 1.85
2 to 3 months 2,247 2,247 0.77 1,793 1,793 0.57 2,579 2,579 0.79
3 to 6 months 2,485 2,485 0.85 1,911 1,911 0.61 2,269 2,269 0.69
6 to 12 months 2,005 2,005 0.69 1,322 1,322 0.42 1,174 1,174 0.36
Over 12 months 2,104 2,104 0.72 940 940 0.30 756 756 0.23
Total number of
mortgage loans
outstanding in arrears 14,977 14,977 5.13 12,888 12,888 4.09 12,818 12,818 3.92
Repossessions
during year 1,133 1,133 0.39 956 956 0.30 875 875 0.27
Amount of mortgage
loan losses 14.0 7.4 n/a 14 7.4 n/a 10.8 5.7 n/a
Mortgage loan losses
as % of total current
balance 0.13% 0.13% n/a 0.12% 0.12% n/a 0.08% 0.08% n/a
DECEMBER 31, 1999
---------------------------
US$
[GBP] (MLS) (MLS) %
- ------------------------ ----------- -------- ----
Current balance 15,524 8,219.85 n/a
Number of mortgage
loans outstanding 338,149 338,149 n/a
Current balance of
loans in arrears
1 to 2 months 247.5 131.0 1.59
2 to 3 months 62.5 33.1 0.40
3 to 6 months 71.7 38.04 0.46
6 to 12 months 36.0 19.1 0.23
Over 12 months 21.3 11.3 0.14
Total current balance of
mortgage loans in
arrears 439.0 232.4 2.83
Number of mortgage
loans outstanding in
arrears
1 to 2 months 5,428 5,428 1.61
2 to 3 months 1,470 1,470 0.43
3 to 6 months 1,749 1,749 0.52
6 to 12 months 870 870 0.26
Over 12 months 447 447 0.13
Total number of
mortgage loans
outstanding in arrears 9,964 9,964 2.95
Repossessions
during year 763 763 0.23
Amount of mortgage
loan losses 8.5 4.5 n/a
Mortgage loan losses
as % of total current
balance 0.05% 0.05% n/a
DECEMBER 31, 2000 DECEMBER 31, 2001 DECEMBER 31, 2002
-------------------------- -------------------------- --------------------------
US$ US$ US$
[GBP] (MLS) (MLS) % [GBP] (MLS) (MLS) % [GBP] (MLS) (MLS) %
- ------------------------ ----------- ------- ---- ----------- ------- ---- ----------- ------- ----
Current balance 17,858 9,456 n/a 21,639 11,458 n/a 28,955 15,331 n/a
Number of mortgage
loans outstanding 367,963 367,963 n/a 414,023 414,023 n/a 489,690 489,690 n/a
Current balance of
loans in arrears
1 to 2 months 218.2 115.5 1.22 231.98 122.83 1.07 271.07 143.53 0.94
2 to 3 months 77.1 40.8 0.43 78.08 41.34 0.36 104.94 55.56 0.36
3 to 6 months 69.3 36.7 0.39 74.11 39.24 0.34 96.55 51.12 0.33
6 to 12 months 34.8 18.4 0.19 36.17 19.15 0.17 32.60 17.26 0.11
Over 12 months 13.2 7.0 0.07 9.27 4.91 0.04 7.39 3.91 0.03
Total current balance of
mortgage loans in
arrears 412.6 218.5 2.31 429.60 227.47 1.99 512.55 271.39 1.77
Number of mortgage
loans outstanding in
arrears
1 to 2 months 5,104 5,104 1.39 4,861 4,861 1.17 4,557 4,557 0.93
2 to 3 months 1,896 1,896 0.52 1,694 1,694 0.41 2,150 2,150 0.44
3 to 6 months 1,601 1,601 0.44 1,598 1,598 0.39 1,946 1,946 0.40
6 to 12 months 800 800 0.22 736 736 0.18 658 658 0.13
Over 12 months 290 290 0.08 191 191 0.05 133 133 0.03
Total number of
mortgage loans
outstanding in
arrears 9,691 9,691 2.63 9,080 9,080 2.19 9,444 9,444 1.93
Repossessions during
year 620 620 0.17 658 658 0.16 573 573 0.06
Amount of mortgage
loan losses 7 3.71 n/a 5.27 2.79 n/a 3.72 1.97 n/a
Mortgage loan losses
as % of total current
balance 0.04% 0.04% n/a 0.03% 0.03% n/a 0.01% 0.01% n/a
DECEMBER 31, 2003
DECEMBER 31, 2003 -------------------------
US$
[GBP] (MLS) (MLS) %
- ------------------------ ----------- ------- ----
Current balance 36,875 19,525 n/a
Number of mortgage
loans outstanding 531,403 531,403 n/a
Current balance of
loans in arrears
1 to 2 months 349.77 185.20 0.95
2 to 3 months 123.18 65.22 0.33
3 to 6 months 101.42 53.70 0.28
6 to 12 months 36.86 19.52 0.10
Over 12 months 5.96 3.16 0.02
Total current balance of
mortgage loans in
arrears 617.19 326.80 1.67
Number of mortgage
loans outstanding in
arrears
1 to 2 months 5,260 5,260 0.99
2 to 3 months 1,965 1,965 0.37
3 to 6 months 1,674 1,674 0.32
6 to 12 months 634 634 0.12
Over 12 months 106 106 0.02
Total number of
mortgage loans
outstanding in
arrears 9,639 9,639 1.81
Repossessions during
year 509 509 0.09
Amount of mortgage
loan losses 1.00 0.53 n/a
Mortgage loan losses
as % of total current
balance 0.00% 0.00% n/a
A-13
DECEMBER 31, 2004
---------------------------
US$
[GBP] (MLS) (MLS) %
- ----------------------------------------------------- ----------- ------- -----
Current balance 48,030 25,432 n/a
Number of mortgage loans outstanding 584,457 584,457 n/a
Current balance of loans in arrears
1 to 2 months 492.89 260.98 1.03
2 to 3 months 161.86 85.70 0.34
3 to 6 months 128.61 68.10 0.27
6 to 12 months 30.54 16.17 0.06
Over 12 months 1.22 0.65 0.003
Total current balance of mortgage loans in arrears 815.12 431.60 1.70
Number of mortgage loans outstanding in arrears
1 to 2 months 5,654 5,654 0.97
2 to 3 months 2,055 2,055 0.35
3 to 6 months 1,695 1,695 0.29
6 to 12 months 422 422 0.07
Over 12 months 18 18 0.003
Total number of mortgage loans outstanding in arrears 9,844 9,844 1.68
Repossessions during year 628 628 0.11
Amount of mortgage loan losses 0.64 0.34 n/a
Mortgage loan losses as % of total current balance 0.001% 0.001% n/a
- ----------
Provided by Northern Rock plc
Repossessions expresses the number of mortgaged properties that the
administrator has taken into possession during the period, as a percentage of
the number of mortgage loans outstanding at the end of the period.
In January 2005 the Council of Mortgage Lenders published arrears figures
for the year ended 2004 showing that repossessions in the United Kingdom had
fallen to a 25-year low. No assurance can be given as to whether, or for how
long, this downward trend will continue. See "RISK FACTORS --- THE TIMING AND
AMOUNT OF PAYMENTS ON THE MORTGAGE LOANS COULD BE AFFECTED BY VARIOUS FACTORS
WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES" in the prospectus.
A-14
ANNEX B
SERIES 2005-2 AAA (CLASS A1) LOAN TRANCHE
The series 2005-2 class A1 notes will fund the series 2005-2 AAA (class A1)
loan tranche, which shall have the following terms as set out in the supplement
to the global intercompany loan agreement:
Tier of loan tranche: AAA (Class A1)
Series number: Series 2005-2
Initial outstanding principal balance: [GBP]530,467,900
Closing date: May 25, 2005
Interest commencement date: May 25, 2005
Final repayment date: The loan payment date falling in June 2030
Loan payment dates: Each monthly payment date
SERIES 2005-2 AAA (CLASS A4) LOAN TRANCHE
The series 2005-2 class A4 notes will fund the series 2005-2 AAA (class A4)
loan tranche, which shall have the following terms as set out in the supplement
to the global intercompany loan agreement:
Tier of loan tranche: AAA (Class A4)
Series number: Series 2005-2
Initial outstanding principal balance: [GBP]435,255,713
Closing date: May 25, 2005
Interest commencement date: May 25, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
SERIES 2005-2 AAA (CLASS A6) LOAN TRANCHE
The series 2005-2 class A6 notes will fund the series 2005-2 AAA (class A6)
loan tranche, which shall have the following terms as set out in the supplement
to the global intercompany loan agreement:
Tier of loan tranche: AAA (Class A6)
Series number: Series 2005-2
Initial outstanding principal balance: [GBP]680,087,051
Closing date: May 25, 2005
Interest commencement date: May 25, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
B-1
SERIES 2005-2 AA (CLASS B1) LOAN TRANCHE
The series 2005-2 class B1 notes will fund the series 2005-2 AA (class B1)
loan tranche, which shall have the following terms as set out in the supplement
to the global intercompany loan agreement:
Tier of loan tranche: AA (Class B1)
Series number: Series 2005-2
Initial outstanding principal balance: [GBP]48,966,268
Closing date: May 25, 2005
Interest commencement date: May 25, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
SERIES 2005-2 A (CLASS M1) LOAN TRANCHE
The series 2005-2 class M1 notes will fund the series 2005-2 A (class M1)
loan tranche, which shall have the following terms as set out in the supplement
to the global intercompany loan agreement:
Tier of loan tranche: A (Class M1)
Series number: Series 2005-2
Initial outstanding principal balance: [GBP]51,686,616
Closing date: May 25, 2005
Interest commencement date: May 25, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
SERIES 2005-2 (CLASS C1) LOAN TRANCHE
The series 2005-2 class C1 notes will fund the series 2005-2 BBB (class C1)
loan tranche, which shall have the following terms as set out in the supplement
to the global intercompany loan agreement:
Tier of loan tranche: BBB (Class C1)
Series number: Series 2005-2
Initial outstanding principal balance: [GBP]48,966,268
Closing date: May 25, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
B-2
ANNEX C
START-UP LOAN TRANCHE
The start-up loan tranche to be made available to the issuer on the closing
date will have the following terms:
1. Start-up loan provider Northern Rock plc
2. Initial outstanding principal balance [GBP]73,647,096
3. Interest rate Three-month sterling LIBOR + 0.90% per annum
C-1
GRANITE MASTER ISSUER PLC
Issuer
* We may issue from time to time class A, class B, class M, class C and
class D notes in one or more series. Each series will consist of one or
more classes or sub-classes of notes. One or more series and classes of
notes may be issued at one time.
* The principal asset from which we will make payments of interest on, and
principal of, the notes is a global intercompany loan to an affiliated
company called Granite Finance Funding 2 Limited.
* The principal asset from which Granite Finance Funding 2 Limited will
make payments on the global intercompany loan is its interest in a pool
of UK residential mortgage loans originated by Northern Rock plc and held
in a master trust by Granite Finance Trustees Limited.
* Each mortgage loan is secured by a mortgaged property located in England,
Wales or Scotland. All of the transaction documents are governed by the
laws of England and Wales, Scotland, Jersey or New York.
* Only class A, class B, class M and class C notes will be offered pursuant
to this prospectus and related prospectus supplements.
THE NOTES OFFERED BY THIS PROSPECTUS WILL BE SOLELY OUR OBLIGATION. THE
NOTES WILL NOT BE OBLIGATIONS OF NORTHERN ROCK PLC, ANY OF ITS AFFILIATES OR
ANY OF THE OTHER PARTIES NAMED IN THIS PROSPECTUS OTHER THAN US.
YOU SHOULD CONSIDER THE DISCUSSION UNDER THE "RISK FACTORS" BEGINNING ON
PAGE 27 OF THIS PROSPECTUS BEFORE YOU PURCHASE ANY NOTES.
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the Financial
Services and Markets Act 2000 for notes issued during the period of twelve
months from the date of this prospectus to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for such notes to be admitted to trading on the
London Stock Exchange's market for listed securities.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE NOTES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 19, 2005
You should note that Granite Finance Funding Limited, a company of common
ownership with us, has an interest in the same trust property (being the pool
of UK residential mortgage loans originated by Northern Rock plc) as Granite
Finance Funding 2 Limited. Granite Finance Funding Limited has established
issuers which have issued notes and used the proceeds thereof to make
intercompany loans to Granite Finance Funding Limited. Granite Finance Funding
Limited may also establish from time to time new issuers which will issue notes
and make new intercompany loans to Granite Finance Funding Limited. Subject to
certain conditions, Granite Finance Funding 2 Limited may establish, from time
to time, new issuers which will issue notes and make new intercompany loans to
Granite Finance Funding 2 Limited. The notes issued by these existing issuers
ultimately are, and any new notes issued by such new issuers ultimately will
be, secured by the same trust property as the notes issued by us under this
prospectus and the related prospectus supplements. References in this document
to "FUNDING" means Granite Finance Funding Limited and references to "FUNDING
2" means Granite Finance Funding 2 Limited.
A note is not a deposit and none of the notes, payments under the global
intercompany loan or the underlying mortgage loans are insured or guaranteed by
any United Kingdom or United States governmental agency or authority.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements including, but not
limited to, statements made under the captions "RISK FACTORS", "THE MORTGAGE
LOANS", and "THE ADMINISTRATOR AND THE ADMINISTRATION AGREEMENT". These
forward-looking statements can be identified by the use of forward-looking
terminology, such as the words "BELIEVES", "EXPECTS", "MAY", "INTENDS",
"SHOULD" or "ANTICIPATES", or the negative or other variations of those terms.
These statements involve known and unknown risks, uncertainties and other
important factors that could cause the actual results and performance of the
notes, Northern Rock plc or the UK residential mortgage industry to differ
materially from any future results or performance expressed or implied in the
forward-looking statements. These risks, uncertainties and other factors
include, among others: general economic and business conditions in the UK;
currency exchange and interest fluctuations; governmental, statutory,
regulatory or administrative initiatives affecting Northern Rock plc; changes
in business strategy, lending practices or customer relationships; and other
factors that may be referred to in this prospectus. Some of the most
significant of these risks, uncertainties and other factors are discussed under
the caption "RISK FACTORS", and you are encouraged to carefully consider those
factors prior to making an investment decision.
2
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the notes in two separate documents that
progressively provide more detail: (a) this prospectus, which provides general
information, some of which may not apply to a particular series and class of
notes, including your series and class, and (b) the accompanying prospectus
supplement, which will describe the specific terms of your series and class of
notes, including:
* the timing of interest and principal payments;
* financial and other information about our assets;
* information about enhancement for your series or class;
* the ratings for your class;
* the method for selling the notes; and
* other terms and conditions not contained herein that are applicable
to such series and class.
This prospectus may be used to offer and sell any series and class of notes
only if accompanied by the prospectus supplement for that series and class.
If the terms of a particular series or class of notes vary between this
prospectus and the accompanying prospectus supplement, you should rely on the
information in the accompanying prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement including the information incorporated by
reference. We have not authorized anyone to provide you with different
information. The information in this prospectus or the accompanying prospectus
supplement is only accurate as of the dates on their respective covers.
We include cross-references in this prospectus and in the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The Table of Contents in this prospectus and in the
accompanying prospectus supplement provide the pages on which these captions
are located.
INCORPORATION BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
them about your notes. This means that we can disclose important information to
you by referring you to these documents. The information incorporated by
reference is an important part of this prospectus, and information that we file
later with the SEC about your notes will automatically update and supersede
this information.
You may request a copy of our filings at no cost by writing or telephoning
at the following address:
Northern Rock plc
Northern Rock House
Gosforth
Newcastle upon Tyne
NE3 4PL
Tel: +44 (0)191 285 7191
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement with the SEC for the US notes. This
prospectus is one portion of the registration statement.
3
We will file reports and other information with the SEC about the mortgages
trust the property of which ultimately secures your notes. Our SEC filings are
available to the public over the Internet at the SEC's web site at http://
www.sec.gov. You may also read and copy any document we file at the SEC's public
reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on their public
reference rooms.
4
TABLE OF CONTENTS
SUMMARY OF PROSPECTUS.................................................... 6
RISK FACTORS............................................................. 27
DEFINED TERMS............................................................ 55
THE ISSUER............................................................... 56
USE OF PROCEEDS.......................................................... 57
THE NORTHERN ROCK GROUP.................................................. 58
FUNDING 2................................................................ 59
THE MORTGAGES TRUSTEE.................................................... 60
HOLDINGS................................................................. 61
GPCH LIMITED............................................................. 62
ISSUANCE OF NOTES........................................................ 63
THE MORTGAGE LOANS....................................................... 68
CERTAIN CHARACTERISTICS OF THE UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET 91
THE ADMINISTRATOR AND THE ADMINISTRATION AGREEMENT....................... 97
ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY.................... 108
THE MORTGAGES TRUST...................................................... 119
THE GLOBAL INTERCOMPANY LOAN AGREEMENT................................... 138
CASHFLOWS................................................................ 143
CREDIT STRUCTURE......................................................... 168
THE SWAP AGREEMENTS...................................................... 178
CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING 2.................. 183
CASH MANAGEMENT FOR THE ISSUER........................................... 187
SECURITY FOR FUNDING 2'S OBLIGATIONS..................................... 189
SECURITY FOR THE ISSUER'S OBLIGATIONS.................................... 194
DESCRIPTION OF THE TRUST DEED............................................ 198
THE NOTES................................................................ 200
DESCRIPTION OF THE US NOTES.............................................. 205
MATERIAL LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE RELATED SECURITY.... 231
MATERIAL UNITED KINGDOM TAX CONSEQUENCES................................. 237
MATERIAL UNITED STATES TAX CONSEQUENCES.................................. 240
MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSIDERATIONS..................... 245
ERISA CONSIDERATIONS..................................................... 246
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES.................... 249
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS............................ 250
LEGAL MATTERS............................................................ 251
UNDERWRITING............................................................. 252
REPORTS TO NOTEHOLDERS................................................... 255
LISTING AND GENERAL INFORMATION.......................................... 256
GLOSSARY................................................................. 259
5
SUMMARY OF PROSPECTUS
The information in this section is a summary of the principal features of
the notes, including a description of the mortgage loans that will generate the
income for us to make payments on the notes and the contracts that document the
transaction. This summary does not contain all of the information that you
should consider before investing in the notes. You should read the entire
prospectus carefully, especially the risks of investing in the notes discussed
under "RISK FACTORS".
OVERVIEW OF THE TRANSACTION
The following is an overview of the transaction as illustrated by the
"STRUCTURAL DIAGRAM OF THE SECURITIZATION TRANSACTION". The numbers in the
diagram refer to the numbered paragraphs in this section.
(1) On March 26, 2001, the seller assigned the initial mortgage
portfolio and the other initial trust property to the mortgages
trustee pursuant to the mortgage sale agreement. Since March 26,
2001 the seller has assigned (and may in the future, from time to
time assign) further mortgage portfolios and the other further
trust property to the mortgages trustee pursuant to the mortgage
sale agreement. For a further description of the assignment of the
initial mortgage portfolio and the further mortgage portfolios, see
"-- ASSIGNMENT OF THE MORTGAGE LOANS". The trust property consists
of the mortgage loans in the mortgage portfolio, their related
security, any accrued interest on those mortgage loans and other
amounts derived from those mortgage loans. The mortgage loans are
residential mortgage loans originated by Northern Rock plc and
secured over mortgaged properties located in England, Wales and
Scotland.
(2) The mortgages trustee holds the trust property on trust for the
benefit of the seller, Funding and Funding 2 pursuant to a
mortgages trust deed. The seller, Funding and Funding 2 each have a
joint and undivided interest in the trust property, but their
entitlement to the proceeds from the trust property is in
proportion to their respective shares of the trust property.
(3) Unless otherwise expressly provided in the mortgages trust deed,
the cash manager on behalf of the mortgages trustee distributes
interest and principal payments on the mortgage loans and allocates
losses in relation to the mortgage loans to the seller, Funding and
Funding 2 according to the share that each of them then has in the
trust property, expressed as a percentage. These percentages
fluctuate as described under "-- THE MORTGAGES TRUST".
(4) Under the terms of the global intercompany loan agreement, we will
make advances (each a loan tranche) to Funding 2 in an amount equal
to the gross proceeds of each class of notes issued by us as part
of a series. The aggregate of the loan tranches, at any time, will
constitute the global intercompany loan. The amount outstanding
under the global intercompany loan agreement, may be increased from
time to time through additional loan tranches. Funding 2 will apply
the proceeds of each loan tranche:
* in payment of a contribution to the mortgages trustee to
increase its beneficial interest in the trust property pursuant
to the mortgages trust deed. Upon receipt of any such
contribution from Funding 2, the mortgages trustee will pay
these funds:
(a) to the seller, as an initial purchase price for additional
mortgage loans to be assigned, from time to time, by the
seller to the mortgages trustee;
(b) to the seller, as a special distribution (which will have
the effect of reducing the seller share); or
6
(c) to Funding as a special distribution (which will have the
effect of reducing the Funding share)
* to fund or replenish the Funding 2 reserve fund and/or to make
a deposit into the Funding 2 GIC account; or
* in payment back to us to refinance an existing loan tranche.
From time to time Funding 2 will make deferred contributions to the
mortgages trustee pursuant to the mortgages trust deed in respect
of the Funding 2 share of the trust property and from such deferred
contributions the mortgages trustee will from time to time make
corresponding payments of deferred purchase price to the seller.
(5) In addition to paying certain of its own fees and expenses, Funding
2 will use amounts received from its share in the trust property to
meet its obligations to pay interest, principal and fees due to us
under the global intercompany loan agreement, to replenish the
Funding 2 liquidity reserve fund, if any, and to replenish the
Funding 2 reserve fund. Funding 2's obligations to us under the
global intercompany loan agreement will be secured under the
Funding 2 deed of charge by, among other things, Funding 2's
interest in the trust property.
(6) Our obligations to pay interest on, and principal of, the notes
will be funded primarily from the payments of interest and
principal received by us from Funding 2 under the global
intercompany loan agreement. Our primary asset will be our rights
under the global intercompany loan agreement and security therefor.
Neither you nor we will have any direct interest in the trust
property, although we will have a security interest under the
Funding 2 deed of charge in Funding 2's interest in the trust
property. Prior to the enforcement of the issuer security, we may
only repay a class of notes (or part thereof) of any series on the
relevant note payment date if we have received principal repayments
in respect of the loan tranche that was funded by the issue of such
notes. We will only receive a principal repayment in respect of a
loan tranche if, amongst other things, following such repayment
(and repayment of the applicable notes), there would be sufficient
credit enhancement on that date for each outstanding class of
notes, either in the form of lower ranking classes of notes or
other forms of credit enhancement.
(7) Subject to satisfying certain issuance tests, we will issue notes
in separate series and classes from time to time. Each series will
consist of one or more classes of notes and will be offered
pursuant to this prospectus and a prospectus supplement setting out
the terms of that series. We may issue notes of any class on any
date provided there is sufficient credit enhancement on that date,
either in the form of lower ranking classes of notes or other forms
of credit enhancement. We will use the proceeds of each series and
class of notes to fund a new loan tranche or to fund an increase in
the amount outstanding on existing loan tranches.
(8) The accounts, reserve funds and swaps transactions, and their
function in the transaction structure are described later in this
prospectus and in the related prospectus supplement. They are
included in the following diagram so that you can refer back to see
where they fit into the structure.
7
STRUCTURAL DIAGRAM OF THE SECURITIZATION TRANSACTION
8
DIAGRAM OF OWNERSHIP STRUCTURE
This diagram illustrates the ownership structure of the principal parties to
the transaction:
* Each of the mortgages trustee, Funding, Funding 2 and the post-
enforcement call option holder is a wholly-owned subsidiary of
Granite Finance Holdings Limited.
* We are a wholly-owned subsidiary of Funding 2.
* The entire issued share capital of Holdings is held on trust by a
professional trust company under the terms of a discretionary trust
for the benefit of one or more charities. The professional trust
company is not affiliated with the seller. Any profits received by
Holdings, after payment of the costs and expenses of Holdings, will
be paid for the benefit of the Down's Syndrome North East
Association (UK) and for other charitable purposes selected at the
discretion of the professional trust company. The payments on your
notes will not be affected by this arrangement.
* Funding 2 may establish an additional issuer or issuers in the
future.
9
The purpose of this diagram is to draw your attention to TWO facts:
* Firstly, the seller has no ownership interest in any of the
entities in this diagram. As a result, the financial condition of
the seller should not directly affect the mortgages trustee,
Funding, Funding 2, the Funding issuers, us or, ultimately,
investors in the notes, although the seller still has a connection
with the transaction for other reasons (such as acting as
administrator of the mortgage loans and as Funding 2 basis rate
swap provider); and
* Secondly, Funding and Funding 2, which each have a beneficial
interest in the mortgages trust, have each established and may
establish issuers that have issued and will issue notes which are
ultimately secured by the same trust property (primarily consisting
of the mortgage portfolio) as the notes offered by us under this
prospectus and the related prospectus supplements. Subject to
certain exceptions, allocations of the proceeds of the trust
property, including receipts of principal and interest on the
mortgage loans, will be made pari passu and pro rata as between
Funding and Funding 2.
THE ISSUER
Granite Master Issuer plc is a public limited company incorporated in
England and Wales. Its registered office is at Fifth Floor, 100 Wood Street,
London EC2V 7EX. References in this document to "WE" or "US" mean the issuer
and references to "YOU" mean potential investors in the notes.
We are a newly created special purpose company and a wholly-owned subsidiary
of Granite Finance Funding 2 Limited. Our purpose is to issue notes from time
to time which represent our mortgage-backed obligations and to use the proceeds
to lend amounts equal to the proceeds of the notes to Granite Finance Funding 2
Limited. We will not engage in any activities unrelated to this purpose.
FUNDING 2
Granite Finance Funding 2 Limited is a newly created private limited company
incorporated in England and Wales. Its registered office is at Fifth Floor, 100
Wood Street, London EC2V 7EX.
Funding 2 is a special purpose company. Funding 2 will borrow money from us
pursuant to the terms of the global intercompany loan agreement. Funding 2 will
use the money borrowed from us to pay to the mortgages trustee contributions
for the Funding 2 share of the trust property pursuant to the mortgages trust
deed or to refinance existing loans made by us to Funding 2. Funding, Funding 2
and the seller together are beneficially entitled to all of the trust property
in accordance with their respective shares in the trust.
THE MORTGAGES TRUSTEE
Granite Finance Trustees Limited is a private limited company incorporated
in Jersey, Channel Islands. Its registered office is at 22 Grenville Street,
St. Helier, Jersey JE4 8PX.
The mortgages trustee is a special purpose company. The purpose of the
mortgages trustee is to acquire from time to time additional trust property
from the seller and to hold all of the trust property on trust for the seller,
Funding and Funding 2 under the terms of the mortgages trust deed.
THE SELLER, THE ADMINISTRATOR, THE CASH MANAGER, THE ISSUER CASH MANAGER AND
THE ACCOUNT BANK
Northern Rock plc is a bank incorporated in England and Wales as a public
limited company. It is regulated by the FSA. Its registered office is at
Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL.
10
The seller originated each of the mortgage loans which it assigned to the
mortgages trustee according to the seller's lending criteria applicable at the
time such mortgage loan was offered, which lending criteria were the same as or
substantially similar to the criteria described later in this prospectus.
The seller acts as administrator of the mortgage portfolio under the terms
of the administration agreement, pursuant to which it has agreed to continue to
perform administrative functions in respect of the mortgage loans on behalf of
the mortgages trustee and the beneficiaries, including collecting payments
under the mortgage loans and taking steps to recover arrears. The seller may
not resign as administrator unless a successor administrator has been
appointed. In addition, the administrator may be replaced by a new
administrator if it defaults in its obligations under the administration
agreement.
The seller has also been appointed as the cash manager for the mortgages
trustee, Funding and Funding 2 to manage their bank accounts, determine the
amounts of and arrange payments to be made by them and keep certain records on
their behalf.
The seller has also been appointed as account bank to provide banking
services to Funding 2. It has also been appointed as account bank in respect of
the issuer GIC account and the mortgages trustee GIC account.
The seller has also been appointed as the issuer cash manager to manage our
bank account, determine the amounts of and arrange payments to be made by us
and keep certain records on our behalf.
Citibank, N.A. has been appointed as account bank to provide banking
services to us.
Lloyds TSB Bank plc, Jersey International Branch, a branch of Lloyds TSB
Bank plc, has been appointed as Jersey account bank to provide banking services
to the mortgages trustee. The activities of Lloyds TSB Bank plc, Jersey
International Branch currently include currency exchange, fund management,
private banking, investment advice and treasury operations. The address of
Lloyds TSB Bank plc, Jersey International Branch is 25 New Street, St. Helier,
Jersey JE4 8ZE.
The seller has a continuing interest in the mortgage loans as one of the
beneficiaries of the mortgages trust.
THE FUNDING 2 SECURITY TRUSTEE
The Bank of New York is the Funding 2 security trustee. Its address is 48th
Floor, One Canada Square, London E14 5AL. The Funding 2 security trustee will
act as trustee for the Funding 2 secured creditors (including us) under the
Funding 2 deed of charge.
THE NOTE TRUSTEE
The Bank of New York is the note trustee. Its address is 48th Floor, One
Canada Square, London E14 5AL. The note trustee will act as trustee for you
under the trust deed.
THE ISSUER SECURITY TRUSTEE
The Bank of New York is the issuer security trustee. Its address is 48th
Floor, One Canada Square, London E14 5AL. The issuer security trustee will act
as trustee for the issuer secured creditors (including you) under the issuer
deed of charge.
THE PAYING AGENTS AND AGENT BANK
Citibank, N.A. is the principal paying agent. Its address is 5 Carmelite
Street, London EC4Y 0PA. Citibank, N.A. is the US paying agent and its address
is 14th Floor, 388 Greenwich Street, New York, New York 10013. The paying
agents will make payments on the notes to you.
11
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 floating rate
notes and the index linked interest notes.
THE REGISTRAR AND TRANSFER AGENT
Citibank, N.A. is the registrar and transfer agent. Its address is 5
Carmelite Street, London EC4Y 0PA. The registrar will maintain a register in
respect of the notes. The transfer agent is responsible for administering any
transfer of notes.
THE SWAP PROVIDERS
The Funding 2 basis rate swap provider is Northern Rock plc. Its registered
office is at Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL
England. The Funding 2 basis rate swap provider has entered into the Funding 2
basis rate swap agreement with Funding 2 (see "THE SWAP AGREEMENTS -- THE
FUNDING 2 BASIS RATE SWAPS").
Each series and class of notes to be issued by us from time to time may be
denominated in different currencies and have a fixed or floating rate of
interest (as specified in the relevant prospectus supplement). To hedge certain
interest rate, currency and/or other risks in respect of amounts received by us
from Funding 2 under the global intercompany loan agreement and amounts payable
by us in respect of each series and class of notes, on the closing date for any
series and class of notes we may enter into an issuer swap agreement with an
issuer swap provider in relation to such series and class of notes. Each
prospectus supplement will provide details of any issuer swap agreement in
respect of the related series and class of notes including the name of the
issuer swap provider (see "THE SWAP AGREEMENTS -- THE ISSUER SWAPS").
SERIES OF NOTES
The notes will be issued in series. Each series will comprise one or more of
class A, class B, class M, class C or class D notes issued on a single issue
date. A class designation determines the relative seniority for receipt of
cashflows. The notes of a particular class in different series (and the notes
of differing sub-classes of the same class and series) will not necessarily
have all the same terms. Differences may include principal amount, interest
rates, interest rate calculations, currency, permitted redemption dates, final
maturity dates, and/or ratings. Each series and class of notes will be secured
over the same property as the notes offered by this prospectus. The terms of
each series and class of notes will be set forth in the related prospectus
supplement.
Some series and classes of notes will be paid ahead of others, regardless of
the ranking of the notes. For example, some payments on some series of class B
notes, class M notes, class C and class D notes may be paid before some series
of class A notes, as described in "-- PAYMENT PRIORITY AND RANKING OF THE
NOTES".
References in this prospectus to a "SERIES" of notes refer to all classes of
notes issued on a given day and any class of notes issued on any other day
which:
(a) is expressed to be consolidated; and
(b) is identical in all respects (including as to listing) except for
closing date, interest commencement date and issue price,
with any of the classes of notes issued on such given day.
References in this prospectus to a "SERIES AND CLASS" of notes refer to a
particular class of notes of a given series.
A class of notes of a given series may comprise one or more sub-classes. If
a class of notes of a given series does comprise more than one sub-class,
references to "SERIES AND CLASS" will refer to a particular sub-class within
such class.
Unless otherwise specified in the related prospectus supplement for the
series and class of notes we may only issue such series and class of notes on
the satisfaction of
12
certain tests, referred to as "ISSUANCE TESTS", which are set out in "ISSUANCE
OF NOTES -- ISSUANCE". In particular, a note may be issued only if there is
sufficient credit enhancement on that date, in the form of outstanding
subordinated loan tranches and reserves or other forms of credit enhancement,
equal to or greater than the required subordinated amount for each outstanding
class of notes. The required subordinated percentage for each class of notes
will be specified in the applicable prospectus supplement. The required
subordination for a class of notes may, subject to certain conditions, be
increased or decreased without noteholder consent.
We are not required to provide prior notice to, or permit any prior review
by you or obtain your consent to issue any notes. There are no restrictions on
the timing of any issuance of notes so long as the issuance tests are met.
Not all series and classes of notes will be registered in the United States
under the Securities Act and therefore will not be offered by this prospectus.
However, the term "NOTES", unless otherwise stated, when used in this
prospectus, includes all of the notes issued by us.
US NOTES
Any series of the class A, class B, class M or class C notes which are
registered in the United States under the Securities Act and offered under this
prospectus and a related prospectus supplement. Class D notes will not be
registered in the United States under the Securities Act and will not be
offered under this prospectus.
STATUS OF THE NOTES
The notes issued from time to time by us will constitute our direct, secured
and unconditional obligations and will be secured by the same security.
RATINGS ON THE NOTES
Each series and class of US Notes and Reg S notes is expected to be issued
with the following ratings by each of Standard & Poor's, Moody's and Fitch.
CLASS A CLASS B CLASS M CLASS C CLASS D
------- ------- ------- ------- -------
Standard & Poor's AAA AA A BBB BB
Moody's Aaa Aa3 A2 Baa2 Ba2
Fitch AAA AA A BBB BB
It is expected that any series and class of notes which are designated as
money market notes will be issued with a rating of A-1+ by Standard & Poor's, a
rating of P-1 by Moody's and a rating of F1+ by Fitch.
The ratings assigned to each series and class of US Notes and Reg S notes
will be specified in the applicable prospectus supplement.
LISTING
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the Financial
Services and Markets Act 2000 for the notes issued during the period of 12
months from the date of this prospectus to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for each series and class of the notes to be admitted
to trading on the London Stock Exchange's market for listed securities.
DENOMINATIONS
Notes will be issued in such denominations as may be agreed between the
relevant underwriters and/or dealers (as applicable) and us, subject to minimum
and maximum denominations as may be allowed or required from time to time by
the relevant central
13
bank or regulatory authority (or equivalent body) or any laws or regulations
applicable to the issuer or the relevant specified currency.
MATURITIES
Notes will be issued in such maturities as may be specified in the relevant
prospectus supplement, subject to compliance with all applicable legal and/or
regulatory and/or central bank requirements.
CURRENCIES
Subject to compliance with all applicable legal and regulatory and central
bank requirements a series and class of notes may be denominated in such
currency or currencies as may be agreed between the relevant underwriters and/
or dealers (as applicable) and us and specified in the applicable prospectus
supplement.
ISSUE PRICE
Each series and class of notes may be issued on a fully paid or partly paid
basis and at an issue price which is at par, or at discount from, or premium
over, par.
SELLING RESTRICTIONS
For a description of certain restrictions on offers, sales and deliveries of
notes and on the distribution of offering material in the United States of
America, the United Kingdom and certain other jurisdictions, see "Underwriting"
below and the relevant prospectus supplement.
REDENOMINATION
A series and class of notes may be redenominated in euro in accordance with
condition 11(f) (Redenomination) if so specified in the applicable prospectus
supplement.
RELATIONSHIP BETWEEN THE NOTES AND THE GLOBAL INTERCOMPANY LOAN
The global intercompany loan will comprise multiple loan tranches. For more
information on the global intercompany loan, see "THE GLOBAL INTERCOMPANY LOAN
AGREEMENT". The gross proceeds of each issue of a series and class of notes
will fund a single loan tranche. The repayment terms of the loan tranche (for
example, dates for payment of principal and the type of amortisation or
redemption) will reflect the terms of the related series and class of notes.
Subject to the various swap agreements and the payments to be made to us by the
various swap providers as described under "THE SWAP AGREEMENTS", we will repay
the notes from payments made to us by Funding 2 under the global intercompany
loan agreement.
PAYMENT PRIORITY AND RANKING OF THE NOTES
Payments of interest and principal on the class A notes of any series due
and payable on a note payment date will rank ahead of payments of interest and
principal on the class B notes of any series, the class M notes of any series,
the class C notes of any series and the class D notes of any series (in each
case, due and payable on such note payment date). Payments of interest and
principal on the class B notes of any series due and payable on a note payment
date will rank ahead of payments of interest and principal on the class M notes
of any series, the class C notes of any series and the class D notes of any
series (in each case, due and payable on such note payment date). Payments of
interest and principal on the class M notes of any series due and payable on a
note payment date will rank ahead of payments of interest and principal on the
class C notes of any series and the class D notes of any series (in each case,
due and payable on such note payment date). Payments of interest and principal
on the class C notes of any series due and payable on a note payment date will
rank ahead of payments of interest and principal on the class D notes of any
series due and payable on such note payment
14
date. 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 notes of each series rank
equally (but subject to the note payment dates of the class A notes of each
series). Payments of interest and principal on the class B notes of each series
rank equally (but subject to the note payment dates of the class B notes of
each series). Payments of interest and principal on the class M notes of each
series rank equally (but subject to the note payment dates of the class M notes
of each series). Payments of interest and principal on the class C notes of
each series rank equally (but subject to the note payment dates of the class C
notes of each series). Payments of interest and principal on the class D notes
of each series rank equally (but subject to the note payment dates of the class
D notes of each series). The note payment dates for a series and class of notes
will be specified in the applicable prospectus supplement.
Investors should note that:
* notes of different series and classes are intended to receive
payment of interest and principal at different times, therefore
lower ranking classes of notes of one series may be paid interest
and principal before higher ranking classes of notes of a different
series;
* no loan tranche of any tier (other than the AAA loan tranches) and,
consequently, no notes of any class (other than the class A notes)
may be repaid principal if, following such repayment, the amount of
subordination available from all outstanding classes of notes (and
other forms of credit enhancement) is less than the required credit
enhancement for each class of notes. The "REPAYMENT TESTS", which
determine whether any loan tranche (or any part thereof) and,
consequently, any series and class of notes may be repaid principal
are set out in "CASHFLOWS -- DISTRIBUTION OF FUNDING 2 AVAILABLE
PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT OF THE FUNDING 2
SECURITY -- RULES FOR APPLICATION OF FUNDING 2 AVAILABLE PRINCIPAL
RECEIPTS". The failure to repay principal in respect of such loan
tranche and the related notes on the applicable redemption dates
for such reason will not constitute an event of default in respect
of such loan tranche or in respect of the related notes;
* if any class A note and/or AAA loan tranche remains outstanding and
either the issuer arrears test or the issuer reserve requirement is
not satisfied on any permitted redemption date, no amount of
principal will be repayable in respect of any subordinate loan
tranche and (consequently) the related series and class of notes.
The failure to repay principal in respect of such subordinate loan
tranche and the related notes on the applicable redemption dates
for such reason will not constitute an event of default in respect
of such loan tranche or in respect of the related notes;
* prior to the enforcement of the issuer security, a series and class
of notes will be redeemed on a permitted redemption date only to
the extent of the amount (if any) repaid on the related loan
tranche on such date (save in certain circumstances, where amounts
standing to the credit of the issuer reserve fund may be so
applied);
* to the extent required, but subject to certain limits and
conditions, the issuer may apply amounts standing to the credit of
the issuer reserve fund in payment of interest and principal on the
notes;
* if not redeemed earlier, each series and class of notes will be
redeemed by us on the final maturity date specified in the
applicable prospectus supplement. The failure to redeem a series
and class of notes on its final maturity date will constitute an
event of default in respect of such notes; and
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* following the enforcement of the issuer security, the priority of
payments will change and we will make payments of interest and
principal in accordance with and subject to the relevant priority
of payments as described under "CASHFLOWS".
Investors should also note that Funding 2 may establish from time to time
other Funding 2 issuers which will issue notes and from the proceeds thereof
make intercompany loans to Funding 2. The notes issued by such other Funding 2
issuers ultimately will be secured by the same trust property (primarily
consisting of the mortgage portfolio) as the notes issued by us under this
prospectus and the related prospectus supplements (see "RISK FACTORS -- IF
FUNDING 2 ENTERS INTO OTHER FUNDING 2 INTERCOMPANY LOANS, SUCH OTHER FUNDING 2
INTERCOMPANY LOANS AND ACCOMPANYING NOTES MAY BE REPAID PRIOR TO THE GLOBAL
INTERCOMPANY LOAN AND THE NOTES" and "RISK FACTORS -- OTHER FUNDING 2 ISSUERS
MAY SHARE IN THE SAME SECURITY GRANTED BY FUNDING 2 TO US, AND THIS MAY
ULTIMATELY CAUSE A REDUCTION IN THE PAYMENTS YOU RECEIVE ON THE NOTES").
INTEREST
Interest will accrue on each series and class of notes from its date of
issuance at the applicable interest rate specified for that series and class of
notes, which may be a fixed, floating or other type of rate as specified in the
applicable prospectus supplement. Interest on each series and class of notes
will be due and payable on each note payment date as specified in the
applicable prospectus supplement. Following the earlier to occur of a pass-
through trigger event and the step-up date (if any) in relation to a series and
class of notes, interest in respect of such notes will become due and payable
on monthly payment dates and interest will accrue on a monthly basis.
Any revenue shortfall in payments of interest due on any series of the class
B notes, the class M notes, the class C notes or the class D notes on any note
payment date in respect of such notes will be deferred until the immediately
succeeding note payment date in respect of such notes. On that immediately
succeeding note payment date, the amount of interest due on the relevant class
of notes will be increased to take account of any deferred interest. If on that
note payment date there is still a revenue shortfall, that revenue 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 notes, the class M notes, the
class C notes or the class D notes, then you may not receive all interest
amounts payable on those classes of notes.
We are not able to defer payments on interest due on any note payment date
in respect of the most senior class of notes then outstanding. The failure to
pay interest on such notes will be a note event of default.
FIXED RATE NOTES
For a series and class of fixed rate notes, fixed interest will be payable
on such note payment dates as specified in the applicable prospectus supplement
and on redemption and will be calculated on the basis of such day count
fraction as specified in the applicable prospectus supplement.
FLOATING RATE NOTES
A series and class of floating rate notes will bear interest at a rate
determined:
(i) on the same basis as the floating rate under an interest rate swap
transaction in the relevant specified currency governed by an
agreement incorporating the ISDA definitions and based upon certain
elections made pursuant to the ISDA definitions; or
(ii) on the basis of a reference rate appearing on the agreed screen
page of a commercial quotation service: or
16
(iii) on such other basis.
as specified in the applicable prospectus supplement.
The margin (if any) relating to such series and class of notes will be
specified in the applicable prospectus supplement.
INDEX LINKED NOTES
Payments of principal in respect of a series and class of index linked
redemption notes or of interest in respect of a series and class of index
linked interest notes will be calculated by reference to such index and/or
formula or to changes in the prices of securities or commodities or to such
other factors specified in the applicable prospectus supplement.
OTHER PROVISIONS IN RELATION TO FLOATING RATE AND INDEX LINKED INTEREST NOTES
A series and class of floating rate notes and/or index linked interest notes
may also have a maximum interest rate, a minimum interest rate or both (as
specified in the applicable prospectus supplement). Interest on floating rate
notes and/or index linked interest notes in respect of each interest period,
will be payable on such note payment dates, and will be calculated on the basis
of such day count fraction, as specified in the applicable prospectus
supplement.
DUAL CURRENCY NOTES
Payments (whether in respect of principal or interest and whether at
maturity or otherwise) in respect of a series and class of dual currency notes
will be made in such currencies, and based on such rates of exchange, as
specified in the applicable prospectus supplement.
ZERO COUPON NOTES
A series and class of zero coupon notes may be offered and sold at a
discount to their nominal amount unless otherwise specified in the applicable
prospectus supplement.
PASS-THROUGH NOTES
A series and class of pass-through notes will be redeemable in full on the
final maturity date specified for such series and class of notes in the
applicable prospectus supplement. On each applicable loan payment date, Funding
2 may be permitted to make payments of amounts equal to the pass-through
requirement in respect of pass-through loan tranches to us so that we may, on
the applicable note payment date, repay all or part of the pass-through notes
prior to their respective final maturity dates. Following the earlier to occur
of a pass-through trigger event and the step-up date (if any) in relation to a
series and class of notes, we will repay such notes, to the extent that funds
are available and subject to the conditions for repayment, on monthly payment
dates.
CONTROLLED AMORTIZATION NOTES
A series and class of controlled amortization notes will be redeemable, on
controlled redemption dates in controlled amortization installments, the
amounts of which will be determined as specified in the applicable prospectus
supplement. On each controlled repayment date for a controlled repayment loan
tranche, Funding 2 will seek to make payments equal to the controlled repayment
requirement to us so that we may repay each controlled amortization installment
on its controlled redemption date. If there are insufficient funds on a
controlled redemption date to repay the relevant controlled amortization
installment(s) in respect of a series and class of controlled amortization
notes, then we shall be required to pay the shortfall, to the extent we receive
funds therefor, on subsequent note payment dates in respect of such notes.
17
Following the earlier to occur of a pass-through trigger event and the
step-up date (if any) in relation to a series and class of controlled
amortization notes, such notes will be deemed to be pass-through notes and we
will repay such notes, to the extent that funds are available and subject to the
conditions regarding repayment, on monthly payment dates.
SCHEDULED REDEMPTION NOTES
A series and class of scheduled redemption notes will be redeemable on
scheduled redemption dates, in two or more scheduled amortization installments,
the amounts of which will be determined as specified in the applicable
prospectus supplement. On each scheduled repayment date Funding 2 will seek to
make payments equal to the scheduled repayment requirement to us so that we may
repay each scheduled amortization installment on its scheduled redemption date.
If there are insufficient funds on a scheduled redemption date to repay the
relevant scheduled amortization installment(s) in respect of a series and class
of scheduled redemption notes, then we shall be required to pay the shortfall,
to the extent we receive funds therefor, on subsequent note payment dates in
respect of such notes.
Following the earlier to occur of a pass-through trigger event and the step-
up date (if any) in relation to a series and class of scheduled redemption
notes, such notes will be deemed to be pass-through notes and we will repay
such notes, to the extent that funds are available and subject to the
conditions regarding repayment, on monthly payment dates.
BULLET REDEMPTION NOTES
A series and class of bullet redemption notes will be redeemable in full on
the bullet redemption date specified in the applicable prospectus supplement.
Funding 2 will seek to accumulate funds relating to principal payments on each
bullet loan tranche over its cash accumulation period in order to repay such
funds as a lump sum payment to us so that we can redeem the corresponding
bullet redemption notes in full on the relevant bullet redemption date. A cash
accumulation period in respect of a bullet loan tranche is the period of time
estimated to be the number of months prior to the relevant bullet repayment
date necessary for Funding 2 to accumulate enough principal receipts derived
from its share of the trust property to repay that bullet loan tranche to us so
that we will be able to redeem the corresponding notes in full on the relevant
bullet redemption date. The cash accumulation period will be determined
according to a formula described under "CASHFLOWS -- DISTRIBUTION OF FUNDING 2
AVAILABLE PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT OF THE FUNDING 2
SECURITY". To the extent that there are insufficient funds to redeem a series
and class of bullet redemption notes on the relevant bullet redemption date,
then we shall be required to pay the shortfall, to the extent we receive funds
therefor, on subsequent note payment dates in respect of such notes.
No assurance can be given that Funding 2 will accumulate sufficient funds
during the cash accumulation period relating to any bullet loan tranche to
enable it to repay the relevant loan tranche to us so that the related series
of bullet redemption notes on their bullet redemption date. See "RISK FACTORS
- -- THE YIELD TO MATURITY OF THE NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENTS
OR REDEMPTIONS ON THE MORTGAGE LOANS OR REPURCHASES OF MORTGAGE LOANS BY THE
SELLER".
Following the earlier to occur of a pass-through trigger event and the step-
up date (if any) in relation to a series and class of bullet redemption notes,
such notes will be deemed to be pass-through notes and we will repay such notes
to the extent that funds are available and subject to the conditions regarding
repayment, on monthly payment dates.
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MONEY MARKET NOTES
From time to time, we may issue a series and class of money market notes.
Money market notes will be bullet redemption notes or scheduled redemption
notes, the final maturity date of which will be less than 397 days from the
closing date on which such notes were issued.
We may repay certain series and classes of money market notes on their final
maturity dates using amounts received from a money market note subscriber
pursuant to the terms of a money market note subscription agreement. The
applicable prospectus supplement will, in addition to providing information
regarding a series and class of money market notes, identify any money market
note subscriber in respect of such money market notes and the terms of the
applicable money market note subscription agreement.
Certain risks relating to repayment of money market notes by means of a
money market note subscriber are described under "RISK FACTORS -- PAYMENTS FROM
A MONEY MARKET NOTE SUBSCRIBER MAY NOT BE SUFFICIENT TO REPAY MONEY MARKET
NOTES".
REDEMPTION AND REPAYMENT
If not redeemed earlier, each series and class of notes will be redeemed by
us on the final maturity date specified for such series and class of notes in
the applicable prospectus supplement.
For more information on the redemption of the 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".
See also
"-- PAYMENT PRIORITY AND RANKING OF THE NOTES".
ENFORCEMENT
All notes will become immediately due and payable on the service on us by
the note trustee of an issuer enforcement notice. The note trustee becomes
entitled to serve an issuer enforcement notice at any time after the occurrence
of a note event of default in respect of a series and class of notes (and it
may do so using its own discretion or on the instructions of the noteholders of
the applicable class of notes across all series (holding, in aggregate at least
one quarter in principal amount outstanding of such class of notes)) provided
that, at such time, all notes ranking in priority to such class of notes have
been repaid in full.
For more information on issuer enforcement notices and note events of
default, see "DESCRIPTION OF THE US NOTES -- EVENTS OF DEFAULT" and
"DESCRIPTION OF THE US NOTES -- ENFORCEMENT OF NOTES".
OPTIONAL REDEMPTION OF THE NOTES FOR TAX AND OTHER REASONS
We may redeem a series and class of notes at their principal amount
outstanding, together with any accrued and unpaid interest in respect thereof,
in the event of particular tax changes affecting such series and class or the
global intercompany loan which cannot be avoided by us or Funding 2, as the
case may be, taking reasonable measures available to us or Funding 2, if (a) we
give not more than 60 nor less than 30 days' notice to you and the note trustee
in accordance with the terms and conditions of such series, and (b) we have,
prior to giving that notice, provided all necessary opinions to the note
trustee and certified to the note trustee that, among other things, we will
have the necessary funds to pay principal and interest due in respect of such
series and class of notes on the relevant note payment date.
In addition, we may redeem in principally the same manner as stated in the
previous paragraph, a series and class of notes outstanding:
* on the step-up date relating to such series and class of notes (as
specified in the applicable prospectus supplement) and on any
monthly payment date thereafter; or
19
* if the Capital Requirements Directive has been implemented in the
United Kingdom, whether by rule of law, recommendation or best
practice or by any other regulation, on the first note payment date
in respect of such notes falling after such implementation and any
applicable note payment date thereafter provided that an issuer
enforcement notice has not been served; or
* on any note payment date in respect of such notes on which the
aggregate principal amount outstanding of such series and class of
notes and all other classes of notes of the same series is less
than 10% of the aggregate principal amount outstanding of such
series of notes as at the applicable closing date; or
* on any note payment date in respect of such notes after it has
become unlawful for us to make, fund or allow to remain outstanding
the related loan tranche and we have required Funding 2 to prepay
such loan tranche.
Any notes that we redeem under these circumstances will be redeemed at their
principal amount outstanding together with accrued and unpaid interest on that
principal amount.
For a detailed description of the circumstances under which the notes may be
redeemed see "DESCRIPTION OF THE US NOTES".
POST-ENFORCEMENT CALL OPTION
The note trustee is required, at the request of a subsidiary of Holdings
called GPCH Limited (in its capacity as post-enforcement call option holder),
for a nominal consideration, to transfer or procure transfer of all of the
notes to the post enforcement call option holder pursuant to the option granted
to it by the note trustee (as agent for the noteholders) under the terms of the
issuer post-enforcement call option agreement. The post-enforcement call option
may only be exercised following the final maturity date of the latest maturing
notes or this enforcement of the issuer security. See "GPCH LIMITED -- POST-
ENFORCEMENT CALL OPTION"
WITHHOLDING TAX
Payments of interest and principal with respect to any series of notes will
be subject to any applicable withholding taxes and we will not be obliged to
pay additional amounts in relation thereto. The applicability of any UK
withholding tax is discussed under "MATERIAL UNITED KINGDOM TAX CONSEQUENCES".
THE FUNDING 2 PROGRAM DATE
On or about January 19, 2005.
OPERATIVE DOCUMENTS CONCERNING THE NOTES
We will issue each series of notes under the trust deed. The notes will also
be subject to a paying agent and agent bank agreement. The security for the
notes is provided under the issuer deed of charge among us, the issuer security
trustee, the note trustee and our other secured creditors. Operative legal
provisions relating to the notes are included in the trust deed, the paying
agent and agent bank agreement, the issuer deed of charge, the issuer cash
management agreement and the notes themselves.
GOVERNING LAW
The notes will be governed by, and construed in accordance with, English
law.
THE GLOBAL INTERCOMPANY LOAN
We have entered into the global intercompany loan agreement with Funding 2.
As described under "-- RELATIONSHIP BETWEEN THE NOTES AND THE GLOBAL
INTERCOMPANY LOAN", the global intercompany loan will consist of separate loan
tranches, each corresponding to a particular series and class of notes. The
loan tranches will
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comprise AAA tranches, AA tranches, A tranches, BBB tranches and BB tranches
reflecting the designated credit rating assigned to each loan tranche. The loan
tranche related to a series and class of notes will be specified for such
series and class of notes in the applicable prospectus supplement. The terms of
each loan tranche will be set forth in the related loan tranche supplement and
the global intercompany loan agreement.
From time to time and subject to certain conditions, we will lend amounts to
Funding 2 as separate loan tranches using the proceeds of each issuance of a
series and class of notes by us. Funding 2 will use the funds advanced under
each such loan tranche to:
* pay to the mortgages trustee a contribution to acquire and/or
increase its beneficial interest in the trust property pursuant to
the mortgages trust deed;
* fund or replenish the Funding 2 reserve fund and/or to make a
deposit into the Funding 2 GIC account; and/or
* make a payment back to us to refinance an existing loan tranche.
Subject to the provisions of the relevant Funding 2 priority of payments
(see "CASHFLOWS"), Funding 2 will repay the global intercompany loan from
payments received from the mortgages trustee, as described under "-- THE
MORTGAGES TRUST". To the extent required, but subject to certain limits and
conditions, Funding 2 may also apply amounts standing to the credit of the
Funding 2 reserve fund and the Funding 2 liquidity reserve fund (if any) in
payments of interest and principal due under the the global intercompany loan.
We will make payments of interest on, and principal of, the notes principally
from payments of interest and principal made by Funding 2 to us under the
global intercompany loan agreement.
During a cash accumulation period for any bullet loan tranche, Funding 2
will continue to make principal repayments on any other loan tranches that are
then due and scheduled to be paid, subject to having sufficient funds therefor
after meeting its obligations with a higher priority. Such principal repayments
may only be made to the extent that (following such principal repayments and
the principal repayments on the related series and class of notes) the amount
of subordination available from all outstanding subordinate classes of notes
(and other forms of credit enhancement) and reserves (as applicable) is at
least equal to the required credit enhancement for each of the class A notes,
the class B notes, the class M notes and the class C notes then outstanding. In
certain circumstances, payment on the controlled repayment loan tranches,
scheduled repayment loan tranches and pass-through loan tranches will be
deferred (see "CASHFLOWS -- DISTRIBUTION OF FUNDING 2 AVAILABLE PRINCIPAL
RECEIPTS PRIOR TO THE ENFORCEMENT OF THE FUNDING 2 SECURITY -- RULES FOR
APPLICATION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS").
Funding 2 is generally required to repay principal on the loan tranches
(after repaying amounts owed to the Funding 2 liquidity facility provider, if
any, and after replenishing the reserve funds) based on their respective loan
tranche ratings. This means that the AAA loan tranches are repaid before the AA
loan tranches, which in turn are repaid before the A loan tranches, which in
turn are repaid before the BBB loan tranches which in turn are repaid before
the BB tranches. Prior to the occurrence of a pass-through trigger event, there
are a number of exceptions to this priority of payments. For further
information on such exceptions you should read the "CASHFLOWS" section of this
prospectus.
For a detailed description of Funding 2's payments of interest and principal
under the global intercompany loan agreement, see "THE GLOBAL INTERCOMPANY LOAN
AGREEMENT -- PAYMENT OF INTEREST" and "THE GLOBAL INTERCOMPANY LOAN AGREEMENT
- -- REPAYMENT OF THE GLOBAL INTERCOMPANY LOAN".
REPAYMENT OF LOAN TRANCHES
Whenever Funding 2 is to repay a loan tranche (in whole or in part), it will
do so only to the extent that its share of the proceeds of principal receipts
it has received from the mortgages trustee and allocated to that loan tranche
are sufficient to repay that loan
21
tranche in accordance with its terms, and only to the extent that certain tests
relating to repayment of loan tranches are satisfied, including that following
such repayment and the consequential redemption of the related series and class
of notes, the amount of subordination available from all subordinate
outstanding classes of notes (and other forms of credit enhancement) and
reserves (as applicable) is greater than or equal to the required credit
enhancement for each of the class A notes, the class B notes, the class M notes
and the class C notes (see "CASHFLOWS -- DISTRIBUTION OF FUNDING 2 AVAILABLE
PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT OF THE FUNDING 2 SECURITY -- RULES
FOR APPLICATION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS").
The circumstances under which we can take action against Funding 2 if it
does not make a payment under the global intercompany loan agreement are
limited. In particular, prior to the latest occurring final repayment date of
any loan tranche advanced under the global intercompany loan agreement it will
not be an event of default under the global intercompany loan agreement if
Funding 2 does not pay some or all amounts due under the global intercompany
loan agreement where Funding 2 does not have the money to make the relevant
payment or because the loan tranche that would otherwise be redeemed is
required to provide subordination for senior loan tranches. However, the
occurrence of an event of default under any other Funding 2 intercompany loan
agreement (if any) may trigger an acceleration of the loan tranches outstanding
under the global intercompany loan agreement. For more information on events of
default under the global intercompany loan agreement generally, see "THE GLOBAL
INTERCOMPANY LOAN AGREEMENT".
ISSUANCE OF LOAN TRANCHES
Upon receipt by us of the proceeds from an issue of a series and class of
notes, we will advance a new loan tranche to Funding 2.
Neither Funding 2 nor we are required to provide prior notice to you, to
permit any prior review by you or to obtain your consent to the advance of any
loan tranche. There are no restrictions on the timing of any loan tranches.
If we issue notes constituting part of a series and class of notes on a date
after the first date on which such series and class of notes were issued, the
proceeds of the issuance of such new notes will, without notice to, or the
consent of, any noteholders, increase the outstanding principal amount of the
applicable loan tranche.
THE MORTGAGE LOANS
The mortgage loans comprising the mortgage portfolio from time to time have
been and will be originated by the seller. Each mortgage loan (other than a
regulated personal secured loan) is secured by a first legal charge over a
residential property located in England or Wales or a first ranking standard
security over a residential property located in Scotland. Each regulated
personal secured loan is secured by a legal charge over freehold or leasehold
property located in England or Wales or by a standard security over heritable
or long leasehold property located in Scotland which ranks in priority below
the first legal charge or first ranking standard security securing the related
borrower's existing mortgage loan. The mortgage loans included in the mortgage
portfolio consist of several different types with a variety of characteristics
relating to, among other things, calculation of interest and repayment of
principal. See "THE MORTGAGE LOANS -- CHARACTERISTICS OF THE MORTGAGE LOANS"
for a more detailed description of the mortgage loans offered by the seller and
the relevant prospectus supplement for statistical information on the mortgage
portfolio.
All such mortgage loans are originated in accordance with the seller's
lending criteria at the time of offer of the mortgage loan. The seller may,
from time to time, change its lending criteria and any other terms applicable
to the new mortgage loans or their related security assigned to the mortgages
trust after the Funding 2 program date so that all new mortgage loans
originated after the date of that change will be subject to the new lending
22
criteria. Notwithstanding any change to the lending criteria or other terms
applicable to new mortgage loans, they and their related security may only be
assigned to the mortgages trust if those new mortgage loans comply with the
seller's representations and warranties set out in the mortgage sale agreement,
including a representation that those new mortgage loans were originated in
accordance with the seller's lending criteria applicable at the time of their
origination. The seller is obliged to repurchase from the mortgage trustee
mortgage loans that are in breach of these representations and warranties. See
"ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY"
ASSIGNMENT OF THE MORTGAGE LOANS
The seller assigned the initial mortgage portfolio to the mortgages trustee
on March 26, 2001, and since March 26, 2001 has assigned further mortgage
portfolios and other trust property to the mortgages trustee, in each case
subject to the terms of the mortgage sale agreement. After the Funding 2
program date, the seller may assign new mortgage loans and their related
security to the mortgages trustee in order to increase or maintain the trust
property. The seller also may add to the trust property from time to time in
connection with, amongst other things, an issue of new notes by us, the
proceeds of which are applied ultimately to fund the acquisition (by
assignment) of the new mortgage loans and their related security to the
mortgages trustee as described under "ASSIGNMENT OF THE MORTGAGE LOANS AND
RELATED SECURITY -- ASSIGNMENT OF NEW MORTGAGE LOANS AND THEIR RELATED
SECURITY".
The English mortgage loans and their related security were and will be
assigned by the seller to the mortgages trustee by way of an English law
equitable assignment. The beneficial interests in the Scottish mortgage loans
and their related security were and will be transferred by the seller to the
mortgages trustee by way of a declaration of trust in favour of the mortgages
trustee. In each case this means that the beneficial interest in the mortgage
loans and the related security is passed to the mortgages trustee in its
capacity as trustee for and on behalf of the beneficiaries of the mortgages
trust. However, unless certain events have occurred and certain additional
steps have been taken (including the execution and (where necessary)
registration of certain transfers and assignations and the giving of notices of
the assignment to the relevant borrowers), legal title to the mortgage loans
and their related security will remain with the seller. More information on
equitable and beneficial assignments is described under "ASSIGNMENT OF THE
MORTGAGE LOANS AND RELATED SECURITY -- TRANSFER OF LEGAL TITLE TO THE MORTGAGES
TRUSTEE".
When new mortgage loans are assigned to the mortgages trustee, the trust
property will increase accordingly. Depending on the circumstances, the
increase in the trust property may result in an increase in the seller share of
the trust property, the Funding share and/or the Funding 2 share of the trust
property. For a description of how adjustments are made to the seller share of
the trust property and the Funding 2 share of the trust property, see "THE
MORTGAGES TRUST".
THE MORTGAGES TRUST
The mortgages trust was established on March 26, 2001 among the mortgages
trustee, the seller, Funding and Law Debenture Corporate Services Limited. On
the Funding 2 program date Funding 2 became a beneficiary of the mortgages
trust. As of the Funding 2 program date, the mortgages trustee holds the trust
property on trust for Funding 2, Funding and the seller. Funding 2, Funding and
the seller each has a joint and undivided beneficial interest in the trust
property. Unless otherwise expressly provided in the mortgages trust deed, the
proceeds of interest and principal payments arising from the mortgage loans in
the trust property are allocated to Funding 2, Funding and the seller as
described later in this section. The only beneficiaries of the trust are
Funding, Funding 2 and the seller.
The trust property currently consists of, among other things, the mortgage
portfolio, including any permitted replacement mortgage loan in respect of any
permitted product
23
switch and any income generated by the mortgage loans or their related security
on or after the relevant assignment date (excluding third party amounts). In
addition, re-draws that have been made under flexible mortgage loans and
further draws that have been made under personal secured loans, in each case
that were assigned to the mortgages trustee, also form part of the existing
trust property. Future re-draws that are made under flexible mortgage loans and
further draws that are made under personal secured loans, in each case that
were assigned to the mortgages trustee, will also form part of the trust
property. The trust property also includes any contribution paid by each
beneficiary to the mortgages trustee (until the relevant funds are applied by
the mortgages trustee in accordance with the mortgages trust deed) and includes
any money in the mortgages trustee transaction account and the mortgages
trustee guaranteed investment contract, or GIC, account. The mortgages trustee
GIC account is the bank account in which the mortgages trustee holds any cash
that is part of the trust property until it is distributed to the
beneficiaries.
The seller is entitled, but not obliged, to purchase any mortgage loans that
are the subject of a further advance or any mortgage loans where the applicable
borrower subsequently takes a personal secured loan. This arrangement may
change if the seller decides at a later date to retain these mortgage loans
within the trust property and to assign these further advances to the mortgages
trustee. Any further advance made to an existing borrower (in respect of a
mortgage loan within the mortgages trust) that the seller at a later date
decides to assign to the mortgages trustee will be funded solely by the seller,
will comply with the applicable conditions to the assignment of new mortgage
loans and their related security to the mortgages trustee as described in this
prospectus, will be secured by the same mortgaged property securing that
borrower's mortgage loan, will form part of the trust property, and will
increase only the seller share of the trust property, unless at the time of
assignment Funding 2 or Funding provides a contribution (excluding any deferred
contribution) to the mortgages trustee in respect of that new trust property.
The seller is solely responsible for funding re-draws under flexible
mortgage loans and further draws under personal secured loans. This means that
for any cash re-draw under a flexible mortgage loan or further draw under a
personal secured loan, the seller will pay the amount of that cash re-draw or
further draw to the borrower and both the trust property and the seller share
of the trust property will increase by the amount of that cash payment. It also
means that for any non-cash re-draw under a flexible mortgage loan, the seller
will pay to the mortgages trustee an amount equal to the unpaid interest
associated with that non-cash re-draw, and both the trust property and the
seller share of the trust property will increase by the amount of that payment.
The composition of the trust property fluctuates as re-draws under flexible
mortgage loans, further draws under personal secured loans, future further
advances and new mortgage loans are added to the mortgages trust and as the
mortgage loans that are already part of the trust property are repaid or
mature, or are purchased by the seller.
Losses on the mortgage loans generally are allocated to each of Funding,
Funding 2 and the seller in accordance with each of Funding's, Funding 2's and
the seller's respective percentage share of the trust property calculated on
the distribution date immediately preceding the determination of such losses
(or, in certain circumstances, each of Funding's, Funding 2's and the seller's
respective weighted average percentage share of the trust property as
calculated on the relevant distribution date). However, certain losses related
to re-draws and/or set-off by borrowers may, in limited circumstances, be
allocated solely to the seller. In addition, losses in respect of personal
secured loans will be allocated first to the seller's share of the trust
property (including the minimum seller share) until the seller's share is
reduced to zero, and only thereafter to reduce the Funding and Funding 2 shares
of the trust property. For a detailed description of how losses on the mortgage
loans are allocated to the loan tranches, see "THE MORTGAGES TRUST -- LOSSES"
and "CREDIT STRUCTURE -- PRINCIPAL DEFICIENCY LEDGER".
24
Under the terms of the controlling beneficiary deed, Funding, Funding 2, the
security trustee, the Funding 2 security trustee and the seller have agreed as
to, amongst other things, arrangements amongst them in respect of certain
commercial decisions (relating to authorizations, consents, waivers,
instructions or other acts) to be made from time to time in respect of the
transaction documents.
UNITED KINGDOM TAX
A summary of the material UK tax consequences of the purchase, ownership and
disposition of the notes is set out in "MATERIAL UNITED KINGDOM TAX
CONSEQUENCES"
UNITED STATES FEDERAL INCOME TAX
A summary of the material US federal income tax consequences of the
purchase, ownership and disposition of US dollar denominated notes is set out
in "MATERIAL UNITED STATES TAX CONSEQUENCES". As set forth in the applicable
prospectus supplement, it is anticipated that Sidley Austin Brown & Wood LLP,
our US federal income tax counsel, will deliver their opinion that, while not
free from doubt, the US dollar denominated notes will be treated as debt for US
federal income tax purposes.
Further, it is anticipated that our US federal income tax counsel will also
provide their opinion that, assuming compliance with the transaction documents,
neither we nor the mortgages trustee acting in its capacity as trustee of the
mortgages trust nor Funding 2 will be subject to US federal income tax. See
"MATERIAL UNITED STATES TAX CONSEQUENCES".
JERSEY (CHANNEL ISLANDS) TAX
A summary of certain aspects of Jersey taxation of the mortgages trustee is
set out in "MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSIDERATIONS".
ERISA CONSIDERATIONS FOR INVESTORS
The US notes will be eligible for purchase by employee benefit and other
plans subject to Section 406 of ERISA or Section 4975 of the Code and by
governmental plans that are subject to any state, local or other federal law of
the United States that is substantially similar to Section 406 of ERISA or
Section 4975 of the Code, subject to consideration of the issues described in
this prospectus under "ERISA CONSIDERATIONS". Each purchaser of any such notes
(and all subsequent transferees thereof) will be deemed to have represented and
warranted that its purchase, holding and disposition of such notes will not
result in a non-exempt prohibited transaction under ERISA or the Code (or in
the case of any governmental plan, any substantially similar state, local or
other federal law of the United States). In addition, any fiduciary of a plan
subject to the fiduciary responsibility provisions of ERISA or similar
provisions of state, local or other federal laws of the United States should
consult with their counsel to determine whether an investment in the notes
satisfies the prudence, investment diversification and other applicable
requirements of those provisions.
25
FEES
The table below sets out the on-going fees to be paid by the issuer, Funding
2 and the mortgages trustee to transaction parties.
TYPE OF FEE AMOUNT OF FEE PRIORITY IN CASHFLOW
- --------------------------------------- ---------------------- -------------------------------------------
Administration fee 0.08% per year of the Ahead of all revenue
Funding 2 share of the amounts payable to
trust property Funding 2 by mortgages
trustee
Funding 2 cash management fee [GBP]100,000 each year Ahead of all revenue
amounts payable by
Funding 2 and allocable to
issuer
Issuer cash management fee [GBP]100,000 each year Ahead of all interest
payments on the notes
Corporate expenses of mortgages trustee Estimated [GBP]13,000 Ahead of all revenue
each year amounts payable to
Funding 2 by mortgages
trustee
Corporate expenses of Funding 2 Estimated [GBP]10,500 Ahead of all revenue
each year amounts payable by
Funding 2 and allocable to
issuer
Corporate expenses of issuer Estimated [GBP]12,000 Ahead of all interest payments on the notes
each year
Fee payable by Funding 2 to Estimated [GBP]13,000 In respect of Funding 2
Funding 2 security trustee, by each year security trustee, ahead of
issuer to note trustee and issuer all revenue amounts
security trustee and by issuer to payable by Funding 2 and
principal paying agent, paying allocable to issuer, and in
agent, transfer agent, registrar respect of note trustee,
and agent bank issuer security trustee and
agents, ahead of all
interest payments on the
notes
TYPE OF FEE FREQUENCY
- --------------------------------------- -------------------------
Administration fee Each distribution date
Funding 2 cash management fee Each monthly
payment date
Issuer cash management fee Each monthly
payment date
Corporate expenses of mortgages trustee Each distribution
date
Corporate expenses of Funding 2 Each monthly
payment date
Corporate expenses of issuer Each monthly payment date
Fee payable by Funding 2 to Each monthly
Funding 2 security trustee, by payment date
issuer to note trustee and issuer
security trustee and by issuer to
principal paying agent, paying
agent, transfer agent, registrar
and agent bank
Each of the above fees is inclusive of value added tax ("VAT"), which is
currently assessed at 17.5%. The VAT-exclusive amount of the fees will be
subject to adjustment if the applicable rate of VAT changes so that the actual
amount of each fee (inclusive of VAT and regardless of the VAT rate assessed)
will be the amount as set out above.
26
RISK FACTORS
This section describes the principal risk factors associated with an
investment in the notes. If you are considering purchasing our notes, you
should carefully read and think about all the information contained in this
document, including the risk factors set out here, prior to making any
investment decision.
The risks and uncertainties described below are not the only ones relating
to the notes. Additional risks and uncertainties not presently known to us may
also impair your investment. In addition, this prospectus contains forward-
looking statements that involve risks and uncertainties. Actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including the risks described below and elsewhere
in this prospectus.
YOU CANNOT RELY ON ANY PERSON OTHER THAN US TO MAKE PAYMENTS ON THE NOTES
We are the only party responsible for making payments on the notes. The
notes do not represent an interest in or obligation of, and are not insured or
guaranteed by, any of Northern Rock plc, the underwriters, Funding 2, Funding,
the mortgages trustee, the security trustee, the Funding 2 security trustee,
the note trustee, the issuer security trustee, any swap provider or any of
their respective affiliates or any other party to the transaction other than
us.
WE HAVE A LIMITED AMOUNT OF RESOURCES AVAILABLE TO US TO MAKE PAYMENTS ON THE
NOTES
Our ability to make payments of interest on, and principal of, the notes and
to pay our operating and administrative expenses will depend primarily on funds
being received under the global intercompany loan agreement. The payment of
interest on, and principal of, each series and class of notes will primarily
depend on funds being received under the related loan tranche (and no other
loan tranche). In addition, we will rely on the issuer swaps to provide
payments on certain series and classes of notes.
We will not have any other significant sources of funds available to meet
our obligations under the notes and/or any other payments ranking in priority
to the notes other than (in the case of interest due and payable on the notes
and scheduled principal due in respect of original bullet redemption notes) the
amount of funds credited to the issuer reserve fund (as described under "CREDIT
STRUCTURE -- ISSUER RESERVE FUND"). If the resources described above cannot
provide us with sufficient funds to enable us to make required payments on the
notes, you may incur a loss of interest and/or principal which would otherwise
be due and payable on your notes.
FUNDING 2 IS NOT REQUIRED TO MAKE PAYMENTS ON THE GLOBAL INTERCOMPANY LOAN IF
IT DOES NOT HAVE ENOUGH MONEY TO DO SO, WHICH COULD ADVERSELY AFFECT PAYMENT ON
THE NOTES
Funding 2's ability to pay amounts due on loan tranches advanced under the
global intercompany loan agreement will depend upon:
* Funding 2 receiving enough funds from the Funding 2 share of the
trust property, including its share of the proceeds of revenue
receipts and principal receipts on the mortgage loans included in
the mortgages trust on or before each loan payment date;
* Funding 2 receiving funds from the Funding 2 basis rate swap
provider;
* Funding 2 receiving funds from the Funding 2 liquidity facility
provider (if any); and
* (in the case of interest due under the global intercompany loan
agreement and principal due in respect of original bullet loan
tranches) the amount of funds credited to the Funding 2 reserve
fund (as described under "CREDIT STRUCTURE --
27
FUNDING 2 RESERVE FUND") and subject to certain restrictions, the
amount of funds credited to the Funding 2 liquidity reserve fund
(as described under "CREDIT STRUCTURE -- FUNDING 2 LIQUIDITY
RESERVE FUND").
According to the terms of the mortgages trust deed, the mortgages trustee is
obliged to pay to Funding 2 on each distribution date (a) that portion of
revenue receipts on the mortgage loans which is payable to Funding 2 in
accordance with the terms of the mortgages trust deed, and (b) that portion of
principal receipts on the mortgage loans which is payable to Funding 2 in
accordance with the terms of the mortgages trust deed.
On each loan payment date in respect of a loan tranche, however, Funding 2
will only be obliged to pay amounts due to us in respect of such loan tranche
under the global intercompany loan agreement to the extent that it has funds
available to it after making payments ranking in priority to such loan tranche
(such as payments of certain fees and expenses of Funding 2 and loan tranches
of a more senior ranking) and taking into account payments ranking equally with
such loan tranche (such as other loan tranches of the same tier). If Funding 2
does not pay amounts to us in respect of a loan tranche under the global
intercompany loan agreement because it does not have sufficient funds
available, those amounts will be due but not payable until funds are available
to pay those amounts in accordance with the relevant Funding 2 priority of
payments. Funding 2's failure to pay those amounts to us when due in such
circumstances will not constitute an event of default under the global
intercompany loan agreement until the latest occurring final repayment date of
any loan tranche advanced under the global intercompany loan agreement.
Following enforcement of the Funding 2 security and disbursement of the
proceeds thereof, any remaining shortfall will be extinguished.
If there is a shortfall between the amounts paid by Funding 2 to us in
respect of a loan tranche under the global intercompany loan agreement and the
amounts payable by us on the related series and class of notes, then you may
not receive the full amount of interest and/or principal which would otherwise
be due and payable on those notes.
ENFORCEMENT OF THE ISSUER SECURITY IS THE ONLY REMEDY FOR A DEFAULT IN OUR
OBLIGATIONS
The only remedy for recovering amounts due on the notes is through the
enforcement of the issuer security. We will only have recourse to the assets of
Funding 2 if Funding 2 has also defaulted on its obligations under the global
intercompany loan agreement and the Funding 2 security trustee (on our behalf
and on behalf of the other Funding 2 secured creditors) has enforced the
Funding 2 security.
THERE MAY BE A CONFLICT BETWEEN THE INTERESTS OF THE HOLDERS OF THE VARIOUS
CLASSES OF NOTES, AND THE INTERESTS OF OTHER CLASSES OF NOTEHOLDERS MAY PREVAIL
OVER YOUR INTERESTS
The trust deed and the terms of the notes will provide that the note trustee
is to have regard to the interests of the holders of all the classes of notes.
There may be circumstances, however, where the interests of one class of the
noteholders conflict with the interests of another class or classes of the
noteholders. In general, the note trustee will give priority to the interests
of the holders of the most senior class of notes such that:
* the note trustee is to have regard only to the interests of the
class A noteholders in the event of a conflict between the
interests of the class A noteholders on the one hand and the class
B noteholders and/or the class M noteholders and/or the class C
noteholders and/or class D noteholders on the other hand;
* (if there are no class A notes outstanding) the note trustee is to
have regard only to the interests of the class B noteholders in the
event of a conflict between the interests of the class B
noteholders on the one hand and the class M noteholders and/or the
class C noteholders and/or class D noteholders on the other hand;
28
* (if there are no class A notes or class B notes outstanding) the
note trustee is to have regard only to the interests of the class M
noteholders in the event of a conflict between the interests of the
class M noteholders on the one hand and the class C noteholders
and/or class D noteholders on the other hand; and
* (if there are no class A, class B or class M notes outstanding) the
note trustee is to have regard only to the interests of the class C
noteholders in the event of a conflict between the interests of the
class C noteholders on the one hand and the class D noteholders on
the other hand.
CONFLICTS OF INTEREST BETWEEN THE FUNDING BENEFICIARIES AND THE FUNDING
SECURITY TRUSTEES
Where the Funding beneficiaries, acting together, or the Funding security
trustees, acting together, are permitted to provide or exercise directions,
rights, powers, benefits and/or discretions (or their equivalent), the Funding
beneficiaries or the Funding security trustees (as applicable) will provide or
exercise such directions, rights, powers, benefits and/or discretions in
accordance with the controlling directions (as to which see "THE MORTGAGES
TRUST -- THE CONTROLLING BENEFICIARY DEED"). Therefore, in circumstances where
there is a conflict of interest, the directions of Funding or the security
trustee (acting on behalf of the secured creditors of Funding) may prevail over
the directions of Funding 2 or the Funding 2 security trustee (acting on behalf
of the Funding 2 secured creditors), which may adversely affect your interests.
IF FUNDING 2 ENTERS INTO OTHER FUNDING 2 INTERCOMPANY LOANS, SUCH OTHER FUNDING
2 INTERCOMPANY LOANS AND ACCOMPANYING NOTES MAY BE REPAID PRIOR TO THE GLOBAL
INTERCOMPANY LOAN AND THE NOTES
Subject to satisfaction of certain conditions, Funding 2 may, in the future,
establish additional wholly-owned subsidiary companies that will issue notes to
investors. The proceeds of each such issue of notes may be advanced by way of a
Funding 2 intercompany loan to Funding 2. Funding 2 may use the proceeds of
such Funding 2 intercompany loan to, amongst other things, pay to the mortgages
trustee an initial contribution or a further contribution or to refinance all
or part of an existing Funding 2 intercompany loan outstanding at that time. If
the global intercompany loan (or any part thereof) is refinanced, you could be
repaid early.
We expect that the payment of the amounts owing by Funding 2 under any such
Funding 2 intercompany loan will be funded from amounts received by Funding 2
from the trust property. You should note that the obligation to make such
payments may rank equally in priority with payments made by Funding 2 to us
under the global intercompany loan agreement. The terms of the notes issued by
such other Funding 2 issuer and the related Funding 2 intercompany loan may
result in such notes and such Funding 2 intercompany loan being repaid prior to
the repayment of the notes issued by us under this prospectus and the related
prospectus supplements and the repayment of the global intercompany loan.
You will not have any right of prior review or consent before Funding 2
enters into any additional Funding 2 intercompany loans or the corresponding
issuance of notes by the related Funding 2 issuer. Similarly, the terms of the
Funding 2 transaction documents (including, but not limited to, the mortgage
sale agreement, the mortgages trust deed, the Funding 2 deed of charge, the
global intercompany loan agreement), the definitions of the trigger events and
the seller share event and the criteria for the assignment of new loans to the
mortgages trustee may be amended to reflect the new issue. Your consent to
these changes will not be required. There can be no assurance that these
changes will not affect the cashflow available to pay amounts due on your
notes.
Before issuing any notes, however, such other Funding 2 issuer will be
required to satisfy a number of conditions, including that the then current
ratings of your notes will not
29
be reduced, withdrawn or qualified at the time of the issuance of such notes by
such other Funding 2 issuer.
OTHER FUNDING 2 ISSUERS MAY SHARE IN THE SAME SECURITY GRANTED BY FUNDING 2 TO
US, AND THIS MAY ULTIMATELY CAUSE A REDUCTION IN THE PAYMENTS YOU RECEIVE ON
THE NOTES
Any other Funding 2 issuer may become party to the Funding 2 deed of charge
and, if so, will be entitled to share in the security granted by Funding 2 for
our benefit (and the benefit of the other Funding 2 secured creditors) under
the Funding 2 deed of charge. If the Funding 2 security is enforced and there
are insufficient funds to make the payments that are due to all Funding 2
issuers, we expect that each Funding 2 issuer will only be entitled to its
proportionate share of those limited funds. This could ultimately cause a
reduction in the payments you receive on your notes.
AS NEW MORTGAGE LOANS ARE ASSIGNED TO THE MORTGAGES TRUSTEE AND AS MORTGAGE
LOANS ARE IN CERTAIN CIRCUMSTANCES REMOVED FROM THE MORTGAGES TRUST, THE
CHARACTERISTICS OF THE TRUST PROPERTY MAY CHANGE FROM THOSE EXISTING AT THE
FUNDING 2 PROGRAM DATE, AND THOSE CHANGES MAY DELAY OR REDUCE PAYMENTS ON THE
NOTES
We do not guarantee that the characteristics of any new mortgage loans
assigned to the mortgages trustee will have the same characteristics as the
mortgage loans in the mortgage portfolio as of the Funding 2 program date. In
particular, new mortgage loans may have different payment characteristics from
the mortgage loans in the mortgage portfolio as of the Funding 2 program date.
The ultimate effect of this could be to delay or reduce the payments you
receive on your notes or to increase the rate of repayment of the notes.
However, the new mortgage loans will be required to meet the conditions
described under "ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY".
In addition, in order to promote the retention of borrowers, the seller may
periodically contact certain borrowers in order to encourage a borrower to
review the seller's other mortgage products and to discuss offering that
borrower an alternative Northern Rock mortgage product. The seller also may
periodically contact borrowers in the same manner in order to offer to a
borrower the opportunity to apply for a further advance or a personal secured
loan. The employee of the seller who contacts a borrower will not know whether
that borrower's original mortgage loan has been sold to the mortgages trustee.
However, if the relevant original mortgage loan made to that borrower happens
to have been sold to the mortgages trustee and that borrower decides to switch
mortgage products or take a further advance or a personal secured loan, the
seller then has the option of repurchasing that original mortgage loan from the
mortgages trustee.
Generally, the borrowers that the seller may periodically contact are those
borrowers whose mortgage loans are not in arrears and who are otherwise in good
standing. To the extent that these borrowers switch to a different Northern
Rock mortgage product or take a further advance or a personal secured loan and
their original mortgage loans are purchased by the seller, the percentage of
fully performing mortgage loans in the mortgage portfolio may decrease, which
could delay or reduce payments you receive on your notes. However, as described
above, the seller's decision as to which borrowers to target for new mortgage
products and/or further advances and/or personal secured loans and the decision
whether to approve a new mortgage product and/or further advance and/or
personal secured loan for a particular borrower will be made without regard to
whether a borrower's mortgage loan is included in the mortgage portfolio. As a
general matter in relation to the mortgage portfolio, a new mortgage product
and/or further advance will only be approved by the administrator upon receipt
of the seller's confirmation that it will repurchase the relevant loan and
related security in accordance with the terms of the mortgage sale agreement.
30
THE SELLER MAY CHANGE THE LENDING CRITERIA RELATING TO MORTGAGE LOANS WHICH ARE
SUBSEQUENTLY ASSIGNED TO THE MORTGAGES TRUSTEE WHICH COULD AFFECT THE
CHARACTERISTICS OF THE TRUST PROPERTY, AND WHICH COULD LEAD TO A DELAY OR A
REDUCTION IN THE PAYMENTS RECEIVED ON YOUR NOTES OR COULD INCREASE THE RATE OF
REPAYMENT OF THE NOTES
Each of the mortgage loans was originated in accordance with the seller's
lending criteria applicable at the time of origination, which lending criteria
in the case of each mortgage loan included in the mortgage portfolio as of the
Funding 2 program date were the same as or substantially similar to the
criteria described later in this prospectus under "THE MORTGAGE LOANS --
ORIGINATION OF THE MORTGAGE LOANS -- LENDING CRITERIA". These lending criteria
consider a variety of factors such as a potential borrower's credit history,
employment history and status and repayment ability, as well as the value of
the property to be mortgaged. In the event of the assignment of any new
mortgage loans and new related security to the mortgages trustee, the seller
will warrant to the mortgages trustee, Funding 2 and the Funding 2 security
trustee that those new mortgage loans and new related security were originated
in accordance with the seller's lending criteria applicable at the time of
their origination. However, the seller retains the right to revise its lending
criteria as determined from time to time, and so the lending criteria
applicable to any new mortgage loan at the time of origination may not be the
same as those set out in the section "THE MORTGAGE LOANS -- LENDING CRITERIA".
If new mortgage loans that have been originated under revised lending
criteria are assigned to the mortgages trustee, the characteristics of the
trust property could change. This could lead to a delay or a reduction in the
payments received on your notes or it could increase the rate of repayment of
the notes.
REPURCHASES OF MORTGAGE LOANS BY THE SELLER MAY HAVE THE SAME EFFECT AS
PREPAYMENTS ON THE MORTGAGE LOANS
In the event of the seller purchasing, from the mortgages trustee, mortgage
loans subject to product switches or further advances or the repurchase by the
seller of mortgage loans for breaches of representations and warranties, the
payment received by the mortgages trustee will have the same effect as a
prepayment of such mortgage loan or mortgage loans. Because these factors are
not within our control or the control of Funding 2 or the mortgages trustee, we
cannot give any assurances as to the level of resulting prepayments that the
mortgage portfolio may experience.
If a borrower takes a personal secured loan after the borrower's existing
mortgage loan(s) has been assigned to the mortgages trustee, as of the date of
this prospectus, the seller intends to purchase from the mortgages trustee the
mortgage loan(s) of that borrower (including any personal secured loans and any
further draws thereunder in respect of that borrower) that were part of the
trust property. In the case of any such purchase, the payment received by the
mortgages trustee will have the same effect as a prepayment of such mortgage
loan or mortgage loans.
As the decision by the seller whether to purchase a mortgage loan subject to
a product switch or a further advance, or the mortgage loan(s) of a borrower
taking a personal secured loan is not within our control or the control of
Funding 2 or the mortgages trustee, we cannot give any assurance as to the
level of effective prepayments that the mortgage portfolio may experience as a
result.
IF PROPERTY VALUES DECLINE PAYMENTS ON THE NOTES COULD BE ADVERSELY AFFECTED
The security granted by Funding 2 in respect of the global intercompany
loan, which is the principal source of funding for your notes, consists, among
other things, of Funding 2's interest in the mortgages trust. Since the value
of the mortgage portfolio held by the mortgages trustee may increase or
decrease, the value of that security may decrease and will decrease if there is
a general decline in property values. We cannot guarantee that the value of a
mortgaged property will remain at the same level as on the date of origination
of the related mortgage loan. If the residential property market in the United
Kingdom experiences an overall decline in property values, the value of the
security
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created by the mortgage loans could be significantly reduced and, ultimately,
may result in losses to you if the security is required to be enforced.
THE TIMING AND AMOUNT OF PAYMENTS ON THE MORTGAGE LOANS COULD BE AFFECTED BY
GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS
To the extent that specific geographic regions have experienced or may
experience in the future weaker regional economic conditions and housing
markets than other regions, a concentration of the mortgage loans in such a
region may be expected to exacerbate all of the risks relating to the mortgage
loans described in this section. We can predict neither when nor where such
regional economic declines may occur nor to what extent or for how long such
conditions may continue. See "THE MORTGAGE LOANS" in the related prospectus
supplement.
THE TIMING AND AMOUNT OF PAYMENTS ON THE MORTGAGE LOANS COULD BE AFFECTED BY
VARIOUS FACTORS WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES
Various factors influence mortgage delinquency rates, prepayment rates,
repossession frequency and therefore the timing and ultimate payment of
interest and repayment of principal. These factors include changes in the
national or international economic climate, prevailing mortgage interest rates,
regional economic or housing conditions, homeowner mobility, changes in tax
laws, inflation, the availability of financing, yields on alternative
investments, political developments and government policies.
The rate of prepayments on the mortgage loans may be increased due to
borrowers refinancing their mortgage loans and sales of mortgaged properties
(either voluntarily by borrowers or as a result of enforcement action taken),
as well as the receipt of proceeds from buildings insurance and life assurance
policies. The rate of prepayment of mortgage loans may also be influenced by
the presence or absence of early repayment charges.
Other factors in borrowers' personal or financial circumstances may reduce
the ability of borrowers to repay mortgage loans. Loss of earnings, illness,
divorce and other similar factors may lead to an increase in delinquencies by
and bankruptcies of borrowers, and could ultimately have an adverse impact on
the ability of borrowers to repay mortgage loans. In addition, the ability of a
borrower to sell a property given as security for a mortgage loan at a price
sufficient to repay the amounts outstanding under the mortgage loan will depend
upon a number of factors, including the availability of buyers for that
property, the value of that property and property values and the property
market in general at the time.
The global intercompany loan is our principal source of income for repayment
of the notes. The principal source of income for repayment by Funding 2 of the
global intercompany loan is its interest in the mortgage portfolio held on
trust by the mortgages trustee for the benefit of Funding, Funding 2 and the
seller. If the timing and payment of the mortgage loans is adversely affected
by any of the risks described above, the payments on your notes could be
reduced or delayed.
THE INCLUSION OF CERTAIN TYPES OF MORTGAGE LOANS MAY AFFECT THE RATE OF
REPAYMENT AND PREPAYMENT OF THE MORTGAGE LOANS
The mortgage portfolio contains flexible mortgage loans. Flexible mortgage
loans provide the borrower with a range of options that gives that borrower
greater flexibility in the timing and amount of payments made under the
mortgage loan. Subject to the terms and conditions of the mortgage loans (which
may require in some cases notification to the seller and in other cases the
consent of the seller), under a flexible mortgage loan a borrower may "overpay"
or prepay principal on any day or make a re-draw in specified circumstances.
For a detailed summary of the characteristics of the flexible mortgage loans,
see "THE MORTGAGE LOANS -- CHARACTERISTICS OF THE MORTGAGE LOANS -- FLEXIBLE
MORTGAGE LOANS". In addition, certain of the seller's flexible mortgage loan
products allow the borrower to make overpayments or repay the entire current
balance under the flexible mortgage loan at any time without incurring an early
repayment charge. See "THE
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MORTGAGE LOANS -- CHARACTERISTICS OF THE MORTGAGE LOANS -- EARLY REPAYMENT
CHARGES".
The inclusion of Together Connections mortgage loans and Connections
mortgage loans, which are another type of flexible mortgage loan, in the
mortgages trust may also affect the yield to maturity of and the timing of
payments on the notes. Application of the Together Connections Benefit, a
feature of Together Connections mortgage loans, and Connections Benefit, a
feature of Connections mortgage loans, will reduce the principal amount
outstanding on a Together Connections mortgage loan and a Connections mortgage
loan, respectively. As a result, less of a related borrower's contractual
monthly payment (which the borrower is nevertheless obligated to continue
making in full) will be required to pay interest, and proportionately more of
that contractual monthly payment will be allocated as a repayment of principal.
This reallocation may lead to amortization of the related mortgage loan more
quickly than would otherwise be the case. For a description of the Together
Connections mortgage loans and the Together Connections Benefit and the
Connections mortgage loans and the Connections Benefit, see "THE MORTGAGE LOANS
- -- CHARACTERISTICS OF THE MORTGAGE LOANS -- MORTGAGE LOAN PRODUCTS OFFERED BY
THE SELLER".
To the extent that borrowers under flexible mortgage loans consistently
prepay principal or to the extent that Together Connections mortgage loans and
Connections mortgage loans amortize more quickly than otherwise expected, the
timing of payments on your notes may be adversely affected.
THE YIELD TO MATURITY OF THE NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENTS OR
REDEMPTIONS ON THE MORTGAGE LOANS OR REPURCHASES OF MORTGAGE LOANS BY THE
SELLER
The yield to maturity of the notes of each class will depend mostly on (a)
the amount and timing of the repayment of principal on the mortgage loans, and
(b) the price paid by the noteholders of each class of notes. The yield to
maturity of the notes of each class may be adversely affected by a higher or
lower than anticipated rate of prepayments on the mortgage loans. The rate of
prepayment of mortgage loans is influenced by a wide variety of factors, as
summarized in the two immediately preceding risk factors.
Variation in the rate and timing of prepayments of principal on the mortgage
loans may affect each class of notes differently depending upon amounts already
repaid by Funding 2 to us under the global intercompany loan and whether a
trigger event has occurred or the security granted by us under the issuer deed
of charge has been enforced. If prepayments on the mortgage loans occur less
frequently than anticipated, then the amortization of the notes may take much
longer than is presently anticipated and the actual yields on your notes may be
lower than you anticipate.
No assurance can be given that Funding 2 will receive sufficient funds prior
to the bullet repayment date for a bullet loan tranche, prior to the scheduled
repayment date for a scheduled repayment loan tranche or prior to the
controlled repayment date for a controlled repayment loan tranche, in each case
to enable Funding 2 to repay these loan tranches to us in time for us to redeem
the corresponding series and classes of notes on their bullet redemption date,
scheduled redemption dates or controlled redemption dates, respectively. The
extent to which sufficient funds are received by Funding 2 during a cash
accumulation period for a bullet loan tranche or prior to a scheduled repayment
date or a controlled 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 2 does not have sufficient funds to pay the full amount scheduled
to be repaid on a bullet loan tranche, scheduled repayment loan tranche or
controlled repayment loan tranche and therefore we cannot redeem the
corresponding series and classes of notes on their bullet redemption date,
scheduled redemption dates or controlled redemption dates, respectively, then
Funding 2 will be required to pay us only the amount it has actually received
in respect of such loan tranches. Accordingly, we will only be obliged to pay
the amount of funds we received from Funding 2 to holders of the
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corresponding notes. Any shortfall on such loan tranches and related notes will
be deferred to and paid on subsequent loan payment dates or, as applicable,
note payment dates when Funding 2 has money available to pay such shortfall on
the loan tranches to us and we, in turn, have funds to pay the amount to be
repaid on the related series and classes of notes. If this happens, holders of
affected notes will not receive repayment of principal when expected which may
have an adverse effect on the yield to maturity of those notes.
In addition, during the cash accumulation period for the bullet loan
tranches, no payments of principal will be made on other loan tranches unless
the quarterly CPR of the mortgage loans is greater than 15% and certain other
conditions are met, as described under "CASHFLOWS -- DISTRIBUTION OF FUNDING 2
AVAILABLE PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT OF THE FUNDING 2 SECURITY
- -- RULES FOR APPLICATION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS".
THE OCCURRENCE OF AN ASSET TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER SECURITY
OR THE FUNDING 2 SECURITY MAY ACCELERATE THE REPAYMENT OF CERTAIN NOTES AND/OR
DELAY THE REPAYMENT OF OTHER NOTES
If an asset trigger event has occurred or the issuer security and/or the
Funding 2 security has been enforced, the mortgages trustee will distribute
principal receipts on the mortgage loans to Funding, Funding 2 and the seller
proportionally based on their percentage shares of the trust property. Funding
2 will, on each monthly payment date following the occurence of an asset
trigger event or the enforcement of the Funding 2 security or the issuer
security apply those principal receipts received by it from the mortgages
trustee, after making the requisite payments to the Funding 2 liquidity
facility provider (if any), the Funding 2 reserve fund and the Funding 2
liquidity reserve fund (if any), to repay:
* first, the AAA loan tranches in respect of each Funding 2
intercompany loan until each of those AAA loan tranches is fully
repaid;
* then, the AA loan tranches in respect of each Funding 2
intercompany loan until each of those AA loan tranches is fully
repaid;
* then, the A loan tranches in respect of each Funding 2 intercompany
loan until each of those A loan tranches is fully repaid;
* then, the BBB loan tranches in respect of each Funding 2
intercompany loan until each of those BBB loan tranches is fully
repaid;
* then, the BB loan tranches in respect of each Funding 2
intercompany loan until each of those BB loan tranches is fully
repaid.
The above priority of payments may cause certain series and classes of notes
to be repaid more rapidly than expected and other series and classes of notes
to be repaid more slowly than expected and there is a risk that such notes may
not be repaid by their final maturity date.
THE OCCURRENCE OF A NON-ASSET TRIGGER EVENT MAY ACCELERATE THE REPAYMENT OF
CERTAIN NOTES AND/OR DELAY THE REPAYMENT OF OTHER NOTES
If a non-asset trigger event has occurred, the mortgages trustee will
distribute all principal receipts to Funding 2 and Funding until the Funding 2
share percentage and the Funding share percentage of the trust property are
each zero. Funding 2 will, on each monthly payment date following the occurence
of a non-asset trigger event, apply these principal receipts received by it
from the mortgages trustee, after making the requisite payments to the Funding
2 liquidity facility provider (if any), the Funding 2 reserve fund and the
Funding 2 liquidity reserve fund (if any), to repay:
* firstly, the AAA loan tranches in order of final repayment date,
beginning with the earliest final repayment date;
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* then, the AA loan tranches in respect of each Funding 2
intercompany loan until each of those AA loan tranches is fully
repaid;
* then, the A loan tranches in respect of each Funding 2 intercompany
loan until each of those A loan tranches is fully repaid;
* then, the BBB loan tranches in respect of each Funding 2
intercompany loan until each of those BBB loan tranches is fully
repaid;
* then, the BB loan tranches in respect of each Funding 2
intercompany loan until each of those BB loan tranches is fully
repaid.
The above priority of payments may cause certain series and classes of notes
to be repaid more rapidly than expected and other series and classes of notes
to be repaid more slowly than expected and there is a risk that such notes may
not be repaid by their final maturity date.
THE OCCURRENCE OF A PASS-THROUGH TRIGGER EVENT MAY ACCELERATE THE REPAYMENT OF
CERTAIN NOTES AND/OR DELAY THE REPAYMENT OF OTHER NOTES
Following the earliest to occur of a trigger event, the enforcement of the
issuer security and the enforcement of the Funding 2 security:
* each series and class of notes will be deemed pass-through notes
and each loan tranche will be deemed a pass-through loan tranche;
* interest on each loan tranche will be calculated on a monthly basis
and will be due and payable by Funding 2 to us on each monthly
payment date and interest on each series and class of notes will
also be calculated on a monthly basis and will be due and payable
by us on each monthly payment date;
* principal repayments in respect of each loan tranche (as to which
see "-- THE OCCURRENCE OF AN ASSET TRIGGER EVENT OR ENFORCEMENT OF
THE ISSUER SECURITY OR THE FUNDING 2 SECURITY MAY ACCELERATE THE
REPAYMENT OF CERTAIN NOTES AND/OR DELAY THE REPAYMENT OF OTHER
NOTES" and "-- THE OCCURRENCE OF A NON-ASSET TRIGGER EVENT MAY
ACCELERATE THE REPAYMENT OF CERTAIN NOTES AND/OR DELAY THE
REPAYMENT OF OTHER NOTES" will be made by Funding 2 on each monthly
payment date and we will, also on each monthly payment date, apply
the proceeds of such principal repayments, which are available for
payment, in repayment of the notes in accordance with the
applicable issuer priority of payments but without regard to the
scheduled amounts due in respect of the bullet redemption notes,
the scheduled redemption notes and the controlled amortization
notes and the dates on which such amounts would otherwise have been
due.
This may cause certain series and classes of notes to be repaid more rapidly
than expected and other series and classes of notes to be repaid more slowly
than expected and there is a risk that such notes may not be repaid by their
final maturity date.
COMPETITION IN THE UK MORTGAGE LOAN INDUSTRY COULD INCREASE THE RISK OF AN
EARLY REDEMPTION OF YOUR NOTES
The mortgage loan industry in the United Kingdom is highly competitive. Both
traditional and new lenders use heavy advertising, targeted marketing,
aggressive pricing competition and loyalty schemes in an effort to expand their
presence in or to facilitate their entry into the market and compete for
customers. For example, certain of the seller's competitors have implemented
loyalty discounts for long-time customers to reduce the likelihood that these
customers would refinance their mortgage loans with other lenders such as the
seller.
This competitive environment may affect the rate at which the seller
originates new mortgage loans and may also affect the level of attrition of the
seller's existing borrowers. If the rate at which new mortgage loans are
originated declines significantly or if existing
35
borrowers refinance their mortgage loans with lenders other than the seller
then the risk of a trigger event occurring increases, which could result in an
early redemption of your notes.
IF THE SELLER DOES NOT PURCHASE FIXED RATE MORTGAGE LOANS UNDER WHICH THE
BORROWER EXERCISES HIS OR HER RE-FIX OPTION THEN FUNDING 2 MAY NEED TO ENTER
INTO NEW HEDGING ARRANGEMENTS AND WE MAY NOT FIND A COUNTERPARTY AT THE
RELEVANT TIME
If the seller does not elect within 30 days of the end of the relevant fixed
rate period to purchase the relevant mortgage loan from the mortgages trustee
if it becomes a re-fixed mortgage loan, then this will necessitate the entry by
Funding 2 into further hedging arrangements with an alternative basis rate swap
counterparty satisfactory to the rating agencies. Entering into additional
hedging arrangements may increase Funding 2's obligations on any monthly
payment date which may adversely affect payments on your notes. In addition, we
cannot provide assurance that an alternative basis rate swap counterparty will
be available to Funding 2 at the relevant time.
IF THE MORTGAGES TRUSTEE GIC PROVIDER, THE FUNDING 2 GIC PROVIDER OR THE ISSUER
GIC PROVIDER CEASES TO SATISFY CERTAIN CRITERIA, THEN THE MORTGAGES TRUSTEE GIC
ACCOUNT, THE FUNDING 2 GIC ACCOUNT AND THE ISSUER GIC ACCOUNT MAY HAVE TO BE
TRANSFERRED TO ANOTHER GIC PROVIDER UNDER TERMS THAT MAY NOT BE AS FAVOURABLE
AS THOSE OFFERED BY THE CURRENT GIC PROVIDER
The mortgages trustee GIC provider, the Funding 2 GIC provider and the
issuer 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, the
Funding 2 GIC account and the issuer GIC account, respectively. If either the
mortgages trustee GIC provider, the Funding 2 GIC provider or the issuer GIC
provider ceases to satisfy these criteria, then the relevant account may need
to be transferred to another entity which does satisfy these criteria. In these
circumstances, the stand-by GIC provider (in relation to the mortgages trustee
GIC account) or other bank, as applicable, may not offer a GIC on terms as
favourable as those provided by the mortgages trustee GIC provider, the Funding
2 GIC provider or the issuer GIC provider.
The criteria referred to above as of the date of this prospectus include a
requirement that the short-term, unguaranteed and unsecured debt ratings
ascribed to the mortgages trustee GIC provider, the Funding 2 GIC provider or
the issuer GIC provider (as applicable) are at least "A-1+" (or in the
circumstances described below, "A-1") by Standard & Poor's, "F1" by Fitch and
"P-1" by Moody's, provided that where the relevant deposit amount is less than
20% of the aggregate principal amount outstanding of the notes issued by the
issuer and the Funding issuers, then the short-term, unguaranteed and unsecured
rating required to be ascribed by Standard & Poor's to the mortgages trustee
GIC provider, the Funding 2 GIC provider or the issuer GIC provider (as
applicable) shall be at least "A-1". These criteria are subject to change by
the rating agencies.
RATINGS ASSIGNED TO THE NOTES MAY BE LOWERED OR WITHDRAWN AFTER YOU PURCHASE
THE NOTES, WHICH MAY LOWER THE MARKET VALUE OF THE NOTES
The ratings assigned to each class of notes address the likelihood of full
and timely payment to you of all payments of interest on each note payment date
under those classes of notes. The ratings also address the likelihood of
ultimate repayment of principal on the final maturity date of each class of
notes. The expected ratings of a series and class of notes offered by this
prospectus will be set out in the prospectus supplement applicable to that
series and class of notes. Any rating agency may lower, withdraw or qualify its
rating if, in the sole judgment of the rating agency, the credit quality of the
notes has declined or is in question. If any rating assigned to the notes is
lowered, withdrawn or qualified, the market value of the notes may be reduced.
36
SUBORDINATION OF OTHER NOTE CLASSES MAY NOT PROTECT YOU FROM ALL RISK OF LOSS
The class B notes, the class M notes, class C notes and class D notes of any
series are subordinated in right of payment of interest to the class A notes of
any series. The class M notes, the class C notes and the class D notes of any
series are subordinated in right of payment of interest to the B notes of any
series. The class C notes and the class D notes of any series are subordinated
in right of payment of interest to the class M notes of any series. The class D
notes of any series are subordinated in right of payment of interest to the
class C notes of any series.
The class B notes, the class M notes, the class C notes and the class D
notes of any series are subordinated in right of payment of principal to the
class A notes of any series. The class M notes, the class C notes and the class
D notes of any series are subordinated in right of payment of principal to the
class B notes of any series. The class C notes and the class D notes of each
series are subordinated in right of payment of principal to the class M notes
of each series. The class D notes of any series are subordinated in right of
payment of principal to the class C notes of any series.
You should be aware, however, that not all classes of notes are scheduled to
receive payments of principal on each monthly payment date. The note payment
dates for the payment of interest and principal in respect of each series and
class of notes will be specified in the applicable prospectus supplement. Each
series and class of notes may have note payment dates in respect of interest
and/or principal that are different from other notes of the same class (but of
different series) or of the same series (but of a different class or sub-
class). Despite the principal priority of payments described above, subject to
no pass-through trigger event having occured and satisfaction of the repayment
tests, lower ranking classes of notes may nevertheless be repaid principal
before higher ranking classes of notes and a series and class of notes may be
repaid principal before other series of notes of the same class. Payments of
principal are expected to be made to each class of notes in amounts up to the
amounts set forth under "CASHFLOWS -- DISTRIBUTION OF ISSUER AVAILABLE
PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY".
There is no assurance that these subordination rules will protect the class
A noteholders from all risks of loss, the class B noteholders from all risk of
loss, the class M noteholders from all risk of loss, or the class C noteholders
from all risk of loss. If the losses borne by the class D notes, the class C
notes, the class M notes and the class B notes are in an aggregate amount equal
to the aggregate outstanding principal balances of the class D notes, the class
C notes, the class M notes and the class B notes, then losses on the mortgage
loans will thereafter be borne by the class A notes at which point there will
be an asset trigger event. If the losses borne by the class D notes, the class
C notes and the class M notes are in an aggregate amount equal to the aggregate
outstanding principal balances of the class D notes, the class C notes and the
class M notes, then losses on the mortgage loans will thereafter be borne by
the class B notes. Similarly, if the losses allocated to the class D notes and
the class C notes are in an aggregate amount equal to the aggregate outstanding
principal balance of the class D notes and the class C notes, then losses on
the mortgage loans will thereafter be borne by the class M notes. Finally, if
the losses borne by the class D notes are in an amount equal to the aggregate
outstanding principal balance of the class D notes, then loss on the mortgage
loans will thereafter be borne by the class C notes.
PAYMENTS OF CLASS B, CLASS M, CLASS C AND CLASS D NOTES MAY BE DELAYED OR
REDUCED IN CERTAIN CIRCUMSTANCES
If on any note payment date on which a repayment of principal is due on any
series of class B, class M, class C or class D notes at a time when, if the
repayment was made, the principal amount outstanding of the remaining
subordinate classes of notes is not sufficient to provide the level of credit
enhancement required to support the ratings on the more senior classes of notes
then outstanding and we are unable to issue additional
37
notes of such class B, class M class C or class D notes or obtain acceptable
alternative forms of credit enhancement, such subordinated class of notes will
not be entitled to receive payments of principal until all more senior classes
of notes outstanding have their required level of subordination. See "CASHFLOWS
- -- DISTRIBUTION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT
OF THE FUNDING 2 SECURITY -- RULES FOR APPLICATION OF FUNDING 2 AVAILABLE
PRINCIPAL RECEIPTS".
On any note payment date on which a payment of principal is due on any
series of class B notes, the class M notes, the class C notes and the class D
notes, our obligation to make such principal payments will be subject to the
satisfaction of the issuer arrears test and the issuer reserve requirement to
the extent that any class A notes of any series are outstanding on that date.
See "CASHFLOWS -- DISTRIBUTION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS PRIOR
TO ENFORCEMENT OF THE FUNDING 2 SECURITY -- RULES FOR APPLICATION OF FUNDING 2
AVAILABLE PRINCIPAL RECEIPTS".
THE REQUIRED SUBORDINATION FOR A CLASS OF NOTES MAY BE CHANGED
We may change the required subordinated amount for any class of notes, or
the method of calculating the required subordinated amount for such class, at
any time without the consent of any noteholders if certain conditions are met,
including confirmation from each rating agency that such change will not cause
a reduction, qualification or withdrawal of its then-current rating of any
outstanding notes that will be affected by such change.
IN CERTAIN CIRCUMSTANCES SOME OF THE CONDITIONS FOR ISSUANCE OF NOTES MAY BE
WAIVED
If we obtain confirmation from each rating agency that the issuance of a new
series and class of notes will not cause a reduction, qualification or
withdrawal of its then-current rating of any outstanding notes rated by that
rating agency, then some of the conditions of issuance described under
"ISSUANCE OF NOTES" may be waived.
PAYMENTS FROM A MONEY MARKET NOTE SUBSCRIBER MAY NOT BE SUFFICIENT TO REPAY
MONEY MARKET NOTES
Where we have entered into a money market note subscription agreement in
respect of a series and class of money market notes, our ability to redeem such
notes on their final maturity date will be dependent upon timely receipt of
subscription proceeds from the relevant money market note subscriber (which
will be used by us to redeem such notes) as it is unlikely that the principal
receipts available to us on such final maturity date will be sufficient to
redeem such notes in full on such date.
The applicable prospectus supplement will, in addition to providing
information regarding a series and class of money market notes, identify any
money market note subscriber in respect of such money market notes and the
terms of the applicable money market note subscription agreement.
ISSUANCE OF ADDITIONAL NOTES MAY AFFECT THE TIMING AND AMOUNTS OF PAYMENTS TO
YOU
We expect to issue notes from time to time. New notes may be issued without
notice to existing noteholders and without their consent, and may have
different terms from outstanding notes. For a description of the conditions
that must be meet before the issuer can issue new notes, see "ISSUANCE OF
NOTES".
The issuance of new notes could adversely affect the timing and amount of
payments on outstanding notes. For example, if notes of the same class as your
notes issued after your notes have a higher interest rate than your notes, this
could result in a reduction in the available funds used to pay interest on your
notes. Also, when new notes are issued, the voting rights of your notes will be
diluted.
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YOU MAY NOT BE ABLE TO SELL THE NOTES
There currently is no secondary market for the notes. The underwriters
expect, but are not obliged, to make a market in the notes. If no secondary
market develops, you may not be able to sell the notes prior to maturity. We
cannot offer any assurance that a secondary market will develop or, if one does
develop, that it will continue to exist.
YOU MAY BE SUBJECT TO EXCHANGE RATE AND INTEREST RATE RISKS
Repayments of principal and payments of interest on a series and class of
notes may be made in a currency other than sterling but the global intercompany
loan made by us to Funding 2 and repayments of principal and payments of
interest by Funding 2 to us under the global intercompany loan will be in
sterling. In addition, interest due and payable by Funding 2 to us on any loan
tranche under the global intercompany loan agreement will be calculated
pursuant to a margin over LIBOR for three-month sterling deposits or, for some
loan tranches, such other sterling LIBOR rate as may be specified in the
applicable loan tranche supplement (but will be payable in monthly
installments) or, following the earlier to occur of the step-up date in
relation to such loan tranche or a pass-through trigger event, LIBOR for one-
month sterling deposits but interest due and payable on a series and class of
notes may be calculated on a fixed, floating or other type of calculation basis
(as set out in the applicable prospectus supplement).
To hedge our currency exchange rate exposure and/or interest rate exposure
in such cases, on the closing date for a series and class of notes we will,
where applicable, enter into appropriate currency and/or interest rate swap
transactions for such notes with an issuer swap provider as specified in the
related prospectus supplement (see "THE SWAP AGREEMENTS -- THE ISSUER SWAPS").
Each issuer swap provider is obliged only to make payments under an issuer
swap as long as we make our timely payments under it. If such issuer swap
provider is not obliged to make payments of, or if it defaults in its
obligations to make payments of, amounts equal to the full amount scheduled to
be paid to us on the dates for payment specified under the relevant issuer swap
or such issuer swap is otherwise terminated, we will be exposed to changes in
the exchange rates between sterling and the currency in which such notes are
denominated and in the relevant interest rates. Unless a replacement swap
transaction is entered into, we may have insufficient funds to make payments
due on the applicable series and class of notes.
In addition, some of the mortgage loans carry variable rates of interest,
some of the mortgage loans pay interest at a fixed rate or rates of interest
and some of the flexible mortgage loans pay interest at variable rates of
interest no higher than the rate offered by a basket of UK mortgage lenders or
pay interest at a rate which tracks the Bank of England base rate. However,
these interest rates on the mortgage loans which will fund the interest payable
under the global intercompany loan will not necessarily match the rates of
interest payable by Funding 2 to us on any loan tranche under the global
intercompany loan agreement (which will be calculated pursuant to a margin over
three-month sterling LIBOR or, for some loan tranches, such other sterling
LIBOR rate as may be specified in the applicable loan tranche supplement (or,
following the earlier to occur of the step-up date in relation to such loan
tranche or a pass-through trigger event, a margin over one-month sterling
LIBOR) and will be payable in monthly installments).
To hedge its exposure against the possible variance between the foregoing
interest rates, Funding 2 entered into the Funding 2 basis rate swaps with the
Funding 2 basis rate swap provider on the Funding 2 program date (see "THE SWAP
AGREEMENTS -- THE FUNDING 2 BASIS RATE SWAPS").
If the Funding 2 basis rate swap provider fails to make payments under the
Funding 2 basis rate swaps or such Funding 2 basis rate swaps otherwise
terminate, Funding 2 will be exposed to the variance between the rates of
interest payable on the mortgage loans and the rate(s) of interest payable on
the global intercompany loan. Unless a replacement swap is entered into,
Funding 2 may have insufficient funds to make
39
payments due on the global intercompany loan which may affect the funds we will
have available to make payments due on the notes of any class and any series.
SWAP TERMINATION PAYMENTS MAY ADVERSELY AFFECT THE FUNDS AVAILABLE TO MAKE
PAYMENTS ON THE NOTES
If any of the issuer swaps terminate, we may be obliged to pay a swap
termination payment to the relevant issuer swap provider. If any of the Funding
2 basis rate swaps terminate, Funding 2 may be obliged to make a swap
termination payment to the Funding 2 basis rate swap provider. The amount of
the applicable swap termination payment will be based on the cost of entering
into a replacement swap.
Under the global intercompany loan agreement, Funding 2 will be required to
pay to us an amount equal to that required by us to pay any swap termination
payment due to be paid by us to the relevant issuer swap provider. Funding 2
will also be obliged to pay us any extra amounts (beyond that which is paid to
us by the relevant issuer swap provider) which we may be required to pay to
enter into a replacement swap.
We cannot give you any assurance that Funding 2 will have the funds
available to make any swap termination payment under any of the Funding 2 basis
rate swaps or to make any payment to us or that we will have sufficient funds
available to make any termination payment under any of the issuer swaps or to
make subsequent payments to you in respect of the relevant series and class of
notes. Nor can we give you any assurance that Funding 2 or we, as applicable,
will be able to enter into a replacement swap, or if one is entered into, that
the credit rating of the replacement swap provider (notwithstanding the terms
of the transaction documents) will be sufficiently high to prevent a reduction,
qualification or withdrawal of the then current ratings of the notes by the
rating agencies.
Except where termination of an issuer swap occurs as a result of a swap
provider default with respect to the relevant issuer swap provider, our
obligation to make any swap termination payment due by us will rank equally
with payments due on the applicable series and class of notes. 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 other
hedging transactions) if we cannot immediately enter into a replacement swap),
will also rank equally with payments due on the notes.
Except where termination of a Funding 2 basis rate swap occurs as a result
of a swap provider default with respect to the Funding 2 basis rate swap
provider, any swap termination payment due by Funding 2 will rank in priority
to payments due on the loan tranches. Any additional amounts required to be
paid by Funding 2 following termination of any of the Funding 2 basis rate
swaps (including any extra costs incurred (for example, from entering into
other hedging transactions) if Funding 2 cannot immediately enter into a
replacement swap), will also rank in priority to payments due on the loan
tranches.
If Funding 2 is obliged to make a swap termination payment to the Funding 2
basis rate swap provider or to pay any other additional amount as a result of
the termination of any of the Funding 2 basis rate swaps, this may affect the
funds which Funding 2 has to make payments on the global intercompany loan and
therefore may affect the funds which we have available to make payments on the
notes of any class and any series. In addition, if we are obliged to make a
swap 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
notes of any class and any series.
IF THE BANK OF ENGLAND BASE RATE FALLS BELOW A CERTAIN LEVEL, WE COULD SUFFER A
REVENUE SHORTFALL WHICH COULD ADVERSELY AFFECT OUR PAYMENTS ON THE NOTES
The seller guarantees that for variable rate mortgage loans that are
eligible for interest to be charged at the seller's standard variable rate
(including fixed rate mortgage loans which become variable after the fixed
period), during the period in which the seller
40
may impose an early repayment charge, the actual gross interest rate that the
seller charges will be the lower of:
(a) the seller's standard variable rate; or
(b) the Bank of England base rate plus a margin which is determined by
Northern Rock.
If the Bank of England base rate plus the appropriate margin (as described
above) falls to a level below the seller's standard variable rate it is
possible that there would be a reduction in income on the mortgage loans and
that, as a result, either or both of Funding 2 and we would suffer a revenue
shortfall.
IF BORROWERS BECOME ENTITLED TO THE LOYALTY DISCOUNT OFFERED BY THE SELLER, WE
COULD SUFFER A REVENUE SHORTFALL WHICH COULD ADVERSELY AFFECT OUR PAYMENTS ON
THE NOTES
The seller currently offers a loyalty discount on each mortgage loan (other
than a Together mortgage loan, a Together Connections mortgage loan and a CAT
standard mortgage loan) which currently provides for a reduction of 0.25% per
annum (although the seller may in the future allow for a discount of between
0.25% and 0.75% per annum) of the applicable interest rate on that mortgage
loan once the borrower has held that mortgage loan for at least seven years,
subject to certain conditions. If the loyalty discount becomes applicable to a
significant number of borrowers it is possible that there would be a reduction
in income on the mortgage loans and that, as a result, either or both of
Funding 2 and we would suffer a revenue shortfall.
WE RELY ON THIRD PARTIES AND YOU MAY BE ADVERSELY AFFECTED IF THEY FAIL TO
PERFORM THEIR OBLIGATIONS
We are a party to contracts with a number of other third parties that have
agreed to perform services in relation to the notes. For example, the issuer
swap providers will agree to perform under their respective swap transactions,
the corporate services provider has agreed to provide corporate services and
the paying agents and the agent bank have agreed to provide payment and
calculation services in connection with the notes. In the event that any
relevant third party was to fail to perform its obligations under the
respective agreements to which it is a party, you may be adversely affected.
EXCESS REVENUE RECEIPTS AVAILABLE TO FUNDING 2 MAY NOT BE SUFFICIENT TO
REPLENISH PRINCIPAL THAT HAS BEEN USED TO PAY INTEREST DUE ON LOAN TRANCHES,
WHICH MAY RESULT IN YOUR NOTES NOT BEING REPAID IN FULL
If, on any loan payment date, revenue receipts available to Funding 2 are
insufficient to enable it to pay interest on the loan tranches to us and its
other expenses ranking in priority to interest due on loan tranches, then it
may use principal receipts received from the mortgages trustee to make up that
revenue shortfall.
During the term of the transaction, however, it is expected that these
principal deficiencies will be recouped from subsequent excess Funding 2
available revenue receipts. However, if subsequent excess Funding 2 available
revenue receipts are insufficient to recoup those principal deficiencies, this
will affect the funds which we have available to make payments on the notes of
any class or series and as a consequence, you may receive later than
anticipated, or you may not receive in full, repayment of the principal amount
outstanding on your notes.
For more information on principal deficiencies, see "CREDIT STRUCTURE --
PRINCIPAL DEFICIENCY LEDGER".
THE SELLER SHARE AND THE FUNDING SHARE OF THE TRUST PROPERTY DO NOT PROVIDE
CREDIT ENHANCEMENT FOR THE NOTES
Subject to certain exceptions as described under "THE MORTGAGES TRUST --
ADJUSTMENTS TO TRUST PROPERTY" and "THE MORTGAGES TRUST -- LOSSES", any losses
from
41
mortgage loans included in the trust property will be allocated to Funding,
Funding 2 and the seller on each distribution date in proportion to the then
current Funding share percentage, the then current Funding 2 share percentage
and the then current seller share percentage of the trust property.
The seller share and the Funding share of the trust property do not provide
credit enhancement for the Funding 2 share of the trust property. Losses on the
mortgage loans in the trust property are generally allocated proportionately
among the seller, Funding and Funding 2 depending on their respective
percentage shares (or, in certain circumstances, their weighted average
percentage shares) of the trust property.
WE WILL ONLY HAVE RECOURSE TO THE SELLER IF THERE IS A BREACH OF WARRANTY BY
THE SELLER, AND OTHERWISE THE SELLER'S ASSETS WILL NOT BE AVAILABLE TO US AS A
SOURCE OF FUNDS TO MAKE PAYMENTS ON THE NOTES
After a Funding 2 intercompany loan enforcement notice is given (as
described under "SECURITY FOR FUNDING 2'S OBLIGATIONS"), the Funding 2 security
trustee may sell Funding 2's rights as a beneficiary under the mortgages trust.
There is no assurance that a buyer would be found or that such a sale would
realize enough money to repay amounts due and payable under the global
intercompany loan agreement.
We will not, and the mortgages trustee, Funding 2 and the Funding 2 security
trustee will not, undertake any investigations, searches or other actions on
any mortgage loan or its related security and we and each of them will rely
instead on the warranties given in the mortgage sale agreement by the seller.
If any of the warranties made by the seller is materially untrue on the date
on which a mortgage loan (including any personal secured loan) is assigned to
the mortgages trustee, then, in the first instance, the seller will be required
to remedy the breach (if capable of remedy) within 28 days of the seller
becoming aware of the same or of receipt by it of a notice from the mortgages
trustee.
If the seller fails to remedy the breach within 28 days or if the breach is
not capable of remedy, then the seller will be required to repurchase from the
mortgages trustee (i) the relevant mortgage loan and its related security and
(ii) any other mortgage loans (including any personal secured loans) of the
relevant borrower and their related security that are included in the trust
property, in each case at their current balance as of the date of completion of
such repurchase together with all interest (whether due or accrued but not due)
and arrears of interest payable thereon to the date of repurchase. There can be
no assurance that the seller will have the financial resources to repurchase
the mortgage loan or mortgage loans and their related security. However, if the
seller does not repurchase those mortgage loans and their related security when
required, then the seller share of the trust property will be deemed to be
reduced by an amount equal to the current balance of those mortgage loans
together with any arrears of interest and accrued and unpaid interest and
expenses.
Other than as described here, none of the mortgages trustee, Funding 2, you,
or we will have any recourse to the assets of the seller in relation to a
breach of warranty under the mortgage sale agreement.
THERE CAN BE NO ASSURANCE THAT A BORROWER WILL REPAY PRINCIPAL AT THE END OF
THE TERM ON AN INTEREST-ONLY LOAN (WITH OR WITHOUT A CAPITAL REPAYMENT VEHICLE)
OR A COMBINATION LOAN
Each mortgage loan in the cut-off date mortgage portfolio was advanced on
one of the following bases:
* Repayment basis, with principal and interest repaid on a monthly
basis through the mortgage term; or
* An interest-only basis with or without a capital repayment vehicle;
or
42
* A combination basis, that is, a combination of the repayment and
interest-only arrangements where only part of the principal will be
repaid by way of monthly payments.
Neither the interest-only mortgage loans nor the interest-only portion of
any combination mortgage loan includes scheduled amortization of principal.
Instead the principal must be repaid by the borrower in a lump sum at maturity
of the mortgage loan.
For interest-only mortgage loans with a capital repayment vehicle or a
combination loan with a capital repayment vehicle the borrower is recommended
to put in place an investment plan or other repayment mechanism forecast to
provide sufficient funds to repay the principal due at the end of the term.
The ability of a borrower to repay the principal on an interest-only
mortgage loan or the final payment of principal on a combination mortgage loan
at maturity depends on that borrower's responsibility to ensure that sufficient
funds are available from an investment plan or another source, such as ISAs,
pension policies, personal equity plans or endowment policies, and also depends
on the financial condition of the borrower, tax laws and general economic
conditions at the relevant time. However, there can be no assurance that there
will be sufficient funds from any investment plan to repay the principal or (in
the case of a combination loan) the part of the principal that it is designed
to cover.
The seller does not (and in certain circumstances cannot) take security over
investment plans. Consequently, in the case of a borrower in poor financial
condition, the investment plan will be an asset available to meet the claims of
other creditors. The seller also recommends that the borrower takes out term
life assurance cover in relation to the mortgage loan, although the seller
again does not take security over such policies.
In the case of interest-only mortgage loans, there can be no assurance that
the borrower will have the funds required to repay the principal at the end of
the term. If a borrower cannot repay the mortgage loan and a loss occurs on the
mortgage loan after enforcing the related security, then this may affect
payments on the notes if that loss cannot be cured by the application of excess
issuer available revenue receipts.
THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE MORTGAGES TRUSTEE HAS NO
LEGAL TITLE TO THE MORTGAGE LOANS AND THEIR RELATED SECURITY WHICH MAY
ADVERSELY AFFECT PAYMENTS ON THE NOTES
Each assignment by the seller to the mortgages trustee of the benefit of
English mortgage loans and their related security has taken effect in equity
only (and any assignment of the benefit of English mortgage loans and their
related security in the future will take effect in equity only). Each sale and
assignment by the seller to the mortgages trustee of Scottish mortgage loans
and their related security was given effect by a declaration of trust by the
seller by which the beneficial interests in such Scottish mortgage loans and
their related security were transferred to the mortgages trustee (and any sale
of Scottish mortgage loans and their related security in the future will be
given effect by further declarations of trust). In each case this means that
legal title to the mortgage loans and their related security assigned to the
mortgages trustee remains with the seller, but the mortgages trustee has all
the other rights and benefits relating to ownership of each mortgage loan and
its related security (which rights and benefits are subject to the trust in
favor of the beneficiaries). The mortgages trustee has the right to demand the
seller to give it legal title to the mortgage loans and the related security in
the circumstances described under "ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED
SECURITY -- TRANSFER OF LEGAL TITLE TO THE MORTGAGES TRUSTEE" and until then
the mortgages trustee will not apply to the Land Registry or the Land Charges
Registry to seek to protect its equitable interest in the English mortgages,
and cannot in any event apply to the Registers of Scotland to register or
record its beneficial interest in the Scottish mortgages. For more information
on the Scottish mortgage loans and their related security, see "THE MORTGAGE
LOANS -- SCOTTISH MORTGAGE LOANS" and "MATERIAL LEGAL
43
ASPECTS OF THE MORTGAGE LOANS AND THE RELATED SECURITY -- SCOTTISH MORTGAGE
LOANS". In addition, except in the limited circumstances set out in "ASSIGNMENT
OF THE MORTGAGE LOANS AND RELATED SECURITY -- TRANSFER OF LEGAL TITLE TO THE
MORTGAGES TRUSTEE", the seller will not give notice of the assignment of the
mortgage loans and related security to any borrower.
At any time during which the mortgages trustee does not hold the legal title
to the mortgage loans and the related security or has not notified the
borrowers of its interest in the mortgage loans and the related security, there
are risks, as follows:
* firstly, if the seller wrongly sold to another person a mortgage
loan and that mortgage loan has already been assigned to the
mortgages trustee, and that person acted in good faith and did not
have notice of the interests of the mortgages trustee or the
beneficiaries in the mortgage loan and that person notified the
borrower of that sale to it of the mortgage loan and its related
security or registered its interest in that mortgage, then that
person might obtain good title to the mortgage loan, free from the
interests of the mortgages trustee and the beneficiaries. If this
occurred then the title of the mortgages trustee to the affected
mortgage loan and its related security would be subordinated to the
title of that person and the mortgages trustee would not be
entitled to payments by a borrower in respect of such a mortgage
loan. This may affect our ability to repay the notes;
* secondly, the rights of the mortgages trustee and the beneficiaries
may be subject to the rights of the borrowers against the seller,
such as rights of set-off (see in particular "-- THERE ARE RISKS IN
RELATION TO FLEXIBLE MORTGAGE LOANS AND PERSONAL SECURED LOANS
WHICH MAY ADVERSELY AFFECT THE FUNDS AVAILABLE TO PAY THE NOTES")
which occur in relation to transactions or deposits made between
certain borrowers and the seller and the rights of borrowers to
repay their mortgage loans directly to the seller. If these rights
were to be exercised, the mortgages trustee may receive less money
than anticipated from the mortgage loans, which may affect our
ability to repay the notes; and
* finally, the mortgages trustee would not be able to enforce any
borrower's obligations under a mortgage loan or mortgage itself but
would have to join the seller as a party to any legal proceedings.
However, once notice has been given to a borrower of the transfer of the
related mortgage loan and its related security to the mortgages trustee, any
independent set-off rights which that borrower has against the seller will
crystallize; further rights of independent set-off would cease to accrue from
that date and no new rights of independent set-off could be asserted following
that notice. Set-off rights arising under transaction set-off (which are set-
off claims arising out of a transaction connected with the mortgage loan) will
not be affected by that notice.
Additionally, if a borrower exercises any set-off rights, then an amount
equal to the amount set-off will firstly reduce the total amount of the seller
share of the trust property only. For more information on the risks of
transaction set-off, see "-- THERE ARE RISKS IN RELATION TO FLEXIBLE MORTGAGE
LOANS AND PERSONAL SECURED LOANS WHICH MAY ADVERSELY AFFECT THE FUNDS AVAILABLE
TO PAY THE NOTES".
THERE ARE RISKS IN RELATION TO FLEXIBLE MORTGAGE LOANS AND PERSONAL SECURED
LOANS WHICH MAY ADVERSELY AFFECT THE FUNDS AVAILABLE TO PAY THE NOTES
As described under "-- THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE
MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGE LOANS AND THEIR RELATED
SECURITY WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES", the seller has made
an equitable assignment of (or, in the case of the Scottish mortgage loans, a
transfer of the beneficial interest in) the relevant mortgage loans and
mortgages to the mortgages trustee, with legal title being retained by the
seller. Therefore, the rights of the mortgages trustee may
44
be subject to the direct rights of the borrowers against the seller, including
rights of set-off existing prior to notification to the borrowers of the
assignment of the mortgage loans and the mortgages. Such set-off rights
(including analogous rights in Scotland) may arise if the seller fails to
advance a cash re-draw to a borrower under a flexible mortgage loan or a
further draw to a borrower under a personal secured loan when the borrower is
entitled to such cash re-draw or further draw.
If the seller fails to advance the cash re-draw or further draw in
accordance with the relevant mortgage loan, then the relevant borrower may
argue that he is entitled to set-off any damages claim (or to exercise the
analogous rights in Scotland) arising from the seller's breach of contract
against the seller's (and, as equitable assignee of or holder of the beneficial
interest in the mortgage loans and the mortgages, the mortgages trustee's)
claim for payment of principal and/or interest under the flexible mortgage loan
or personal secured loan as and when it becomes due. In addition, a borrower
under a personal secured loan may attempt to set-off any such damages claim (or
to exercise the analogous rights in Scotland) against the seller's claim for
payment of principal and/or interest under any other mortgage loan which the
borrower has with the seller. Such 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 cash re-draw or further draw will,
in many cases, be the cost to the borrower of finding an alternative source of
funds (although in the case of Scottish mortgage loans which are personal
secured loans it is possible, though regarded as unlikely, that the borrower's
rights of set-off could extend to the full amount of the relevant further
draw). The borrower may obtain a mortgage loan elsewhere in which case the
damages would be equal to any difference in the borrowing costs together with
any consequential losses, namely the associated costs of obtaining alternative
funds (for example, legal fees and survey fees). If the borrower is unable to
obtain an alternative mortgage loan, he or she may have a claim in respect of
other losses arising from the seller's breach of contract where there are
special circumstances communicated by the borrower to the seller at the time
the borrower entered into the mortgage or which otherwise were reasonably
foreseeable.
A borrower may also attempt to set-off against his or her mortgage payments
an amount greater than the amount of his or her damages claim (or the exercise
of analogous rights in Scotland). In that case, the administrator will be
entitled to take enforcement proceedings against the borrower although the
period of non-payment by the borrower is likely to continue until a judgment is
obtained.
The exercise of set-off rights by borrowers would reduce the incoming cash
flow to the mortgages trustee during such exercise. However, the amounts set-
off will be applied firstly to reduce the seller share of the trust property
only.
Further, there may be circumstances in which:
* a borrower may seek to argue that certain re-draws are
unenforceable by virtue of non-compliance with the CCA;
* a borrower may seek to argue that personal secured loans may be
unenforceable or unenforceable without a court order because of
non-compliance with the CCA;
* a borrower may seek to argue that a loan is unenforceable under
FSMA or that there has been a breach of an FSA rule, and claim
damages in respect thereof (see "-- REGULATION OF MORTGAGE LENDING
IN THE UNITED KINGDOM UNDER THE FSMA" below); or
* certain re-draws or further draws may rank behind security created
by a borrower after the date upon which the borrower entered into
its mortgage with the seller.
45
The minimum seller share has been sized in an amount expected to cover these
risks, although there is no assurance that it will. If the minimum seller share
is not sufficient in this respect then there is a risk that you may not receive
all amounts due on the notes or that payments may not be made when due.
IF THE ADMINISTRATOR IS REMOVED, THERE IS NO GUARANTEE THAT A SUBSTITUTE
ADMINISTRATOR WOULD BE FOUND, WHICH COULD DELAY COLLECTION OF PAYMENTS ON THE
MORTGAGE LOANS AND ULTIMATELY COULD ADVERSELY AFFECT PAYMENTS ON THE NOTES
The seller has been appointed by the mortgages trustee and the beneficiaries
as administrator to service the mortgage loans. If the administrator breaches
the terms of the administration agreement, then the mortgages trustee and/or
the Funding beneficiaries and the Funding security trustees will be entitled to
terminate the appointment of the administrator and the Funding security
trustees will be entitled to appoint a substitute administrator.
There can be no assurance that a substitute administrator would be found who
would be willing and able to service the mortgage loans on the terms of the
administration agreement. In addition, as described under the third risk factor
immediately succeeding this risk factor, any substitute administrator will be
required to be authorized under the FSMA in order to administer mortgage loans
that constitute regulated mortgage contracts. The ability of a substitute
administrator fully to perform the required services would depend, among other
things, on the information, software and records available at the time of the
appointment. Any delay or inability to appoint a substitute administrator may
affect payments on the mortgage loans and hence our ability to make payments
when due on the notes.
You should note that the administrator has no obligation itself to advance
payments that borrowers fail to make in a timely fashion.
THE MORTGAGES TRUSTEE MAY NOT RECEIVE THE BENEFIT OF CLAIMS MADE ON THE
BUILDINGS INSURANCE WHICH COULD ADVERSELY AFFECT PAYMENTS ON THE NOTES
The practice of the seller in relation to buildings insurance is described
under "THE MORTGAGE LOANS -- BUILDINGS INSURANCE POLICIES". As described in
that section, we cannot provide assurance that the mortgages trustee will
always receive the benefit of any claims made under any applicable insurance
contracts or that the amount received in the case of a successful claim will be
sufficient to reinstate the affected property. This could reduce the share of
the principal receipts received by Funding 2 according to the Funding 2 share
and could adversely affect our ability to make payments on the notes. You
should note that buildings insurance is normally renewed annually.
THE MORTGAGES TRUSTEE IS NOT REQUIRED TO MAINTAIN MORTGAGE INDEMNITY INSURANCE
WITH THE CURRENT INSURER, AND THE SELLER IS NOT REQUIRED TO MAINTAIN THE
CURRENT LEVEL OF MORTGAGE INDEMNITY INSURANCE COVERAGE FOR NEW MORTGAGE LOANS
THAT IT ORIGINATES IN THE FUTURE, WHICH MAY ADVERSELY AFFECT THE FUNDS
AVAILABLE TO PAY THE NOTES
The mortgages trustee is not required to maintain a mortgage indemnity
policy with the current insurer. The mortgages trustee has the discretion to
contract for mortgage indemnity guarantee protection from any insurer then
providing mortgage indemnity insurance policies or not to contract for such
protection at all, subject to prior agreement with the rating agencies and
their confirmation that this will not cause a reduction, qualification or
withdrawal of the then current ratings of the notes.
In addition, the seller is not required to maintain the same level of
coverage under mortgage indemnity insurance policies for mortgage loans that it
may originate in the future and assign to the mortgages trustee. See "THE
MORTGAGE LOANS -- BUILDINGS INSURANCE POLICIES -- MIG POLICIES".
46
REGULATORY CHANGES BY THE OFFICE OF FAIR TRADING, THE FSA AND ANY OTHER
REGULATORY AUTHORITIES MAY HAVE AN IMPACT ON THE SELLER, THE MORTGAGES TRUSTEE,
FUNDING 2, THE ISSUER, THE MORTGAGE LOANS AND/OR PERSONAL SECURED LOANS AND MAY
ADVERSELY AFFECT OUR ABILITY TO MAKE PAYMENTS WHEN DUE ON THE NOTES
In the United Kingdom, the Office of Fair Trading ("OFT") is responsible for
the issue of licenses under 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 (except
to the extent of the regulation of the market by the FSA under FSMA -- see
below). The licensing regime under the CCA is different from, and additional
to, the regime for authorisation under the FSMA.
REGULATION OF MORTGAGE LENDING IN THE UNITED KINGDOM UNDER THE FSMA
Mortgage lending in the United Kingdom became a regulated activity under the
FSMA on October 31, 2004 ("N(M)").
Certain provisions of the FSMA apply to a "REGULATED MORTGAGE CONTRACT". A
mortgage loan contract will be a regulated mortgage contract under the FSMA if
it is originated after N(m) or originated prior to N(m) but varied after N(m)
such that a new contract is entered into and if, at the time it is entered
into: (a) the borrower is an individual or trustee, (b) the contract provides
for the obligation of the borrower to repay to be secured by a first legal
mortgage (or the Scottish equivalent) on land (other than timeshare
accommodation) in the UK, and (c) at least 40% of that land is used, or is
intended to be used, as or in connection with a dwelling by the borrower or (in
the case of credit provided to trustees) by an individual who is a beneficiary
of the trust, or by a related person. Therefore, the FSMA does not apply to a
mortgage contract that is secured by a second or subsequent legal charge (or
the Scottish equivalent) or is provided to a corporate body. The CCA may
continue to apply to mortgage loans post N(m) where the mortgage loan does not
satisfy the definition of a regulated mortgage contract but does fall within
the criteria for regulation under the CCA as described below in this risk
factor.
On and from N(m), subject to any exemption, persons carrying on any
specified regulated mortgage-related activities by way of business must be
authorized by the FSA under the FSMA. The specified activities currently are
(a) entering into a regulated mortgage contract as lender, (b) administering a
regulated mortgage contract (administering in this context means notifying
borrowers of changes in mortgage payments and/or collecting payments due under
the mortgage loan), (c) advising on regulated mortgage contracts, and (d)
arranging regulated mortgage contracts. Agreeing to carry on any of these
activities is also a regulated activity. If requirements as to, inter alia,
authorization of lenders and brokers are not complied with, a regulated
mortgage contract will be unenforceable against the borrower except with the
approval of a court and the unauthorized person may commit a criminal offense.
The regime under the FSMA regulating financial promotions covers the content
and manner of promotion of agreements relating to qualifying credit, and by
whom such promotions can be issued or approved. In this respect, the FSMA
regime not only covers financial promotions of regulated mortgage contracts but
also promotions of certain other types of secured credit agreements under which
the lender is a person who carries on the regulated activity of entering into a
regulated mortgage contract. Failure to comply with this regime is a criminal
offense and will render the regulated mortgage contract or other secured credit
agreement in question unenforceable against the borrower except with the
approval of a court.
An unauthorized person who carries on a regulated mortgage-related activity
of administering or advising in respect of a regulated mortgage contract that
has been validly entered into may commit an offense, although this will not
render the contract unenforceable against the borrower. The mortgages trustee
does not need to be an authorised person under the FSMA in order to acquire
legal or beneficial title to a
47
regulated mortgage contract. The mortgages trustee will not carry on the
regulated activity of administering in relation to regulated mortgage
contracts, where such contracts are administered pursuant to an administration
agreement by an entity having the required FSA authorization and permission. If
such administration agreement terminates, however, the 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 authorization and permission. In addition, on and from N(m) no
variations may be made to the mortgage loans and no re-draws, further draws or
further advances may be made under the mortgage loans, where this would result
in 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 mortgages trustee would be required to be authorized under the FSMA to
do so.
Prior to N(m), there was only self-regulation of mortgage business in the UK
under the Mortgage Code (the "CML CODE") issued by the Council of Mortgage
Lenders (the "CML"). The seller subscribed to the CML Code. Membership of the
CML and compliance with the CML Code were voluntary. The CML Code set out a
minimum standard of good mortgage business practise, from marketing to lending
procedures and dealing with borrowers experiencing financial difficulties.
Since April 30, 1998, lender-subscribers to the CML Code were not permitted to
accept mortgage business introduced by intermediaries who were not registered
with (before November 1, 2000 until 31 October 2004) the Mortgage Code Register
of Intermediaries or (on and after November 1, 2000) the Mortgage Code
Compliance Board. The CML Code ceased to have effect on N(m). Since N(m), as an
authorized person the seller is subject to the FSA requirements in its
Mortgages: Conduct of Business Source Book ("MCOB"). MCoB sets out various
requirements that a regulated mortgage lender must comply with when carrying on
regulated mortgage-related activities. In particular, MCoB sets out
requirements as to pre-application disclosures at offer stage, disclosures at
the start of a regulated mortgage contract and responsible lending. A failure
to comply with MCoB by a regulated mortgage lender, would not render the
regulated mortgage contract unenforceable or void as against the borrower or
constitute an offense by the regulated mortgage lender. A borrower who is a
private person may have a right of action against the regulated mortgage lender
where the borrower has suffered a loss as a result of the contravention.
In September 2002, the European Commission published a proposal for a
directive of the European Parliament and of the Council on the harmonization of
the laws, regulations and administrative provisions of the member states
concerning credit for consumers and surety agreements entered into by
consumers.
However, in October 2004 the European Commission adopted a modified proposal
to incorporate many of the amendments called for by the European Parliament
when it held its first vote on the directive in April 2004. In its current
form, the proposal requires specified requirements to be met and restrictions
observed in respect of loans secured on land for a sum not more than
[e]100,000, including new credit agreements for further drawings under certain
flexible mortgages and further advances. The proposal provides that the
directive will not apply retrospectively; however, it is unclear whether this
will extend to new drawings and further advances made in respect of existing
agreements.
Member states will then have a further two years in which to bring into
force national implementing legislation regulations and administrative
provisions. The UK Department of Trade and Industry (the "DTI") is currently in
consultation with consumer and industry organizations in relation to the
modified proposal.
REGULATION OF CONSUMER CREDIT LENDING 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 [GBP]25,000 for credit
agreements made on or after May 1, 1998, or lower amounts for credit agreements
made before that date, and (c) the credit
48
agreement is not an exempt agreement as specified in or under section 16 of the
CCA (for example, certain types of credit to finance the purchase of, or
alterations to, homes or business premises or a regulated mortgage contract
under the FSMA (see above)). Some of the personal secured loans in the mortgage
portfolio might be wholly or partly regulated or treated as such by the CCA.
The loan agreement that evidences any such personal secured loan has to comply
with requirements under the CCA as to content, layout and execution. If the
contract does not comply, then to the extent that it is regulated or to be
treated as such:
(a) the contract relating to the personal secured loan is unenforceable
if the form of agreement to be signed by the borrower is not signed
by the borrower or omits or mis-states a "prescribed term"; or
(b) in other cases, the contract relating to the personal secured loan
is unenforceable without a court order and, in exercising its
discretion whether to make the order, the court will take into
account any prejudice suffered by the borrower and any culpability
by the lender.
If a court order is necessary to enforce some or part of a personal secured
loan agreement in the mortgage portfolio to the extent that it is regulated or
to be treated as such, then in dealing with such an application, the court has
the power, if it appears just to do so, to amend the personal secured loan
agreement or to impose conditions upon its performance or to make a time order
(for example, giving extra time for arrears to be cleared). The CCA contains
anti-avoidance provisions. The seller does not believe that these provisions
would apply to the mortgage loans, and has represented that no mortgage loan
agreement (apart from a personal secured loan documented as a regulated
agreement subject to the CCA) is wholly or partly regulated by the CCA or to be
treated as such.
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
new loan or further advance made after this time, other than under a regulated
mortgage contract under the FSMA or an exempt agreement under the CCA, will be
regulated by the CCA. Such agreement relating to the loan or further advance
will have to comply with requirements as to the form and content of the credit
agreement and, in certain cases, new requirements for pre-contract disclosure
of key information. If it does not comply, the agreement will be unenforceable
against the borrower. A white paper on consumer credit was published by the DTI
in December 2003. The white paper was accompanied by a consultation on draft
regulations.
Following the consultation process, a number of finalized regulations have
been laid before Parliament since June 2004. Those include amongst others,
regulations governing consumer credit advertising; the form and content of
regulated consumer credit agreements; requirements for pre-contract disclosure;
and the rebate of interest charges to which a borrower will be entitled on
early settlement of regulated consumer credit agreements. The new regulations
relating to advertising came into effect on October 31, 2004. The regulations
relating to form and content of regulated consumer credit agreements are due to
come into effect on May 31, 2005, or August 31, 2005 for agreements that have
been presented, sent or made available to the borrower but have not been
executed before May 31, 2005. Regulations on pre-contract disclosure are due to
take effect from May 31, 2005. The regulations on early settlement introduce
revised formulae for calculating the minimum rebate of interest to which the
borrower is entitled on an early settlement of a loan made under a regulated
consumer credit agreement, which are anticipated to be more favourable to the
borrower than the existing formulae. The new formulae come into force on May
31, 2005 for all regulated consumer credit agreements
49
entered into on or after that date. For all regulated consumer credit
agreements existing on May 31, 2005, the new formulae will apply from May 31,
2007 for all such agreements which were originally for a term of 10 years or
less, and from May 31, 2010 for all such agreements which were originally for a
term of more than 10 years.
The Consumer Credit Bill was introduced into Parliament on 16 December 2004.
The bill, if enacted, would amend the CCA and the main provisions covered by
the bill include: (a) removing the financial limit for consumer lending, whilst
retaining the limit of [GBP]25,000 for lending for business purposes to
individuals, unincorporated bodies and partnerships of up to 3 partners; (b)
strengthening the licensing regime; (c) reforming the law on extortionate
credit as it applies to both new and existing regulated consumer credit
agreements; and (d) introducing alternative dispute resolution procedures
outside the courts for consumer credit agreements. At present there is no
indication as to when the Consumer Credit Bill is likely to be enacted, or if
it will be enacted in its current form.
So as to avoid dual regulation on and from N(m), all mortgage loans
regulated by the FSA are not covered by the CCA. This carve-out only affects
mortgage loans entered into on or after N(m) (or entered into before N(m) but
varied on or after that date such that a new contract is formed). In respect of
mortgage loans entered into prior to N(m) (which have not been so varied) the
CCA will continue to be the relevant legislation. A mortgage contract that
would (except for the carve-out) be regulated under the CCA or treated as such
will, however, only be enforceable on an order of the court pursuant to section
126 of the CCA, notwithstanding regulation under the FSMA.
No assurance can be given that additional regulations will not arise with
regard to the mortgage market in the United Kingdom generally, the seller's
particular sector in that market or specifically in relation to the seller. Any
such action or developments, in particular, but not limited to, the cost of
compliance, may have a material adverse effect on the seller, the mortgages
trustee and/or the administrator and their respective businesses and
operations. This may adversely affect our ability to make payments in full when
due on the notes.
REGULATIONS IN THE UNITED KINGDOM COULD LEAD TO SOME TERMS OF THE AGREEMENTS
RELATING TO THE MORTGAGE LOANS AND PERSONAL SECURED LOANS BEING UNENFORCEABLE,
WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES
In the United Kingdom, the Unfair Terms in Consumer Contracts Regulations
1994 applied to all of the mortgage loans that were entered into between July
1, 1995 and September 30, 1999. These regulations were revoked and replaced by
the Unfair Terms in Consumer Contracts Regulations 1999 ("UTCCR") on October 1,
1999, which apply to all the mortgage loans as of that date. The UTCCR
generally provide that:
* a borrower may challenge a term in an agreement on the basis that
it is an "unfair" term within the regulations and therefore not
binding on the borrower; and
* the OFT and any "qualifying body" (as defined in the regulations,
such as the FSA) may seek to prevent a business from relying on
unfair terms.
This will not generally affect "core terms" which set out the main subject
matter of the contract, such as the borrower's obligation to repay principal.
However, it may affect terms that are not considered to be core terms, such as
the right of the lender to vary the interest rate. For example, if a term
permitting a lender to vary the interest rate is found to be unfair, the
borrower will not be liable to pay interest at the increased rate or, to the
extent that she or he has paid it, will be able, as against the lender or the
mortgages trustee, to claim repayment of the extra interest amounts paid or to
set-off the amount of such claim against the amount owing by the borrower under
the mortgage loan. Any such non-recovery, claim or set-off ultimately may
adversely affect our ability to make payments on the notes such that the
payments on your notes could be reduced or delayed.
50
On February 24, 2000, the OFT issued a guidance note on what the OFT
considered to be fair and unfair terms for interest variation in mortgage loan
contracts. Where the interest variation term does not provide for precise and
immediate tracking of an external rate outside the lender's control, and if the
borrower is locked in, for example by an early repayment charge that is
considered to be a penalty, the term is likely to be regarded as unfair under
the UTCCR unless the lender (i) notifies the borrower in writing at least 30
days before the rate change and (ii) permits the borrower to repay the whole
loan during the next three months after the rate change, without paying the
early repayment charge. The seller has reviewed the guidance note and has
concluded that its compliance with it will have no material adverse effect on
the mortgage loans or its business. The guidance note has been withdrawn from
the OFT website. The FSA has agreed with the OFT to take responsibility for the
enforcement of the UTCCR insofar as they apply to regulated mortgage contracts.
The guidance note is currently under review by the OFT and the FSA, but there is
no indication as to when this review is likely to be concluded or what changes,
if any, may arise from it.
In August 2002 the Law Commission for England and Wales and the Scottish Law
Commission published a Joint Consultation Paper proposing changes to the UTCCR,
including harmonizing provisions of the UTCCR and the Unfair Contract Terms Act
1977, applying the UTCCR to business-to-business contracts and revising the
UTCCR to make it "clearer and more accessible". The closing date for comments
on this consultation was November 8, 2002 and a final report (together with a
draft Bill) is expected to be published early in 2005. No assurances can be
given that changes to the UTCCR, if implemented, will not have an adverse
effect on the seller, the mortgages trustee and/or the administrator.
Under the FSMA, the Financial Ombudsman Service (the "OMBUDSMAN") is
required to make decisions on (among other things) complaints relating to the
terms in agreements on the basis of what, in the Ombudsman's opinion, would be
fair and reasonable in all circumstances of the case, taking into account
(among other things) law and guidance. Complaints brought before the Ombudsman
for consideration must be decided on a case-by-case basis, with reference to
the particular facts of any individual case. Each case would first be
adjudicated by an adjudicator. Either party to the case may appeal against the
adjudication. In the event of an appeal, the case proceeds to a final decision
by the Ombudsman. The Ombudsman may make a money award to a borrower, which may
adversely affect the value at which mortgage loans could be realized and
accordingly our ability to make payments in full when due on the notes.
THE MORTGAGES TRUSTEE'S ENTITLEMENT TO BE INDEMNIFIED FOR LIABILITIES
UNDERTAKEN DURING THE ENFORCEMENT PROCESS MAY ADVERSELY AFFECT THE FUNDS
AVAILABLE TO FUNDING 2 TO PAY AMOUNTS DUE UNDER THE GLOBAL INTERCOMPANY LOAN,
WHICH MAY IN TURN ADVERSELY AFFECT THE FUNDS AVAILABLE TO PAY THE NOTES
In order to enforce a power of sale in respect of a mortgaged property, the
relevant mortgagee (which may be Northern Rock or the mortgages trustee) must
first obtain possession of the mortgaged property unless the property is
vacant. Possession is usually obtained by way of a court order although this
can be a lengthy process and the mortgagee must assume certain risks. The
mortgages trustee is entitled to be indemnified to its satisfaction against
personal liabilities which it could incur if it were to become a mortgagee in
possession before it is obliged to seek possession, provided that it is always
understood that the Funding 2 security trustee is never obliged to enter into
possession of the mortgaged property.
THE EUROPEAN UNION DIRECTIVE ON THE TAXATION OF SAVINGS INCOME
The European Union has adopted a Directive regarding the taxation of savings
income. Subject to a number of important conditions being met, it is proposed
that member states will be required from July 1, 2005, to provide to the tax
authorities of other member states details of payments of interest and other
similar income paid by a person
51
to an individual in another member state, except that Austria, Belgium and
Luxembourg will instead impose a withholding system for a transitional period
unless during such period they elect otherwise.
WITHHOLDING TAX PAYABLE BY FUNDING 2 OR US MAY ADVERSELY AFFECT OUR ABILITY TO
MAKE PAYMENTS ON THE NOTES
In the event any withholding or deduction for or on account of taxes is
imposed on or is otherwise applicable to payments of interest on or repayments
of principal of the notes or the loan tranches, Funding 2 is not obliged to
gross-up or otherwise compensate us for the lesser amount we will receive and
we are not obliged to gross-up or otherwise compensate you for the lesser
amounts you will receive, in each case, as a result of such withholding or
deduction.
IF THE UNITED KINGDOM JOINS THE EUROPEAN MONETARY UNION PRIOR TO THE MATURITY
OF THE NOTES, WE CANNOT ASSURE YOU THAT THIS WOULD NOT ADVERSELY AFFECT
PAYMENTS ON YOUR NOTES
It is possible that prior to the maturity of the notes the United Kingdom
may become a participating member state in the European economic and monetary
union and the euro may become the lawful currency of the United Kingdom. In
that event, (a) all amounts payable in respect of any notes denominated in
sterling will become payable in euro; (b) applicable provisions of law may
allow or require us to re-denominate such notes into euro and take additional
measures in respect of such notes; and (c) the introduction of the euro as the
lawful currency of the United Kingdom may result in the disappearance of
published or displayed rates for deposits in sterling used to determine the
rates of interest on such notes or changes in the way those rates are
calculated, quoted and published or displayed. The introduction of the euro
could also be accompanied by a volatile interest rate environment which could
adversely affect a borrower's ability to repay its loan as well as adversely
affect investors. It cannot be said with certainty what effect, if any,
adoption of the euro by the United Kingdom will have on investors in the notes.
YOUR INTERESTS MAY BE ADVERSELY AFFECTED BY A CHANGE OF LAW
The structure of the issue of the notes and the ratings which are to be
assigned to them are based on English law, Scottish law, Jersey law and New
York law and administrative practise in effect as at the date of this
prospectus. No assurance can be given as to the impact of any possible change
to English law, Scottish law, Jersey law or New York law or administrative
practise after the date of this prospectus, nor can any assurance be given as
to whether any such change could adversely affect our ability to make payments
in respect of the notes.
THE IMPLEMENTATION OF CHANGES TO THE BASEL CAPITAL ACCORD AND THE EU REGULATORY
CAPITAL FRAMEWORK MAY RESULT IN CHANGES TO THE RISK-WEIGHTING OF YOUR NOTES
In June 1999, the Basel Committee on Banking Supervision (the "BASEL
COMMITTEE") issued proposals for reform of the 1988 Capital Accord and proposed
a new capital adequacy framework which would place enhanced emphasis on risk-
sensitivity and market discipline. Following an extensive consultation period,
the Basel Committee published the "International Convergence of Capital
Measurement and Capital Standards: A Revised Framework" (the "NEW BASEL CAPITAL
ACCORD") on June 26, 2004, with an intended implementation date of year-end
2006. On July 14, 2004, the European Commission published its consultation
paper on the EU's implementation of the New Basel Capital Accord (known as the
"CAPITAL REQUIREMENTS DIRECTIVE"). The various approaches under the framework
set out in the Capital Requirements Directive will be implemented in the EU in
stages, some from year-end 2006, and the most advanced at year-end 2007. The
implementation of the New Basel Capital Accord or the Capital Requirements
Directive, as applicable, could affect the risk-weighting of the notes in
respect of investors which are subject to regulatory capital requirements.
Consequently, you should consult your own advisers as to the consequences to
and effect on you of the implementation of the New Basel Capital Accord or the
Capital Requirements Directive, as applicable. We cannot
52
predict the precise effects of potential changes which might result from the
implementation by national regulators of the New Basel Capital Accord or the
Capital Requirements Directive.
YOU WILL NOT RECEIVE PHYSICAL NOTES, WHICH MAY CAUSE DELAYS IN DISTRIBUTIONS
AND HAMPER YOUR ABILITY TO PLEDGE OR RESELL THE NOTES
Unless the global note certificates are exchanged for individual note
certificates, which will only occur under a limited set of circumstances, your
beneficial ownership of the notes will only be registered in book-entry form
with DTC, Euroclear or Clearstream, Luxembourg. The lack of physical notes
could, among other things:
* result in payment delays on the notes because we will be sending
distributions on the notes to DTC instead of directly to you;
* make it difficult for you to pledge or otherwise grant security
over the notes if physical notes are required by the party
demanding the pledge or other security; and
* hinder your ability to resell the notes because some investors may
be unwilling or unable to buy notes that are not in physical form.
IF YOU HAVE A CLAIM AGAINST US IT MAY BE NECESSARY FOR YOU TO BRING SUIT
AGAINST US IN ENGLAND TO ENFORCE YOUR RIGHTS
We have agreed to submit to the non-exclusive jurisdiction of the courts of
England, and it may be necessary for you to bring a suit in England to enforce
your rights against us.
PROVISIONS OF THE INSOLVENCY ACT 2000 COULD DELAY ENFORCEMENT OF YOUR RIGHTS IN
THE EVENT OF OUR INSOLVENCY OR AN INSOLVENCY OF FUNDING 2
The Insolvency Act 2000 amended the Insolvency Act 1986 to provide that
certain "small" companies (which are defined by reference to certain tests
relating to a company's balance sheet, turnover and number of employees) will
be able to seek protection from their creditors for a period of up to 28 days
with the option for creditors to extend the moratorium for a further two
months. The position as to whether or not a company is a "small" company may
change from period to period and consequently no assurance can be given that we
or Funding 2 will, at any given time, be determined to be a "small" company.
The Secretary of State for Trade and Industry may by regulation modify the
eligibility requirements for "small" companies and can make different
provisions for different cases. No assurance can be given that any such
modification or different provisions will not be detrimental to the interests
of noteholders.
However, the Insolvency Act 1986 (Amendment) (No.3) Regulations 2002
(Statutory Instrument 2002 No. 1990) provides for an exception to the "small"
companies moratorium provisions if the company is party to an arrangement which
is or forms part of a capital market arrangement under which (i) a party has
incurred, or when the arrangement was entered into was expected to incur, a
debt of at least [GBP]10 million under the arrangement and (ii) the arrangement
involves the issue of a capital market investment. We believe that we will fall
within this exception and that the moratorium provisions will not apply to us.
However, we take the view that the exception will not cover Funding 2 and there
is therefore a risk that it may be the subject of a "small" companies
moratorium under the Insolvency Act 2000. It should be borne in mind that the
moratorium merely delays the enforcement of security whilst the moratorium is
in effect (a maximum of three months), it does not void or in any way negate
the security itself.
RISKS RELATING TO THE INTRODUCTION OF INTERNATIONAL FINANCIAL REPORTING
STANDARDS
Our UK corporation tax position depends to a significant extent on the
accounting treatment applicable to us. From January 1, 2005, our accounts are
required to comply with International Financial Reporting Standards ("IFRS") or
with new UK Financial Reporting Standards reflecting IFRS ("NEW UK GAAP").
Funding 2 may also choose to
53
comply with IFRS. There is a concern that companies such as ourselves, might,
under either IFRS or new UK GAAP, suffer timing differences that could result
in profits or losses for accounting purposes, and accordingly for tax purposes,
which bear little or no relationship to the company's cash position. However,
draft legislation has been published to be included in the Finance Act 2005
which, if enacted, would allow "securitization companies" to prepare tax
computations for accounting periods ending not later than March 31, 2006 on the
basis of UK GAAP as applicable up to December 31, 2004, notwithstanding any
requirement to prepare statutory accounts under IFRS or new UK GAAP. We (but,
currently, not Funding 2) are likely to be a "securitization company" for these
purposes on the basis of the current draft legislation.
The draft legislation remains subject to change and withdrawal until enacted
and as currently drafted does not apply to accounting periods ending after
March 31, 2006. The stated policy of the Inland Revenue is that the tax
neutrality of securitization special purpose companies in general should not be
disrupted as a result of the transition to IFRS and that they are working with
participants in the securitization industry to identify appropriate means of
preventing any such disruption. However, if the draft legislation is changed
(or continues, notwithstanding the stated policy of the Inland Revenue, not to
apply to Funding 2) or if further extensions or measures are not introduced by
the Inland Revenue to deal with accounting periods ending after March 31, 2006,
then we may be required to recognize profits or losses as a result of the
application of IFRS or new UK GAAP which could have tax effects not
contemplated in the cashflows for the transaction and as such adversely affect
us and therefore noteholders.
54
DEFINED TERMS
We have provided an index of defined terms at the end of this prospectus
under "GLOSSARY". Terms used in this prospectus have the meaning set out in the
glossary unless they are defined where they first appear in this prospectus.
For purposes of this prospectus, the term "BORROWER" has the meaning set out in
the glossary, but generally means a person or persons who have borrowed money
under a mortgage loan.
References to "THE ISSUER", "WE" or "US" refer to Granite Master Issuer plc.
References to "THE NOTES" refer to any of the notes, including the "US NOTES",
that we are issuing under this prospectus and the related prospectus
supplements.
References to a "SERIES" of notes refer to all classes of notes issued on a
given day and any class of notes issued on any other day which:
(a) is expressed to be consolidated; and
(b) is identical in all respects (including as to listing) except for
closing date, interest commencement date and issue price,
with any of the classes of notes issued on such given day.
References to a "SERIES AND CLASS" of notes refer to a particular class of
notes of a given series.
A class of notes of a given series may comprise one or more sub-classes. If
a class of note of a given series does comprise more than one sub-class,
references to "SERIES AND CLASS" will refer to a particular sub-class within
such class.
55
THE ISSUER
INTRODUCTION
The issuer was incorporated in England and Wales as a public company limited
by shares under the Companies Act 1985 on 5 October, 2004 with registered
number 5250668. The registered office of the issuer is at Fifth Floor, 100 Wood
Street, London EC2V 7EX. The issuer is wholly owned by Funding 2 (see "FUNDING
2").
The issuer is organized as a special purpose company and will be mostly
passive. The issuer has no subsidiaries. The seller does not own directly or
indirectly any of the share capital of Funding 2 or the issuer.
The principal objects of the issuer are set out in its memorandum of
association and permit the issuer, among other things, to lend money and give
credit, secured or unsecured, to borrow or raise money and to grant security
over its property for the performance of its obligations or the payment of
money. The issuer was established to raise capital by the issue of notes and to
use the net proceeds of such issuance to make the global intercompany loan to
Funding 2 in accordance with the global intercompany loan agreement entered
into between Funding 2 and the issuer.
Since its incorporation, the issuer has not engaged in any material
activities other than those incidental to its registration as a public company
under the Companies Act 1985, the authorization and issue of the notes, the
matters contemplated in this prospectus, the authorization of the other
transaction documents referred to in this prospectus or in connection with the
issue of the notes and other matters which are incidental or ancillary to those
activities. The issuer has no employees.
56
USE OF PROCEEDS
An indication of the application of the proceeds from each issue of notes
will be contained in the applicable prospectus supplement.
57
THE NORTHERN ROCK GROUP
THE SELLER
The seller was incorporated as a public limited liability company in England
and Wales on October 30, 1996 with registered number 03273685. The seller is
regulated by the FSA. The seller was originally a building society and was
converted on October 1, 1997 from a mutual form UK building society to a UK
public limited company whose shares are listed on the London Stock Exchange plc
and which is authorized under the FSMA.
The registered office of the seller is at Northern Rock House, Gosforth,
Newcastle upon Tyne NE3 4PL.
At June 30, 2004, the seller was the ninth largest UK quoted bank by market
capitalization. It is a specialized mortgage lender whose core business is the
provision of residential mortgages funded in both the retail and wholesale
markets. It also provides a range of other services, mainly related to its core
activities.
At June 30, 2004, the seller and its principal subsidiaries (the "GROUP")
had total assets under management of approximately [GBP]57.1 billion and
employed approximately 4,670 employees. At the date of this prospectus,
Northern Rock has a long-term rating of "A" by Standard & Poor's, "A1" by
Moody's and "A+" by Fitch.
MORTGAGE BUSINESS
The seller is one of the major residential mortgage lenders in the UK in
terms of mortgage residential loans outstanding. In the UK mortgage market, the
seller's net mortgage lending during 2002 and 2003 and for the six months ended
June 30, 2004 (i.e., new mortgage lending during the year/period net of capital
repayments and acquisitions) was [GBP]6.7 billion, [GBP]8.5 billion and
[GBP]5.1 billion, respectively, and gross mortgage lending during 2002 and 2003
and for the six months ended June 30, 2004 (i.e., solely on the basis of new
mortgage lending during the year/period) was [GBP]12.6 billion, [GBP]17.3
billion and [GBP]8.5 billion, respectively.
SUBSIDIARIES OF THE SELLER
The seller currently has the following two principal subsidiaries:
* NORTHERN ROCK MORTGAGE INDEMNITY COMPANY LIMITED
Northern Rock Mortgage Indemnity Company Limited, or NORMIC, is a private
limited liability company incorporated in Guernsey on July 15, 1994 with
registered number 28379. NORMIC's core business is the provision of mortgage
indemnity insurance. NORMIC provides mortgage indemnity insurance to the
seller.
* NORTHERN ROCK (GUERNSEY) LIMITED
Northern Rock (Guernsey) Limited, or NRG, is a private limited liability
company incorporated in Guernsey on November 17, 1995 with registered number
30224. NRG is a wholly owned subsidiary of the seller and engages in retail
deposit taking.
The issuer believes that additional information relating to Northern Rock,
in its capacity as Funding 2 basis rate swap provider and administrator, is not
material to an investor's decision to purchase the notes.
58
FUNDING 2
INTRODUCTION
Funding 2 was incorporated in England and Wales as a private limited company
on 4 October, 2004 with registered number 5249387. The registered office of
Funding 2 is at Fifth Floor, 100 Wood Street, London EC2V 7EX. Funding 2 is
wholly owned by Holdings.
Funding 2 is organized as a special purpose company and will be mostly
passive. Funding 2 has no subsidiaries other than the issuer although, subject
to certain conditions, Funding 2 may establish new issuers from time to time.
Since its incorporation, Funding 2 has not engaged in any material
activities other than those incidental to establishing the issuer, authorising
the transaction documents referred to in this prospectus, and other matters
which are incidental or ancillary to those activities. Funding 2 has no
employees.
59
THE MORTGAGES TRUSTEE
INTRODUCTION
The mortgages trustee was incorporated as a private limited company in
Jersey, Channel Islands on February 14, 2001 with registered number 79309. The
registered office of the mortgages trustee is at 22 Grenville Street, St.
Helier, Jersey JE4 8PX, Channel Islands. The mortgages trustee is wholly owned
by Holdings. The mortgages trustee is organized as a special purpose company
and is mostly passive. The mortgages trustee has no subsidiaries. The seller
does not own directly or indirectly any of the share capital of Holdings or the
mortgages trustee.
Since its incorporation, the mortgages trustee has not engaged in any
material activities other than those incidental to the settlement of the trust
property on the mortgages trustee or relating to the issue of notes by the
Funding issuers and us, the authorization of the transaction documents referred
to in this prospectus to which it is or will be a party or relating to the
issue of notes by the Funding issuers, and other matters which are incidental
or ancillary to those activities.
60
HOLDINGS
INTRODUCTION
Holdings was incorporated as a private limited company in England and Wales
on December 14, 2000 with registered number 4127787. The registered office of
Holdings is at Fifth Floor, 100 Wood Street, London EC2V 7EX.
Holdings is wholly owned by The Law Debenture Intermediary Corporation
p.l.c. under the terms of a trust for the benefit of charitable institutions.
Holdings is organized as a special purpose company and is mostly passive.
The principal objects of Holdings are as set out in its memorandum of
association and are, among other things, to acquire and hold, by way of
investments or otherwise and to deal in or exploit in such manner as may from
time to time be considered expedient, all or any of the shares, stocks,
debenture stocks, debentures or other interests of or in any company (including
the mortgages trustee, Funding, Funding 2 and the post-enforcement call option
holder).
61
GPCH LIMITED
INTRODUCTION
GPCH Limited, the post-enforcement call option holder, was incorporated as a
private limited company in England and Wales on December 15, 2000 with
registered number 4128437. The registered office of the post-enforcement call
option holder is at Fifth Floor, 100 Wood Street, London EC2V 7EX.
The post-enforcement call option holder is wholly owned by Holdings.
The post-enforcement call option holder is organized as a special purpose
company and is mostly passive. The post-enforcement call option holder has no
subsidiaries. The seller does not own directly or indirectly any of the share
capital of Holdings or the post-enforcement call option holder.
The principal objects of the post-enforcement call option holder are as set
out in its memorandum of association and are, among other things, to hold
bonds, notes, obligations and securities issued or guaranteed by any company
and any options or rights in respect of them.
Since its incorporation, the post-enforcement call option holder has not
engaged in any material activities other than those activities incidental or
relating to the issue of the notes by the Funding issuers and the authorizing
of the transaction documents referred to in this prospectus and other matters
which are incidental to those activities. The post-enforcement call option
holder has no employees.
POST-ENFORCEMENT CALL OPTION
The post-enforcement call option agreement will be entered into between us,
the note trustee (as agent for the noteholders) and by the post-enforcement
call option holder. The terms of the option will require, upon exercise of the
option granted to the post-enforcement call option holder by the note trustee,
the transfer to the post-enforcement call option holder of all (but not some
only) of the notes outstanding at the time of the exercise of the option. The
option may be exercised upon the earlier of (1) within 20 days following the
final maturity date of the latest maturing notes, the issuer security trustee
certifying that there is no further amount outstanding under the global
intercompany loan, and (2) following the enforcement by the issuer security
trustee of the security granted by us under the issuer deed of charge, the
issuer security trustee's determination that there are no further assets
available to pay amounts due and owing to the noteholders. If the earlier of
the foregoing two events is the enforcement of the security under the issuer
deed of charge, the option may only be exercised if the issuer security trustee
has determined that there is not enough money to pay all amounts due to the
noteholders and has distributed to the noteholders their respective shares of
the remaining proceeds. The noteholders will be bound by the terms of the notes
to transfer the notes to the post-enforcement call option holder in these
circumstances. The noteholders will not be paid more than a nominal sum for
that transfer.
As the post-enforcement call option may only be exercised in the two
situations described above, the economic position of the noteholders will not
be further disadvantaged. In addition, exercise of the post-enforcement call
option and delivery by the noteholders of the notes to the post-enforcement
call option holder will not extinguish any other rights or claims that these
noteholders may have against us other than the rights to payment of interest
and repayment of principal under the notes.
62
ISSUANCE OF NOTES
The notes will be issued pursuant to the trust deed. The following summary
and the information set out in "DESCRIPTION OF THE TRUST DEED", "THE NOTES" and
"DESCRIPTION OF THE US NOTES" summarize the material terms of the notes and the
trust deed. These summaries do not purport to be complete and are subject to
the provisions of the trust deed and the terms and conditions of the notes.
GENERAL
The notes will be issued in series. Each series will comprise of one or more
class A, class B, class M, class C or class D notes issued on a single issue
date. A class designation determines the relative seniority for receipt of cash
flows. The notes of a particular class in different series (and the notes of
differing sub-classes of the same class and series) will not necessarily have
all the same terms. Differences may include principal amount, interest rates,
interest rate calculations, currency, dates, final maturity dates and ratings.
Each series and class of notes will be secured over the same property as the
notes offered by this prospectus. The terms of each series of notes will be set
forth in the related prospectus supplement.
ISSUANCE
We may issue new series and classes of notes and advance new loan tranches
to Funding 2 from time to time without obtaining the consent of existing
noteholders. As a general matter we may only issue a new series and class of
notes if sufficient subordination is provided for that new series and class of
notes by one or more subordinate classes of notes and/or the issuer reserve
fund and the Funding 2 reserve fund. The required subordinated percentage,
which is used to calculate the required subordination for each class of notes
other than the class D notes, will be set forth in the applicable prospectus
supplement for each series of that class of notes. Similarly, the target
reserve required amount and the programme reserve required percentage will be
specified in each prospectus supplement. The conditions and tests (including
the required levels of subordination) necessary to issue a series and class of
notes, or the "ISSUANCE TESTS", include the following:
ALL CLASSES OF NOTES
On the closing date of any series and class of notes:
* there may be no debit balance on the principal deficiency ledger
(in respect of any loan tranche);
* no note event of default shall have occurred which is continuing or
will occur as a consequence of such issuance;
* no issuer enforcement notice has been served on us by the note
trustee;
* no Funding 2 intercompany loan enforcement notice has been served
on Funding 2 by the Funding 2 security trustee;
* the issuer reserve fund and the Funding 2 reserve fund are (in
aggregate) fully funded up to the programme reserve required amount
(or if the issuer reserve fund or the Funding 2 reserve fund are
not so fully funded, no payments have been made from the issuer
reserve fund or the Funding 2 reserve fund, as applicable);
* each of the applicable transaction documents has been executed by
the relevant parties to those documents;
* we shall have delivered a solvency certificate to the note trustee
in form and substance satisfactory to the note trustee; and
63
* the rating agencies have provided written confirmation that their
ratings of the outstanding notes will not be reduced, qualified or
withdrawn as a consequence of such issuance.
AND,
FOR THE CLASS A NOTES OF ANY SERIES,
On the closing date for that series of notes and after giving effect to the
issuance of that series of notes, the class A available subordinated amount
must be equal to or greater than the class A required subordinated amount.
* The "CLASS A REQUIRED SUBORDINATED AMOUNT" is calculated, on any
date, as the product of:
A x B
where:
A = the class A required subordinated percentage as specified in
the most recent prospectus supplement for class A notes of any
series; and
B = the principal amount outstanding of all notes on such date
(after giving effect to any payments of principal to be made on
the notes on such date) less the amounts standing to the credit
of the Funding 2 cash accumulation ledger and the Funding 2
principal ledger available on such date for the repayment of
principal on the loan tranches (after giving effect to any
repayments of principal to be made on the loan tranches on such
date).
* The "CLASS A AVAILABLE SUBORDINATED AMOUNT" is calculated, on any
date, as:
(a) the sum of (i) the aggregate of the principal amounts outstanding
of the class B notes of all series, the class M notes of all
series, the class C notes of all series and the class D notes of
all series (after giving effect to repayments of principal to be
made on the notes on such date); and (ii) the aggregate amount of
the Funding 2 reserve fund and the issuer reserve fund on such date
and (iii) excess spread;
less
(b) the amounts standing to the credit of the Funding 2 principal
ledger available on such date for the payment of principal on AA
loan tranches, A loan tranches, BBB loan tranches and BB loan
tranches (after giving effect to any payments of principal to be
made on the loan tranches on such date).
FOR THE CLASS B NOTES OF ANY SERIES
On the closing date for that series of notes and after giving effect to the
issuance of that series of notes, the class B available subordinated amount
must be equal to or greater than the class B required subordinated amount.
* The "CLASS B REQUIRED SUBORDINATED AMOUNT" is calculated, on any
date, as the product of:
A x B
where:
A = the class B required subordinated percentage as specified in
the most recent prospectus supplement for class B notes of any
series; and
B = the principal amount outstanding of all notes on such date
(after giving effect to any payments of principal to be made on
the notes on such date) less the amounts standing to the credit
of the Funding 2 cash accumulation ledger and the Funding 2
principal ledger available on such date for the repayment of
principal on the loan tranches (after giving effect to any
repayments of principal to be made on the loan tranches on such
date).
64
* The "CLASS B AVAILABLE SUBORDINATED AMOUNT" is calculated, on any
date, as:
(a) the sum of (i) the aggregate of the principal amounts outstanding
of the class M notes of all series, the class C notes of all series
and the class D notes of all series (after giving effect to
repayments of principal to be made on the notes on such date); and
(ii) the aggregate amount of the Funding 2 reserve fund and the
issuer reserve fund on such date and (iii) excess spread;
less
(b) the amounts standing to the credit of the Funding 2 principal
ledger available on such date for the payment of principal on A
loan tranches, BBB loan tranches and BB loan tranches (after giving
effect to any payments of principal to be made on the loan tranches
on such date).
FOR THE CLASS M NOTES OF ANY SERIES
On the closing date for that series of notes and after giving effect to the
issuance of that series of notes, the class M available subordinated amount
must be equal to or greater than the class M required subordinated amount.
* The "CLASS M REQUIRED SUBORDINATED AMOUNT" is calculated, on any
date, as the product of:
A x B
where:
A = the class M required subordinated percentage as specified in
the most recent prospectus supplement for class M notes of any
series; and
B = the principal amount outstanding of all notes on such date
(after giving effect to any payments of principal to be made on
the notes on such date) less the amounts standing to the credit
of the Funding 2 cash accumulation ledger and the Funding 2
principal ledger available on such date for the repayment of
principal on the loan tranches (after giving effect to any
repayments of principal to be made on the loan tranches on such
date).
* The "CLASS M AVAILABLE SUBORDINATED AMOUNT" is calculated, on any
date, as:
(a) the sum of (i) the aggregate of the principal amounts outstanding
of the class C notes of all series and the class D notes of all
series (after giving effect to repayments of principal to be made
on the notes on such date); and (ii) the aggregate amount of the
Funding 2 reserve fund and the issuer reserve fund on such date and
(iii) excess spread;
less
(b) the amounts standing to the credit of the Funding 2 principal
ledger available on such date for the payment of principal on BBB
loan tranches and BB loan tranches (after giving effect to any
payments of principal to be made on the loan tranches on such
date).
FOR THE CLASS C NOTES OF ANY SERIES
On the closing date for that series of notes and after giving effect to the
issuance of that series of notes, the class C available subordinated amount
must be equal to or greater than the class C required subordinated amount.
* The "CLASS C REQUIRED SUBORDINATED AMOUNT" is calculated as the
product of:
A x B
where:
A = the class C required subordinated percentage as specified in
the most recent prospectus supplement for class C notes of any
series; and
65
B = the principal amount outstanding of all notes on such date
(after giving effect to any payments of principal to be made on
the notes on such date) less the amounts standing to the credit
of the Funding 2 cash accumulation ledger and the Funding 2
principal ledger available on such date for the payment of
principal on the loan tranches (after giving effect to any
payments of principal to be made on the loan tranches on such
date).
* The "CLASS C AVAILABLE SUBORDINATED AMOUNT" is calculated, on any
date, as:
(a) the sum of (i) the aggregate of the principal amounts outstanding
of the class D notes of all series (after giving effect to payments
of principal to be made on the notes on such date); and (ii) the
aggregate amount of the Funding 2 reserve fund and the issuer
reserve fund on such date and (iii) excess spread;
less
(b) the amounts standing to the credit of the Funding 2 principal
ledger available on such date for the payment of principal on BB
loan tranches (after giving effect to any payments of principal to
be made on the loan tranches on such date).
In relation to the above, the amounts available on any date for the payment
of principal on any loan tranche shall be calculated in accordance with the
Funding 2 pre-enforcement principal priority of payments (as set out in
"CASHFLOWS -- DISTRIBUTION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS PRIOR TO
THE ENFORCEMENT OF THE FUNDING 2 SECURITY -- DEFINITION OF FUNDING 2 AVAILABLE
PRINCIPAL RECEIPTS") and shall be calculated without reference to the rules for
the application of Funding 2 available principal receipts (as set out in
"CASHFLOWS -- DISTRIBUTION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS PRIOR TO
THE ENFORCEMENT OF THE FUNDING 2 SECURITY -- RULES FOR APPLICATION OF FUNDING 2
AVAILABLE PRINCIPAL RECEIPTS").
Excess spread is calculated, on any date, as:
(a) the product of:
X + Y
--------
2
and the aggregate outstanding principal balance of the loan
tranches advanced under the global intercompany loan agreement less
the amount debited to the Funding 2 principal deficiency ledger at
such date; less
(b) the product of the weighted average interest rate of the
outstanding notes at such date, including any notes issued on such
date (subject to adjustment where the step-up date occurs for any
series and class of notes and taking into account the margins on
the issuer swaps as at such date and the expenses of the issuer
ranking in priority to payments on such notes) and the aggregate
principal amount of outstanding of such notes at such date.
where:
X = the weighted average yield on the mortgage loans in the
mortgage trust at such date, together with new mortgage loans
(if any) to be assigned to the mortgages trustee on such date
(taking into account the margins on the basis rate swaps as at
such date)
Y = LIBOR for 3 month sterling deposits plus 0.50%
We may change the required subordinated amount for any class of notes or the
method of computing the required subordinated amount, at any time without the
consent of any noteholders so long as we have:
* received confirmation from each rating agency that has rated any
outstanding notes that the change will not result in the reduction,
qualification or withdrawal of its then current rating of any
outstanding notes; and
66
* an opinion of counsel that for US federal income tax purposes (i)
the change will not adversely affect the tax characterization as
debt of any outstanding series and class of notes that were
characterized as debt at the time of their issuance and (ii) such
change will not cause or constitute an event in which gain or loss
would be recognized by any holder of such notes.
In addition, if we obtain confirmation from each rating agency that has
rated any outstanding notes that the issuance of a new series and class of
notes will not cause a reduction, qualification or withdrawal of the ratings of
any outstanding notes rated by that rating agency, then some of the other
conditions to issuance described above may be waived.
67
THE MORTGAGE LOANS
SUMMARY OF MORTGAGE PORTFOLIO
Each prospectus supplement issued in connection with the issuance of a
series and class of notes will contain tables summarising information in
relation to the applicable cut-off date mortgage portfolio. The tables will
contain information in relation to various criteria as at the applicable cut-
off date. Tables will indicate, amongst other things, composition by type of
property, seasoning, period to maturity, geographical distribution, indexed
loan-to-value ratios, outstanding current balance, mortgage loan products and
repayment terms as well as other information that may be described from time to
time.
Each prospectus supplement relating to the issuance of a series and class of
notes also will contain tables summarizing certain characteristics of the
United Kingdom mortgage market. Tables will provide historical information on,
amongst other things, repossession rates, arrears, house price to earnings
ratios as well as other information that may be described from time to time.
These tables should be read in conjunction with the additional historical
information on certain aspects of the United Kingdom residential mortgage
market appearing in "CERTAIN CHARACTERISTICS OF THE UNITED KINGDOM RESIDENTIAL
MORTGAGE MARKET".
INTRODUCTION
The housing market in the UK primarily consists of owner-occupied housing.
The remainder of dwellings are in some form of public, private landlord or
social ownership. The mortgage market, in which mortgage loans are provided for
the purchase of a property and secured on that property, is the primary source
of household borrowings in the UK.
In describing the characteristics of the mortgage loans, references in this
prospectus to:
* "INITIAL MORTGAGE PORTFOLIO" means the portfolio of mortgage loans,
their related security, accrued interest and other amounts derived
from such mortgage loans that the seller assigned to the mortgages
trustee on March 26, 2001;
* "FURTHER MORTGAGE PORTFOLIOS" means the portfolios of further
mortgage loans, their related security, accrued interest and other
amounts derived from such further mortgage loans that the seller
has assigned to the mortgages trustee after March 26, 2001;
* "ADDITIONAL MORTGAGE PORTFOLIO" means the portfolio of additional
mortgage loans, their related security, accrued interest and other
amounts derived from such additional mortgage loans that the
seller, as of any cut-off date, anticipates assigning to the
mortgages trustee;
* "CUT-OFF DATE MORTGAGE PORTFOLIO" means, as of any cut-off date,
the initial mortgage portfolio and the further mortgage portfolios
(taking account of, among other things, amortization of mortgage
loans in that portfolio and the addition and/or removal of any
mortgage loans to or from that portfolio since March 26, 2001)
combined with any additional mortgage portfolio; and
* "MORTGAGE PORTFOLIO" means, as of any date of determination, the
initial mortgage portfolio and the further mortgage portfolios
assigned to the mortgages trustee prior to such date of
determination, taking account of, among other things, amortization
of mortgage loans in that portfolio and the addition and/or removal
of any mortgage loans to or from that portfolio since the last such
assignment.
The following is a description of some of the characteristics of the
mortgage loans currently or previously offered by the seller and includes
details of mortgage loan types, the underwriting process, lending criteria and
selected statistical information. Each mortgage loan in the mortgage portfolio
incorporated one or more of the features referred
68
to in this section. The seller will not assign to the mortgages trustee any
mortgage loan that was more than one month in arrears at any time during the 12
months prior to the assignment date, and will not assign to the mortgages
trustee any mortgage loan that is a non-performing mortgage loan.
Each borrower may have more than one mortgage loan incorporating different
features, but all mortgage loans secured on the same mortgaged property will be
incorporated in a single account with the seller which is called the mortgage
account. Each mortgage loan (other than a regulated personal secured loan) is
secured by a first-ranking legal charge over a residential property located in
England or Wales (an "ENGLISH MORTGAGE") or a first ranking standard security
over a residential property located in Scotland (a "SCOTTISH MORTGAGE"). Each
regulated personal secured loan will be secured by a legal charge over freehold
or leasehold property located in England and Wales or by a standard security
over heritable or long leasehold property located in Scotland ranking below the
first priority legal charge or standard security securing the related
borrower's existing mortgage loan. A "MORTGAGE" means an English mortgage or,
as applicable, a Scottish mortgage. Each mortgage loan secured over a property
located in England and Wales (an "ENGLISH MORTGAGE LOAN") is subject to the
laws of England and Wales and each mortgage loan secured over a property
located in Scotland (a "SCOTTISH MORTGAGE LOAN") is subject to the laws of
Scotland.
CHARACTERISTICS OF THE MORTGAGE LOANS
MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER
The seller offers a variety of fixed rate, variable rate and hybrid mortgage
loan products to borrowers. The seller may assign to the mortgages trustee any
of the following of its mortgage loan products, which in each case may comprise
one or more of the following:
* "FIXED RATE MORTGAGE LOANS": mortgage loans subject to a fixed
interest rate for a specified period of time and at the expiration
of that period are generally subject to the seller's standard
variable rate.
* "STANDARD VARIABLE RATE MORTGAGE LOANS": mortgage loans subject to
the seller's standard variable rate for the life of the mortgage
loan.
* "TOGETHER MORTGAGE LOANS": flexible mortgage loans, which are
offered in various product types: Together flexible, Together
variable, Together fixed, Together fixed for life, Together
discount tracker and Together stepped tracker. These products allow
the borrower to obtain a mortgage loan, an unsecured loan and, in
some cases (historically, although no longer), a credit card, each
with a variable or a fixed interest rate, depending on the product
type, and which in certain circumstances permit the borrower to
make authorized underpayments and take payment holidays
(collectively referred to in this prospectus as "non-cash re-
draws"), receive cash re-draws and make overpayments.
* "TOGETHER CONNECTIONS MORTGAGE LOANS": flexible mortgage loans,
which were offered in two product types: Together Connections
variable and Together Connections fixed. These products have the
same basic features as a Together mortgage loan, but also allow the
borrower to link the mortgage loan with certain deposit and/or
current accounts that are held with the seller. If a borrower
elects to take the Together Connections Benefit (as defined below),
the seller will only charge interest on the difference between the
total of the outstanding balances on the Together Connections
mortgage loan and certain deposit/current accounts held with the
seller (the "COMBINED DEBIT BALANCE") and the average monthly
cleared credit balance in that borrower's linked deposit account or
accounts (the "COMBINED CREDIT BALANCE"). Despite the foregoing,
the borrower is nevertheless obligated to make his contractual
monthly payment of principal (if any) and interest in full. The
"TOGETHER CONNECTIONS BENEFIT" is the difference between (1) the
contractual monthly payment due on the combined debit balance
69
and (2) the proportion of the payment made on the amount by which
the outstanding combined debit balance exceeds the average cleared
credit balance in that borrower's linked deposit account or
accounts in respect of each month or any part of a month. Where the
customer has elected to take Together Connections Benefit,
calculations will be made and applied with effect from the first
day of the month following the month during which the combined
debit balance exceeded such credit balance. Unless the borrower
specifies otherwise, the Together Connections Benefit will be
apportioned pro rata between the mortgage loan and the unsecured
loan in accordance with their respective contractual monthly
payments. Any Together Connections Benefit is used to reduce the
principal amount outstanding on the mortgage loan and related
unsecured loan as described above. The application of the Together
Connections Benefit may lead to amortization of the related
mortgage loan more quickly than would otherwise be the case, as a
higher proportion of the contractual monthly payment could be
allocated towards the repayment of principal of the mortgage loan.
See "RISK FACTORS -- THE INCLUSION OF CERTAIN TYPES OF MORTGAGE
LOANS MAY AFFECT THE RATE OF REPAYMENT AND PREPAYMENT OF THE
MORTGAGE LOANS". The borrower is not permitted to make a cash
redraw of the principal amounts that have been repaid as a result
of the application of the Together Connections Benefit.
Alternatively, customers that have linked their mortgage loan to
one or more deposit accounts may simply opt to be paid interest
periodically on deposits held in their linked accounts at the same
interest rate that is used to calculate interest on their mortgage
loan. This option is referred to as "TOGETHER CONNECTIONS
INTEREST".
The connection between a borrower's mortgage loan and unsecured
loan and any linked account or account of the borrower may be ended
(1) by the seller giving the borrower three months notice in
writing at any time or (2) immediately by the seller giving the
borrower notice in writing at any time where there are serious
grounds for ending the connection with immediate effect. The
connection between a borrower's mortgage loan and unsecured loan
and any linked account or account of the borrower will be ended
automatically where the average combined cleared credit balance for
the month exceeds the combined debit balance in any month.
The seller has for the time being, ceased to offer Together
Connections mortgage loans to borrowers. However, the seller may
continue to assign Together Connections mortgage loans which it has
previously originated to the mortgages trustee.
* "CONNECTIONS MORTGAGE LOANS": flexible mortgage loans, which allow
the borrower to obtain a mortgage loan with either a variable or
fixed rate, depending on the product type, and which, in certain
circumstances, permit the borrower to make authorized underpayments
and take payment holidays (collectively referred to in this
prospectus as "NON-CASH RE-DRAWS"), receive cash re-draws and make
overpayments. Connections mortgage loans have the same basic
features as Together Connections mortgage loans but without the
facility for an unsecured loan or credit card. The "CONNECTIONS
DEBIT BALANCE" will equal the total outstanding balance on the
Connections mortgage loan. In addition, the "CONNECTIONS COMBINED
CREDIT BALANCE" will comprise the average monthly cleared credit
balance in the borrower's linked Save Direct deposit account (a
deposit account operated by a dedicated savings division of the
seller) and/or current account with the seller. "CONNECTIONS
BENEFIT" and "CONNECTIONS INTEREST" are calculated in the same way
as "Together Connections Benefit" and "TOGETHER CONNECTIONS
INTEREST" taking into account the amended definitions of
"CONNECTIONS DEBIT BALANCE" and "CONNECTIONS
70
COMBINED CREDIT BALANCE" as outlined above. For the purposes of
calculating Connections Interest, only the average cleared balance
in the deposit account will apply.
* "CAT STANDARD MORTGAGE LOANS": flexible mortgage loans, the terms
of which can offer either a variable rate equal to the Bank of
England base rate plus an additional fixed percentage or can offer
initially a fixed rate for a specified period of time followed by a
variable rate equal to the Bank of England base rate plus an
additional fixed percentage, and which in some cases permit the
borrower to make non-cash re-draws and receive cash re-draws.
* "CAPPED RATE MORTGAGE LOANS": mortgage loans subject to a maximum
rate of interest and interest which is charged at the lesser of the
seller's standard variable rate or the specified capped rate.
* "FLEXIBLE CAPPED RATE MORTGAGE LOANS": flexible mortgage loans with
the same basic features as a Together mortgage loan (other than
allowing the borrower to obtain a credit card and unsecured loan),
the terms of which are subject to a maximum rate of interest for a
specified period of time, and at the expiration of that period are
generally subject to the seller's standard variable rate.
* "FLEXIBLE DISCOUNT RATE MORTGAGE LOANS": flexible mortgage loans
with the same basic features as a Together mortgage loan (other
than allowing the borrower to obtain a credit card and unsecured
loan), the terms of which allow the borrower to pay interest at a
specified discount to the seller's standard variable rate for a
specified period of time or for the life of the mortgage loan.
* "FLEXIBLE FIXED RATE MORTGAGE LOANS": flexible mortgage loans with
the same basic features as a Together mortgage loan (other than
allowing the borrower to obtain a credit card and unsecured loan)
which are subject to a fixed rate of interest for a specified
period of time, and at the expiration of that period are generally
subject to the seller's standard variable rate.
* "LOW-START FLEXIBLE FIXED RATE MORTGAGE LOANS": flexible mortgage
loans with the same features as flexible fixed rate mortgage loans
with the exception that the interest rate increases incrementally
in fixed amounts on each of the first, second, third and sixth
years of the term of each mortgage loan, at the expiration of which
each mortgage loan becomes generally subject to the seller's
standard variable rate.
* "DISCOUNT RATE MORTGAGE LOANS": mortgage loans, the terms of which
allow the borrower to pay interest at a specified discount to the
seller's standard variable rate for a specified period of time or
for the life of the loan.
* "TRACKER RATE MORTGAGE LOANS": mortgage loans subject to a variable
rate of interest that is linked to the Bank of England base rate
plus an additional fixed percentage.
* "FLEXIBLE TRACKER RATE MORTGAGE LOANS": flexible mortgage loans
with the same basic features as a Together mortgage loan (other
than allowing the borrower to obtain a credit card and unsecured
loan) which are subject to a variable rate of interest that is
linked to the Bank of England base rate plus an additional fixed
percentage.
* "CASHBACK MORTGAGE LOANS": mortgage loans which are subject to
either the seller's standard variable rate or a fixed rate of
interest or discount to the seller's standard variable rate for a
specified period of time and, the terms of which provide for a
specified lump sum payment to be made to the borrower at the time
that the mortgage loan is advanced to the borrower.
* "PERSONAL SECURED LOANS": mortgage loans having a fixed or variable
interest rate the proceeds of which may be used by the borrower for
unrestricted purposes and which are offered to borrowers who have
existing mortgage loans
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with the seller. A personal secured loan is secured on the same
property that secures the borrower's existing mortgage loan. A
personal secured loan is governed by separate terms and conditions
documented either as a regulated agreement subject to the CCA (a
"REGULATED PERSONAL SECURED LOAN") or as an agreement not regulated
by the CCA (an "UNREGULATED PERSONAL SECURED LOAN"), depending upon
purposes for which it is used. A personal secured loan is, if the
loan is an unregulated personal secured loan, secured pursuant to
the borrower's existing mortgage. If the loan is a regulated
personal secured loan, it is secured pursuant to a separate
subordinate ranking mortgage. Some personal secured loans permit
the borrower to draw additional amounts in aggregate up to the
fixed amount of credit extended under the terms of the mortgage
conditions at the inception of such personal secured loan. Such
draws under a personal secured loan are collectively referred to as
"FURTHER DRAWS".
REPAYMENT TERMS
Borrowers typically make payments of interest on, and repay principal of,
their mortgage loans using one of the following methods:
* "REPAYMENT": the borrower makes monthly payments of both interest
and principal so that, when the mortgage loan matures, the borrower
will have repaid the full amount of the principal of the mortgage
loan.
* "INTEREST-ONLY" (with a repayment vehicle): the borrower makes
monthly payments of interest but not of principal; when the
mortgage loan matures, the entire principal amount of the mortgage
loan is still outstanding and the borrower must repay that amount
in one lump sum. The borrower arranges a separate investment plan
which will be administered by an organization separate from the
seller, which plan provides a lump sum payment to coincide with the
end of the mortgage term. Although these investment plans are
forecast to provide sufficient sums to repay the principal balance
of the mortgage loan upon its maturity, to the extent that the lump
sum payment is insufficient to pay the principal amount owing, the
borrower will be liable to make up any shortfall. These types of
plans include:
* "ENDOWMENT": the borrower makes regular payments to a life
assurance company which invests the premiums; the endowment
policy is intended to repay the mortgage loan at maturity;
* "PENSION POLICY": the borrower makes regular payments to a
personal pension plan; upon retirement, or plan maturity, the
borrower will receive a tax-free lump sum which is intended to
repay the mortgage loan;
* "INDIVIDUAL SAVINGS ACCOUNTS" or "ISAS": the borrower makes
contributions to a tax-free ISA account; once the value of the
ISA equals or exceeds the outstanding mortgage debt, the
borrower may use those amounts to repay the mortgage loan at
any time thereafter or may wait to repay the mortgage loan upon
its maturity;
* "PERSONAL EQUITY PLANS" or "PEPS": similarly to ISAs, the
borrower makes contributions to a tax-free PEP account and uses
these amounts to repay the mortgage loan. Although PEPs have
been discontinued in the United Kingdom, some mortgage loans
with PEP repayment vehicles may be included in the mortgage
portfolio; and
* "UNIT TRUSTS": the borrower makes regular payments to the
trustees of a unit trust, and the accumulated unit trust is
used to repay the mortgage loan by the end of its term.
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* "INTEREST-ONLY" (without a repayment vehicle): similar to the
interest-only mortgage loans described above, where the borrower
makes monthly payments of interest but not of principal and when
the mortgage loan matures, the entire principal amount of the
mortgage loan is due. However, the borrower has no formal repayment
vehicle in place to repay the mortgage loan in full.
* "COMBINATION REPAYMENT AND INTEREST-ONLY" (with or without a
repayment vehicle): this situation most often occurs when the
borrower had an interest-only mortgage loan with a repayment
vehicle on a prior mortgaged property, and after selling that
mortgaged property the borrower purchased a property with a
mortgage loan issued by the seller, where the subsequent home was
either more expensive than the prior home or the borrower took out
a larger mortgage loan or further advance. The borrower used the
existing interest-only repayment vehicle for the new mortgage loan
or further advance issued by the seller and made up the difference
between the anticipated maturity value of the interest-only
repayment vehicle and the higher mortgage loan amount with a
repayment mortgage.
The required monthly payment in connection with repayment mortgage loans or
interest-only mortgage loans may vary from month to month for various reasons,
including changes in interest rates. See "-- MAXIMUM LTV RATIO" for the maximum
LTV ratio for the mortgage loans described above.
The seller does not (and in some cases cannot) take security over investment
plans. See "RISK FACTORS -- THERE CAN BE NO ASSURANCE THAT A BORROWER WILL
REPAY PRINCIPAL AT THE END OF A TERM ON AN INTEREST-ONLY LOAN (WITH OR WITHOUT
A CAPITAL REPAYMENT VEHICLE) OR A COMBINATION LOAN".
CAPITAL PAYMENTS, OVERPAYMENTS AND UNDERPAYMENTS ON NON-FLEXIBLE MORTGAGE LOANS
Subject to certain conditions, if a borrower makes a monthly payment on a
mortgage loan (other than a flexible mortgage loan) that is greater by [GBP]200
or more than the amount due for that month, and the borrower notifies the
seller that the overpayment is intended to reduce the capital balance of the
related mortgage loan (a "CAPITAL PAYMENT"), then the current balance of the
mortgage loan will be immediately reduced, and the capital balance of the
mortgage loan will be reduced from the last day of the month in which the
capital payment occurs. As interest on the mortgage loans accrues on the
capital balance thereof from time to time, any capital payment will affect the
amount of interest payable by the borrower from the first day of the month
following the month in which the capital payment was made by the borrower.
Capital payments may be subject to early repayment charges, as described under
"-- EARLY REPAYMENT CHARGES", and may only be made in certain minimum amounts
and only if the relevant borrower's account is not in arrears at the time of
the capital payment.
If the borrower makes a monthly payment on a mortgage loan (other than a
flexible mortgage loan) that is greater than the amount due for that month, but
the borrower (1) does not specify that the additional payment is intended to
reduce the capital balance of the related mortgage loan, (2) does not specify
any intention or (3) specifies that the payment is intended to repay the
capital balance but the additional payment is less than [GBP]200, that
overpayment initially will only reduce the current balance of the related
mortgage loan and not the capital balance. Any overpayment will be held by the
cash manager in the mortgages trustee GIC account and recorded on an
overpayments ledger and will not reduce the capital balance of the related
mortgage loan until the annual date at the end of each calendar year on which
the capital balances of the mortgage loans (other than flexible mortgage loans
as described below) are reconciled with the current balances of such mortgage
loans. The capital balances of such mortgage loans will only be reduced on such
annual date in an amount equal to the aggregate amount of the overpayments made
in that calendar year less any amounts that the borrower has underpaid (or has
overpaid in error, which amounts may be refunded to the borrower)
73
during the same calendar year of the overpayment. These credits and debits will
be recorded on the overpayments ledger during each calendar year. Any
underpayments or refunds may be made only up to the net amount of the
overpayment standing to the credit of the overpayments ledger during the same
calendar year as the underpayment. As interest on the mortgage loans accrues on
the capital balance thereof from time to time, an overpayment may only have an
effect on the interest accruing on that mortgage loan after the annual date
that the current balance and the capital balance of the mortgage loan is
reconciled.
If a borrower under a mortgage loan (other than a flexible mortgage loan)
makes a monthly payment which is less than the required monthly payment (an
"UNDERPAYMENT"), the current balance of that mortgage loan will remain higher
than the expected scheduled current balance, although the capital balance of
that mortgage loan will remain unchanged until the annual reconciliation of the
current balance and capital balance. As overpayments on non-flexible mortgage
loans will be held in the overpayments ledger throughout the calendar year in
which the overpayment was made, amounts standing to the credit of the
overpayments ledger will be used to fund underpayments that the borrower has
made during that same calendar year. See "THE MORTGAGES TRUST -- OVERPAYMENTS".
If a borrower makes an unauthorized underpayment but has not made any prior
overpayments within that same calendar year, those underpayments are treated by
the seller as arrears.
At the end of a calendar year, if a borrower under a mortgage loan (other
than a flexible mortgage loan) has a current balance which is less than its
capital balance (because of any overpayments made in that same calendar year
which were not used to fund an underpayment), the seller will decrease the
capital balance on that borrower's mortgage loan to equal the current balance
on that borrower's mortgage loan. The borrower then will no longer be able to
fund underpayments with amounts overpaid in the prior calendar year.
Conversely, if at the end of a calendar year a borrower under a mortgage loan
(other than a flexible mortgage loan) has a current balance which is greater
than its capital balance (because of any underpayments which were not funded by
overpayments made in that same calendar year), the seller will increase the
capital balance on that borrower's mortgage loan to equal the current balance
on that borrower's mortgage loan. Notwithstanding the year-end reconciliation
of the related capital balance and current balance, the borrower will still be
considered in arrears for the amount of the underpayment.
For a description of the treatment of overpayments and underpayments under
the seller's current flexible mortgage loan products, see "-- FLEXIBLE MORTGAGE
LOANS".
EARLY REPAYMENT CHARGES
Borrowers under the seller's non-flexible mortgage products that have
received a benefit in the form of a cashback, capped, discounted or fixed rate
mortgage loan may be required to pay an early repayment charge if (a) in any
one calendar year in addition to the scheduled monthly payments they repay more
than a specified percentage of the initial amount of the mortgage loan, or (b)
generally if they make a product switch or a permitted product switch, in each
case before a date specified in the offer of advance. Although a borrower under
the seller's flexible capped rate mortgage loan, flexible fixed rate mortgage
loan, low-start flexible fixed rate mortgage loan, flexible discount rate
mortgage loan, Together fixed mortgage loan, Together Connections fixed
mortgage loan or Connections fixed mortgage loan may make overpayments or
capital payments at any time without incurring any early repayment charge, that
borrower will be subject to an early repayment charge for the remaining period
of time during which the fixed or capped rate, as the case may be, on the
mortgage loan applies (except in the case of flexible fixed rate mortgage loans
with an extended early repayment charge period), to the extent that the
borrower repays the entire current balance under that mortgage loan during such
period. Borrowers under the seller's Connections Base Rate Tracker mortgage
loans will be subject to an early repayment charge which is currently three (3)
years from completion of the applicable mortgage loan, to the extent that the
borrower repays the
74
entire current balance under that mortgage loan during such period. Borrowers
under the seller's flexible fixed rate mortgage loans with an extended early
repayment charge period will be subject to an early repayment charge for the
remaining period of time during which the fixed rate on the mortgage loan
applies plus an additional period of one year to the extent that the borrower
repays the entire current balance under that mortgage loan during such period.
Borrowers under the seller's Together variable, Together Connections variable
and CAT standard mortgage loans are not subject to early repayment charges
regardless of whether they make an overpayment or they repay the entire current
balance under the relevant mortgage loan.
Any early repayment charge will equal a percentage of the amount repaid in
excess of the specified percentage limit, except for an early repayment in
full, where the early repayment charge will equal a varying percentage of the
entire amount repaid. The seller retains absolute discretion to waive or
enforce early repayment charges in accordance with the seller's policy from
time to time. Under the terms of the mortgage sale agreement, the amount of any
early repayment charges which may become payable on any mortgage loans that
have been assigned to the mortgages trustee will be paid by the mortgages
trustee to the seller as deferred purchase price.
Cashback mortgage loans offered by the seller provide the borrower with a
cash payment that the seller makes to the borrower upon completion of the
mortgage loan. The cash payment depends upon the terms of the offer of advance,
but is usually calculated as a percentage of the amount borrowed. If a borrower
with a cashback mortgage loan makes an unscheduled principal repayment or
executes a product switch or a permitted product switch (as described under "--
PRODUCT SWITCHES") in either case before a date specified in the offer of
advance, then the borrower must repay to the seller some or all of the cash
payment made by the seller.
All of the seller's mortgage loan products allow for the borrower to avoid
early repayment charges and, if applicable, avoid repaying to the seller any of
the cash payment described above, by "porting" the existing mortgage loan to a
new mortgaged property, provided that (1) the new mortgage loan is equal to or
greater than the existing mortgage loan and (2) the borrower receives from the
seller substantially the same mortgage loan product. The new mortgage loan
preserves the borrower's status in that mortgage loan product.
A prepayment of the entire outstanding balance of a mortgage loan discharges
the related mortgage. Any prepayment in full must be made together with all
accrued interest, arrears of interest, any unpaid charges and any early
repayment charges.
INTEREST PAYMENTS AND SETTING OF INTEREST RATES
Interest on each mortgage loan accrues on the capital balance of that
mortgage loan from time to time. Interest is payable by the borrower monthly in
advance. Interest on the mortgage loans in the cut-off date mortgage portfolio
may be computed on a daily, monthly or annual basis. Each mortgage loan in the
cut-off date mortgage portfolio accrues interest at any time at a fixed or a
variable rate.
Fixed rate mortgage loans provide that the borrower pays interest on such
mortgage loan at a fixed rate of interest for the period specified in the offer
of advance. At the end of that period, the interest rate reverts to the
seller's standard variable rate. However, under the terms of certain fixed rate
loan agreements, the borrower may exercise a one-time option within three
months of the end of the initial fixed rate period to "re-fix" the interest
rate for a further specified period of time at a new fixed rate that the seller
is offering to existing borrowers at that time. Any exercise of an option to
"re-fix" constitutes a product switch and is dealt with as described under "--
PRODUCT SWITCHES".
The rate of interest set by the seller for variable rate mortgage loans is
the "SELLER'S STANDARD VARIABLE RATE". Interest accrues on these mortgage loans
at a rate equal to the seller's standard variable rate, or, for a specified
period of time, at a set margin above or below the seller's standard variable
rate. The seller's standard variable rate is not directly
75
linked to interest rates in the financial markets although, in general, the
seller's standard variable rate follows movements in the markets. The seller's
standard variable rate for existing and/or new borrowers, as at each cut-off
date, will be specified in each prospectus supplement.
The seller's "BASE RATE PLEDGE" guarantees that for some variable rate
mortgage loans, and for fixed rate mortgage loans upon conversion from a fixed
rate to the seller's standard variable rate, the actual gross interest rate
that the seller charges will be the lower of:
* the seller's standard variable rate; or
* the Bank of England base rate plus a margin which is determined by
Northern Rock.
This base rate pledge only applies, however, during the period, if any, in
which the borrower is subject to an early repayment charge as described under
"-- EARLY REPAYMENT CHARGES".
If the Bank of England's base rate falls to a level of 1.99% below the
seller's standard variable rate it is possible that either or both of Funding
and we would suffer a revenue shortfall. See "RISK FACTORS -- IF THE BANK OF
ENGLAND BASE RATE FALLS BELOW A CERTAIN LEVEL, WE COULD SUFFER A REVENUE
SHORTFALL WHICH COULD ADVERSELY AFFECT OUR PAYMENTS ON THE NOTES".
Mortgage loans may combine one or more of the features listed in this
section. For mortgage loans with an interest rate that lasts for a limited
period of time specified in the offer of advance, after the expiration of that
period the interest rate adjusts to some other interest rate type or else it
reverts to, or remains at, the seller's standard variable rate. The features
that may apply to a particular mortgage loan are specified in the offer of
advance (and as the seller may vary from time to time).
Each mortgage loan (other than a Together mortgage loan, a Together
Connections mortgage loan and a CAT standard mortgage loan) currently provides
for a loyalty discount reduction of 0.25% per annum (although the seller may in
the future allow for a discount of between 0.25% and 0.75% per annum) of the
applicable interest rate once the borrower has held the mortgage loan for at
least seven years, subject to certain conditions.
Except in limited circumstances as set out in "THE ADMINISTRATOR AND THE
ADMINISTRATION AGREEMENT -- THE ADMINISTRATION AGREEMENT -- UNDERTAKINGS BY THE
ADMINISTRATOR", the administrator on behalf of the mortgages trustee, each
Funding beneficiary and each Funding security trustee is responsible for
setting the variable mortgage rate on the mortgage loans in the mortgage
portfolio as well as on any new mortgage loans that are assigned to the
mortgages trustee. The mortgage conditions applicable to all of the variable
rate mortgage loans provide that the seller and its successors may vary the
variable mortgage rate only for certain reasons which are specified in the
mortgage conditions. These reasons may include:
* where there has been, or the lender reasonably expects there to be
in the near future, a general trend to increase rates on mortgages;
* where the lender for good commercial reasons needs to fund an
increase in the interest rate or rates payable to depositors;
* where the lender wishes to adjust its interest rate structure to
maintain a prudent level of profitability;
* where there has been, or the lender reasonably expects there to be
in the near future, a general increase in the risk of shortfalls on
the accounts of mortgage borrowers; and
* where the lender's administrative costs have increased or are
likely to increase in the near future.
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The term "LENDER" in the above five bullet points means the seller and its
successors.
The rate that the borrower is required to pay under the variable rate
mortgage loans must not be greater than either the seller's standard variable
rate or a set margin above or below the seller's standard variable rate. In
maintaining, determining or setting the variable mortgage rate for mortgage
loans within the mortgages trust, the administrator will apply the factors set
out here and has undertaken to maintain, determine or set the standard variable
rate and other applicable discretionary rates or margins at rates which are not
higher than the seller's equivalent rates from time to time.
The seller has given the mortgages trustee, Funding, Funding 2, the
administrator, the security trustee and the Funding 2 security trustee the
power to set the seller's standard variable rate and other applicable
discretionary rates or margins, but that power may only be exercised in limited
circumstances.
FLEXIBLE MORTGAGE LOANS
The "TOGETHER" mortgage loans, the "TOGETHER CONNECTIONS" mortgage loans,
the "CONNECTIONS" mortgage loans, the flexible capped rate mortgage loans, the
flexible fixed rate mortgage loans, the low-start flexible fixed rate mortgage
loans, the flexible discount rate mortgage loans, the flexible tracker rate
mortgage loans and the "CAT STANDARD" mortgage loans (collectively, the
"FLEXIBLE MORTGAGE LOANS") are subject to a range of options selected by the
borrower that give the borrower greater flexibility in the timing and amount of
payments made under the mortgage loan as well as access to re-draws under the
mortgage loan. A mortgage loan that has one or more of these features may be
called a flexible mortgage loan. The seller expects that an increasing
percentage of the mortgage loans that it originates will offer the flexible
features described below. As a result, mortgage loans assigned to the mortgages
trustee in the future may contain a higher proportion of flexible mortgage
loans than are in the cut-off date mortgage portfolio. In addition to the
flexible mortgage loans that the seller currently offers, the seller in the
future may offer flexible mortgage loans that the seller also may assign to the
mortgages trustee that have different features from those described below.
Unlike non-flexible mortgage loans for which separate current balances and
capital balances are only reconciled annually (see "-- CAPITAL PAYMENTS,
OVERPAYMENTS AND UNDERPAYMENTS ON NON-FLEXIBLE MORTGAGE LOANS"), the flexible
mortgage loans that the seller currently offers have separate current balances
and capital balances which are reconciled on a daily basis.
The following options currently are available to a borrower following the
issue of a flexible mortgage loan:
* Overpayments. A borrower may make overpayments or may repay the
entire current balance under its Together, Together Connections,
Connections and CAT standard mortgage loan at any time without
incurring any early repayment charges. Although a borrower may make
overpayments under its flexible capped rate mortgage loan, flexible
fixed rate mortgage loan, low-start flexible fixed rate mortgage
loan flexible tracker rate mortgage loan, Together fixed mortgage
loan, Together Connections fixed mortgage loan, Connections Base
Rate Tracker mortgage loan or Connections fixed mortgage loan at
any time without incurring any early repayment charge, that
borrower will be subject to an early repayment charge for the
remaining period of time during which the fixed, tracker or capped
rate, as the case may be, on the mortgage loan applies (except in
the case of a Connections Base Rate Tracker mortgage loan which has
a variable early repayment charge period of approximately three
years from completion), to the extent that the borrower repays the
entire current balance under that mortgage loan. Any overpayments
immediately reduce the current balance of the flexible
77
mortgage loan from the day the seller receives payment. Any
overpayment on a flexible mortgage loan will result in the
immediate reduction in the amount of interest payable by the
relevant borrower.
* Authorized Underpayments. A borrower may use certain amounts that
it has previously overpaid to the seller to fund future
underpayments under its mortgage loan (an "AUTHORIZED
UNDERPAYMENT"). If a borrower makes an authorized underpayment
under its mortgage loan, the current balance of that mortgage loan
will be increased at the end of the month in which the authorized
underpayment has been made and there will be an immediate effect on
the amount of interest payable by the borrower. An authorized
underpayment is also called a "NON-CASH RE-DRAW" for the purposes
of this prospectus. A borrower under a flexible mortgage loan may
offset authorized underpayments up to the aggregate amount of any
overpayments previously made (but not yet used to fund an
authorized underpayment or redrawn in cash by the borrower) during
the lifetime of the mortgage loan. Any authorized underpayment will
be funded solely by the seller in an amount equal to the unpaid
interest associated with that authorized underpayment. However, any
such amounts funded by the seller in connection with an authorized
underpayment will form part of the mortgage portfolio and thereby
increase the seller share of the trust property.
* Unauthorized Underpayments. Any underpayment made by a borrower (a)
which cannot be funded by prior overpayments and (b) where the
borrower is not entitled to a payment holiday (an "UNAUTHORIZED
UNDERPAYMENT"), if any, will be treated by the seller as arrears.
* Payment Holidays. A borrower that has made nine consecutive
scheduled monthly payments (or an equivalent sum of payments) on
his flexible mortgage loan may apply for a one month payment
holiday even if that borrower has not made prior overpayments. A
borrower may apply for this payment holiday facility once in each
rolling twelve-month period and may accumulate the right to take up
to a maximum of three monthly payment holidays in any one calendar
year if the borrower has not used the payment holiday facility in a
given three-year period. In addition, a flexible mortgage loan
borrower may apply for a payment holiday of up to six months in
certain limited cases (generally, where the borrower can
demonstrate an extenuating circumstance). The mortgage loan will
continue to accrue interest and other charges during any payment
holiday and accrued interest will be added to the current balance
of the related mortgage loans which will increase the amount of
interest payable by the borrower. Any payment holiday will be
funded solely by the seller in an amount equal to the unpaid
interest associated with that payment holiday. However, any such
amounts funded by the seller in connection with a payment holiday
will form part of the mortgage portfolio and thereby increase the
seller share of the trust property. A payment holiday is also
called a "NON-CASH RE-DRAW" for the purposes of this prospectus.
* Cash re-draws. A borrower may request a cash re-draw of
overpayments that the borrower has made on his flexible mortgage
loan by requesting that the seller refund some or all of such
overpayments in cash, provided that the aggregate amount of all
overpayments not yet used to fund an authorized underpayment or
otherwise re-drawn in cash by the borrower from the period
commencing with the origination of the mortgage loan to the date of
the cash re-draw is equal to or greater than [GBP]500, and that the
amount of such cash re-draw is equal to or greater than [GBP]500.
If the aggregate amount of all overpayments for such period is less
than [GBP]500, any borrower wishing to make a cash re-draw in these
amounts may instead make an authorized underpayment of the
scheduled monthly payment, but is not entitled to a cash re-draw.
Notwithstanding the foregoing, a borrower under a Together
Connections Benefit mortgage loan or
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Connections mortgage loan is not permitted to make a cash re-draw
of the principal amounts that have been repaid as a result of the
application of the Together Connections Benefit or Connections
Benefit. Any cash re-draw on a flexible mortgage loan will result
in the immediate increase in the related current balance and will
increase the amount of interest payable by the borrower. Any cash
re-draws will be funded solely by the seller, but will form part of
the mortgage portfolio and thereby increase the seller share of the
trust property.
Under the mortgage conditions, a borrower must receive permission from the
seller to make an authorized underpayment or take a payment holiday on a
flexible mortgage loan. However, the seller occasionally waives the requirement
that the borrower first seeks the seller's permission. The seller, however,
retains the discretion whether to grant a cash redraw or to provide a further
advance (as described under "-- FURTHER ADVANCES" below) to a borrower on a
flexible mortgage loan, and also maintains discretion in some cases to grant a
payment holiday to a borrower, depending on the facts associated with the
borrower's request. Despite the foregoing means by which the seller describes
and treats authorized underpayments, payment holidays and cash re-draws, each
re-draw technically would be a "FURTHER ADVANCE" as such term is used in the
Land Registration Act 2002 (which applies only in England and Wales and which
has no statutory or common law equivalent in Scotland).
For a description of the treatment of overpayments and underpayments in
respect of the seller's current non-flexible loan products, see "-- CAPITAL
PAYMENTS, OVERPAYMENTS AND UNDERPAYMENTS ON NON-FLEXIBLE MORTGAGE LOANS".
In addition to the features described above, the flexible mortgage loans
that the seller currently offers under the Together and Together Connections
programs may be linked to an unsecured credit facility and, historically, a
credit card which are made available to a borrower. The seller is no longer
offering a credit card facility in relation to this product. In 2002, the
seller also began offering a linked unsecured credit facility to borrowers
under the flexible capped rate mortgage loan, flexible tracker rate mortgage
loan and flexible fixed rate mortgage loan products and in 2003 under the
flexible discount rate mortgage loans and in 2004 in relation to the low-start
flexible rate mortgage loans. The unsecured credit facility is a line of credit
available to be drawn down by the borrower over and above the amount of the
mortgage loan. Amounts drawn under the credit facility (or the credit card in
respect of Together and Together Connections mortgage loans) are not secured by
a mortgage on the borrower's property. These flexible mortgage loans that offer
borrowers a linked unsecured credit facility allow a borrower to make one
monthly payment of amounts due under the mortgage loan and under the unsecured
credit facility, to the extent the borrower has made a drawing under the
unsecured credit facility (any linked credit card payments under the Together
and Together Connections programs will be made separately). The seller applies
the borrower's regular monthly payments and any overpayments received on a
flexible mortgage loan in proportion to the contractual monthly payment due on
the mortgage loan and the amount due on the unsecured credit facility, unless
the borrower specifies otherwise.
The amount of a flexible mortgage loan is agreed at origination. Amounts
available under the unsecured credit facility (currently a maximum of
[GBP]30,000 for Together and Together Connections mortgage loans and
[GBP]10,000 for flexible capped rate, flexible tracker rate and flexible fixed
rate mortgage loans and low-start flexible fixed rate mortgage loans) and any
credit card (in respect of Together and Together Connections mortgage loans)
are not secured by the mortgaged property, and the seller will not assign to
the mortgages trustee amounts due under the unsecured credit facility or any
credit card. This means that only the secured mortgage loan is assigned to the
mortgages trustee.
The seller has originated several types of Together mortgage loans (referred
to collectively in this prospectus as "TOGETHER" mortgage loans):
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(1) "TOGETHER VARIABLE" mortgage loans. The interest rate on Together
variable mortgage loans offered at any time is set periodically (a)
for approximately the first two years of the mortgage loan, at a
rate which is below the average standard variable rate offered by a
basket of mortgage lenders in the UK or a rate which tracks the
Bank of England base rate and (b) after that initial approximate
two-year period, at a variable rate which is below the seller's
standard variable rate for the seller's then-existing borrowers.
(2) "TOGETHER FLEXIBLE" mortgage loans. The interest rate on Together
flexible mortgage loans is set periodically (a) for approximately
the first two years of the mortgage loan, at a rate equal to or
lower than the seller's standard variable rate and (b) after that
initial period, at a variable rate equal to the lower of (i) the
Bank of England base rate plus a margin or (ii) the seller's then
current standard variable rate.
(3) "TOGETHER FIXED FOR LIFE" mortgage loans. The interest rate on
Together fixed for life mortgage loans is fixed by the seller,
which rate will remain for the life of the mortgage loan.
(4) "TOGETHER FIXED" mortgage loans. The initial interest rate on
Together fixed mortgage loans is fixed by the seller. After the
initial interest rate period, the interest rate will be set
periodically at a variable rate equal to the lower of (i) the Bank
of England base rate plus a margin or (ii) the seller's then
current standard variable rate.
(5) "TOGETHER DISCOUNT TRACKER" mortgage loans. The initial interest
rate on the Together discount tracker mortgage loans is a variable
rate and is linked to the Bank of England base rate. The interest
rate on the Together discount tracker mortgage loans is discounted
for approximately the first two years of the mortgage loan and
thereafter tracks the Bank of England base rate plus a margin.
(6) "TOGETHER STEPPED TRACKER" mortgage loans. The interest rate on
Together stepped tracker mortgage loans is a fixed rate which steps
up after a period of time (currently one or two years) before
becoming linked to the Bank of England base rate.
The seller also began originating Together Connections variable mortgage
loans (referred to in this prospectus as "TOGETHER CONNECTIONS VARIABLE"
mortgage loans) in May 2001 and Together Connections fixed mortgage loans
(referred to in this prospectus as "TOGETHER CONNECTIONS FIXED" mortgage loans)
in August 2002 (Together Connections variable mortgage loans and Together
Connections fixed mortgage loans are together referred to in this prospectus as
"TOGETHER CONNECTIONS" mortgage loans). Together Connections mortgage loans
generally share the same characteristics as Together mortgage loans, but have
the additional feature of allowing the borrower to link the mortgage loan with
one or more deposit accounts that are held with the seller, as described above
under "-- MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER". The interest rate on
Together Connections mortgage loans depends on the LTV ratio of the particular
mortgage loan.
The seller began originating Connections mortgage loans in November 2002.
Connections mortgage loans have similar features to Together Connections
mortgage loans as described above under "-- MORTGAGE LOAN PRODUCTS OFFERED BY
THE SELLER" but do not allow the borrower to have an unsecured facility.
Generally, a prospective borrower applying for a flexible mortgage loan
(offered by the seller as at the date of this prospectus) may borrow up to a
maximum of 95% of the lower of the original property value or the purchase
price of the mortgaged property. The seller requires a lower LTV ratio where
the valuation or purchase price is over [GBP]250,000. In the case of a
remortgage, the seller calculates the maximum amount of the loan available by
using the then current valuation of the mortgaged property. A borrower may
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repay amounts owed under a currently offered flexible mortgage loan under any
of the repayment terms described above under "--REPAYMENT TERMS". The term over
which a borrower may repay its flexible mortgage loan (other than a Together
Connections mortgage loan or a Connections mortgage loan) is, as at the date of
this prospectus, up to 35 years, and the term over which a borrower may repay
its Together Connections mortgage loan or Connections mortgage loan is, as at
the date of this prospectus, up to 30 years.
The seller currently reviews monthly the interest rate on its variable rate
flexible mortgage loans. In addition, the seller will recalculate accrued
interest on flexible mortgage loans to take account of the exercise of any
overpayment or re-draw, so that (a) interest on any re-draw is charged from the
date of the redraw, and (b) borrowers are given the benefit of any overpayment
from the date on which the overpayment is paid.
In addition to the conditions described above, the re-draw options for
borrowers with flexible mortgage loans may cease to be available, at the
seller's sole discretion, if an event of default (as set out in the applicable
terms and conditions) occurs.
PERSONAL SECURED LOANS
Personal secured loans are offered to borrowers who have an existing
mortgage loan with the seller. The proceeds of a personal secured loan may be
used for any purpose and such loan is secured by a legal charge or (in
Scotland) a standard security on the same property that secures the borrower's
existing mortgage loan. The priority of the legal charge or (in Scotland)
standard security securing a regulated personal secured loan will rank below
the first priority legal charge or standard security securing the related
borrower's existing mortgage loan. An unregulated personal secured loan will be
secured pursuant to the first priority legal charge or standard security
securing the related borrower's existing mortgage loan. A borrower may have
more than one personal secured loan. A personal secured loan may be in any
amount up to a maximum of [GBP]25,000. If the borrower's existing mortgage loan
is not a flexible mortgage loan then the borrower may be eligible for a "flexi
plan loan" which is a personal secured loan under which a fixed amount of
credit (up to [GBP]25,000) is extended. The borrower may draw down the flexi
plan loan in increments up to the amount of credit granted. Draws after the
initial advance of funds under a flexi plan loan are referred to as further
draws. Flexi plan loans bear interest at the standard variable rate whereas all
other personal secured loans bear interest at either the standard variable rate
or a fixed rate. For personal secured loans that are not flexi plan loans, the
borrower may elect the interest rate applicable to the borrower's existing
mortgage loan during the period, if any, when an incentive rate of interest
applies to that existing mortgage loan. The seller will not assign to the
mortgages trustee the mortgage loans of a borrower where the combined LTV of
the personal secured loan(s) and the other mortgage loans secured on the same
property that secures the personal secured loan(s) is greater than 95%.
FURTHER ADVANCES
An existing borrower may apply to the seller for a further amount to be lent
to him or her under his or her mortgage loan, which amount will be secured by
the same mortgaged property as the mortgage loan. Any such application may
result from a solicitation made by the seller, as the seller may periodically
contact borrowers in respect of the seller's total portfolio of mortgage loans
in order to offer to a borrower the opportunity to apply for a further advance.
Any further advance approved by the seller and made to an existing borrower
will be added to the outstanding principal balance of that borrower's mortgage
loan at the time of the advance under the same terms and conditions as the
existing mortgage loan. The aggregate of the outstanding amount of the mortgage
loan and the further advance may be greater than the original amount of the
mortgage loan.
In determining whether to make a further advance, the seller will use its
lending criteria applicable to further advances at that time in determining, in
its sole discretion,
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whether to approve the application. The seller will calculate a new LTV ratio
by dividing the aggregate of the outstanding amount of the mortgage loan and
the further advance by the revised valuation of the mortgaged property. Where
the aggregate of the initial advance and the further advance is greater than
95% of the indexed value of the mortgaged property, the seller will reassess
the property's value, by instructing a valuer, who may physically inspect the
property. The seller will not assign to the mortgages trust any mortgage loan
where the LTV ratio at the time of origination or further advance is in excess
of 95% (excluding capitalized fees and/or charges).
None of the mortgage loans in any cut-off date mortgage portfolio will
oblige the seller to make further advances (other than cash and non-cash re-
draws under a flexible loan or further draws under a flexi-plan loan). However,
the seller may choose to make further advances on some mortgage loans in an
additional mortgage portfolio prior to their assignment to the mortgages
trustee. Under the administration agreement, the administrator may, on behalf
of the seller, accept an application from or issue an offer for a further
advance to any borrower in respect of a mortgage loan which has been assigned
to the mortgages trustee where the seller has confirmed that it would elect to
purchase that mortgage loan in accordance with the terms of the mortgage sale
agreement. If the seller decides at a later date to retain those mortgage loans
within the trust property and to assign such further advances to the mortgages
trustee, then this may have an effect on whether a further advance may be
offered or made on such mortgage loans. See "RISK FACTORS -- THE YIELD TO
MATURITY OF THE NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENT OR REDEMPTIONS ON
THE MORTGAGE LOANS OR REPURCHASES OF MORTGAGE LOANS BY THE SELLER" and
"ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY".
PRODUCT SWITCHES
From time to time borrowers may request or the seller may offer, in limited
circumstances, a variation in the mortgage conditions applicable to the
borrower's mortgage loan. In addition, in order to promote the retention of
borrowers, the seller may periodically contact certain borrowers in respect of
the seller's total portfolio of outstanding mortgage loans in order to
encourage a borrower to review the seller's other mortgage products and to
discuss moving that borrower to an alternative mortgage product. Any such
variation, including a change in product type (other than a variation described
as a permitted product switch), is called a "PRODUCT SWITCH". The administrator
is required under the administration agreement not to accept an application
from or issue an offer for a product switch to any borrower in respect of a
mortgage loan which has been assigned to the mortgages trustee unless the
seller has elected to purchase that mortgage loan in accordance with the terms
of the mortgage sale agreement. However, some fixed rate mortgage loans permit
the borrower to exercise a one-time option within three months of the end of
the initial fixed rate period to "RE-FIX" the interest rate at a new fixed rate
that the seller is offering existing borrowers at that time. Although this re-
fixing of the borrower's fixed rate mortgage loan is considered by the seller
to be a product switch, these mortgage loans may or may not be purchased by the
seller from the mortgages trustee. See "RISK FACTORS -- THE YIELD TO MATURITY
OF THE NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENT OR REDEMPTIONS ON THE
MORTGAGE LOANS OR REPURCHASES OF MORTGAGE LOANS BY THE SELLER" and "ASSIGNMENT
OF THE MORTGAGE LOANS AND RELATED SECURITY".
ARREARS CAPITALIZATION
From time to time, where a borrower has demonstrated a regular payment
history following previous arrears, the seller may capitalize any outstanding
amounts in arrears. In those circumstances, the seller will set the arrears
tracking balance to zero and the related mortgage loan will no longer be
considered to be in arrears. The outstanding balance will be required to be
repaid over the remaining term of such mortgage loan. See "THE ADMINISTRATOR
AND THE ADMINISTRATION AGREEMENT -- ARREARS AND DEFAULT PROCEDURES".
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ORIGINATION OF THE MORTGAGE LOANS
The seller currently derives its mortgage lending business from the
following sources:
* intermediaries that range from mortgage clubs to small independent
mortgage advisors;
* its branch network throughout the United Kingdom;
* its website; and
* Northern Rock Direct, a centralized telephone-based lending
operation.
In each case, the seller performs all the evaluations of the borrower and
determines whether a mortgage loan will be offered. The seller adopted the CML
Code which was a voluntary code observed by most banks, building societies and
other residential mortgage lenders in the UK. The CML Code ceased to have
effect on N(m). The seller is authorized to conduct mortgage lending business
under the FSMA and is subject to the requirements of MCoB. MCoB sets out, among
other things, what information loan applicants should be provided with before
committing to a mortgage loan, including the repayment method and repayment
period, the financial consequences of early repayment, the type of interest
rate, insurance requirements, costs and fees associated with the mortgage loan
and when an applicant's account details can be given to credit reference
agencies. MCoB, as with the CML Code prior to N(m), also requires that the
lender, among other things, acts fairly and reasonably with its borrowers and
assists borrowers in choosing a mortgage that fits the needs of the relevant
borrower. See "RISK FACTORS -- REGULATORY CHANGES BY THE OFFICE OF FAIR
TRADING, THE FSA AND ANY OTHER REGULATORY AUTHORITIES MAY HAVE AN IMPACT ON THE
SELLER, THE MORTGAGES TRUSTEE, FUNDING 2, THE ISSUER, THE MORTGAGE LOANS AND/OR
PERSONAL SECURED LOANS AND MAY ADVERSELY AFFECT OUR ABILITY TO MAKE PAYMENTS
WHEN DUE ON THE NOTES".
UNDERWRITING
The decision to offer a mortgage loan to a potential borrower is made by one
of the seller's underwriters and/or mandate holders located in its mortgage
service centers or head office in Gosforth, who may liaise with the
intermediaries. Each underwriter and/or mandate holder must pass the seller's
formal training program to gain the authority to approve mortgage loans. The
seller has established various levels of authority for its underwriters who
approve mortgage loan applications. The levels are differentiated by, among
other things, degree of risk, value of the property and LTV ratio in the
relevant application. An underwriter wishing to move to the next level of
authority must first take and pass a further training course. The seller also
monitors the quality of underwriting decisions on a regular basis.
The decision to offer a mortgage loan to a potential borrower also may be
made by one of the seller's mandate holders located in a regional mortgage
service center or the seller's head office. "MANDATE HOLDERS" are employees of
the seller who are not underwriters but who have participated in a formal
training program, and who have been given a mandate by the seller to approve a
mortgage loan for which the potential borrower has attained a specified minimum
credit score on the seller's initial credit review.
The seller continually reviews the way in which it conducts its mortgage
origination business in order to ensure that it remains up-to-date and cost
effective in a competitive market. The seller may therefore change its
origination processes from time to time. However, the seller will retain
exclusive control over the underwriting polices and lending criteria to be
applied to the origination of each mortgage loan. The seller's underwriting and
processing of mortgage loans are independent from the process by which the
seller's mortgage loans are originated.
LENDING CRITERIA
Each mortgage loan was originated according to the seller's lending criteria
applicable at the time the mortgage loan was offered, which lending criteria in
the case of each
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mortgage loan included in the mortgage portfolio as of the Funding 2 program
date were the same as or substantially similar to the criteria described in
this section. New mortgage loans may only be included in the mortgage portfolio
if they are originated in accordance with the lending criteria applicable at
the time the mortgage loan is offered and if the conditions contained in
"ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY -- ASSIGNMENT OF NEW
MORTGAGE LOANS AND THEIR RELATED SECURITY" have been satisfied. However, the
seller retains the right to revise its lending criteria from time to time, so
the criteria applicable to new mortgage loans may not be the same as those
currently used.
To obtain a mortgage loan, each prospective borrower completes an
application form which includes information about the applicant's income,
current employment details, bank account information, if any, current mortgage
information, if any, and certain other personal information. The seller
completes a credit reference agency search in all cases against each applicant
at their current address and, if necessary, former addresses, which gives
details of public information including any county court judgments and details
of any bankruptcy. Some of the factors currently used in making a lending
decision are as follows:
(1) Employment details
The seller operates the following policy in respect of the verification of a
prospective borrower's income details. Under this policy, the seller
categorizes prospective borrowers as either "employed" or "self-employed".
Proof of income for employed prospective borrowers applying for mortgage loans
in an amount less than [GBP]500,000 may be established by:
* last three monthly bank statements and/or three monthly payslips
from the six month period prior to the date of the loan
application; and
* a form P60 or accountant's certificate certifying the borrower's
income.
Proof of income for self-employed prospective borrowers may be established
by:
* a letter from the prospective borrower's accountant in acceptable
form; or
* acceptable confirmation of self-employment which might include any
of a tax return, accountant's letter or a trade invoice, together
with a certificate from the prospective borrower as to income.
In May 2001 the seller introduced its fast track program to prospective
borrowers for certain mortgage loan products. If a mortgage loan is judged
appropriate for the fast track program, income is accepted as stated by the
prospective borrower without further proof once positive identification of the
borrower is provided and the borrower has passed the seller's credit scoring
test. The seller does, nevertheless, reserve the right to request income
verification from prospective borrowers. In order to qualify, the prospective
borrower must have attained a specified minimum credit score on the seller's
initial credit review. From May 2001 through January 2002, a prospective
borrower eligible for the fast track program must have had a property value of
at least [GBP]150,000, applied for a mortgage loan with an LTV ratio no greater
than 60% and must have had a valuation made on the mortgaged property. From
January 2002 to August 2002, a prospective borrower eligible for the fast track
program must have had a property value of at least [GBP]100,000, applied for a
mortgage loan with an LTV ratio no greater than 75% and must have had a
valuation made on the mortgaged property. From August 2002 to July 2003, a
prospective borrower eligible for the fast track program must have a property
value of at least [GBP]100,000, applied for a mortgage loan with an LTV ratio
no greater than 80% and must have a valuation made on the mortgaged property.
From July 2003, a prospective borrower eligible for the fast track program must
have a property value of at least [GBP]100,000, be applying for a mortgage loan
with an LTV ratio no greater than 85% and must have a valuation made on the
mortgaged property. An existing borrower may also be eligible for the fast
track program in respect of a further advance under a mortgage loan provided
that the LTV ratio of the combined mortgage loan and further advance does
84
not exceed 95% and that prior to the request for a further advance the mortgage
loan was not subject to the seller's fast track program procedure. Further, an
existing borrower may also be eligible for the fast track program if the
borrower is moving from one property (for which the seller is the mortgagee) to
another property and either (a) the borrower has had a mortgage loan with the
seller for at least two years prior to the date on which the borrower applies
for the new mortgage loan and the LTV ratio for the new mortgage loan is no
greater than 80%, or (b) the amount of the new mortgage loan is equal to or
less than the amount of the original mortgage loan, and the borrower's personal
circumstances (for example, income and employment) have not changed since the
date of the original mortgage loan. In all cases, the seller reserves the right
to obtain proof of income references. Together mortgage loans and Together
Connections mortgage loans are excluded from the seller's fast track program.
As of March 2004 the seller no longer originates mortgage loans under the fast
track program.
Since March 2004 the seller has adopted a new set of procedures under which
verification of a borrower's income is not required in certain circumstances.
For mortgage loans with an LTV ratio of 85% or less (80% or less for mortgage
loans greater than [GBP]500,000) a borrower receiving a medium to high credit
score does not need to provide proof of income. First time buyers, borrowers
employed less than six months and borrowers of Together mortgage loans are
ineligible for a non-verified mortgage loan. Notwithstanding these procedures,
the seller retains the right to require proof of income or other credit-related
information in any case it deems necessary.
(2) Valuation
The seller requires that a valuation of the property be obtained either from
its in-house valuation department or from an independent firm of professional
valuers selected from a panel of approved valuers. The seller retains details
of professional indemnity insurance held by panel valuers. The person
underwriting the mortgage loan and/or the valuation team reviews the valuation
of each property securing the mortgage loans. For more information on the
valuation process and criteria used for a further advance, including the use of
desktop valuations, see "-- CHARACTERISTICS OF THE MORTGAGE LOANS -- FURTHER
ADVANCES".
(3) Property types
The seller applies the criteria set out below in determining the eligibility
of properties to serve as security for mortgage loans. Under these criteria,
eligible property types include freehold, heritable and leasehold houses,
heritable and leasehold flats and mixed commercial and residential use
properties where there is a separate entrance for the residential part of the
property. In the case of a mortgage loan secured by a leasehold property, the
seller requires that the unexpired term of the lease be at least 30 years from
the end of the agreed mortgage loan term.
The seller may consider some property types that do not meet its usual
lending criteria on a case-by-case basis. However, some property types will not
be considered for the purposes of providing security for a mortgage loan. The
types of property falling within this category comprise freehold flats in
England or Wales, shared ownership or shared equity schemes and properties of
non-standard construction of a type considered to be defective.
(4) Loan amount
Generally, the maximum loan amount is [GBP]1,000,000, but this may vary
according to the application in question. The amount borrowed may exceed this
limit in exceptional cases. The seller has represented and warranted in the
mortgage sale agreement that, as of the date of assignment, no mortgage loan in
the mortgage portfolio has a current balance greater than [GBP]500,000.
85
(5) Term
Each mortgage loan must have an initial term of between 7 and 30 years (in
the case of a Together Connections mortgage loan) or between 7 and 35 years in
the case of all other mortgage loans.
(6) Age of applicant
The first named borrower in respect of a Together mortgage loan or a
Together Connections mortgage loan must be aged 21 or over. All borrowers in
respect of all other mortgage loans must be aged 18 or over. There are no
maximum age limits.
(7) Status of applicant(s)
The maximum loan amount of the mortgage 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 along with performance or
profit-related pay, allowances, mortgage subsidies, pensions, annuities,
overtime, bonus and commission. The seller will deduct the annual cost of
existing commitments of twelve months or more from the applicant's gross
income. Positive proof of the applicant's identity and address is obtained in
all cases.
In cases where an applicant requests that the seller takes a secondary
income into account, the seller will consider the sustainability of the
applicant's work hours, the similarity of the jobs and/or skills, the commuting
time and distance between 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, a portion of the secondary income will be used as part of the
normal income calculation.
Where there are two applicants, the seller adds joint incomes together for
the purposes of calculating the applicants' total income. In determining the
loan amount available to the applicants the seller may use the higher of the
joint income multiplied by the appropriate income multiple or the highest of
the two incomes multiplied by the appropriate income multiple plus the lower
income. The seller may at its discretion consider the income of one additional
applicant as well, but only at a maximum income multiple of 1.
The seller may exercise discretion within its lending criteria in applying
those factors that are used to determine the maximum amount an applicant can
borrow. Accordingly, these parameters may vary for some mortgage loans. The
seller may take the following into account when applying discretion: credit
score result, existing customer relationship, LTV and total income needed to
support the mortgage loan.
(8) Credit history
(a) Credit search
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 (or the Scottish equivalent),
default or bankruptcy notice) is revealed.
(b) Existing lender's reference
In some cases the seller may seek a reference from any existing
and/or previous lender. Any reference must satisfy the seller that
the account has been properly conducted and that no history of
material arrears exists. The seller may substitute the reference
with the bureau record obtained as a result of the credit search.
(9) Scorecard
The seller uses some of the criteria described here and various other
criteria to produce an overall score for the application that reflects the
statistical analysis of the risk of advancing the mortgage loan. The scorecard
has been developed using the seller's own data and experience of its own
mortgage accounts. The lending policies and processes are determined centrally
to ensure consistency in the management and
86
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
a mortgage account going into arrears. The seller also uses behavioural
scoring, which uses customer data on existing accounts to make further lending
decisions and to prioritize action in case of arrears.
The seller reserves the right to decline an application that has achieved a
passing score. The seller does have an appeals process if an applicant believes
that his/her application has been unfairly declined. It is the seller's policy
to allow only authorized individuals to exercise discretion in granting
variances from the scorecard.
SELLER'S DISCRETION TO LEND OUTSIDE OF ITS LENDING CRITERIA
On a case-by-case basis, and within approved limits as detailed in the
seller's lending criteria, the seller may have determined that, based upon
compensating factors, a prospective borrower that did not strictly qualify
under its lending criteria at that time warranted an underwriting exception.
The seller may take into account compensating factors including, but not
limited to, a low LTV ratio, stable employment and time in residence at the
applicant's current residence. New mortgage loans and further advances (made
prior to their assignment to the mortgages trustee or if the seller decides at
a later date to retain such mortgage loans subject to further advances within
the mortgages trust, after their assignment to the mortgages trustee) that the
seller has originated under lending criteria that are different from the
lending criteria set out here may be assigned to the mortgages trustee.
MAXIMUM LTV RATIO
The maximum LTV ratio permitted for prospective borrowers applying for
mortgage loans secured by mortgaged properties valued up to [GBP]250,000 is 95%
of the lower of the purchase price or valuation of the mortgaged property
determined by the relevant valuation. The maximum LTV ratio permitted for
prospective borrowers applying for mortgage loans secured by mortgaged
properties valued up to [GBP]1,000,000 is 90% of the lower of the purchase
price or valuation of the mortgaged property determined by the relevant
valuation. The maximum LTV ratio permitted for prospective borrowers applying
for mortgage loans secured by mortgaged properties valued over [GBP]1,000,000
is 85% of the lower of the purchase price or valuation of the mortgaged
property determined by the relevant valuation. The maximum LTV ratio for
prospective borrowers applying for mortgage loans secured by the seller's
currently offered flexible mortgage loans is as described under "--
CHARACTERISTICS OF THE MORTGAGE LOANS -- FLEXIBLE MORTGAGE LOANS".
In the case of a purchase of a mortgaged property, the seller will determine
the current market value of that mortgaged property (which will be used to
determine the maximum amount of the mortgage loan permitted to be made by the
seller) to be the lower of:
* the valuation made by an independent valuer from the panel of
valuers appointed by the seller or an employee valuer of the
seller; or
* the purchase price for the mortgaged property paid by the
prospective borrower.
If a borrower or a prospective borrower has applied to remortgage its
current mortgaged property, the seller will determine the current market value
of the mortgaged property (for the purpose of determining the maximum amount of
the loan available) by using the then current valuation of the mortgaged
property as determined using the process described under "-- LENDING CRITERIA
- -- (2) VALUATION".
If the borrower has applied for a further advance or a personal secured
loan, the seller will determine the current market value of the mortgaged
property by using either an indexed valuation figure provided by a UK pricing
index, a desktop valuation by an employee valuer of the seller or the then
current valuation of the mortgaged property as determined using the process
described under "-- LENDING CRITERIA -- (2) VALUATION".
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BUILDINGS INSURANCE POLICIES
INSURANCE ON THE PROPERTY
A borrower is required to arrange for insurance on the mortgaged property
for an amount equal to the full rebuilding cost of the property. The borrower
may either purchase the insurance through an insurer arranged by the seller (a
"SELLER ARRANGED INSURER"), or the borrower or landlord (for a leasehold
property) may arrange for the insurance independently. Where borrower or
landlord-arranged insurance fails or (without the knowledge of the seller) no
insurance is arranged, a contingency insurance policy exists to protect the
seller (but not the borrower) up to the amount of the seller's insurable
interest in the property (subject to aggregate limits of indemnity) and the
seller can make a claim under the contingency insurance policy. The policy has
a [GBP]50,000 deductible in the aggregate in any one period of insurance.
SELLER ARRANGED BUILDINGS INSURANCE POLICIES
The solicitor, licensed or qualified conveyancer acting for the seller is
required to ensure that buildings insurance cover is taken out by the relevant
borrower prior to the completion of each mortgage loan. If a borrower asks the
seller to arrange insurance on its behalf, a policy will be issued by a seller
arranged insurer, which currently is AXA General Insurance Ltd., a member of
the AXA Group of Companies ("AXA"). AXA's registered number is 141 885 and its
address is 107 Cheapside, London EC2V 6DU. The policy will provide the borrower
with rebuilding insurance up to an amount equal to the actual rebuilding cost.
Standard policy conditions apply, which are renegotiated periodically by the
seller with the seller arranged insurer. Under seller arranged insurance
policies, the seller will assign its rights under those policies to the
mortgages trustee. Amounts paid under the insurance policy are generally
utilized to fund the reinstatement of the property or are otherwise paid to the
seller to reduce the amount of the mortgage loan(s).
In the administration agreement, the seller, acting in its capacity as
administrator, has agreed to deal with claims under the seller arranged
insurance policies in accordance with its normal procedures and also has agreed
to make and enforce claims and to hold the proceeds of claims on trust for the
mortgages trustee or as the mortgages trustee may direct.
BORROWER OR LANDLORD-ARRANGED BUILDINGS INSURANCE POLICIES AND THE CONTINGENCY
INSURANCE POLICY
If a borrower elects not to take up a seller arranged insurance policy, or
if a borrower who originally had a seller arranged insurance policy confirms
that he or she no longer requires such insurance, that borrower is sent an
"alternative insurance requirements" form. The borrower is required to
acknowledge that he is responsible for arranging an alternative insurance
policy which covers the rebuilding cost of the property and to request joint
insured status for the seller.
Once an alternative insurance requirements form has been dispatched, it is
assumed that the borrower is making arrangements in accordance with those
requirements. If it transpires that the borrower has not complied with those
requirements and if the property is damaged while uninsured or partially
insured because of under-insurance, the seller is entitled to make a claim
under the contingency insurance policy provided the seller has no prior
knowledge of the deficiency. The contingency insurance policy is an insurance
policy currently provided to the seller by AXA that insures the seller against
loss relating to mortgaged properties where borrowers have failed to make their
own property insurance arrangements. The contingency insurance policy provides
cover for the mortgages trustee. The administrator will make claims in
accordance with the contingency insurance policy and hold the proceeds of
claims on trust for the mortgages trustee or as the mortgages trustee may
direct.
In the case of leasehold properties where the lease requires the landlord to
insure the property, provision is made to deal with the insurance in the
mortgage conditions or the "GENERAL INSTRUCTIONS TO SOLICITORS" or other
comparable or successor instructions or
88
guidelines. Again, if it transpires that the property is not insured and is
damaged, the seller can claim under the contingency insurance policy.
If a borrower who originally had seller arranged insurance fails to pay a
premium, but does not notify the seller that it wishes to make alternative
arrangements, it is assumed that the borrower requires seller arranged
insurance to continue and no alternative insurance requirements form is sent to
that borrower. The unpaid premium is paid by the seller and the amount of the
premium is added to the balance of the relevant mortgage loan.
It is possible that the seller may not be insured under any insurance policy
which is not arranged by the seller and, therefore, it may not have the benefit
of any security over such policies. The mortgages trustee, therefore, may not
have an interest in policies that were not arranged through the seller. See
"RISK FACTORS -- THE MORTGAGES TRUSTEE MAY NOT RECEIVE THE BENEFIT OF CLAIMS
MADE ON THE BUILDINGS INSURANCE WHICH COULD ADVERSELY AFFECT PAYMENTS ON THE
NOTES".
PROPERTIES IN POSSESSION POLICY
If the seller takes possession of a property from a borrower in default, the
seller has coverage through a properties in possession policy from AXA. The
policy provides the seller with rebuilding insurance up to an amount equal to
the actual rebuilding cost. The seller will assign its rights under this policy
to the mortgages trustee for any mortgage loan which is in the mortgage
portfolio and is a property in possession. Amounts paid under the properties in
possession policy are generally utilized to fund the reinstatement of the
property or are otherwise paid to the seller to reduce the amount of the
mortgage loan. This policy is subject to a [GBP]50,000 deductible in the
aggregate in any one period of insurance.
MIG POLICIES
A mortgage indemnity guarantee, or MIG, policy is an agreement between a
lender and an insurance company to underwrite the amount of each relevant
mortgage loan which exceeds a specified LTV ratio. Although since January 1,
2003 the seller is no longer required to take out a MIG policy with respect to
any mortgage loan originated on or after January 1, 2003, each mortgage loan
originated prior to January 1, 2003, that had an LTV ratio in excess of 75%
contains a condition that the seller take out mortgage indemnity insurance with
Northern Rock Mortgage Indemnity Company Limited ("NORMIC"). However, under the
terms of these MIG policies, the MIG coverage for a mortgage loan will be
cancelled in the event a further advance is granted with respect to such
mortgage loan on or after January 1, 2003.
This insurance is intended to provide only limited cover in the event of
losses being incurred in excess of the relevant LTV ratio following
repossession and sale of a mortgaged property from a borrower, and is further
limited in that such insurance is subject to certain caps on claims that may be
made under the MIG policy by the seller and/or its relevant subsidiary.
Firstly, each mortgage loan that is subject to a MIG policy is subject to a cap
on claims made in respect of that mortgage loan, regardless of whether or not
that mortgage loan is included in the mortgage portfolio. In addition, all
mortgage loans that were originated in any one year and that are subject to a
MIG policy are also subject to an aggregate cap on claims that can be made in
respect of that group of mortgage loans. However, the aggregate cap in respect
of mortgage loans originated in any one year is proportioned between mortgage
loans that are included in the mortgage portfolio and mortgage loans that are
not included in the mortgage portfolio. As each proportionate aggregate cap is
applicable either to mortgage loans included in the mortgage portfolio or
mortgage loans that are not included in the mortgage portfolio, any losses on
mortgage loans outside of the mortgage portfolio will not reduce the amount of
MIG coverage remaining on those mortgage loans included in the mortgage
portfolio which continue to have MIG coverage. The MIG policy will not cover
all losses suffered in relation to the mortgage loans which continue to have
MIG coverage and each such mortgage loan is only covered for a ten year period
following completion of the mortgage
89
loan or further advance. In addition, the mortgages trustee is not required to
maintain a mortgage indemnity policy with the current insurer, and the seller
is not required to maintain the same or any level of coverage under the
mortgage indemnity insurance policies for mortgage loans that it may originate
in the future and assign to the mortgages trustee. See "RISK FACTORS -- THE
MORTGAGES TRUSTEE IS NOT REQUIRED TO MAINTAIN MORTGAGE INDEMNITY INSURANCE WITH
THE CURRENT INSURER, AND THE SELLER IS NOT REQUIRED TO MAINTAIN THE CURRENT
LEVEL OF MORTGAGE INDEMNITY INSURANCE COVERAGE FOR NEW MORTGAGE LOANS THAT IT
ORIGINATES IN THE FUTURE, WHICH MAY ADVERSELY AFFECT THE FUNDS AVAILABLE TO PAY
THE NOTES".
The insured under each MIG policy is the seller and/or its relevant
subsidiary. The related borrower has no interest in this policy. The seller
will formally assign its interest in each MIG policy to the mortgages trustee
to the extent that it relates to the mortgage loans from time to time comprised
in the mortgage portfolio. Practically speaking, this will have little effect
on the way in which claims are made and paid under the policies as they will
continue to be administered by the seller acting in its capacity as
administrator. To the extent that claims relate to mortgage loans in the
mortgage portfolio, their proceeds will be paid by the seller into the
mortgages trustee transaction account and the proceeds of all other claims will
be paid into the seller's account.
NORMIC is a Guernsey limited liability company and a wholly-owned insurance
subsidiary of the seller. NORMIC's registered number in Guernsey is 28379, and
its address is P.O. Box 384, The Albany, South Esplanade, St. Peter Port,
Guernsey, Channel Islands. NORMIC does not have a public credit rating or
claims paying ability or financial strength rating by any of Moody's, Standard
& Poor's or Fitch. The seller does not guarantee the liabilities of NORMIC and
is under no legal obligation to support NORMIC in the discharge of those
liabilities. The seller is, however, contingently liable to NORMIC to pay up
any unpaid amount in respect of the seller's shareholding in NORMIC. The unpaid
share capital is immaterial in relation to NORMIC's overall exposure.
The seller has warranted in the mortgage sale agreement that each of the
mortgage indemnity policies relating to a mortgaged property is in force and
all premiums thereon have been paid. The seller also has warranted that, so far
as the seller is aware, there has been no breach of any term of the mortgage
indemnity policies which would entitle the relevant insurer to avoid the same.
Management of the seller believes that financial information relating to NORMIC
is not material to an investor's decision to purchase the notes.
SCOTTISH MORTGAGE LOANS
A portion of the mortgage loans in the mortgage portfolio are, and in any
additional mortgage portfolio may be, secured over properties located in
Scotland. Under Scots law, the only means of creating a fixed charge or
security over heritable or long leasehold property is the statutorily
prescribed standard security. In relation to the Scottish mortgage loans,
references in this prospectus to a "MORTGAGE" are to be read as references to
such standard security and references to a "MORTGAGEE" are to be read as
references to the security holder (under Scots law, termed the "HERITABLE
CREDITOR").
In practice, the seller has advanced and intends to advance mortgage loans
on a similar basis both in England and Wales and in Scotland. While there are
certain differences in law and procedure in connection with the enforcement and
realization of Scottish mortgages, the seller does not consider that these
differences make Scottish mortgages significantly different from or less
effective than the English mortgages. For further information on Scottish
mortgages, see "MATERIAL LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE RELATED
SECURITY -- SCOTTISH MORTGAGE LOANS".
90
CERTAIN CHARACTERISTICS OF THE UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET
The housing market in the UK is primarily one of owner-occupier housing. The
remaining occupants are in some form of public/private landlord or social
ownership.
Set out in the following tables are certain characteristics of the United
Kingdom mortgage market. The prospectus supplement for each issuance of notes
will contain information updating such tables together with other information
regarding the characteristics of the United Kingdom mortgage market.
CPR RATES
The quarterly constant payment rate ("CPR") data presented below was
calculated by dividing the amount of scheduled and unscheduled repayments of
mortgage loans in a quarter by the quarterly balance of mortgage loans
outstanding for building societies in the UK. You should note that the CPR data
presented below understates the seller's historical CPR data for mortgage loans
originated by the seller (and therefore the expected CPR for mortgage loans
included in the mortgages trust) as the data presented below is based upon a
percentage of the total UK residential mortgage market and as the seller's CPR
data (which calculates the amount of scheduled and unscheduled repayments on a
monthly basis) includes the effect of further advances and product switches,
which results in a higher CPR.
The following table sets out the quarterly CPR rates experienced in respect
of residential mortgage loans by building societies since 1964. The prospectus
supplement for each issuance of a series of notes will contain information
updating the historical CPR rates with data available as at the date of such
prospectus supplement.
FOUR FOUR
CPR FOR QUARTER CPR FOR QUARTER
THE ROLLING THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
DATE (%) (%) DATE (%) (%)
- -------------- -------------- ------- ------------- ------------- -------
March 1964 11.29 12.27 June 1964 12.30 12.41
September 1964 12.68 12.41 December 1964 12.82 12.27
March 1965 11.12 12.23 June 1965 10.80 11.86
September 1965 10.66 11.35 December 1965 11.51 11.02
March 1966 10.45 10.85 June 1966 11.39 11.00
September 1966 11.71 11.27 December 1966 10.60 11.04
March 1967 9.49 10.80 June 1967 10.95 10.69
September 1967 11.65 10.67 December 1967 11.51 10.90
March 1968 10.18 11.07 June 1968 10.57 10.98
September 1968 10.91 10.79 December 1968 10.24 10.48
March 1969 9.15 10.22 June 1969 10.23 10.13
September 1969 10.65 10.07 December 1969 10.01 10.01
March 1970 8.92 9.95 June 1970 10.68 10.06
September 1970 11.60 10.30 December 1970 11.46 10.66
March 1971 9.33 10.76 June 1971 11.44 10.96
September 1971 12.17 11.10 December 1971 12.30 11.31
March 1972 10.72 11.66 June 1972 11.81 11.75
September 1972 12.24 11.77 December 1972 11.74 11.63
March 1973 10.11 11.48 June 1973 10.54 11.16
September 1973 11.06 10.86 December 1973 10.55 10.56
March 1974 7.94 10.02 June 1974 7.94 9.37
September 1974 9.58 9.01 December 1974 10.83 9.07
March 1975 9.96 9.58 June 1975 12.23 10.65
September 1975 12.76 11.44 December 1975 12.21 11.79
March 1976 10.10 11.82 June 1976 11.48 11.64
91
FOUR FOUR
CPR FOR QUARTER CPR FOR QUARTER
THE ROLLING THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
DATE (%) (%) DATE (%) (%)
- -------------- -------------- ------- ------------- ------------- -------
September 1976 11.86 11.41 December 1976 11.70 11.28
March 1977 8.00 10.76 June 1977 9.84 10.35
September 1977 12.13 10.42 December 1977 12.66 10.66
March 1978 11.30 11.48 June 1978 12.19 12.07
September 1978 11.71 11.97 December 1978 11.19 11.60
March 1979 9.33 11.11 June 1979 10.12 10.59
September 1979 11.36 10.50 December 1979 11.07 10.47
March 1980 8.03 10.15 June 1980 8.66 9.78
September 1980 9.87 9.41 December 1980 10.48 9.26
March 1981 9.97 9.74 June 1981 11.78 10.52
September 1981 12.53 11.19 December 1981 11.82 11.53
March 1982 9.63 11.44 June 1982 12.91 11.72
September 1982 13.96 12.08 December 1982 14.20 12.68
March 1983 12.55 13.41 June 1983 12.76 13.37
September 1983 12.48 13.00 December 1983 11.86 12.41
March 1984 10.40 11.88 June 1984 12.13 11.72
September 1984 12.40 11.70 December 1984 11.87 11.70
March 1985 10.02 11.61 June 1985 11.67 11.49
September 1985 13.46 11.76 December 1985 13.68 12.21
March 1986 11.06 12.47 June 1986 15.53 13.43
September 1986 17.52 14.45 December 1986 15.60 14.92
March 1987 10.57 14.80 June 1987 14.89 14.64
September 1987 16.79 14.46 December 1987 16.18 14.61
March 1988 13.55 15.35 June 1988 16.03 15.64
September 1988 18.23 16.00 December 1988 12.60 15.10
March 1989 8.85 13.93 June 1989 13.04 13.18
September 1989 11.53 11.51 December 1989 10.38 10.95
March 1990 8.91 10.96 June 1990 9.37 10.05
September 1990 9.66 9.58 December 1990 10.58 9.63
March 1991 9.07 9.67 June 1991 10.69 10.00
September 1991 11.57 10.48 December 1991 10.24 10.39
March 1992 9.14 10.41 June 1992 9.12 10.02
September 1992 9.75 9.56 December 1992 7.96 8.99
March 1993 8.53 8.84 June 1993 9.97 9.05
September 1993 10.65 9.28 December 1993 10.01 9.79
March 1994 8.97 9.90 June 1994 10.48 10.03
September 1994 11.05 10.13 December 1994 10.68 10.29
March 1995 9.15 10.34 June 1995 10.51 10.35
September 1995 11.76 10.53 December 1995 11.61 10.76
March 1996 10.14 11.00 June 1996 11.32 11.21
September 1996 13.20 11.57 December 1996 12.58 11.81
March 1997 9.75 11.71 June 1997 15.05 12.65
September 1997 12.18 12.39 December 1997 11.17 12.04
March 1998 10.16 12.14 June 1998 12.05 11.39
September 1998 13.79 11.79 December 1998 13.43 12.36
March 1999 11.14 12.60 June 1999 14.27 13.16
September 1999 15.60 13.61 December 1999 14.94 13.99
March 2000 13.82 14.66 June 2000 13.87 14.56
September 2000 14.89 14.38 December 2000 15.55 14.53
March 2001 15.49 14.95 June 2001 17.39 15.83
92
FOUR FOUR
CPR FOR QUARTER CPR FOR QUARTER
THE ROLLING THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
DATE (%) (%) DATE (%) (%)
- -------------- -------------- ------- ------------- ------------- -------
September 2001 19.17 16.90 December 2001 19.03 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 20.18 21.07
September 2003 21.66 20.88 December 2003 21.33 20.67
Source of repayment and outstanding mortgage information: Bank of England
HOUSE PRICE INDEX
UK residential property prices, as measured by the Nationwide House Price
Index and Halifax House Price Index (collectively the "HOUSING INDICES"), have
generally followed the UK Retail Price Index over an extended period.
Nationwide is a UK building society and Halifax is a UK bank.
The housing market has been through three economic cycles since 1976. High
year to year increases in the Housing Indices occurred in the late 1970s and
late 1980s with greatest decrease in the early 1990s. The Housing Indices have
generally increased since 1996.
The following table sets out the quarterly housing price indices experienced
in respect of residential mortgage loans by building societies since 1964. The
prospectus supplement for each issuance of notes will contain information
updating the historical housing price indices with data available as at the
date of such prospectus supplement.
NATIONWIDE
UK RETAIL HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------- ------- -------- ----- -------- ----- --------
1973 Q4 N/A N/A 19.5 N/A N/A N/A
1974 Q1 N/A N/A 19.8 N/A N/A N/A
1974 Q2 N/A N/A 20.0 N/A N/A N/A
1974 Q3 N/A N/A 20.2 N/A N/A N/A
1974 Q4 N/A N/A 20.4 4.4 N/A N/A
1975 Q1 31.5 N/A 20.7 4.5 N/A N/A
1975 Q2 34.8 N/A 21.4 6.8 N/A N/A
1975 Q3 35.6 N/A 21.9 7.9 N/A N/A
1975 Q4 37.0 N/A 22.5 10.1 N/A N/A
1976 Q1 38.2 19.3 23.0 10.3 N/A N/A
1976 Q2 39.5 12.7 23.4 9.0 N/A N/A
1976 Q3 40.7 13.4 23.9 8.9 N/A N/A
1976 Q4 42.6 14.1 24.4 7.8 N/A N/A
1977 Q1 44.6 15.5 24.8 7.4 N/A N/A
1977 Q2 46.5 16.3 25.3 7.8 N/A N/A
1977 Q3 47.1 14.6 25.9 7.8 N/A N/A
1977 Q4 47.8 11.5 26.2 7.4 N/A N/A
1978 Q1 48.6 8.6 27.6 10.8 N/A N/A
1978 Q2 50.0 7.3 28.9 13.3 N/A N/A
1978 Q3 50.8 7.6 31.7 20.4 N/A N/A
1978 Q4 51.8 8.0 33.6 24.6 N/A N/A
1979 Q1 53.4 9.4 35.5 25.3 N/A N/A
93
NATIONWIDE
UK RETAIL HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------- ------- -------- ----- -------- ----- --------
1979 Q2 55.7 10.8 38.1 27.5 N/A N/A
1979 Q3 59.1 15.1 40.9 25.3 N/A N/A
1979 Q4 60.7 15.9 43.8 26.7 N/A N/A
1980 Q1 63.9 18.0 45.2 24.3 N/A N/A
1980 Q2 67.4 19.1 46.6 20.2 N/A N/A
1980 Q3 68.5 14.8 47.1 14.3 N/A N/A
1980 Q4 69.9 14.1 46.9 6.7 N/A N/A
1981 Q1 72.0 11.9 47.3 4.5 N/A N/A
1981 Q2 75.0 10.7 48.1 3.2 N/A N/A
1981 Q3 76.3 10.8 48.3 2.3 N/A N/A
1981 Q4 78.3 11.3 47.5 1.3 N/A N/A
1982 Q1 79.4 9.8 48.2 1.9 N/A N/A
1982 Q2 81.9 8.8 49.2 2.4 N/A N/A
1982 Q3 81.9 7.1 49.8 3.2 N/A N/A
1982 Q4 82.5 5.2 51.0 7.2 N/A N/A
1983 Q1 83.1 4.6 52.5 8.4 97.1 N/A
1983 Q2 84.8 3.5 54.6 10.4 99.4 N/A
1983 Q3 86.1 5.0 56.2 12.1 101.5 N/A
1983 Q4 86.9 5.2 57.1 11.2 102.3 N/A
1984 Q1 87.5 5.2 59.2 12.0 104.1 7.0
1984 Q2 89.2 5.1 61.5 11.9 106.0 6.4
1984 Q3 90.1 4.5 62.3 10.4 108.4 6.6
1984 Q4 90.9 4.5 64.9 12.8 111.0 8.2
1985 Q1 92.8 5.9 66.2 11.2 113.5 8.6
1985 Q2 95.4 6.7 68.2 10.3 115.4 8.5
1985 Q3 95.4 5.7 69.2 10.5 116.8 7.5
1985 Q4 96.1 5.6 70.7 8.5 120.6 8.3
1986 Q1 96.7 4.1 71.1 7.1 124.0 8.8
1986 Q2 97.8 2.5 73.8 8.0 128.1 10.4
1986 Q3 98.3 3.0 76.3 9.7 132.2 12.4
1986 Q4 99.6 3.6 79.0 11.1 136.8 12.6
1987 Q1 100.6 4.0 81.6 13.7 142.3 13.8
1987 Q2 101.9 4.1 85.8 15.0 146.7 13.6
1987 Q3 102.4 4.1 88.6 15.0 151.5 13.6
1987 Q4 103.3 3.6 88.5 11.4 158.0 14.4
1988 Q1 104.1 3.4 90.0 9.8 167.0 16.0
1988 Q2 106.6 4.5 97.6 13.0 179.4 20.1
1988 Q3 108.4 5.7 108.4 20.1 197.4 26.5
1988 Q4 110.3 6.6 114.2 25.5 211.8 29.3
1989 Q1 112.3 7.6 118.8 27.8 220.7 27.9
1989 Q2 115.4 7.9 124.2 24.1 226.1 23.1
1989 Q3 116.6 7.3 125.2 14.4 225.5 13.3
1989 Q4 118.8 7.4 122.7 7.2 222.5 4.9
1990 Q1 121.4 7.8 118.9 0.1 223.7 1.4
1990 Q2 126.7 9.3 117.7 -5.4 223.3 -1.2
1990 Q3 129.3 10.3 114.2 -9.2 222.7 -1.2
1990 Q4 129.9 8.9 109.6 -11.3 223.0 0.2
1991 Q1 131.4 7.9 108.8 -8.8 223.1 -0.3
1991 Q2 134.1 5.7 110.6 -6.2 221.9 -0.6
1991 Q3 134.6 4.0 109.5 -4.2 219.5 -1.4
94
NATIONWIDE
UK RETAIL HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------- ------- -------- ----- -------- ----- --------
1991 Q4 135.7 4.4 107.0 -2.4 217.7 -
2.4
1992 Q1 136.7 4.0 104.1 -4.4 213.2 -4.5
1992 Q2 139.3 3.8 105.1 -5.1 208.8 -6.1
1992 Q3 139.4 3.5 104.2 -5.0 206.9 -5.9
1992 Q4 139.2 2.5 100.1 -6.7 199.5 -8.7
1993 Q1 139.3 1.9 100.0 -4.0 199.6 -6.6
1993 Q2 141.0 1.2 103.6 -1.4 201.7 -3.5
1993 Q3 141.9 1.8 103.2 -1.0 202.6 -2.1
1993 Q4 141.9 1.9 101.8 1.7 203.5 2.0
1994 Q1 142.5 2.3 102.4 2.4 204.6 2.5
1994 Q2 144.7 2.6 102.5 -1.1 202.9 0.6
1994 Q3 145.0 2.2 103.2 0.0 202.7 0.0
1994 Q4 146.0 2.8 104.0 2.1 201.9 -0.8
1995 Q1 147.5 3.4 101.9 -0.5 201.8 -1.4
1995 Q2 149.8 3.5 103.0 0.5 199.3 -1.8
1995 Q3 150.6 3.8 102.4 -0.8 197.8 -2.4
1995 Q4 150.7 3.2 101.6 -2.3 199.2 -1.3
1996 Q1 151.5 2.7 102.5 0.6 202.1 0.1
1996 Q2 153.0 2.1 105.8 2.7 206.7 3.6
1996 Q3 153.8 2.1 107.7 5.1 208.8 5.4
1996 Q4 154.4 2.4 110.1 8.0 213.9 7.1
1997 Q1 155.4 2.5 111.3 8.3 216.7 7.0
1997 Q2 157.5 2.9 116.5 9.6 220.2 6.3
1997 Q3 159.3 3.5 121.2 11.8 222.6 6.4
1997 Q4 160.0 3.6 123.3 11.4 225.4 5.2
1998 Q1 160.8 3.4 125.5 12.0 228.4 5.3
1998 Q2 163.4 3.7 130.1 11.0 232.1 5.3
1998 Q3 164.4 3.2 132.4 8.8 234.8 5.3
1998 Q4 164.4 2.7 132.3 7.0 237.2 5.1
1999 Q1 164.1 2.0 134.6 7.0 238.6 4.4
1999 Q2 165.6 1.3 139.7 7.1 245.5 5.6
1999 Q3 166.2 1.1 144.4 8.6 255.5 8.4
1999 Q4 167.3 1.7 148.9 11.8 264.1 10.7
2000 Q1 168.4 2.6 155.0 14.1 273.1 13.5
2000 Q2 171.1 3.3 162.0 14.8 272.8 10.5
2000 Q3 171.7 3.3 161.5 11.2 275.9 7.7
2000 Q4 172.2 2.9 162.8 9.0 278.6 5.3
2001 Q1 172.2 2.2 167.5 7.8 281.7 3.1
2001 Q2 174.4 1.9 174.8 7.6 293.2 7.2
2001 Q3 174.6 1.7 181.6 11.8 302.4 9.2
2001 Q4 173.4 0.7 184.6 12.5 311.8 11.3
2002 Q1 174.5 1.3 190.2 12.7 327.3 15.0
2002 Q2 176.2 1.0 206.5 16.6 343.7 15.9
2002 Q3 177.6 1.7 221.1 19.7 366.1 19.1
2002 Q4 178.5 2.9 231.3 22.6 392.1 22.9
2003 Q1 179.9 3.0 239.3 22.9 403.8 21.0
2003 Q2 181.3 2.9 250.1 19.2 419.0 19.8
95
NATIONWIDE
UK RETAIL HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------- ------- -------- ----- -------- ----- --------
2003 Q3 182.5 2.7 258.9 15.8 434.5 17.1
2003 Q4 183.5 2.8 267.1 14.4 455.3 14.9
1 The percentage annual change is calculated in accordance with the following
formula:
In (x/y) where "X" is equal to the current quarter's index value and "Y" is
equal to the index value of the previous year's corresponding quarter.
Source: Office for National Statistics, Nationwide, Halifax.
96
THE ADMINISTRATOR AND THE ADMINISTRATION AGREEMENT
THE ADMINISTRATOR
The mortgages trustee, the seller, Funding and Funding 2 have appointed
Northern Rock plc under the terms of the administration agreement as the
initial administrator of the mortgage loans. The administrator performs the
day-to-day servicing of the mortgage loans through its retail branches,
mortgage service centers and telephone banking and operations centers. The
administrator will continue to administer other mortgage loans in addition to
those mortgage loans included in the mortgage portfolio. The administrator's
registered office is Northern Rock House, Gosforth, Newcastle upon Tyne NE3
4PL, United Kingdom.
This section describes the administrator's procedures in relation to
mortgage loans generally. A description of the administrator's obligations
under the administration agreement follows in the next section. The
administrator is continually reviewing the way in which it conducts its
mortgage loan administration business in order to ensure that it remains up-to-
date and cost effective in a competitive market, and the administrator may
therefore change its administration processes from time to time.
ADMINISTRATION OF MORTGAGE LOANS
Administration procedures include monitoring compliance with and
administering the mortgage loan features and facilities applicable to the
mortgage loans, responding to customer inquiries and management of mortgage
loans in arrears. See "-- THE ADMINISTRATION AGREEMENT".
Under the terms and conditions of the mortgage loans, borrowers generally
must pay the monthly payment required under the terms and conditions of the
mortgage loans on each monthly payment due date. Interest accrues in accordance
with the terms and conditions of each mortgage loan and is collected from
borrowers monthly.
In the case of variable rate mortgage loans, the administrator determines
the standard variable rate from time to time. In the case of variable rate
mortgage loans which are assigned to the mortgages trustee, except in certain
limited circumstances, the administrator will continue to determine the
standard variable rate applicable to such mortgage loans on behalf of the
mortgages trustee, the Funding beneficiaries and/or the Funding security
trustees. The administrator will take all necessary steps under the mortgage
loans to notify borrowers of any change in the interest rates applicable to the
mortgage loans (whether or not due to a change in the standard variable rate).
Payments of interest and, in the case of repayment mortgage loans,
principal, are payable monthly in advance. Where a borrower defaults in the
payment of interest and/or principal under a mortgage loan, the administrator
will follow the usual arrears procedures described under "-- ARREARS AND
DEFAULT PROCEDURES" below.
ARREARS AND DEFAULT PROCEDURES
The administrator collects all payments due under or in connection with
mortgage loans in accordance with its administration procedures in force from
time to time, but having regard to the circumstances of the relevant borrower
in each case. In accordance with standard market practice in the UK mortgage
loan servicing business, the administrator identifies a mortgage loan as being
"IN ARREARS" when, on any due date, the overdue amounts which were due on
previous due dates equal, in the aggregate, one or more full monthly payments.
In making an arrears determination, the administrator calculates as of the date
of determination the difference between:
* the sum of all monthly payments that were due and payable by a
borrower on any due date up to that date of determination (less the
aggregate amount of all authorized underpayments made by such
borrower up to such date of determination); and
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* the sum of all payments actually made by that borrower up to that
date of determination.
The administrator will determine that a mortgage loan is in arrears if the
result arrived at by dividing that difference (if any) by the amount of the
required monthly payment equals or exceeds 1. A mortgage loan will continue to
be in arrears for each calendar month in which the result of the foregoing
arrears calculation equals or exceeds 1, which result means that the borrower
has missed payments that in the aggregate equal or exceed one monthly payment,
and subsequent payments by that borrower (if any) have not reduced the amount
of missed payments to less than one monthly payment. As the administrator
determines its arrears classification based upon the number of full monthly
payments that have been missed by a borrower, a borrower that has missed
payments that in the aggregate equal or exceed 2 monthly payments (but for
which the aggregate of missed payments is less than 3 monthly payments) would
be classified by the administrator as being between 2-3 months in arrears, and
so on. For example, suppose a borrower has made four monthly payments (either
in consecutive months or throughout any period of time) each in an amount less
than the required monthly amount, and the difference, for the purposes of
arrears calculation, between the sum of the payments due and payable by that
borrower and the sum of the payments actually made by that borrower (that
difference then divided by that borrower's required monthly payment) is less
than 1. The administrator would not classify that borrower as being in arrears.
However, if that borrower makes another payment (for the purposes of our
example, on the monthly payment date in January of a particular year) that is
less than the required monthly amount and which deficient payment, when
aggregated with that borrower's prior deficient payments, results in the
foregoing arrears calculation equalling or exceeding 1, that borrower will be
classified as being one month in arrears as of February 1 of that same year.
Furthermore, if the result of the foregoing arrears calculation continues to
equal or exceed 1 (but remains less than 2) until March 1 of that same year,
that borrower will continue to be classified as being one month in arrears
during that time period. The administrator will not classify the borrower as
being two months in arrears until the beginning of the month following the
monthly payment date in which the result of the arrears calculation equals or
exceeds 2.
This formula that the administrator uses to determine arrears means that
there may be mortgage loans in the mortgage portfolio on which borrowers have
paid less than the monthly payment due, but which have not been classified as
being in arrears, as the aggregate of the amount of deficient payments does not
equal or exceed one monthly payment. This also means that there may be a
significant period of time between the due date on which a borrower pays less
than the monthly payment due on that due date and the date that the aggregate
amount of those deficient payments equals or exceeds one monthly payment, at
which time the administrator will classify that mortgage loan as being in
arrears. In addition, there may be a significant period of time between the
classification of a borrower as being, for example, one month in arrears, and
(assuming the borrower continues to make deficient monthly payments) the time
at which those deficient payments in the aggregate result in the administrator
classifying the borrower as being two months in arrears.
The arrears are reported at each calendar month end. After the arrears are
first reported the borrower is contacted and asked for payment of the arrears.
The administrator will continue to contact the borrower asking for payment of
the arrears. The administrator classifies a mortgage loan that is in arrears as
a "NON-PERFORMING MORTGAGE LOAN" if the related borrower has not made any
payment within any of the three consecutive calendar months prior to the date
of determination.
In the case of any flexible and non-flexible mortgage loan and subject to
the terms and conditions of the mortgage loan, arrears are capitalized upon
receipt of three consecutive full monthly payments.
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In seeking to control and manage arrears, the administrator from time to
time enters into arrangements with borrowers regarding the arrears, including:
* arrangements to make each monthly payment as it falls due plus an
additional amount to pay the arrears over a period of time;
* arrangements to pay only a portion of each monthly payment as it
falls due; and/or
* a deferment for a period of time of all payments, including
interest and principal or parts of any of them.
The administrator may vary any of these arrangements from time to time at
its discretion, the primary aim being to rehabilitate the borrower and recover
the arrears.
Legal proceedings do not usually commence until the arrears are equal to at
least three times the monthly payment then due. However, in many cases legal
proceedings may commence later than this. Once legal proceedings have
commenced, the administrator may send further letters to the borrower
encouraging the borrower to enter into discussions to pay the arrears. The
administrator may still enter into an arrangement with a borrower at any time
prior to a court hearing, or it may request an adjournment of a court hearing.
If the administrator (on behalf of the mortgagee) applies to the court for an
order for possession following a default of the borrower, the court has
discretion as to whether it will grant the order requiring the borrower to
vacate the mortgaged property, and discretion as to the terms upon which the
order is granted. If, after the possession order has been granted, the borrower
does not voluntarily vacate the property, then the administrator will be
required to request a warrant for execution by a court officer of the
possession order. On average, the equivalent of 12 monthly payments may have
been missed prior to the administrator obtaining possession, assuming no prior
mortgage or the imposition of defenses. Where a court order for possession is
deferred to allow time for payment and the borrower subsequently defaults in
making the payment, the administrator may take any action it considers
appropriate, including entering into an arrangement with the borrower. In all
cases, the administrator has a duty of care to the borrower to act reasonably.
The administrator has discretion to deviate from these arrears procedures.
In particular, the administrator may deviate from these procedures where a
borrower suffers from a mental or physical infirmity, is deceased or where the
borrower is otherwise prevented from making payment due to causes beyond the
borrower's control. This is the case for both sole and joint borrowers.
After the mortgagee has been granted possession, the administrator (on
behalf of the mortgagee) may take any action it considers appropriate, subject
to any fiduciary duties which the mortgagee may owe to the borrower, including
but not limited to:
* securing, maintaining or protecting the property and putting it
into a suitable condition for sale;
* creating (other than in Scotland) any estate or interest on the
property, including a leasehold;
* disposing of the property (in whole or in parts) or of any interest
in the property, by auction, private sale or otherwise, for a price
it considers appropriate; and/or
* letting the property for any period of time.
Subject as provided above, the administrator (on behalf of the mortgagee)
has discretion as to the timing of any of these actions, including whether to
postpone the action for any period of time. The administrator (on behalf of the
mortgagee) may also carry out works on the property as it considers
appropriate, including the demolition of the whole or any part of it.
The period between the administrator (on behalf of the mortgagee) obtaining
possession and sale of a mortgaged property is generally between three and nine
months.
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However, you should note that the administrator's ability to exercise its
power of sale in respect of a mortgaged property is dependent upon mandatory
legal restrictions as to notice requirements. In addition, there may be factors
outside the administrator's control, such as whether the borrower contests the
sale and the market conditions at the time of sale, that may affect the length
of time between the administrator's decision (on behalf of the mortgagee) to
exercise the power of sale and final completion of the sale.
The administrator will apply the net proceeds of sale of the mortgaged
property against the sums owed by the borrower to the extent necessary to
discharge the mortgage including any accumulated fees and interest. Where those
proceeds are insufficient to cover all amounts owing under the mortgage loan,
the administrator will make a claim under the MIG policy, if appropriate. Where
the funds arising from application of these procedures are insufficient to pay
all amounts owing in respect of a mortgage loan, the funds are applied first in
paying principal, and secondly in paying interest and costs.
At this point the administrator will close the borrower's account. However,
the borrower remains liable for any deficit remaining after the mortgaged
property is sold but before the proceeds of any MIG insurance are applied. The
administrator may pursue the borrower to the extent of any deficiency resulting
from the sale if the administrator deems it appropriate to do so.
These arrears and security enforcement procedures may change over time as a
result of a change in the administrator's business practises, legislative or
regulatory changes or business codes of practise.
ARREARS EXPERIENCE
Each prospectus supplement relating to the issuance of a series of notes
will contain tables summarizing, in respect of the seller's overall mortgage
portfolio, then up-to-date information on the seller's experience administering
mortgage loans in arrears and its repossession experience for residential
mortgage loans originated by the seller. The tables will include information in
respect of the seller's experience in administering mortgage loans secured by
mortgaged properties located in England, Wales and Scotland.
There can be no assurance that the arrears and repossession experience with
respect to the mortgage loans included in the mortgage portfolio will
correspond to the experience of the administrator's overall mortgage portfolio.
Moreover, if the property market experiences an overall decline in property
values so that the value of the mortgaged properties relating to the mortgage
loans included in the trust property falls below the current balances of such
mortgage loans, the actual rates of arrears and repossessions could be
significantly higher than those previously experienced by the seller. In
addition, other adverse economic conditions, whether or not they affect
property values, may nonetheless affect the timely payment by borrowers of
principal and interest and, accordingly, the rates of arrears, repossessions
and losses with respect to the mortgage loans included in the mortgage
portfolio. You should note that the United Kingdom experienced relatively low
and stable interest rates during the periods covered in the preceding tables.
If interest rates were to rise, it is likely that the rate of arrears and
repossessions likewise would rise.
Northern Rock's level of mortgage arrears has been on a downward trend since
the recession in the UK in the early 1990s. Between June 1996 and December
2000, interest rate increases, and the reduction (and ultimate elimination) of
benefits offered by the Mortgage Interest Relief At Source scheme, have
contributed to slowing that downward trend.
House price inflation has indirectly contributed to the improved arrears
situation by enabling borrowers to sell at a profit if they encounter financial
hardship. Recently, the historical upward trend of house price inflation has
moderated. In the period from 1988 to 1990, housing prices rose substantially
faster than inflation as housing turnover increased
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to record levels. At that time, the UK economy grew rapidly, which led to
falling unemployment and relatively high rates of real income growth. These fed
into higher demand for housing and house prices rose rapidly. Demand was
further increased by changes in taxation legislation with regard to tax relief
on mortgage payments in 1988. When monetary policy was tightened subsequently
(in terms of both "locking in" sterling to the European Exchange Rate Mechanism
(being the mechanism by which members of the European Community formerly
operated their currency exchange rates) and higher interest rates), the pace of
economic activity first slowed and then turned into recession. Rising
unemployment combined with high interest rates led to a fall in housing demand
and increased default rates and repossessions. The ability of borrowers to
refinance was limited as house prices began to fall and many were in a position
of negative equity (borrowings greater than the resale value of the property)
in relation to their mortgage loans.
The performance of Northern Rock's new business and the arrears profiles are
monitored monthly against various triggers. Whenever arrears rise and a trigger
is exceeded, the cause is reviewed and acted upon. In a continuing effort to
reduce the level of mortgage arrears and to improve collection performance,
Northern Rock has developed behavioral scoring systems to target differing
groups of customers in arrears according to risk.
For statistical information on the levels of arrears experience for the
mortgage loans in the administrator's mortgage portfolio, see the prospectus
supplement for the notes you are considering an investment in.
THE ADMINISTRATION AGREEMENT
The following section describes, in summary, the material terms of the
administration agreement. The description does not purport to be complete and
is subject to the provisions of the administration agreement, a form of which
has been filed as an exhibit to the registration statement of which this
prospectus is a part.
APPOINTMENT
On March 26, 2001, each of the mortgages trustee, Funding and the seller
appointed Northern Rock under the administration agreement to be their agent to
exercise their respective rights, powers and discretions in relation to the
mortgage loans and their related security and to perform their respective
duties in relation to the mortgage loans and their related security. On the
Funding 2 program date, Funding 2 became a party to the administration
agreement and appointed Northern Rock to exercise its rights, power and
discretions in relation to the mortgage loans and their related security and to
perform its duties in relation to the mortgage loans and their related
security. The Funding 2 security trustee also became party to the
administration agreement on the Funding 2 program date and has consented to the
appointment. The administrator will continue to administer mortgage loans which
have not been assigned to the mortgages trustee. The administrator has agreed
to administer the mortgage loans assigned to the mortgages trustee in the same
manner as it administers mortgage loans which have not been assigned to the
mortgages trustee but remain on the books of the seller.
Subject to the provisions of the administration agreement, the mortgage
loans, the mortgages and the transaction documents, the administrator has the
power to do or cause to be done any and all things which it reasonably
considers necessary, convenient or incidental to the administration of the
mortgage loans and their related security or the exercise of such rights,
powers and discretions.
Except as otherwise specified in the transaction documents, the
administrator has agreed to comply with any reasonable directions, orders and
instructions which the mortgages trustee may, from time to time, give to it in
accordance with the provisions of the administration agreement.
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The administrator has agreed to administer and service the mortgage loans
and their related security in accordance with:
* the terms and conditions of the mortgage loans and the mortgages;
* the administrator's administration procedures. The administrator's
administration procedures are the administration, arrears and
enforcement policies and procedures from time to time pursuant to
which the administrator administers and enforces mortgage loans and
their related security which are beneficially owned by the seller;
and
* the terms and provisions of the administration agreement.
UNDERTAKINGS BY THE ADMINISTRATOR
Under the administration agreement, the administrator has undertaken, among
other things:
(A) to determine and set the interest rates applicable to the mortgage
loans which have been assigned to the mortgages trustee including
the standard variable rate, except in the limited circumstances set
out in the administration agreement when the mortgages trustee,
Funding, Funding 2, the security trustee and/or the Funding 2
security trustee will be entitled to do so. The administrator may
not at any time, without the prior consent of the mortgages
trustee, the Funding beneficiaries and the Funding security
trustees set or maintain the standard variable rate and other
discretionary rates or margins for mortgage loans which form part
of the mortgages trust at rates which are higher than the then
prevailing rates for mortgage loans which are beneficially owned by
the seller outside the mortgages trust;
(B) to determine on each monthly payment date, having regard to the
aggregate of:
(1) the income which Funding and Funding 2 would expect to receive
during the next succeeding interest period;
(2) the standard variable rate for mortgage loans included in the
mortgage portfolio and the variable mortgage rates in respect
of such mortgage loans which the administrator proposes to set
under the administration agreement; and
(3) all other resources available to Funding and Funding 2
including (in the case of Funding 2) the Funding 2 reserve
fund, the Funding 2 liquidity reserve fund (if any) and the
Funding 2 liquidity facility (if any);
whether:
(i) Funding would receive an amount of income during that interest
period which is less than the amount which is the aggregate of
(a) the amount of interest which will be payable by Funding in
order to fund (whether by payment to a swap counterparty by a
Funding issuer or otherwise) the amount of interest payable in
respect of the class A notes of the Funding issuers and all
amounts ranking higher in priority to such amounts on the
scheduled payment date falling at the end of that interest
period, and (b) all other amounts payable by Funding which rank
equally with or in priority to interest due on the intercompany
loan in respect of interest which is payable on the class A
notes of the Funding issuers; and
(ii)Funding 2 would receive an amount of income during that
interest period which is less than the amount which is the
aggregate of (a) the amount of interest which will be payable
by Funding 2 in respect of the AAA loan tranches and all
amounts ranking higher in priority to such amounts on the
monthly payment date falling at the end of that interest
period, and (b) all other amounts payable by Funding 2 which
rank equally with or in priority to interest due in respect of
the AAA loan tranches.
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If the administrator determines that there will be a revenue
shortfall in the foregoing amounts, it will give written notice to
the mortgages trustee, each Funding beneficiary and each Funding
security trustee, within one London business day of such
determination, of the amount of the revenue shortfall for each
Funding beneficiary and recommend the standard variable rate and
the other discretionary rates or margins which would, in the
administrator's opinion, need to be set in relation to the mortgage
loans included in the mortgage portfolio in order for no revenue
shortfall (in respect of each Funding beneficiary) to arise, having
regard to the obligations of Funding 2 and/or Funding, as
applicable. If the mortgages trustee, Funding, and/or the security
trustee notify the administrator that, having regard to the
obligations of Funding, the standard variable rate and the other
discretionary rates or margins for mortgage loans included in the
mortgage portfolio should be increased, and/or if the mortgages
trustee, Funding 2 and/or the Funding 2 security trustee make the
same notification to the administrator with respect to the
obligations of Funding 2, the administrator will take all steps
which are necessary, including publishing any notice required under
the mortgage conditions, to effect such increase in those rates or
margins. The mortgages trustee and/or the Funding beneficiaries and
the Funding security trustees may terminate the authority of the
administrator to set the standard variable rate and the other
discretionary rates or margins applicable to mortgage loans
included in the mortgage portfolio in certain limited circumstances
set out in the administration agreement including upon the
occurrence of any administrator termination event (as described
below), in which case the mortgages trustee shall set such standard
variable rate and the other discretionary rates or margins;
(C) except as provided in relation to the exercise of a re-fix option
by a borrower under a fixed mortgage loan, not to accept an
application from, or issue to any borrower an offer for a further
advance or a product switch without having received confirmation
that the seller will elect to purchase the relevant mortgage
loan(s) together with its related security from the mortgages
trustee in accordance with the terms of the mortgage sale
agreement;
(D) sixty days prior to the end of the relevant fixed rate period in
respect of any fixed rate mortgage loan included in the mortgages
trust and on behalf of the mortgages trustee, to offer to re-sell
to the seller all fixed rate mortgage loans which become "RE-FIXED"
during the three month period immediately following the end of the
then current fixed rate period. Where any "RE-FIX" takes place this
will constitute a product switch as described above and if the
seller does not purchase such mortgage loans and their related
security, the administrator will take all steps to set the existing
borrowers' re-fix rate at the higher of the rate recommended by the
administrator (having regard to the obligations of Funding and
Funding 2), the rate notified to it by the mortgages trustee,
Funding and Funding 2 and the rates notified to it by the trustee
or trustees of any other securitizations of the seller which
include fixed rate mortgage loans;
(E) to take all steps necessary under the mortgage conditions and
applicable law to notify borrowers of each change in interest
rates, whether due to a change in the standard variable rate
(including any such change effected at the request of the mortgages
trustee, a Funding beneficiary or a Funding security trustee) or as
a consequence of the mortgage conditions. The administrator will
also notify the mortgages trustee, each Funding beneficiary and
each Funding security trustee of any change in the standard
variable rate;
(F) to maintain such records as are necessary to enforce each mortgage
loan and its related security and to keep and maintain, on a loan
by loan basis, records and accounts on behalf of the mortgages
trustee in relation to the mortgage loans;
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(G) to keep or cause to be kept the mortgage loan files and title deeds
(if any) in safe custody and to the order of the mortgages trustee,
the Funding beneficiaries and the Funding security trustees and in
such a manner that they are readily identifiable and accessible;
(H) to provide the mortgages trustee, each Funding beneficiary and each
Funding security trustee and their agents with access to the title
deeds and mortgage loan files at all reasonable times;
(I) to assist the cash manager in the preparation of a quarterly report
substantially in the form set out in the cash management agreement
on, among other things, arrears outstanding. The administrator will
regularly give to the mortgages trustee and the beneficiaries
written details of mortgage loans that are in arrears;
(J) to take all reasonable steps to collect and recover payments due
under or in respect of the mortgage loans and the related security,
including instituting proceedings and enforcing any relevant
mortgage loan, mortgage or any other related security in accordance
with the seller's administration procedures but having regard to
the circumstances of the relevant borrower in each case; and
(K) not knowingly to fail to comply with any legal requirements in the
performance of its obligations under the administration agreement.
COLLECTION OF PAYMENTS
The administrator has undertaken to ensure that all payments due under the
mortgage loans which are included in the mortgage portfolio will be made by the
relevant borrower by direct debit or, if such payment is late or borrowers
choose not to pay by direct debit, by check or other means into accounts in the
name of the administrator held with Barclays Bank PLC, City Group Office, Percy
Street, Newcastle-upon-Tyne NE99 1JP and Lloyds TSB Bank plc, City Office,
Bailey Drive, Gillingham Business Park, Kent ME8 0LS (each a "COLLECTION BANK")
and other accounts (each a "COLLECTION ACCOUNT") which the administrator may
utilize from time to time in accordance with the collection bank agreement and
the administration agreement. All amounts standing to the credit of such
accounts will be held on trust by the seller.
The administrator has agreed to use its reasonable endeavors to credit any
monthly payment made by a borrower to the relevant collection account within
the following time limits:
* in the case of direct debit payment, by close of business on the
London business day which immediately follows the day on which such
amounts are received;
* in the case of standing order, by close of business on the second
London business day following the day on which such amounts are
received;
* in the case of payment by cash, transfer payment from another
account of the seller or check where reference to the relevant
borrower is provided or payment made by way of paying-in book, by
close of business on the London business day which immediately
follows the day on which such amounts are received; and
* in the case of any payment by check where a reference to the
relevant borrower is not provided, by close of business on the next
London business day after notification from the relevant collection
bank of the identity of the borrower,
provided, however, that in any event the administrator has agreed to credit
monthly payments made by a borrower to the relevant collection account within
three London business days of receiving that monthly payment.
Payments from borrowers under mortgage loans originated by the seller which
are not intended to be assigned to the mortgages trustee are also paid into and
flow through the collection accounts.
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Amounts paid into the collection accounts are held on trust by the seller
for the relevant beneficiaries including the mortgages trustee. The trusts in
favor of the mortgages trustee are in respect of all amounts credited to the
collection accounts which represent receipts in respect of mortgage loans which
have been assigned to the mortgages trustee and included in the mortgage
portfolio.
The collection accounts are operated by the administrator in accordance with
the collection bank agreement. Under the collection bank agreement, until the
collection banks receive notice that, amongst other things, a Funding 2
intercompany loan enforcement notice has been served or that the appointment of
the administrator has been terminated, each collection bank has agreed to
operate the collection accounts in accordance with the instructions of the
administrator. If the short term, unsecured, unguaranteed and unsubordinated
debt obligations of Barclays Bank PLC or Lloyds TSB Bank plc are not rated at
least "A-1+" by Standard & Poor's, "P-1" by Moody's and "F1+" by Fitch, the
administrator will arrange for the transfer of the credit balance on such
accounts to another bank which has the required ratings. The long term and
short term, unsecured, unguaranteed and unsubordinated debt obligations of
Barclays Bank PLC and Lloyds TSB Bank PLC are currently rated "AA" and "A-1+"
and "AA" and "A-1+", respectively, by Standard & Poor's, "Aa1" and "P-1" and
"Aaa" and "P-1", respectively, by Moody's and "AA+" and "F1+" and "AA+" and
"F1+", respectively, by Fitch. Amounts standing to the credit of the collection
accounts that represent amounts collected in respect of mortgage loans that
have been assigned to the mortgages trustee are transferred by the
administrator to the mortgages trustee transaction account every three London
business days.
Amounts standing to the credit of the mortgages trustee transaction account
are transferred (subject to retaining a minimum balance of [GBP]1 in such
account) on a weekly basis by the cash manager to the mortgages trustee GIC
account or, at the cash manager's option, invested in authorized investments,
provided that the yield on those authorized investments expressed as an annual
percentage rate of return is not less than the interest rate on the mortgages
trustee GIC account at the time the investment decision is made. Any amounts
invested in authorized investments, including the interest accrued on such
amounts, are transferred to the mortgages trustee GIC account on the related
distribution date.
In the case of monthly payments which are made by direct debit, the
administrator initially credits the applicable collection account with the full
amount of the direct debit. If an unpaid direct debit is returned in
circumstances where the administrator has credited to the mortgages trustee
transaction account the amount of the monthly payment, the administrator is
permitted to reclaim from the mortgages trustee transaction account the
corresponding amounts previously credited.
Any amount standing to the credit of the mortgages trustee GIC account
accrues interest at a margin below LIBOR for three-month sterling deposits.
REDEMPTION
Under the administration agreement, the administrator is responsible for
handling the procedures connected with the redemption of mortgage and is
authorized to release the relevant title deeds (if any) to the person or
persons entitled thereto upon redemption.
FEES
The administrator is entitled to receive a fee for servicing the mortgage
loans. On each distribution date the mortgages trustee pays to the
administrator an administration fee of 0.08% per annum (inclusive of VAT) on
the aggregate amount of the Funding share and the Funding 2 share of the trust
property as determined on that distribution date in respect of the then current
trust calculation period, but only to the extent that the mortgages trustee has
sufficient funds to pay such amount in accordance with the mortgages trust
allocation of revenue receipts. The unpaid balance (if any) is carried
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forward until the next succeeding distribution date and, if not paid before
such time, is payable on the later of (i) the latest occurring final repayment
date of the Funding intercompany loans, or on their earlier repayment in full
by Funding, or (ii) the latest occurring final repayment date of any loan
tranche advanced under the global intercompany loan agreement, or on the
earlier repayment of all loan tranches in full by Funding 2. The administration
agreement also provides for the administrator to be reimbursed for all
reasonable out-of-pocket expenses and charges properly incurred by the
administrator in the performance of its services under the administration
agreement.
REMOVAL OR RESIGNATION OF THE ADMINISTRATOR
The appointment of the administrator may be terminated by the mortgages
trustee, and/or the Funding beneficiaries and the Funding security trustees
immediately upon written notice to the administrator, on the occurrence of
certain events (each an "ADMINISTRATOR TERMINATION EVENT") including:
* the administrator fails to pay any amount due and payable by it and
such failure is not remedied for a period of 5 London business days
after the administrator becomes aware of the default;
* subject as provided further in the transaction documents, the
administrator fails to comply with any of its other material
obligations under the administration agreement which in the opinion
of the Funding 2 security trustee is materially prejudicial to the
interests of the holders of the notes issued by the issuer, and
such failure is not remedied for a period of 20 days after the
administrator becomes aware of the default;
* if at any time required under any UK mortgage regulatory regime the
administrator fails to obtain or maintain the necessary license or
permission or regulatory approval enabling it to continue
administering mortgage loans; or
* the occurrence of an insolvency event in relation to the
administrator.
Upon termination of the administrator, the Funding security trustees have
agreed to use their reasonable endeavors to appoint a substitute administrator.
In addition, subject to the fulfillment of certain conditions including,
without limitation, that a substitute administrator has been appointed by the
mortgages trustee, the Funding beneficiaries and the Funding security trustees
(and in the event of failure to agree, by the Funding security trustees) the
administrator may voluntarily resign by giving not less than 12 months' notice
of termination to the mortgages trustee, each Funding beneficiary and the
seller.
Any such substitute administrator (whether appointed upon a termination of
the appointment of, or the resignation of, the administrator) is required to:
* if possible, to have experience in administering mortgage loans
secured on residential properties in England, Wales and Scotland;
and
* enter into an agreement on substantially the same terms as the
provisions of the administration agreement.
In addition, the then current ratings (if any) of the notes, the previous
notes or any new notes may not be reduced, withdrawn or qualified as a result
of the appointment of the substitute administrator, unless otherwise agreed by
an extraordinary resolution of the holders of the relevant class of notes.
Forthwith upon termination of the appointment of the administrator, the
administrator must deliver the title deeds (if any), the mortgage loan files
and all books of account and other records maintained by the administrator
relating to the mortgage loans and/or the related security to, or at the
direction of, the mortgages trustee.
The administration agreement will terminate automatically upon a termination
of the mortgages trust when neither Funding nor Funding 2 has any interest in
the trust property.
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DELEGATION BY THE ADMINISTRATOR
The administrator may, in some circumstances including with the prior
written consent of the mortgages trustee, and the Funding beneficiaries and
after consultation with the Funding security trustees, delegate or sub-contract
the performance of any of its obligations or duties under the administration
agreement. Upon the appointment of any such delegate or sub-contractor the
administrator will nevertheless remain responsible for the performance of those
duties to Funding, Funding 2, the mortgages trustee and the security trustee
and the Funding 2 security trustee.
DELEGATION BY THE FUNDING 2 SECURITY TRUSTEE TO AN AUTHORIZED THIRD PARTY
Subject as provided in the transaction documents, the Funding 2 security
trustee is entitled pursuant to the administration agreement to delegate
certain of its functions and rights under the transaction documents to one or
more authorized third parties whom the rating agencies have previously
confirmed in writing to the Funding 2 security trustee and the issuer will not
result in the ratings on the notes being reduced, qualified or withdrawn. In
the event of any such appointment, the Funding 2 security trustee is not
required to monitor or supervise the third party's performance and is not
responsible for any act or omission of such third party or for any loss caused
thereby.
GOVERNING LAW
The administration agreement is governed by English law.
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ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY
The following section describes, in summary, the material terms of the
mortgage sale agreement. The description does not purport to be complete and is
subject to the provisions of the mortgage sale agreement, a form of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
THE MORTGAGE SALE AGREEMENT
Under the mortgage sale agreement dated March 26, 2001 entered into between
the seller, the mortgages trustee, the security trustee and Funding, the seller
assigned the initial mortgage portfolio together with all related security to
the mortgages trustee. The mortgage sale agreement has been amended and
restated on certain dates subsequent to the initial closing date, and the
seller has assigned further mortgage portfolios with all related security to
the mortgages trustee pursuant to such amended and restated mortgage sale
agreement. On the Funding 2 program date, Funding 2 became a party to the
amended and restated mortgage sale agreement. In addition to providing for the
assignment of the initial mortgage portfolio and the further mortgage
portfolios and related security, the mortgage sale agreement also sets out and
provides for the following:
* the representations and warranties given by the seller in relation
to the mortgage loans and the related security and the
representations and warranties to be given by the seller as of each
assignment date in relation to any new mortgage loans and the
related security assigned to the mortgages trustee on that
assignment date;
* the assignment of other mortgage loans and their related security
to the mortgages trust;
* (i) the purchase by the seller of mortgage loans together with
their related security which are subject to a product switch or in
respect of which a further advance is made or where the borrower
takes a personal secured loan or (ii) the repurchase of mortgage
loans together with their related security where the seller has
breached any of its representations and warranties in respect of
such mortgage loans or their related security (the repurchase to
include all mortgage loans of a borrower included in the mortgage
portfolio, including personal secured loans, if such a breach
occurs in respect of any mortgage loan of such borrower);
* the making of re-draws in respect of flexible mortgage loans
contained in the trust property; and
* the circumstances for the transfer of legal title to the mortgage
loans and their related security to the mortgages trustee.
In relation to Scottish mortgage loans, the mortgage sale agreement provides
for the transfer and assignment of the beneficial interest in such mortgage
loans and their related security to be effected by a declaration of trust by
the seller in favour of the mortgages trustee and for the transfer and
assignment of the beneficial interest in any other Scottish mortgage loans and
their related security to be effected by further declarations of trust (and in
relation to Scottish mortgage loans, references in this prospectus to the
"ASSIGNMENT" of mortgage loans are to be read as references to the transfer of
the beneficial interest therein by the making of such declarations of trust and
the terms "ASSIGN" and "ASSIGNED" shall in that context be construed
accordingly) (see "-- TRANSFER OF LEGAL TITLE TO THE MORTGAGES TRUSTEE").
REPRESENTATIONS AND WARRANTIES
The mortgage sale agreement contains representations and warranties given by
the seller to the mortgages trustee, Funding, Funding 2, the security trustee
and the Funding 2 security trustee in relation to each mortgage loan assigned,
or to be assigned, to the mortgages trustee pursuant to that agreement (except
as otherwise provided below). None
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of the mortgages trustee, Funding, Funding 2, the security trustee, the Funding
2 security trustee or the issuer have carried out or will carry out any
searches, inquiries or independent investigations of the type which a prudent
purchaser or mortgagee would normally be expected to carry out. Each is relying
entirely on the seller's representations and warranties under the mortgage sale
agreement. The seller's material warranties under the mortgage sale agreement
include, among others, substantially the following:
* subject to completion of any registration which may be pending at
the Land Registry or the Registers of Scotland, the seller is the
absolute legal and beneficial owner of the mortgage loans, the
related security and all property to be sold by the seller pursuant
to the mortgage sale agreement;
* each related mortgage secures the repayment of all advances,
interest, costs and expenses payable by the relevant borrower to
the seller under the relevant mortgage loan in priority to any
other charges registered against the relevant property or, in the
case of a regulated personal secured loan, subject in priority only
to such charges securing mortgage loans other than regulated
personal secured loans;
* subject to completion of any registration which may be pending at
the Land Registry (in England and Wales) or the Registers of
Scotland (in Scotland), each mortgage (other than a mortgage in
respect of a regulated personal secured loan) either constitutes,
or will constitute, following registration at the Land Registry or
the Registers of Scotland, (in England and Wales) a first ranking
charge by way of legal mortgage or (in Scotland) a first ranking
standard security over the relevant mortgaged property;
* each relevant mortgaged property is located in England, Wales or
Scotland;
* prior to making each mortgage loan, the seller instructed or
required to be instructed on its behalf solicitors to carry out all
investigations, searches and other actions in relation to the
relevant mortgaged property that would have been undertaken by the
seller acting in accordance with standards consistent with those of
a reasonable and prudent mortgage lender, lending to borrowers in
England and Wales or Scotland, as applicable, when advancing money
in an amount equal to such advance to an individual to be secured
on a mortgaged property of the kind permitted under the lending
criteria;
* the seller's lending criteria are consistent with the criteria that
would be used by a reasonable and prudent mortgage lender;
* in relation to each mortgage loan, the borrower has a good and
marketable title to the relevant mortgaged property;
* prior to making a mortgage loan, an independent valuer from the
panel of valuers appointed by the seller or an employee valuer of
the seller valued the relevant mortgaged property, and the results
of such valuation would be acceptable to a reasonable and prudent
mortgage lender;
* prior to making a mortgage loan, the nature and amount of such
mortgage loan, the circumstances of the relevant borrower and
nature of the relevant mortgaged property satisfied the lending
criteria in force at that time in all material respects;
* no payment of interest (or in the case of repayment mortgage loans,
principal and interest) equivalent to an amount in excess of one
month's installment at the applicable rate in respect of a mortgage
loan was at any time during the 12 months before the relevant
closing or assignment date, as the case may be, in arrears;
* so far as the seller is aware, no borrower is in material breach of
its mortgage loan;
* the first payment due has been paid by the relevant borrower in
respect of each mortgage loan and each mortgage loan is fully
performing;
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* each insurance contract arranged by the seller in respect of any
mortgaged property is in full force and effect and all premiums due
on or before the date of the mortgage sale agreement have been paid
in full and the seller is not aware of any circumstances giving the
insurer under any such insurance contract the right to avoid or
terminate such policy in so far as it relates to the mortgaged
properties or the mortgage loans;
* where the lending criteria required that a mortgage loan was
covered by a MIG insurance contract with NORMIC, that mortgage loan
is covered by such an insurance contract;
* the seller has procured that full and proper accounts, books and
records have been kept showing clearly all material transactions,
payments, receipts and proceedings relating to that mortgage loan
and its mortgage;
* each borrower is a natural person, and no borrower is, as of the
assignment date, an employee or an officer of the seller;
* all formal approvals, consents and other steps necessary to permit
a legal or an equitable or beneficial transfer or a transfer of the
servicing away from the seller of the mortgage loans and their
related mortgages to be sold under the mortgage sale agreement have
been obtained or taken and there is no requirement in order for
such transfer to be effective to notify the borrower before, on or
after any such equitable or beneficial transfer or before any
transfer of legal title of the mortgage loans and their related
mortgages;
* in relation to any cashback mortgage loan, the seller paid to the
relevant borrower the full amount of the cashback payment either
upon completion of the relevant mortgage loan or, if subsequent to
completion, prior to the assignment of such mortgage loan to the
mortgages trustee;
* no mortgage loan has a current balance of more than [GBP]500,000;
* in respect of any mortgage loan where the borrower also has a
personal secured loan or in respect of any personal secured loan,
the combined LTV of the maximum amount of credit provided under
such personal secured loan and other mortgage loans secured on the
same property is not greater than 95 per cent.; and
* each mortgage loan was originated by the seller in sterling and is
denominated in sterling (or was originated and is denominated in
euro at any time if and when the euro has been adopted as the
lawful currency of the UK) and is currently repayable in sterling.
Notwithstanding the foregoing, the above representations and warranties in
respect of each mortgage loan will not apply in their entirety to personal
secured loans.
REPURCHASE BY THE SELLER
The seller has agreed in the mortgage sale agreement to repurchase any
mortgage loan together with its related security in the circumstances described
below.
If a mortgage loan (including any personal secured loan) or its related
security does not materially comply on the date of its assignment with the
representations and warranties given by the seller under the mortgage sale
agreement and the seller does not remedy such breach within 28 days of
receiving written notice of such breach from any of the mortgages trustee, the
Funding beneficiaries and the Funding security trustees then, at the direction
of the Funding beneficiaries (with the consent of the Funding security
trustees) or the Funding security trustees, the seller must repurchase from the
mortgages trustee (i) the relevant mortgage loan and its related security and
(ii) any other mortgage loans (including any personal secured loans) of the
relevant borrower and their related security that are included in the mortgage
portfolio.
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For so long as the seller is the administrator, it must notify the mortgages
trustee, each Funding beneficiary and each Funding security trustee of any
material breach of a warranty as soon as it becomes aware of such breach.
The repurchase price payable upon the repurchase of any mortgage loan and
its related security is an amount (not less than zero) equal to the current
balance on such mortgage loan as of the date of completion of such repurchase
plus all unpaid interest (including all accrued interest and arrears of
interest) and expenses payable thereon to the date of repurchase. If the seller
fails to pay the consideration due for any repurchase or otherwise fails to
complete such repurchase in accordance with the terms of the mortgage sale
agreement, then the seller share of the trust property shall be deemed to be
reduced by an amount equal to that consideration. If on any date on which the
seller is obliged to repurchase any mortgage loan or mortgage loans pursuant to
the mortgage sale agreement, the seller assigns new mortgage loans together
with their related security to the mortgages trustee in accordance with the
terms of the mortgage sale agreement (as described below), the seller shall be
entitled to set-off against the repurchase price payable by it on such
repurchase the amount of any initial purchase price payable for any such new
mortgage loans and shall pay or be paid a net amount.
PRODUCT SWITCHES, FURTHER ADVANCES AND PERSONAL SECURED LOANS
Except as described below with respect to re-fixed mortgage loans, under the
mortgage sale agreement, the administrator may not accept an application from
or issue to a borrower an offer for a further advance or a product switch
without having received confirmation from the seller that it will elect to
purchase the relevant mortgage loan together with its related security in
accordance with the terms of the mortgage sale agreement. Upon receipt of such
confirmation the administrator on behalf of the seller may then issue an offer
for a further advance or a product switch and accept the mortgage documentation
duly completed by the borrower. The mortgages trustee may not itself offer or
make any product switch (other than in relation to a re-fixed mortgage loan) or
further advance.
A mortgage loan will be subject to a "PRODUCT SWITCH" if there is any
variation of the financial terms and conditions of the mortgage loan other
than:
* a variation in the financial terms and conditions of the mortgage
loan involving a permitted product switch (as described below);
* a change between interest-only and repayment mortgage loans;
* a transfer of equity;
* a release of a party to a mortgage loan or a release of part of the
land subject to the mortgage;
* any variation agreed with borrowers to control or manage arrears on
a mortgage loan;
* any variation which extends the maturity date of the mortgage loan
unless, while any Funding intercompany loan is outstanding, it is
extended beyond 2039 and/or while any loan tranche under the global
intercompany loan agreement is outstanding, it is extended beyond
January 2052;
* any variation imposed by statute; and
* any variation of the interest rate payable where that rate is
offered to the borrowers of more than 10% by aggregate current
balance of the mortgage loans in the mortgage portfolio in any
interest period.
A "PERMITTED PRODUCT SWITCH" is a variation in the financial terms and
conditions of a mortgage loan in which a borrower exchanges its then current
mortgage loan product for a different mortgage loan product offered by the
seller, provided that the related borrower has made at least one monthly
payment on its then current mortgage loan product, and provided further that
the new mortgage loan for which the prior mortgage
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loan is to be exchanged is a permitted replacement mortgage loan. A "PERMITTED
REPLACEMENT MORTGAGE LOAN" is a mortgage loan:
* that is subject to a variable rate of interest; and
* that has a maturity date prior to January 2039 or, following the
redemption in full of all notes issued by the Funding issuers,
January 2052.
In addition, each of the conditions for the assignment of new mortgage loans
and their related security as set forth under "-- ASSIGNMENT OF NEW MORTGAGE
LOANS AND THEIR RELATED SECURITY" must be satisfied in order for a permitted
product switch to occur, provided that conditions (a), (c), (k), (n) and (o) in
that section will only be required to have been satisfied on the date of the
most recent assignment of mortgage loans to the mortgages trustee. The purchase
obligations of the seller set forth under "-- REPURCHASE BY THE SELLER" will
apply to any permitted replacement mortgage loan.
A mortgage loan will be subject to a "FURTHER ADVANCE", for the purposes of
this prospectus, if an existing borrower requests further monies to be advanced
to him or her under a mortgage loan either in circumstances which do not amount
to a re-draw under a flexible loan or where such mortgage loan is not a
flexible mortgage loan, and in either case such request is granted.
Except as otherwise provided below with respect to re-fixed mortgage loans,
if the administrator and the mortgages trustee are notified or are otherwise
aware that a borrower has requested a further advance or a product switch and
the mortgages trustee has received confirmation of the seller's intention to
elect to purchase the mortgage loan and its related security, the mortgages
trustee shall at any time upon notice from the seller assign to the seller and
the seller shall purchase such mortgage loan together with its related security
in accordance with the mortgage sale agreement at a price not less than the
current balance on such mortgage loan as of the date of completion of such
purchase plus all unpaid interest (including all accrued interest and arrears
of interest) and expenses payable on such mortgage loan to the date of
purchase.
In the case of fixed rate mortgage loans, a borrower may have the right,
under the terms of such fixed rate mortgage loan, to elect to "RE-FIX" such
fixed rate mortgage loan at the applicable fixed rate then being offered to the
seller's existing borrowers for the applicable requested period within three
months following the end of the relevant fixed rate period. Sixty days prior to
the end of the relevant fixed rate period, the mortgages trustee may offer to
re-sell to the seller such fixed rate mortgage loan if that fixed rate mortgage
loan becomes "RE-FIXED" during the three month period immediately following the
end of the relevant fixed rate period. The seller may accept this offer by
payment to the mortgages trustee on the date on which the relevant mortgage
loan becomes a re-fixed mortgage loan of the purchase price payable for that
re-fixed mortgage loan as described below.
If such fixed rate mortgage loan becomes re-fixed during the relevant three
month period and the seller pays the purchase price for that re-fixed mortgage
loan, the mortgages trustee shall assign to the seller and the seller shall
purchase such re-fixed mortgage loan and its related security in accordance
with the mortgage sale agreement. The price payable on such purchase shall be
at least equal to the current balance on the relevant mortgage loan as at the
date of completion of the purchase plus all unpaid interest (including all
accrued interest and arrears of interest) and expenses in respect of such
mortgage loan.
If the seller does not pay to the mortgages trustee the purchase price to
purchase any mortgage loan which becomes re-fixed during such three month
period, the administrator is required to determine the applicable fixed rate in
relation to a borrower's request to re-fix any such mortgage loan if required
by the terms of the mortgage. In any event the seller has agreed under the
mortgage sale agreement to set the existing borrowers' re-fix rate for the
three month period immediately following expiry of the relevant fixed rate
period at a rate not less than that notified from time to time to the
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seller by the mortgages trustee, Funding, Funding 2 or the administrator as
being required by the mortgages trustee, Funding or Funding 2.
In addition, upon a fixed rate mortgage loan becoming re-fixed as stated
above without having been purchased by the seller:
(1) the notional amount of the Funding 2 basis rate swap will
automatically be reduced by the current balance of such re-fixed
mortgage loan; and
(2) Funding 2 will be obliged to enter into a new hedging arrangement
in respect of such mortgage loans with either an existing swap
provider, in which case such hedging will be fixed at such fixed
rate as such swap provider, on the basis of fixed rates being
offered in the swap market, determines to be the fixed rate
applicable to the relevant fixed rate period of the relevant
mortgage loans (which may be different from the fixed rate being
offered to the seller's existing borrowers) or at Funding 2's
option, another swap provider whose rating will not cause the then
current ratings of the notes to be reduced, withdrawn or qualified.
The seller currently intends to purchase from the mortgages trustee mortgage
loans that become subject to further advances. If a borrower takes a personal
secured loan after that borrower's existing mortgage loan has been assigned to
the mortgages trustee, the seller currently intends to purchase that borrower's
existing mortgage loan and any personal secured loan previously assigned to the
mortgages trustee. However, in the future these mortgage loans may remain
within (and the further advances or such personal secured loans may be assigned
to and form part of) the trust property.
RE-DRAWS UNDER FLEXIBLE MORTGAGE LOANS
Only the seller is responsible for funding all future re-draws in respect of
flexible mortgage loans contained in the mortgage portfolio. The seller share
of the trust property increases by the amount of any re-draw.
FURTHER DRAWS UNDER PERSONAL SECURED LOANS
Only the seller is responsible for funding all further draws in respect of
personal secured loans contained in the mortgage portfolio. The seller share of
the trust property increases by the amount of any further draw.
ASSIGNMENT OF NEW MORTGAGE LOANS AND THEIR RELATED SECURITY
The seller is entitled under the terms of the mortgage sale agreement to
assign new mortgage loans and their related security to the mortgages trustee
subject to the fulfillment of certain conditions (which may be varied or waived
by the mortgages trustee with the prior approval of the rating agencies or
their confirmation that such variation or waiver will not cause the ratings of
the outstanding notes of any Funding issuer or the issuer to be reduced,
withdrawn or qualified) on or as at the relevant assignment date, including the
following:
(a) the aggregate arrears of interest in respect of all the mortgage
loans in the mortgage portfolio, as a percentage of the aggregate
gross interest due on all mortgage loans during the previous 12
months, does not exceed 2% or such other percentage as is then
acceptable to the then current rating agencies at such time
("ARREARS OF INTEREST" for the purpose of this clause, in respect
of a mortgage loan on any date, shall mean the aggregate amount
overdue on that date, but only where such aggregate amount overdue
equals or exceeds an amount equal to the monthly payment then due
on the mortgage loan and such amount has been overdue for an entire
calendar month);
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(b) the long term, unsecured, unsubordinated and unguaranteed debt
obligations of the seller are rated no lower than "A3" by Moody's
and "A-" by Fitch (at the time of and immediately following the
assignment of the new mortgage loans to the mortgages trustee);
(c) on the relevant assignment date, the aggregate current balance of
the mortgage loans in the mortgage portfolio which are then in
arrears for at least 3 months is less than 4% of the aggregate
current balance of all mortgage loans in the mortgage portfolio on
such date, unless the rating agencies have confirmed that the then
current ratings of the notes will not be reduced, withdrawn or
qualified;
(d) the seller originated the new mortgage loans in accordance with its
lending criteria in force at the time of origination of the
relevant mortgage loan or with material variations from such
lending criteria provided that the then current rating agencies
have been notified of any such material variation;
(e) no new mortgage loan has on the relevant assignment date an
aggregate amount in arrears which is greater than the amount of the
monthly payment then due;
(f) the rating agencies have not provided written confirmation to the
mortgages trustee, the Funding 2 security trustee and the issuer
that the assignment to the mortgages trustee of new mortgage loans
on the assignment date will adversely affect the then current
ratings of the existing notes of the issuer and any Funding issuer
(provided that at a time when the issuer issues new notes the
rating agencies will have provided written confirmation that the
then current ratings of the existing notes have not been reduced,
withdrawn or qualified);
(g) the aggregate current balance of new mortgage loans transferred in
any one interest period does not exceed 10% of the aggregate
current balance of the mortgage loans in the mortgage portfolio as
at the beginning of that interest period;
(h) the issuer reserve fund and the Funding 2 reserve fund are (in
aggregate) fully funded on the relevant assignment date up to the
programme reserve required amount (or, if the issuer reserve fund
and/or the Funding 2 reserve fund is not so fully funded on such
relevant assignment date, no payments have been made from the
issuer reserve fund or the Funding 2 reserve fund, as applicable);
(i) no Funding 2 intercompany loan enforcement notice has been served
under the global intercompany loan agreement;
(j) the assignment of new mortgage loans does not result in the product
of the weighted average repossession frequency ("WAFF") and the
weighted average loss severity ("WALS") for the mortgage loans in
the mortgage portfolio after such purchase, calculated on such
assignment date in the same way as for the initial mortgage
portfolio (or as agreed by the administrator, Fitch and S&P from
time to time), exceeding the product of the WAFF and WALS for the
mortgage loans in the mortgage portfolio calculated on the most
recent preceding closing date, plus 0.25%;
(k) the assignment of new mortgage loans does not result in the Moody's
portfolio variation test value of the mortgage loans in the
mortgages portfolio after such assignment, (calculated by applying
the Moody's portfolio variation test to such mortgage loans on such
assignment date), exceeding the most recently determined Moody's
portfolio variation test threshold value as calculated in relation
to the mortgage loans in the mortgage portfolio as at the most
recent date on which Moody's performed a full pool analysis on the
mortgages portfolio (not to be less frequent than annually) plus
0.30%;
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(l) new mortgage loans may only be assigned to the mortgages trustee if
(to the extent necessary), the Funding issuers, the issuer and
Funding 2 have entered into appropriate hedging arrangements in
respect of such mortgage loans;
(m) no event of default under the transaction documents shall have
occurred which is continuing at the relevant assignment date;
(n) the weighted average yield on the mortgage loans in the mortgage
portfolio together with the new mortgage loans to be assigned to
the mortgages trustee on the relevant assignment date is not less
than LIBOR for three-month sterling deposits plus 0.50%, taking
into account the weighted average yield on the mortgage loans and
the margins on the basis rate swaps as at the relevant assignment
date;
(o) the assignment of new mortgage loans on the relevant assignment
date does not result in the weighted average LTV ratio of the
mortgage loans and the new mortgage loans, after application of the
LTV test on the relevant assignment date, exceeding the LTV ratio
(based on the LTV test), as determined in relation to the mortgage
loans in the mortgages trust on the most recent preceding closing
date, plus 0.25%;
(p) each new mortgage loan has a maturity date prior to January 2039
or, following the redemption in full of all notes issued by the
Funding issuers, January 2052;
(q) the related borrower under each new mortgage loan has made at least
one monthly payment; and
(r) the rating agencies have provided written confirmation that the
then current ratings on the notes would not be reduced, withdrawn
or qualified by the assignment to the mortgages trustee of a new
mortgage loan in respect of a mortgage loan product having
characteristics and/or features that differ materially from the
characteristics and/or features of the mortgage loans in the
initial mortgage portfolio.
PROVIDED THAT, if an initial purchase price for the new mortgage loans is
payable to the seller by the mortgages trustee on the relevant assignment date,
only the conditions set out in paragraphs (e), (f), (i), (l), (m), (n), (p),
(q) and (r) are required to be satisfied to effect an assignment of the new
mortgage loans.
In addition, no assignment of new mortgage loans may occur after the earlier
to occur of:
* a step-up date in respect of the notes of any Funding issuer, if
the option to redeem such notes on that step-up date pursuant to
the terms and conditions of such notes is not exercised; or
* a step-up date in respect of any series and class of notes of the
issuer, if the option to redeem any such notes on that step-up date
pursuant to the terms and conditions of such notes is not exercised
and the aggregate principal amount outstanding of such notes
(together with any other notes of the issuer in respect of which
the step-up date has passed) as at such step-up date exceeds
[GBP]1,000,000,000; or
* the date falling 12 months after the occurrence of a step-up date
in respect of any series and class of notes of the issuer, if the
option to redeem such notes by such date pursuant to the terms and
conditions of such notes is not exercised.
Any new mortgage loans and related security so assigned will be held by the
mortgages trustee on trust for Funding, Funding 2 and the seller in accordance
with the terms of the mortgages trust deed.
The mortgage sale agreement provides that the seller may not assign new
mortgage loans to the mortgages trustee during any trust calculation period
prior to the distribution
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date occurring in that trust calculation period, and that the seller may only
make one assignment of new mortgage loans to the mortgages trustee during any
trust calculation period.
To the extent that Funding or Funding 2 makes an initial contribution on an
assignment date to increase the Funding share or the Funding 2 share of the
trust property, the consideration for the assignment of the new mortgage loans
and their related security to the mortgages trustee will consist of:
* the payment by the mortgages trustee to the seller of the initial
purchase price for the assignment to the mortgages trustee of the
new mortgage loans. The initial purchase price will be paid by the
mortgages trustee out of funds received by the mortgages trustee in
respect of the initial contribution of Funding for the Funding
share of the new trust property or the initial contribution of
Funding 2 for the Funding 2 share of the new trust property, as the
case may be, pursuant to the mortgages trust deed, which initial
contribution will be funded out of the proceeds of any new loan
tranche, made by the issuer to Funding 2 (or, in the case of
Funding, the proceeds of an intercompany loan from a new Funding
issuer);
* the covenant of the mortgages trustee to pay or procure the payment
to the seller of amounts of deferred purchase price in accordance
with the provisions of the mortgage sale agreement and the
mortgages trust deed, which payment also satisfies the obligation
of Funding or Funding 2, as the case may be, to make deferred
contributions to the mortgages trustee for the Funding share or
Funding 2 share of the trust property, as the case may be. Amounts
of deferred purchase price will be payable to the seller to the
extent of available funds only after paying or providing for prior
ranking claims and only out of excess income to which Funding or
Funding 2, as applicable, is entitled in accordance with and
subject to the priority of payments set out in "THE MORTGAGES TRUST
-- MORTGAGES TRUST ALLOCATION OF REVENUE RECEIPTS"; and/or
* the covenant of the mortgages trustee to hold the trust property on
trust for Funding (as to the Funding share), Funding 2 (as to the
Funding 2 share) and the seller (as to the seller share of the
trust property) in accordance with the terms of the mortgages trust
deed.
In the mortgage sale agreement, the seller has undertaken to use reasonable
efforts to assign to the mortgages trustee, and the mortgages trustee has
undertaken to use reasonable efforts to acquire from the seller and hold in
accordance with the terms of the mortgages trust deed, until the earlier of the
monthly payment date falling in July 2010 (or such later date as may be
notified by Funding or Funding 2) and the occurrence of a trigger event,
sufficient new mortgage loans and their related security so that the
overcollateralization test is not breached on three consecutive distribution
dates. However, the seller shall not be obliged to assign to the mortgages
trustee, and the mortgages trustee shall not be obliged to acquire, new
mortgage loans and their related security if, in the opinion of the seller,
such assignment would adversely affect the business of the seller. If Funding 2
enters into a new Funding 2 intercompany loan or borrows a new loan tranche
under the global intercompany loan agreement or Funding enters into a new
Funding intercompany loan, then the period during which the seller covenants to
use reasonable efforts to maintain the aggregate current balance of mortgage
loans in the mortgages trust at a certain level prior to a trigger event may be
extended.
The overcollateralization test shall be calculated on each distribution date
and shall be breached on any distribution date where the aggregate current
balance of mortgage loans in the mortgage portfolio on such distribution date
is less than an amount equal to the product of 1.05 and the principal amount
outstanding of all notes of the Funding issuers and the issuer on such
distribution date provided that (i) where the notes outstanding are controlled
amortization notes or scheduled redemption notes, the principal amount
outstanding of such notes will be calculated on a straight-line basis by
applying
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the appropriate constant payment rate (being the constant payment rate most
recently calculated) applicable to each series of notes on a monthly, rather
than quarterly, basis and (ii) where the notes are bullet redemption notes, the
amount standing to the credit of the Funding 2 cash accumulation ledger shall
be deducted from the aggregate principal amount outstanding of the bullet
redemption notes.
TRANSFER OF LEGAL TITLE TO THE MORTGAGES TRUSTEE
The English mortgage loans in the mortgage portfolio and their related
security have been assigned to the mortgages trustee by way of equitable
assignment. The transfer by the seller to the mortgages trustee of the
beneficial interest in the Scottish mortgage loans in the mortgage portfolio
and their related security has been given effect by declarations of trust by
the seller. In each case this means that legal title to the mortgage loans and
their related security will remain with the seller until such time as certain
additional steps have been taken including the giving of notices of the
assignment to the borrowers.
In relation to mortgages of registered land in England and Wales and any
land in Scotland, until such time as transfers and assignations of such
mortgages in favor of the mortgages trustee have been completed and registered
at the Land Registry and the Registers of Scotland (as applicable), the
assignment of the mortgages to the mortgages trustee takes effect in equity (in
England and Wales only) and transfers beneficial title only (in England, Wales
and Scotland). In the case of mortgages of unregistered land in England and
Wales, in order for legal title to pass to the mortgages trustee, conveyances
of the relevant mortgages would have to be completed in favor of the mortgages
trustee.
Under the mortgage sale agreement none of the seller, the mortgages trustee,
Funding, Funding 2, the security trustee or the Funding 2 security trustee will
require notification of such assignments to the borrowers or the execution and
completion of such transfers, assignations and conveyances in favor of the
mortgages trustee or the registration of such transfers in order to effect the
transfer of legal title to the mortgage loans and their related security
(including, where appropriate, their registration), except in the limited
circumstances described below.
The execution of transfers and assignations of the mortgages to the
mortgages trustee and the notifications of assignments of mortgage loans to the
borrowers will be required to be completed within 20 business days of receipt
of written notice from the mortgages trustee, the Funding beneficiaries, and/or
the Funding security trustees upon the occurrence of any of, amongst other
things:
* the valid service of a Funding 2 intercompany loan enforcement
notice or (unless the sole reason for service of any issuer
enforcement notice is default by an issuer swap provider) an issuer
enforcement notice;
* unless otherwise agreed by the rating agencies, the termination of
the seller's role as administrator under the administration
agreement and failure of any substitute administrator to assume the
duties of the administrator;
* the seller being required, by an order of a court of competent
jurisdiction, or by a change in law occurring after the initial
closing date, or by a regulatory authority or organization whose
members include mortgage lenders of which the seller is a member or
with whose instructions it is customary for the seller to comply,
to perfect the transfer of legal title to the mortgage loans and
related security in favor of the mortgages trustee;
* the security under the Funding 2 deed of charge or any material
part of such security being in jeopardy and it being necessary to
perfect the transfer of legal title to the mortgage loans in favor
of the mortgages trustee in order to reduce such jeopardy
materially;
* the occurrence of an insolvency event in relation to the seller; or
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* notice in writing from the seller to the mortgages trustee and each
Funding beneficiary (with a copy to each Funding security trustee)
requesting such transfer.
If the seller ceases to have a long term unsecured, unsubordinated and
unguaranteed credit rating by Standard & Poor's of at least "BBB-", by Moody's
of at least "Baa3" and by Fitch of at least "BBB-" (unless Standard & Poor's,
Moody's and Fitch confirm that the then current ratings of the notes will not
be reduced, withdrawn or qualified) the seller will be obliged to give notice
only of the transfer of the equitable and beneficial interest in the mortgage
loans to the borrowers but will not be required to complete any other steps
necessary to perfect legal title to the mortgage loans or the related security
in favor of the mortgages trustee.
TITLE DEEDS
To the extent not held at the Land Registry electronically, the title deeds
and mortgage loan files relating to the mortgage loans are currently held by or
to the order of the seller or by solicitors acting for the seller in connection
with the creation of the mortgage loans and their related security. Under the
administration agreement the administrator has undertaken that all the title
deeds and mortgage loan files at any time in its possession or under its
control or held to its order relating to the mortgage loans which are at any
time assigned to the mortgages trustee will be held to the order of the
mortgages trustee. The administrator will keep, or cause to be kept, the title
deeds and mortgage loan files relating to each mortgage loan and each mortgaged
property in safe custody and shall not part with possession, custody or control
of them except in the limited circumstances specified in the administration
agreement.
GOVERNING LAW
The mortgage sale agreement is governed by English law (other than certain
aspects relating to the Scottish mortgage loans and their related security
which are governed by Scots law).
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THE MORTGAGES TRUST
The following section contains a summary of the material terms of the
mortgages trust deed. The summary does not purport to be complete and is
subject to the provisions of the mortgages trust deed, a form of which has been
filed as an exhibit to the registration statement of which this prospectus is a
part.
GENERAL LEGAL STRUCTURE
The mortgages trust was formed on March 26, 2001 as a trust under English
law with the mortgages trustee as trustee for the benefit of the seller and
Funding as beneficiaries. On the Funding 2 program date, with the consent of
all applicable parties, the seller assigned a portion of its beneficial
interest in the mortgages trust to Funding 2 for a purchase price of [GBP]100.
This section describes the material terms of the mortgages trust, including how
money is distributed from the mortgages trust to Funding, Funding 2 and the
seller.
Under the terms of the mortgages trust deed, as of the Funding 2 program
date, the mortgages trustee has agreed to hold all of the trust property on
trust absolutely for Funding, the seller and, as a result of and following its
acquisition of a beneficial interest in the trust property (as described
above), Funding 2. The "TRUST PROPERTY" consists of:
* the sum of [GBP]100 settled by Law Debenture Corporate Services
Limited on trust on the date of the mortgages trust deed;
* the mortgage portfolio, including the mortgage loans and their
related security, the rights under any MIG policies and the other
seller arranged insurance policies;
* any new mortgage portfolio that is assigned to the mortgages
trustee by the seller after the Funding 2 program date, including
the mortgage loans and their related security, the rights under any
MIG policies and the other seller arranged insurance policies;
* any permitted replacement mortgage loan and its related security
(including the rights under any related MIG policy and other seller
arranged insurance policies) relating to any permitted product
switch effected in relation to any mortgage loan and assigned to
the mortgages trustee in accordance with the mortgage sale
agreement and thereby included in the trust property;
* any interest and principal paid by borrowers on their mortgage
loans on or after the relevant assignment date;
* any other amounts received under the mortgage loans and related
security on or after the relevant assignment date excluding third
party amounts;
* any re-draws under flexible mortgage loans included in the trust
property;
* any further draws under personal secured loans included in the
mortgage portfolio;
* any further advances made by the seller to existing borrowers which
are assigned to the mortgages trustee in accordance with the
mortgage sale agreement;
* any contribution paid by Funding, Funding 2 or the seller to the
mortgages trustee for application in accordance with the terms of
the mortgages trust deed but only up to the time of such
application;
* amounts on deposit (and interest earned on such amounts) in the
mortgages trustee transaction account and the mortgages trustee GIC
account; and
* the proceeds of sale of any mortgage loan and its related security
pursuant to the mortgage sale agreement or other proceeds of sale
of any trust property;
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LESS
* any actual losses in relation to the mortgage loans and any actual
reductions occurring in respect of the mortgage loans as described
in paragraph (1) in
"-- ADJUSTMENTS TO TRUST PROPERTY" below; and
* distributions of principal made from time to time to the
beneficiaries of the mortgages trust.
In the case of Scottish mortgage loans and their related security, the
interest of the mortgages trustee therein comprises its beneficial interest
under the relevant declaration of trust over such Scottish mortgage loans and
their related security, as described under "ASSIGNMENT OF THE MORTGAGE LOANS
AND RELATED SECURITY -- THE MORTGAGE SALE AGREEMENT".
In addition, the outstanding principal balances of any Together Connections
mortgage loans and Connections mortgage loans included in the trust property
(and therefore the aggregate amount of the trust property) will be reduced from
time to time by the amount of any Together Connections Benefit and Connections
Benefit applied to those Together Connections mortgage loans or Connections
mortgage loans, respectively, as described under "THE MORTGAGE LOANS --
CHARACTERISTICS OF THE MORTGAGE LOANS -- MORTGAGE LOAN PRODUCTS OFFERED BY THE
SELLER".
Funding 2 is not entitled to any interest in particular mortgage loans and
their related security separately from Funding and/or the seller. Instead, each
of the beneficiaries has an undivided interest in all of the mortgage loans and
their related security forming part of the trust property.
The beneficial interest of Funding, Funding 2 and the seller, referred to as
the Funding share, the Funding 2 share and the seller share respectively,
represent pro rata interests in the trust property.
FLUCTUATION OF THE SELLER SHARE/FUNDING SHARE/FUNDING 2 SHARE OF THE TRUST
PROPERTY
The Funding share, the Funding 2 share and the seller share of the trust
property fluctuate depending on a number of factors including:
* the allocation of principal receipts from the mortgage loans to
Funding, Funding 2 and/or the seller on each distribution date;
* losses arising on the mortgage loans;
* the assignment of new mortgage loans and their related security to
the mortgages trustee;
* any of the beneficiaries increasing its beneficial interest in, and
hence its share of, the trust property by making contributions
(excluding, in the case of Funding and Funding 2 any deferred
contribution) to the mortgages trustee in accordance with the
mortgages trust deed;
* a borrower making a re-draw under a flexible mortgage loan;
* a borrower making a further draw under a personal secured loan;
* the capitalization of arrears in respect of any mortgage loan;
* the seller making a further advance to an existing borrower whose
mortgage loan is included in the mortgage portfolio. Although the
seller does not currently intend either to assign to the mortgages
trustee further advances made in respect of a mortgage loan
following the assignment of that mortgage loan to the mortgages
trustee or to retain mortgage loans subject to such further
advances within the mortgages trust, it may do so in the future;
and
* the mortgages trustee making a special distribution to any
beneficiary on a distribution date.
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Neither the Funding share nor the Funding 2 share of the trust property may
be reduced below zero. The seller will not be entitled to receive principal
receipts which would reduce the seller share of the trust property to an amount
less than the minimum seller share unless and until both the Funding share and
the Funding 2 share of the trust property have been reduced to zero or following
the occurrence of an asset trigger event.
As of the Funding 2 program date, and following its acquisition (by way of
assignment) from the seller of a portion of the beneficial interest of the
seller in the mortgages trust, the size of the share of Funding 2 in the trust
property will be [GBP]100. Funding 2 will use the proceeds of loan tranches
advanced to it by the issuer (less any amount utilised to fund the Funding 2
reserve fund) to make contributions to the mortgages trustee or to refinance an
existing loan tranche. Any such contribution made by Funding 2 to the mortgages
trustee will fall into one of two categories:
* an "INITIAL CONTRIBUTION", which is to fund the payment to the
seller by the mortgages trustee of (and is equal to) the initial
purchase price in respect of any new mortgage portfolio assigned to
the mortgages trustee; and
* a "FURTHER CONTRIBUTION" which is consideration payable by Funding
2 to the mortgages trustee to increase the Funding 2 share of the
trust property in accordance with the terms of the mortgages trust
deed (excluding any initial contribution or deferred contribution)
and which will be applied by the mortgages trustee in making a
special distribution to the seller (which will reduce the seller
share of the trust property) or to Funding (which will reduce the
Funding share of the trust property).
The cash manager will recalculate the Funding share, the Funding 2 share and
the seller share:
* on each distribution date;
* on any date on which Funding and/or Funding 2 makes an initial
contribution or a further contribution to the mortgages trustee in
connection with the purchase of an increased beneficial interest in
the trust property by Funding and/or Funding 2, respectively and/or
on which date the mortgages trustee will also pay to the seller an
initial purchase price equal to the amount of such initial
contribution or pay to the seller and/or Funding a special
distribution (where such special distribution is not made on a
distribution date) equal to the amount of the further contribution
(each such date, a "CONTRIBUTION DATE"); and
* on the date of each assignment of any new mortgage portfolio to the
mortgages trustee (each such date, an "ASSIGNMENT DATE").
The reason for the recalculation on a contribution date or an assignment
date is to determine the percentage shares of each beneficiary in the trust
property which will reflect additional contributions to the mortgages trust by
Funding or Funding 2 and the assignment of the new mortgage loans to the
mortgages trustee.
When the cash manager recalculates the share and the share percentage of
each beneficiary on a distribution date, that recalculation will apply for the
then current trust calculation period. However, if during that trust
calculation period the seller assigns a new mortgage portfolio to the mortgages
trustee and/or if Funding or Funding 2 makes a contribution (excluding any
deferred contribution) to the mortgages trustee, the recalculation made by the
cash manager on that distribution date will only apply from the beginning of
that then current trust calculation period to (but excluding) that assignment
date or contribution date, as applicable. The new recalculation made by the
cash manager on that relevant assignment date or contribution date will apply
from (and including) that assignment date or contribution date (as applicable)
to the end of that then current trust calculation period. The portion of a
trust calculation period that is less than a full trust calculation period is
called an "INTERIM CALCULATION PERIOD".
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The percentage shares that each of the beneficiaries have in the trust
property will determine their entitlement to interest and principal receipts
from the mortgage loans in the mortgage portfolio and also the allocation of
losses arising on the mortgage loans for each trust calculation period or
interim calculation period, as applicable. The method for determining those new
percentage shares is set out in the next three sections.
FUNDING 2 SHARE OF TRUST PROPERTY (DISTRIBUTION DATE RECALCULATION)
On each distribution date (also referred to in this section as the "RELEVANT
DISTRIBUTION DATE") the interest of Funding 2 in the trust property will be
recalculated for the then current trust calculation period or related interim
calculation period, as applicable, in accordance with the following formula:
* The current Funding 2 share of the trust property will be an amount
equal to:
A -- B -- C + D
* The current Funding 2 share percentage of the trust property will
be an amount equal to:
A -- B -- C + D
---------------- x 100
H
expressed as a percentage and rounded upwards to five decimal places,
where,
A = the amount of the Funding 2 share of the trust property as
determined on the later of the distribution date, or the assignment
date or contribution date (if any), immediately preceding the
relevant distribution date;
B = the amount of any principal receipts on the mortgage loans
distributed to Funding 2 on the relevant distribution date (as
described under "-- MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF
MORTGAGES TRUSTEE PRINCIPAL RECEIPTS PRIOR TO THE OCCURRENCE OF A
TRIGGER EVENT" and "-- MORTGAGES TRUST ALLOCATION AND DISTRIBUTION
OF MORTGAGES TRUSTEE PRINCIPAL RECEIPTS ON OR AFTER THE OCCURRENCE
OF A TRIGGER EVENT");
C = the amount of losses sustained on the mortgage loans during the
immediately preceding trust calculation period and the amount of
any reductions occurring in respect of the mortgage loans as
described in paragraph (1) in "-- ADJUSTMENTS TO TRUST PROPERTY"
below, in each case allocated to Funding 2 in the trust calculation
period ending on the relevant distribution date;
D = the amount of any capitalized arrears which have been allocated to
Funding 2 in the immediately preceding trust calculation period;
and
H = the amount of the mortgages trustee retained principal receipts (if
any) plus the aggregate current balance of all of the mortgage
loans in the trust property as at the last day of the immediately
preceding trust calculation period after making the distributions,
allocations and additions referred to in "B", "C" and "D" above
(or, if applicable, on the relevant assignment date or contribution
date) and after taking account of the following (being "TRUST
PROPERTY CALCULATION ADJUSTMENTS"):
(i) any distribution of principal receipts to the seller, Funding
2 and Funding,
(ii) the amount of any losses or capitalized arrears allocated to
the seller, Funding 2 and Funding,
(iii)the adjustments referred to in paragraphs (1) to (5) in "--
ADJUSTMENTS TO TRUST PROPERTY" below (or, if the seller share
is zero, the adjustments referred to in paragraph (1) only),
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(iv) the amount of any other additions to or removals from the
trust property (including any additions to the trust property
resulting from re-draws and further draws made by borrowers
but excluding the addition of mortgage loans on an assignment
date and any initial contributions or further contributions
made by Funding or Funding 2), and
(v) any reduction in the outstanding principal balances of
Together Connections mortgage loans and Connections mortgage
loans resulting from borrowers being allocated a portion of
the related Together Connections Benefit and Connections
Benefit, respectively, under such mortgage loans.
FUNDING 2 SHARE OF TRUST PROPERTY (ASSIGNMENT DATE AND CONTRIBUTION DATE
RECALCULATION)
On each assignment date or contribution date (also referred to in this
section as the "RELEVANT RECALCULATION DATE"), the interest of Funding 2 in the
trust property will be recalculated for the related interim calculation period,
for the sole purposes of calculating the distributions to be made from the
trust property and determining the amount of losses to be allocated to Funding
2 on the immediately succeeding distribution date, in accordance with the
following formula:
* The current Funding 2 share of the trust property will be an amount
equal to:
A + E + F
* The current Funding 2 share percentage of the trust property will
be an amount equal to:
A + E + F
---------- x 100
H
where,
A = the amount of the Funding 2 share of the trust property as
determined on the distribution date immediately preceding the
relevant recalculation date;
E = the amount of any initial contribution paid by Funding 2 to the
mortgages trustee on that recalculation date in respect of the
Funding 2 share of any new trust property;
F = the amount of any further contribution paid by Funding 2 to the
mortgages trustee on that relevant recalculation date to increase
Funding 2's beneficial interest in the trust property; and
H = the amount of the mortgages trustee retained principal receipts (if
any) plus the aggregate current balance of all of the mortgage
loans in the trust property as at the immediately preceding
distribution date (after making the distributions, allocations and
additions on that preceding distribution date) plus the aggregate
current balance of the new mortgage loans assigned to the mortgages
trustee on that relevant recalculation date and after taking
account of trust property calculation adjustments.
ADJUSTMENTS TO TRUST PROPERTY
If any of the following events occurs during a trust calculation period,
then the aggregate current balance of the mortgage loans in the mortgage
portfolio will be reduced or deemed to be reduced for the purposes of making
the trust property calculation adjustments:
(1) any borrower exercises a right of set-off so that the amount of
principal and interest owing under a mortgage loan is reduced but
no corresponding payment is received by the mortgages trustee. In
this event, the aggregate current balance of the mortgage loans in
the mortgage portfolio will be reduced by an amount equal to the
amount of such set-off; and/or
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(2) a mortgage loan or its related security (i) is in breach of the
loan warranties contained in the mortgage sale agreement or (ii) is
the subject of a product switch, further advance or the subject of
an offer by the seller to the borrower of a personal secured loan
in respect of which the seller has elected to purchase the relevant
mortgage loan or mortgage loans and their related security, and in
the case of (i) above the seller fails to repurchase and in the
case of (ii) above the seller fails to purchase, the mortgage loan
or mortgage loans under the relevant mortgage account and their
related security (including any personal secured loans and any
further draws made thereunder secured over the same property) as
required by the terms of the mortgage sale agreement. In this
event, the aggregate current balance of the mortgage loans in the
mortgage portfolio will be deemed to be reduced, for the purposes
of making the trust property calculation adjustments, by an amount
equal to the current balance of the relevant mortgage loan or
mortgage loans under the relevant mortgage account (together with
arrears of interest and accrued interest); and/or
(3) the security trustee and/or the Funding 2 security trustee are
notified that a flexible mortgage loan or part thereof has been
determined by a court judgment on the point or a determination by a
relevant regulatory authority (whether or not in relation to an
analogous flexible mortgage loan product of another UK mortgage
lender):
(a) to be unenforceable; and/or
(b) not to fall within the first ranking charge by way of legal
mortgage or first ranking standard security over the relevant
mortgaged property,
in which event, the aggregate current balance of the mortgage loans
in the mortgage portfolio will be deemed to be reduced, for the
purposes of making the trust property calculation adjustments, by
an amount equal to that portion of the current balance of the
flexible mortgage loan which is so determined to be unenforceable
or not to fall within the first ranking charge by way of legal
mortgage or first ranking standard security over the relevant
mortgaged property; and/or
(4) (i) in respect of breaches of the loan warranties contained in the
mortgage sale agreement, the seller would be required to repurchase
a mortgage loan and its related security and (ii) in respect of a
mortgage loan subject to a product switch, further advance or in
respect of which the seller has offered to the borrower a personal
secured loan, the seller elects to purchase the relevant mortgage
loan and its related security (including any personal secured loans
and any further draws made thereunder secured over the same
property), in each case as required by the terms of the mortgage
sale agreement, but the mortgage loan is not capable of being
repurchased or purchased, as applicable. In this event, the
aggregate current balance of the mortgage loans in the mortgage
portfolio will be deemed to be reduced, for the purposes of making
the trust property calculation adjustments, by an amount equal to
the current balance of the relevant mortgage loan (together with
arrears of interest and accrued interest); and/or
(5) the seller breaches any other material warranty under the mortgage
sale agreement and/or (for so long as the seller is the
administrator) the administration agreement, which will also be
grounds for terminating the appointment of the administrator. In
this event, the aggregate current balance of the mortgage loans in
the mortgage portfolio will be deemed to be reduced by an amount
equal to the resulting loss incurred by Funding, Funding 2 and the
seller.
The reductions set out in paragraphs (1) to (5) (as well as any resulting
loss in respect thereof) and any losses arising in respect of any personal
secured loans will be
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made on the relevant date on which the cash manager makes the relevant trust
property calculation adjustments first to the seller's share (including the
minimum seller share) of the trust property only, and thereafter but (in
respect of paragraph (1) only) will be made to the Funding and Funding 2 shares
of the trust property. Any subsequent recoveries on mortgage loans which have
been subject to a set-off or in respect of which the seller share of the trust
property has otherwise been reduced or deemed reduced pursuant to paragraphs
(1) to (5) above or any recovery in respect of any personal secured loan will
constitute a revenue receipt under the relevant mortgage loan. Such revenue
receipt will belong to Funding and Funding 2 (but only if and to the extent
that the related reductions were applied against Funding's and Funding 2's
shares of the trust property) and thereafter will belong to the seller and, to
the extent received by the mortgages trustee, will be returned to the seller.
The trust property (and the seller share of the trust property) will also be
adjusted to account for the allocation of any Together Connections Benefit to a
Together Connections mortgage loan and any Connections Benefit to a Connections
mortgage loan, as described below under "-- ADDITIONS TO, AND REDUCTIONS IN,
THE TRUST PROPERTY" and "-- INCREASING AND DECREASING THE SELLER SHARE OF THE
TRUST PROPERTY".
FUNDING SHARE OF THE TRUST PROPERTY
The Funding share of the trust property is calculable and recalculable in a
substantially similar manner to that set out above for the Funding 2 share.
WEIGHTED AVERAGE FUNDING 2 SHARE PERCENTAGE AND WEIGHTED AVERAGE FUNDING SHARE
PERCENTAGE
On any distribution date with respect to which (i) the seller had assigned
new mortgage loans to the mortgages trustee during the immediately preceding
trust calculation period, or (ii) Funding or Funding 2 had made a contribution
(excluding any deferred contribution) to the mortgages trustee in connection
with the purchase of an increased beneficial interest in the trust property by
Funding or Funding 2 during the immediately preceding trust calculation period,
or (iii) Funding had received a special distribution during the immediately
preceding trust calculation period from the mortgages trustee, the cash manager
will calculate (for the sole purpose of making the distributions to be made on
that distribution date) the weighted average of the current Funding share
percentages and Funding 2 share percentages that were calculated previously in
respect of each interim calculation period occurring in that immediately
preceding trust calculation period. The calculation will be based on the
relative lengths of the foregoing interim calculation periods. The "WEIGHTED
AVERAGE FUNDING 2 SHARE PERCENTAGE" for any such distribution date will be
equal to, in respect of the distribution or allocation (as applicable) of each
of revenue receipts, principal receipts and losses to be made on that
distribution date, the formula set forth below:
(A x B) + (C x D)
where,
A = the related current Funding 2 share percentage for interim
calculation period 1;
B = the number of days in interim calculation period 1 divided by the
number of days in the trust calculation period;
C = the related current Funding 2 share percentage for interim
calculation period 2; and
D = the number of days in interim calculation period 2 divided by the
number of days in the trust calculation period;
The "WEIGHTED AVERAGE FUNDING SHARE PERCENTAGE" for any such distribution
date is calculable in an identical manner to that set out above for the
weighted average
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Funding 2 share percentage except that references to Funding 2 are to be read
as references to Funding.
SELLER SHARE OF TRUST PROPERTY (DISTRIBUTION DATE RECALCULATION)
On each relevant distribution date, the current seller share of the trust
property will be recalculated for the then current trust calculation period or
related interim calculation period, as applicable, in accordance with the
following formula:
* the aggregate amount of the trust property (excluding revenue
receipts) as at the relevant distribution date minus the sum of the
current Funding share and the current Funding 2 share as calculated
on such relevant distribution date.
On each relevant distribution date, the current seller share percentage of
the trust property will be recalculated for the then current trust calculation
period or related interim calculation period, as applicable, in accordance with
the following formula:
* 100% minus the sum of the current Funding share percentage and the
current Funding 2 share percentage as calculated on such relevant
distribution date.
SELLER SHARE OF TRUST PROPERTY (ASSIGNMENT DATE AND CONTRIBUTION DATE
RECALCULATION)
On each relevant recalculation date, the current seller share of the trust
property will be recalculated for the related interim calculation period in
accordance with the following formula:
* the aggregate amount of the trust property (excluding revenue
receipts) as at the relevant recalculation date minus the sum of
the current Funding share and the current Funding 2 share as
calculated on such relevant recalculation date.
On each relevant recalculation date, the current seller share percentage of
the trust property will be recalculated for the related interim calculation
period in accordance with the following formula:
* 100% minus the sum of the current Funding share percentage and the
current Funding 2 share percentage.
WEIGHTED AVERAGE SELLER SHARE PERCENTAGE
On any distribution date with respect to which (i) the seller has assigned
new mortgage loans to the mortgages trustee during the immediately preceding
trust calculation period, or (ii) Funding or Funding 2 have made a further
contribution to the mortgages trustee in connection with the purchase of an
increased beneficial interest in the trust property by Funding or Funding 2
during the immediately preceding trust calculation period, or (iii) Funding had
received a special distribution during the immediately preceding trust
calculation period from the mortgages trustee, the cash manager will calculate
(for the sole purpose of making the distributions to be made on that
distribution date) the weighted average of the current seller share percentages
that were calculated previously in respect of each interim calculation period
occurring in that immediately preceding trust calculation period, which will be
a percentage equal to, in respect of the distribution of each of revenue
receipts, principal receipts and losses to be made on that distribution date,
100% minus the sum of the weighted average Funding share percentage and the
weighted average Funding 2 share percentage.
MINIMUM SELLER SHARE
The seller share of the trust property includes an amount known as the
"MINIMUM SELLER SHARE". The amount of the minimum seller share will fluctuate
depending on changes to the characteristics of the mortgage loans in the
mortgage portfolio. 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 both the Funding share and
the Funding 2 share of the trust property have been reduced to zero
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or following the occurrence of an asset trigger event. The minimum seller share
will be the amount determined on each distribution date in accordance with the
following formula:
W + X + Y + Z
where,
W = 100% of the sum of the average cleared credit balance of all
applicable accounts linked to Together Connections mortgage loans
and Connections mortgage loans in respect of each calendar month or
part of any such calendar month;
X = 2.0% of the aggregate current balance of mortgage loans in the
mortgage portfolio;
Y = the product of: p x q x r where:
p = 8.0%;
q = the sum of (i) the "FLEXIBLE CASH RE-DRAW CAPACITY", being an
amount equal to the difference between (1) the maximum amount
of cash re-draws that borrowers may make under flexible
mortgage loans included in the mortgage portfolio (whether or
not drawn) as at the last day of the immediately preceding
trust calculation period and (2) the aggregate current balance
of cash re-draws on mortgage loans included in the mortgage
portfolio as at the last day of the immediately preceding trust
calculation period; and (ii) the "FURTHER DRAW CAPACITY" being
an amount equal to the difference between (1) the maximum
amount of further draws that borrowers may make under personal
secured loans which are flexi-plan loans included in the
mortgage portfolio (whether or not drawn) as at the last day of
the immediately preceding trust calculation period and (2) the
aggregate current balance of personal secured loans which are
flexi-plan loans which form part of the mortgage portfolio as
at the last day of the immediately preceding trust calculation
period; and
r = 3.0; and
Z = the aggregate current balance of (1) re-draws and (2) personal
secured loans included in the mortgage portfolio as at the last day
of the immediately preceding trust calculation period.
The purpose of "W" is to mitigate the risks relating to borrowers holding
deposits in Northern Rock bank accounts that are linked to Together Connections
mortgage loans and Connections mortgage loans, and the purpose of "X" is to
mitigate the risks relating to borrowers holding deposits in Northern Rock bank
accounts that are not linked to Together Connections mortgage loans and
Connections mortgage loans (see "RISK FACTORS -- THERE MAY BE RISKS ASSOCIATED
WITH THE FACT THAT THE MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGE
LOANS AND THEIR RELATED SECURITY WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE
NOTES"). The purpose of the calculation in "Y" is to mitigate the risk of the
seller failing to fund a re-draw under a flexible mortgage loan or a further
draw under a personal secured loan in the mortgage portfolio. The purpose of
"Z" is to mitigate enforceability and priority risks relating to (a) re-draws
under the flexible mortgage loans and (b) further draws under personal secured
loans in the mortgage portfolio.
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 2".
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MORTGAGES TRUST ALLOCATION OF REVENUE RECEIPTS
"MORTGAGES TRUSTEE AVAILABLE REVENUE RECEIPTS" are calculated by the cash
manager on each distribution date and are an amount equal to the sum of (in
each case in the period prior to the end of the immediately preceding trust
calculation period):
* revenue receipts on the mortgage loans (which shall include, in
respect of any non-flexible mortgage loan only, the amount of any
overpayment made by the borrower in respect of such mortgage loan
as is equal to the amount of any underpayment of interest made by
such borrower in respect of such mortgage loan in the immediately
preceding trust calculation period provided that such underpayment
of interest is made prior to December 31 in the year in which such
overpayment is received from the borrower);
* interest payable to the mortgages trustee on the mortgages trustee
transaction account and the mortgages trustee GIC account; and
* payments made by the seller to the mortgages trustee to fund any
non- cash redraw in respect of any flexible mortgage loan included
in the mortgage portfolio;
LESS
* amounts due to third parties (also known as "THIRD PARTY AMOUNTS")
including:
(1) payments of insurance premiums, if any, due to the seller in
respect of any seller arranged insurance policy and/or to the
MIG provider to the extent not paid or payable by the seller
(or to the extent such insurance premiums have been paid by the
seller in respect of any further advance which is not purchased
by the seller to reimburse the seller);
(2) amounts under an unpaid direct debit which are repaid by the
administrator to the bank making such payment if such bank is
unable to recoup that amount itself from its customer's
account;
(3) other charges which are due to the seller; and/or
(4) recoveries in respect of amounts deducted from mortgage loans
as described in paragraphs (1) to (5) under "-- ADJUSTMENTS TO
TRUST PROPERTY" above, which will belong to and be paid to
Funding, Funding 2 and/or the seller as described therein,
which amounts may be paid daily from monies on deposit in the
mortgages trustee transaction account or the mortgages trustee
GIC account; and
* amounts distributed on each previous distribution date in
accordance with the mortgages trust allocation of revenue receipts.
On each distribution date, the cash manager will apply mortgages trustee
available revenue receipts in the following order of priority (the "MORTGAGES
TRUST ALLOCATION OF REVENUE RECEIPTS"):
(A) first, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to:
(1) the mortgages trustee under the provisions of the mortgages
trust deed;
(2) to third parties from the mortgages trustee in respect of the
mortgages trust but only if:
(a) 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
(b) payment has not already been provided for elsewhere;
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(B) second, in no order of priority between them but in proportion to
the respective amounts due (inclusive of VAT) due to the
administrator and the cash manager or to become due to the
administrator and the cash manager prior to the next following
distribution date under the provisions of the administration
agreement and the cash management agreement, as the case may be;
and
(C) third, in no order of priority between them but in proportion to
the respective amounts due:
(1) to the seller in an amount determined by multiplying the total
amount of the remaining mortgages trustee available revenue
receipts by the seller share percentage of the trust property;
(2) to Funding in an amount equal to the lesser of:
(i) that portion of mortgages trustee available revenue
receipts required to be applied by Funding on the next
succeeding scheduled payment date(s) applicable to the
Funding issuers pursuant to the payment priorities in
relation to revenue in the Funding deed of charge, prior to
the enforcement of the Funding security or, as applicable,
following the enforcement of the Funding security (save for
certain exclusions set out in the mortgages trust deed);
and
(ii)an amount determined by multiplying the total amount of the
remaining mortgages trustee available revenue receipts by
the Funding share percentage of the trust property;
(3) to Funding 2 in an amount equal to the lesser of:
(i) the aggregate of the amounts to be applied on the
immediately succeeding monthly payment date as set forth
under the Funding 2 pre-enforcement revenue priority of
payments or, as the case may be, the Funding 2 post-
enforcement priority of payments (but excluding any
principal amount due under the global intercompany loan
agreement (save that, for the avoidance of doubt, such
exclusion shall not apply in respect of any Funding 2
available revenue receipts which are applied by Funding 2
to credit the principal deficiency sub-ledger and thereby
reduce the principal payable under the related loan
tranche) and any amount of deferred contribution under item
(X) of the Funding 2 pre-enforcement revenue priority of
payments and/or item (O) of the Funding 2 post-enforcement
priority of payments), less all other amounts (not derived
from the distribution of mortgages trustee available
revenue receipts under the mortgages trust) which will
constitute Funding 2 available revenue receipts on the
immediately succeeding monthly payment date, such amount
not to be less than zero, and
(ii)an amount determined by multiplying the total amount of the
remaining mortgages trustee available revenue receipts by
the Funding 2 share percentage of the trust property; and
(D) fourth, to allocate the seller an amount equal to YY -- ZZ, where
"YY" is the amount of the mortgages trustee available revenue
receipts and "ZZ" is the amount of such mortgages trustee available
revenue receipts applied and/or allocated under items (A) through
(C) above; and
provided that, if an assignment date or a contribution date has
occurred during the trust calculation period immediately preceding
that distribution date, then the cash manager will use (i) the
weighted average seller share percentage (instead of the seller
share percentage) in determining the amount of mortgages trustee
available revenue receipts to distribute to the seller on that
distribution date, (ii) the weighted average Funding 2 share
percentage (instead of the Funding 2
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share percentage) in determining the amount of mortgages trustee
available revenue receipts to distribute to Funding 2 on that
distribution date and (iii) the weighted average Funding share
percentage (as calculated pursuant to the mortgages trust deed) in
determining the amount of mortgages trustee available revenue
receipts to distribute to Funding on that distribution date.
Amounts due to the mortgages trustee and the administrator will include VAT,
if applicable, payable under United Kingdom tax law. At the date of this
prospectus, VAT is calculated at the rate of 17.5% of the amount to be paid.
Payment of VAT will reduce the amounts ultimately available to pay interest on
the notes.
CASH MANAGEMENT OF TRUST PROPERTY -- PRINCIPAL RECEIPTS
Under the cash management agreement, the cash manager is also responsible
for distributing principal receipts on behalf of the mortgages trustee on each
distribution date in accordance with the order of priority described in the
next two following sections. To understand the basis on which the cash manager
will distribute principal receipts on the mortgage loans on each distribution
date (the "MORTGAGES TRUSTEE PRINCIPAL PRIORITY OF PAYMENTS") you need to
understand the definitions set out below.
A "TRIGGER EVENT" means an asset trigger event and/or a non-asset trigger
event.
An "ASSET TRIGGER EVENT" is the event that occurs when an amount is debited
to the principal deficiency sub-ledger in relation to the class A notes of any
Funding issuer or to the AAA principal deficiency sub-ledger of Funding 2. For
more information on the principal deficiency ledger, see "CREDIT STRUCTURE".
A "NON-ASSET TRIGGER EVENT" means any of the following events:
* an insolvency event occurs in relation to the seller;
* the seller's role as administrator is terminated and a new
administrator is not appointed within 60 days; or
* on the distribution date immediately succeeding a seller share
event distribution date, the current seller share is equal to or
less than the minimum seller share (determined using the amounts of
the current seller share and minimum seller share that would exist
after making the distributions of mortgages trustee principal
receipts due on that distribution date on the basis that the cash
manager assumes that those mortgages trustee principal receipts are
distributed in the manner described under "-- MORTGAGES TRUSTEE
ALLOCATION AND DISTRIBUTION OF MORTGAGES TRUSTEE PRINCIPAL RECEIPTS
PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT").
A "SELLER SHARE EVENT" will occur if, on a distribution date, (i) the result
of the calculation of the current seller share on that distribution date would
be equal to or less than the minimum seller share for such distribution date
(determined using the amounts of the current seller share and minimum seller
share that would exist after making the distributions of mortgages trustee
principal receipts due on that distribution date on the basis that the cash
manager assumes that those mortgages trustee principal receipts are distributed
in the manner described under "-- MORTGAGES TRUSTEE ALLOCATION AND DISTRIBUTION
OF MORTGAGES TRUSTEE PRINCIPAL RECEIPTS PRIOR TO THE OCCURRENCE OF A TRIGGER
EVENT"), and (ii) a seller share event has not occurred on the immediately
preceding distribution date).
A "SELLER SHARE EVENT DISTRIBUTION DATE" is a distribution date on which a
seller share event occurs.
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF MORTGAGES TRUSTEE PRINCIPAL
RECEIPTS PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT
Prior to the occurrence of a trigger event (and whether or not there has
been any enforcement of the Funding security, the Funding 2 security or the
issuer security) the
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cash manager on behalf of the mortgages trustee will allocate and distribute
mortgages trustee principal receipts on each distribution date (or, in respect
of any initial purchase price or special distribution, on any contribution
date) as follows:
(A) first, to the seller the amount of any initial purchase price or
special distribution which is then allocable and payable to the
seller in accordance with the mortgages trust deed;
(B) second, to Funding the amount of any special distribution which is
then allocable and payable to Funding in accordance with the
mortgages trust deed;
(C) third, in no order of priority between them but in proportion to
the respective amounts due:
(1) to Funding in an amount equal to the lesser of:
(a) the amount of mortgage trustee principal receipts required
to be applied by Funding under the terms of the Funding
intercompany loans as determined pursuant to the mortgages
trust deed; and
(b) an amount determined by multiplying the total amount of
remaining mortgages trustee principal receipts by the
current Funding share percentage of the trust property;
(2) to Funding 2 in an amount equal to the lesser of:
(a) if Funding 2 has a repayment requirement on that
distribution date (as to which, see "CASHFLOWS -- FUNDING 2
ALLOCATION OF MORTGAGES TRUSTEE AVAILABLE PRINCIPAL
RECEIPTS"), the amount of such repayment requirement; and
(b) an amount determined by multiplying the total amount of
remaining mortgages trustee principal receipts by the
current Funding 2 share percentage of the trust property;
(D) fourth, in no order of priority between them but in proportion to
the respective amounts due to Funding and to Funding 2, to the
extent not already paid pursuant to item (C) above, up to the
amounts set forth in item (C)(1)(a) and item (C)(2)(a) above,
respectively;
(E) fifth, if such distribution date is not a seller share event
distribution date to allocate to the seller the amount equal to AA
-- BB, where "AA" is the amount of mortgages trustee principal
receipts and "BB" is the amount of such mortgages trustee principal
receipts applied and/or allocated under (A) through (D) above;
provided that, if an assignment date or a contribution date has occurred
during the trust calculation period immediately preceding that
distribution date, then the cash manager will use (i) the weighted
average Funding 2 share percentage (instead of the Funding 2 share
percentage) in determining the amount of mortgages trustee principal
receipts to distribute to Funding 2 on that distribution date and (ii)
the weighted average Funding share percentage (as calculated pursuant to
the mortgages trust deed) in determining the amount of mortgages trustee
principal receipts to distribute to Funding on that distribution date.
PROVIDED THAT in relation to (A) through (E) above the following rules
shall apply:
(1) If the notes have become immediately due and payable as a result of
the service of an issuer enforcement notice or if the loan tranches
under the global intercompany loan agreement have become
immediately due and payable as a result of the service of a Funding
2 intercompany loan enforcement notice, principal payments in
respect of the global intercompany loan may be made in excess of
any bullet repayment loan amount, scheduled repayment loan amount
or controlled repayment loan amount and paragraph (C)(2)(a) above
shall no
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longer apply and, except following a non-asset trigger event, the
amount of principal receipts to be distributed to Funding 2 on that
distribution date may not exceed the amount determined under
paragraph (C)(2)(b) above.
(2) If the notes have become immediately due and payable as a result of
the service of an issuer enforcement notice or if the loan tranches
under the global intercompany loan agreement have become
immediately due and payable as a result of the service of a Funding
2 intercompany loan enforcement notice, then for the purpose of
calculating the amount under paragraph (C)(2)(b) above, that amount
will be reduced to the extent of any remaining amounts standing to
the credit of the Funding 2 reserve ledger and/or the Funding 2
liquidity reserve ledger (if any) which are to be utilized on the
immediately succeeding monthly payment date to repay principal on
the loan tranches, but only to the extent that those amounts would
not otherwise be payable on the loan tranches on that monthly
payment date.
(3) The amount of mortgages trustee principal receipts payable to
Funding 2 on a distribution date will be reduced in proportion to
the aggregate of mortgages trustee available revenue receipts
allocable to Funding 2 on such distribution date which are to be
applied on the immediately succeeding monthly payment date in
reduction of deficiencies recorded on the principal deficiency
ledger, but only to the extent that the mortgages trustee available
revenue receipts which are to be so applied on that monthly payment
date would not otherwise be payable as principal of the relevant
loan tranches on that monthly payment date.
(4) On a seller share event distribution date, the cash manager shall
deposit all mortgages trustee principal receipts remaining after
(C) above (the "MORTGAGES TRUSTEE RETAINED PRINCIPAL RECEIPTS") in
the mortgages trustee GIC account and make a corresponding credit
to the principal ledger.
(5) Neither the Funding 2 share of the trust property nor the Funding
share may be reduced below zero.
(6) The mortgages trustee will not distribute any overpayment (other
than a capital payment) in respect of any non-flexible mortgage
loans until the first distribution date following December 31 of
the year in which such overpayment is received; provided that if a
borrower has made an underpayment of principal on such non-flexible
mortgage loan following the overpayment then the mortgages trustee
will distribute principal in an amount up to the amount of such
underpayment (but not exceeding the amount of the overpayment
previously made) on the next-occurring distribution date.
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF MORTGAGES TRUSTEE PRINCIPAL
RECEIPTS ON OR AFTER THE OCCURRENCE OF A TRIGGER EVENT
On each distribution date on or after the occurrence of a non-asset trigger
event and until the occurrence of an asset trigger event, the cash manager will
allocate and distribute all mortgages trustee principal receipts to Funding and
to Funding 2, pro rata according to their respective shares of the trust
property until the Funding share and the Funding 2 share of the trust property
are zero. Following the occurrence of a non-asset trigger event, the notes will
be subject to prepayment risk (that is, they may be repaid earlier than
expected). See "RISK FACTORS -- THE OCCURRENCE OF A NON-ASSET TRIGGER EVENT MAY
ACCELERATE THE REPAYMENT OF CERTAIN NOTES AND/OR DELAY THE REPAYMENT OF OTHER
NOTES".
On each distribution date on or after the occurrence of an asset trigger
event, the cash manager will allocate and distribute all mortgages trustee
principal receipts as follows:
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(A) if the immediately preceding distribution date was a seller share
event distribution date, all of the mortgages trustee retained
principal receipts to Funding 2 and Funding pro rata according to
their respective shares of the trust property as determined
pursuant to the mortgages trust deed; and then
(B) with no order of priority between them but in proportion to the
respective amounts due to Funding, Funding 2 and the seller
according to the Funding share percentage of the trust property,
the Funding 2 share percentage of the trust property and the seller
share percentage of the trust property, respectively, until the
Funding share and Funding 2 share of the trust property are zero,
even though those payments may reduce the seller share of the trust
property to an amount less than the minimum seller share.
Notwithstanding the foregoing, if an assignment date or a
contribution date has occurred during the trust calculation period
immediately preceding any such distribution date, the cash manager
will apply all mortgages trustee principal receipts remaining after
(A) above among Funding, Funding 2, and the seller in no order of
priority between them but in proportion to the weighted average
Funding share percentage, the weighted average Funding 2 share
percentage (as calculated pursuant to the mortgage trust deed) and
weighted average seller share percentage, each in respect of
mortgages trustee principal receipts, for that distribution date
until the Funding share and Funding 2 share of the trust property
is zero.
Following the occurrence of an asset trigger event, certain series and
classes of notes will be subject to prepayment risk (that is, they may be
repaid earlier than expected) and other series and classes of notes will be
subject to extension risk (that is, they may be repaid later than expected).
See "RISK FACTORS -- THE OCCURRENCE OF AN ASSET TRIGGER EVENT OR ENFORCEMENT OF
THE ISSUER SECURITY OR THE FUNDING 2 SECURITY MAY ACCELERATE THE REPAYMENT OF
CERTAIN NOTES AND/OR DELAY THE REPAYMENT OF OTHER NOTES".
OVERPAYMENTS
An overpayment in respect of any non-flexible mortgage loan which does not
constitute a capital payment in respect of any mortgage loan will not become
available for distribution to the beneficiaries as principal receipts until the
first distribution date following December 31 of the year in which such
overpayment is received, save to the extent that any such overpayment by a
borrower is applied in reduction of an underpayment by such borrower in respect
of such mortgage loan prior to such date. Any such overpayment shall be
retained in the mortgages trustee GIC account and the cash manager will
maintain a separate ledger to record its receipt and subsequent payment from
time to time. Where any such overpayment has been made in error the
administrator will be authorized to refund the amount of such overpayment to
the relevant borrower at any time prior to December 31 of the year in which
such overpayment was made.
An overpayment in respect of any flexible mortgage loan will not be retained
by the mortgages trustee but will be distributed to the beneficiaries on the
immediately succeeding distribution date as principal receipts.
LOSSES
All losses arising on the mortgage loans (other than any personal secured
loans) will, save as otherwise provided, be applied in reducing proportionately
the Funding share of the trust property, the Funding 2 share of the trust
property and the seller share of the trust property. Save as otherwise
provided, the Funding 2 share of losses will be determined on any distribution
date by multiplying the amount of losses in the immediately preceding trust
calculation period by the Funding 2 share percentage (as determined on the
immediately preceding distribution date) until the Funding 2 share of the trust
property is zero. However, if an assignment date or a contribution date has
occurred during the trust calculation period immediately preceding a
distribution date, then the amount of
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losses shall be multiplied by the weighted average Funding 2 share percentage
(as calculated on that distribution date) in respect of losses rather than the
current Funding 2 share percentage. The remainder of the losses shall be
allocated to Funding and to the seller.
Losses arising on any personal secured loans in the mortgage portfolio will
be applied first to reduce the seller's share of the trust property (including
the minimum seller share) until the seller's share is reduced to zero, and only
thereafter to reduce the Funding share and the Funding 2 share of the trust
property (on a pro rata basis).
For a description of how losses on the mortgage loans that have been
allocated to Funding 2 on any date will be allocated to the loan tranches of
the global intercompany loan, see "CREDIT STRUCTURE -- PRINCIPAL DEFICIENCY
LEDGER".
DISPOSAL OF TRUST PROPERTY
The trust property is held on trust for the benefit of Funding, Funding 2
and the seller. Subject as provided otherwise in the mortgages trust deed and
the other transaction documents, the mortgages trustee will not be entitled to
dispose of the trust property or create any security interest over the trust
property.
If a Funding 2 intercompany loan event of default occurs and the Funding 2
security trustee enforces the security granted by Funding 2 over its assets
under the Funding 2 deed of charge, including its share of the trust property,
then the Funding 2 security trustee will be entitled, among other things, to
sell Funding 2's rights as a beneficiary under the mortgages trust. For further
information on the security granted by Funding 2 over its assets, see "SECURITY
FOR FUNDING 2'S OBLIGATIONS".
ADDITIONS TO, AND REDUCTIONS IN, THE TRUST PROPERTY
The trust property may be increased from time to time by the assignment of
new mortgage loans and their related security to the mortgages trustee. The
mortgages trustee will hold the new mortgage loans and their related security
on trust for Funding, Funding 2 and the seller according to the terms of the
mortgages trust deed. For further information on the assignment of new mortgage
loans and their related security to the mortgages trustee, see "ASSIGNMENT OF
THE MORTGAGE LOANS AND RELATED SECURITY".
If a borrower makes a re-draw under a flexible mortgage loan included in the
mortgages trust, then the seller will be solely responsible for funding that
re-draw. As a result, the size of the trust property and the seller share of
the trust property will increase by, in the case of a cash re-draw, the
principal amount of such cash re-draw and, in the case of a non-cash re-draw,
the amount of any further contribution made by the seller to the mortgages
trustee of the unpaid interest element in respect of such non-cash re-draw.
However, if an insolvency event occurs in respect of the seller, then the
seller may continue to make payments to the mortgages trustee in an amount
equal to the unpaid interest element in respect of such non-cash re-draw in the
same manner and for the same purposes as described above, but it is not obliged
to do so.
If at any time the administrator agrees on behalf of the seller to a further
advance being made under a mortgage loan included in the mortgage portfolio,
then the seller will be solely responsible for funding that further advance. If
at some future date the seller decides to assign such further advance to the
mortgages trustee or not purchase the mortgage loan that is subject to such
further advance from the mortgages trustee, the trust property and the seller
share of the trust property will increase by the principal amount of the
further advance made by the seller.
In addition to the reductions or deemed reductions to the trust property
described above under "-- ADJUSTMENTS TO TRUST PROPERTY", the application of
any Together Connections Benefit in relation to Together Connections mortgage
loans and any Connections Benefit in relation to Connections mortgage loans
included in the mortgages trust will also reduce the trust property (and, as
described below under
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"-- INCREASING AND DECREASING THE SELLER SHARE OF THE TRUST PROPERTY", the
seller share of the trust property only). This will occur because the
outstanding principal balances of any Together Connections mortgage loans and
Connections mortgage loans included in the trust property (and therefore the
aggregate amount of the trust property) will be reduced from time to time by
the amount of any Together Connections Benefit applied to those Together
Connections mortgage loans and any Connections Benefit applied to those
Connections mortgage loans, as described under "THE MORTGAGE LOANS --
CHARACTERISTICS OF THE MORTGAGE LOANS -- MORTGAGE LOAN PRODUCTS OFFERED BY THE
SELLER".
ARREARS
The aggregate current balance of the mortgage loans in the mortgage
portfolio will be increased at any time by the amount in which the mortgage
loans that have been assigned to the mortgages trustee are in arrears and those
arrears have been capitalized. Such increase shall be allocated to Funding,
Funding 2 and the seller at any time in proportion to their respective
percentage shares in the trust property as determined in respect of the trust
calculation period or interim calculation period, as the case may be, in which
the arrears occur.
INCREASING AND DECREASING THE SELLER SHARE OF THE TRUST PROPERTY
If a borrower makes a non-cash re-draw in respect of any flexible mortgage
loan under the mortgages trust deed the seller as beneficiary has agreed under
the mortgages trust deed to fund such non-cash re-draw by making a further
contribution to the mortgages trustee of an amount equal to the unpaid interest
element in respect of such non-cash re-draw. Accordingly, the trust property
and the seller share of the trust property will increase by an amount equal to
the further contribution made by the seller. Any such payment received by the
mortgages trustee will be treated as revenue receipts in the mortgages trust
and will be distributed on the immediately succeeding distribution date among
the beneficiaries in accordance with the mortgages trust allocation of revenue
receipts.
The seller will also fund cash re-draws in respect of flexible mortgage
loans and further draws under personal secured loans held in the mortgages
trust by payment of the amount of the cash re-draw or further draw to the
relevant borrower. Accordingly, the trust property and the seller share of the
trust property will automatically increase by the amount of any cash re-draw or
further draw so made.
In addition to the reductions or deemed reductions to the seller share of
the trust property described above under "-- ADJUSTMENTS TO TRUST PROPERTY",
the application of any Together Connections Benefit in relation to Together
Connections mortgage loans and any Connections Benefit in relation to
Connections mortgage loans included in the mortgage portfolio that reduces the
trust property will also reduce the seller share of the trust property. This
will occur because the outstanding principal balances of any Together
Connections mortgage loans and Connections mortgage loans included in the
mortgage portfolio (and therefore the aggregate amount of the trust property)
will be reduced from time to time by the amount of any Together Connections
Benefit applied to those Together Connections mortgage loans and any
Connections Benefit applied to those Connections mortgage loans, as described
under "THE MORTGAGE LOANS -- CHARACTERISTICS OF THE MORTGAGE LOANS -- MORTGAGE
LOAN PRODUCTS OFFERED BY THE SELLER". The amount of any such reduction will be
applied against the seller share of the trust property only.
INCREASING THE FUNDING 2 SHARE OF THE TRUST PROPERTY
If Funding 2 borrows a new loan tranche, then it may apply the proceeds of
that loan tranche as an initial contribution or a further contribution to the
mortgages trust to increase
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its beneficial interest in, and the Funding 2 share of, the trust property.
Funding 2 will be permitted to do this only if it meets certain conditions,
including among others:
* that no Funding 2 intercompany loan enforcement notice has been
served under the global intercompany loan agreement;
* that as at the most recent monthly payment date no deficiency was
recorded on the principal deficiency ledger;
* that no event of default in relation to Funding 2 under the
transaction documents shall have occurred which is continuing;
* that the rating agencies have not confirmed in writing to the
mortgages trustee, the security trustee, the Funding 2 security
trustee and the issuer that the proposed increase in the Funding 2
share would cause the then current ratings by the rating agencies
of the existing notes of the issuer and of the Funding issuers to
be reduced, withdrawn or qualified; and
* that, as of the last day of the immediately preceding trust
calculation period, the aggregate current balance of mortgage loans
in the mortgage portfolio which were then in arrears for at least 3
months is less than 4% of the aggregate current balance of all
mortgage loans in the mortgage portfolio as of such date, unless
the rating agencies have confirmed that the then current ratings of
the notes of the issuer and of the Funding issuers will not be
reduced, withdrawn or qualified.
Under the mortgages trust deed, Funding, Funding 2 and the seller have
agreed that principal receipts held by the mortgages trustee on any date in
respect of any initial contribution or further contribution paid by Funding 2
to the mortgages trustee on that date will be allocated and paid by the
mortgages trustee to the seller as initial purchase price or to the seller or
Funding as a special distribution from the mortgages trust on such date whether
or not such date is a distribution date. The payment of any such initial
purchase price or special distribution will reduce the seller share or the
Funding share of the trust property, as applicable.
TERMINATION OF THE MORTGAGES TRUST
The mortgages trust will terminate on the date on which there is no
remaining trust property or, if earlier, such date as may be requested in
writing by the seller to the mortgages trustee being on or after the date on
which each Funding intercompany loan and all amounts owing under the global
intercompany loan agreement have been repaid in full or there is no further
claim under each Funding intercompany loan and the global intercompany loan
agreement or both the Funding share and the Funding 2 share of the trust
property have been reduced to zero, or such other date which may be agreed
between the mortgages trustee, Funding, Funding 2 and the seller so long as all
amounts due from Funding and Funding 2 to their respective secured creditors
have been repaid in full.
RETIREMENT OF MORTGAGES TRUSTEE
The mortgages trustee is not entitled to retire or otherwise terminate its
appointment. The seller, Funding and Funding 2 cannot replace the mortgages
trustee.
GOVERNING LAW
The mortgages trust deed is governed by English law.
THE CONTROLLING BENEFICIARY DEED
Under the terms of the controlling beneficiary deed, Funding, Funding 2, the
security trustee, the Funding 2 security trustee and the seller have agreed as
to, amongst other things, arrangements amongst them in respect of certain
commercial decisions (relating to
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authorizations, consents, waivers, instructions or other acts) to be made from
time to time in respect of the transaction documents.
If there is a conflict of interest between the Funding beneficiaries and/or
the Funding security trustees in respect of directing the mortgages trustee or
the exercising of any rights, powers, discretions or consents under the
transaction documents then, pursuant to the terms of the controlling
beneficiary deed, the Funding beneficiaries and/or the Funding security
trustees agree to act in accordance with the controlling directions. The seller
agrees that, where necessary, it shall provide directions to the mortgages
trustee that are consistent with the controlling directions.
For the purposes of the previous paragraph, "CONTROLLING DIRECTIONS" means:
(a) in respect of the Funding beneficiaries, in all cases, the Funding
beneficiary representing the issuer(s) with the highest ranking
class of notes then outstanding, and if each Funding beneficiary
represents issuers with the same class as their highest ranking
class, the Funding beneficiary representing the issuer(s) with the
greatest principal amount outstanding of the highest ranking class
of notes; and
(b) in respect of the Funding security trustees, in all cases, the
directions of:
(i) in relation to the Funding issuers, the related note trustee(s)
for the holders of the highest ranking class of notes
outstanding; and
(ii)in relation to us, the issuer security trustee,
and if there is any conflict between the controlling directions due
to two or more issuers (for the purposes of this paragraph, being
any of the Funding issuers and us) having notes from the same class
as their highest ranking class, the directions from the note
trustee(s) (or, in respect of us, the note trustee or, as the case
may be, the issuer security trustee) for the holders of the
greatest aggregate principal amount outstanding of the highest
ranking class of notes will prevail.
For the purposes of (a) and (b):
* all denominations of the principal amount outstanding of any note
shall be calculated in sterling and where the principal amount
outstanding of any note of any Funding issuer or us is not
denominated in sterling it shall be converted into sterling at the
rate specified in the hedging agreements applicable to such note;
and
* the highest ranking class of notes outstanding shall mean the class
A notes (for so long as there are class A notes outstanding), the
class B notes (so long as there are no class A notes outstanding),
the class M notes (so long as there are neither class A notes nor
class B notes outstanding), the class C notes (so long as there are
neither class A notes, class B notes nor class M notes outstanding)
or (in our case only) the class D notes (so long as there are
neither class A notes, class B notes, class M notes or class C
notes outstanding).
The controlling beneficiary deed is governed by English law.
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THE GLOBAL INTERCOMPANY LOAN AGREEMENT
The following section describes, the material terms of the global
intercompany loan agreement. The description does not purport to be complete
and is subject to the provisions of the global intercompany loan agreement, a
form of which has been filed as an exhibit to the registration statement of
which this prospectus is a part.
THE FACILITY
Under the terms of the global intercompany loan agreement, the issuer will
lend to Funding 2, from time to time on the relevant closing date for each
series and class of notes an aggregate amount in sterling equal to the proceeds
of the issue of such notes. Each such advance of funds will be a separate loan
tranche under the global intercompany loan agreement. Each loan tranche will
relate to a particular series and class of notes. The loan tranche supplement
will set forth the terms of each loan tranche. For this purpose, the proceeds
of notes in a specified currency other than sterling will be converted into
sterling at the relevant specified currency exchange rate. Funding 2 will then
use the proceeds of each loan tranche to:
* make contributions (excluding deferred contributions) to the
mortgages trustee to acquire and/or increase its beneficial
interest in the trust property pursuant to the mortgages trust
deed;
* fund the Funding 2 reserve fund or to make a deposit into the
Funding 2 GIC account; and/or
* make a payment back to us to refinance an existing loan tranche.
Upon receipt of a contribution from Funding 2 which constitutes an initial
contribution, the mortgages trustee will pay such funds to the seller as an
initial purchase price. Upon receipt of a contribution from Funding 2 which
constitutes a further contribution, the mortgages trustee (as directed by
Funding 2) will pay such funds to the seller and/or Funding as a special
distribution, which will reduce the seller share and/or the Funding share (as
applicable) of the trust property. The global intercompany loan agreement is
governed by English law.
LOAN TRANCHE RATINGS ASSIGNED TO THE LOAN TRANCHES
The designated loan tranche ratings of the AAA loan tranches reflect the
ratings expected to be assigned to any class A notes, by the rating agencies on
the relevant closing date except that money market classes will have different
short-term ratings. The designated loan tranche ratings of the AA loan tranches
reflect the rating expected to be assigned to any class B notes by the rating
agencies on the relevant closing date. The designated loan tranche ratings of
the A loan tranches reflect the rating expected to be assigned to any class M
notes by the rating agencies on the loan tranches on the relevant closing date.
The designated ratings of the BBB loan tranches reflect the rating expected to
be assigned to any class C notes by the rating agencies on the relevant closing
date. The designated loan tranche ratings of the BB tranches reflect the rating
expected to be assigned to any class D notes by the rating agencies on the
relevant closing date. If, after any closing date, the rating agencies
subsequently change the ratings assigned to a series and class of notes, then
this will not affect the loan tranche ratings of the related loan tranche under
the global intercompany loan agreement.
ISSUANCE OF LOAN TRANCHES
We may advance loan tranches to Funding 2 and issue corresponding series and
classes of notes from time to time without obtaining the consent of existing
noteholders. We will not be obliged to advance loan tranches to Funding 2
unless on the applicable closing date certain conditions have been met,
including:
(a) the related series and class of notes has been issued and the
proceeds have been received by us or on our behalf;
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(b) one or more deeds of accession relating to the Funding 2 deed of
charge have been executed by the parties to the Funding 2 deed of
charge;
(c) each of the applicable transaction documents has been executed by
the relevant parties to those documents; and
(d) Funding 2 has delivered a solvency certificate to the Funding 2
security trustee in form and substance satisfactory to the Funding
2 security trustee.
REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS
The global intercompany loan agreement contains representations, warranties
and undertakings given by Funding 2 to the issuer.
The undertakings include, among others, the following:
* it will not create or permit to subsist any security interest over
or in respect of any of its assets (unless arising by operation of
law) other than as provided for pursuant to the transaction
documents;
* it will not sell, assign, transfer, lease or otherwise dispose of
or grant any option over all or any of its assets, properties or
undertakings or any interest, estate, right, title or benefit to or
in such assets, properties or undertakings other than as provided
for pursuant to the transaction documents;
* it will not enter into any amalgamation, demerger, merger or
reconstruction, nor acquire any assets or business nor make any
investments other than as contemplated in the transaction
documents;
* except as provided or contemplated under the transaction documents
it will not incur any indebtedness or give any guarantee or
indemnity in respect of any obligation of any other person;
* it will not pay any dividend or make any other distribution in
respect of any of its shares other than in accordance with the
Funding 2 deed of charge, or issue any new shares or alter any
rights attaching to its issued shares as at the date of the global
intercompany loan agreement;
* it will not carry on any business or engage in any activity other
than as contemplated by the transaction documents or which is not
incidental to or necessary in connection with any of the activities
in which the transaction documents provide or envisage that Funding
2 will engage; and
* save for the issuer (and any other Funding 2 issuer created in the
future), it will not have any subsidiaries or subsidiary
undertakings as defined in the Companies Act 1985 (as amended).
PAYMENT OF INTEREST
Payment of interest and fees on each loan tranche made under the global
intercompany loan agreement will be made only from and to the extent of
distributions by the mortgages trustee of amounts constituted from revenue
receipts, to Funding 2 in respect of the Funding 2 share of the trust property.
Such payments of interest and fees will be made on loan payment dates in the
priorities set forth in "CASHFLOWS -- DISTRIBUTION OF FUNDING 2 AVAILABLE
REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING 2 SECURITY".
The interest rates applicable to the loan tranches from time to time will be
determined by reference to LIBOR for three-month sterling deposits or, for some
loan tranches, such other sterling LIBOR rate as may be specified in the
applicable loan tranche supplement (other than, in each case, in respect of the
first interest period) plus or minus, in each case, a margin which may differ
for each separate loan tranche. Notwithstanding the previous sentence,
following the occurrence of any of the events specified in items (2) and (3)
under "-- DUE DATES OF LOAN TRANCHES", the interest rate appliable to the
relevant loan tranche will be determined by reference to LIBOR for one-
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month sterling deposits plus or minus the applicable margin. LIBOR for an
interest period will be determined on the date(s) specified in the applicable
loan tranche supplement.
Subject as provided above and to the limited recourse provisions described
below, in addition, on each loan payment date or as and when required, Funding
2 will pay an additional fee to the issuer. This fee will be equal to the
amount required by the issuer to pay or provide for certain other amounts (but
excluding interest and principal due on the notes and tax that can be met out
of the issuer's profits) if any, falling due on that loan payment date as set
forth in the items under "CASHFLOWS -- DISTRIBUTION OF ISSUER AVAILABLE REVENUE
RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY" or in the relevant items
under such other issuer priority of payments as may apply on that loan payment
date.
REPAYMENT OF THE GLOBAL INTERCOMPANY LOAN
Repayment of principal on each loan tranche made under the global
intercompany loan agreement will be made only from and to the extent of
distributions by the mortgages trustee, of amounts constituted from principal
receipts, to Funding 2 in respect of the Funding 2 share of the trust property.
Such principal repayments will be made in respect of each loan tranche on the
dates and in the priorities set forth in "CASHFLOWS -- DISTRIBUTION OF FUNDING
2 AVAILABLE PRINCIPAL RECEIPTS" and in the applicable prospectus supplement.
DUE DATES OF LOAN TRANCHES
The loan tranche supplement for each loan tranche will set forth (i) the
bullet repayment dates, (ii) the scheduled repayment dates, (iii) the
controlled repayment dates or (iv) the loan payment date on which an original
pass-through loan tranche is scheduled to be paid, as applicable. Each such
date will be the same as the equivalent dates for the related series and class
of notes. A loan tranche (or a part thereof) will become "due" on the earlier
to occur of:
(1) any date specified in relation to the same in the loan tranche
supplement;
(2) the date upon which a pass-through trigger event occurs; and
(3) the date upon which a step-up date, if any, occurs in relation to
the relevant loan tranche.
In each case, when a loan tranche becomes due, it shall continue to be due
until it is fully repaid. If there are insufficient funds available to repay a
loan tranche on a loan payment date upon which that loan tranche has become or
remains due, then the shortfall will be repaid on subsequent loan payment dates
from Funding 2 available principal receipts until that loan tranche is fully
repaid.
Funding 2 may, as a general matter, make a repayment of principal on a loan
tranche if, following such repayment, each tier of loan tranches then
outstanding retains its required amount of subordination. This general
requirement is expressed in the "repayment tests" set out in part B of Rule (1)
in "CASHFLOWS -- DISTRIBUTION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS PRIOR
TO THE ENFORCEMENT OF THE FUNDING 2 SECURITY -- Rules for application of
Funding 2 principal receipts" below, which must be satisfied in respect of any
repayment of principal on a loan tranche.
LIMITED RECOURSE
Funding 2 will only be obliged to pay amounts to the issuer in respect of
any loan tranche under the global intercompany loan agreement to the extent it
has funds to do so after making payments ranking in priority to amounts due on
such loan tranches (including amounts due on loan tranches of a more senior
ranking).
If, on the latest occuring final repayment date of any loan tranche advanced
under the global intercompany loan agreement, there is a shortfall between the
amount of interest and/or principal due on all loan tranches then outstanding
and the amount
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available to Funding 2 to make that payment, then that shortfall shall become
immediately due and payable irrespective of whether Funding 2 has the funds to
make the payments then due.
Following enforcement of the Funding 2 security and distribution of all
proceeds of such enforcement in accordance with the terms of the Funding 2 deed
of charge, all outstanding claims of the issuer and the issuer security trustee
against Funding 2 will be extinguished.
FUNDING 2 INTERCOMPANY LOAN EVENTS OF DEFAULT
The global intercompany loan agreement will contain events of default (each,
a "FUNDING 2 INTERCOMPANY LOAN EVENT OF DEFAULT") including, among others, the
following events:
* Funding 2 does not pay any amount payable under the global
intercompany loan agreement for a period of 5 London business days
after such amount has become due and payable in accordance with the
terms of the global intercompany loan agreement; or
* Funding 2 does not comply in any material respect with any of its
obligations under the transaction documents (except for its payment
obligations under the global intercompany loan agreement) and, if
capable of remedy, such non-compliance is not remedied within 20
London business days of Funding 2 becoming aware of it or of
receiving notice from the Funding 2 security trustee requiring it
to be remedied; or
* a representation or warranty of Funding 2 made or repeated in
connection with any of the transaction documents is incorrect in
any material respect when made or deemed to be made or repeated; or
* an insolvency event occurs in relation to Funding 2; or
* it is, or becomes, unlawful for Funding 2 to perform its
obligations under any of the transaction documents to which it is a
party; or
* the Funding 2 deed of charge is no longer binding or enforceable
against Funding 2 or is no longer effective to create the security
intended to be created by it.
If a Funding 2 intercompany loan event of default occurs and is continuing
under the global intercompany loan agreement then the Funding 2 security
trustee may, by delivery of a Funding 2 intercompany loan enforcement notice to
Funding 2, declare all loan tranches outstanding under the global intercompany
loan agreement to be immediately due and payable and/or declare all loan
tranches outstanding under the global intercompany loan agreement to be due and
payable on demand of the Funding 2 security trustee.
You should be aware that the non-payment by Funding 2 of any amount due
under the global intercompany loan agreement in circumstances where Funding 2
does not have sufficient funds available to make the relevant payment to the
issuer or where the repayment tests are not satisfied will not be a Funding 2
intercompany loan event of default except on the latest occurring final
repayment date of any loan tranche advanced under the global intercompany loan
agreement. Our ability to repay each series and class of notes will depend,
among other things, upon payments received by the issuer from Funding 2 under
the related loan tranches pursuant to the global intercompany loan agreement.
See "RISK FACTORS -- FUNDING 2 IS NOT REQUIRED TO MAKE PAYMENTS ON THE GLOBAL
INTERCOMPANY LOAN IF IT DOES NOT HAVE ENOUGH MONEY TO DO SO, WHICH COULD
ADVERSELY AFFECT THE PAYMENT ON THE NOTES".
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OTHER FUNDING 2 INTERCOMPANY LOAN AGREEMENTS
Other Funding 2 issuers may be established by Funding 2 for the purpose of
issuing notes to investors and using the proceeds thereof to make Funding 2
intercompany loans to Funding 2. The issuance of notes by any such other
Funding 2 issuer and the making of the related Funding 2 intercompany loans
will only be permitted if certain conditions precedent are satisfied,
including, among others, that the ratings of your notes will not be reduced,
withdrawn or qualified at the time of the issuance of such notes (see "RISK
FACTORS -- IF FUNDING 2 ENTERS INTO OTHER FUNDING 2 INTERCOMPANY LOANS, SUCH
OTHER FUNDING 2 INTERCOMPANY LOANS AND ACCOMPANYING NOTES MAY BE REPAID PRIOR
TO THE GLOBAL INTERCOMPANY LOAN AND THE NOTES" and "RISK FACTORS -- OTHER
FUNDING 2 ISSUERS MAY SHARE IN THE SAME SECURITY GRANTED BY FUNDING 2 TO US,
AND THIS MAY ULTIMATELY CAUSE A REDUCTION IN THE PAYMENTS YOU RECEIVE ON THE
NOTES").
FUNDING 2'S BANK ACCOUNTS
Funding 2 currently maintains the "Funding 2 GIC account" in its name with
Northern Rock. A separate "Funding 2 reserve ledger" is maintained to record
amounts standing to the credit of the Funding 2 reserve fund from time to time.
See "CREDIT STRUCTURE -- FUNDING 2 RESERVE FUND".
On each distribution date the Funding 2 share of each of the mortgages
trustee available revenue receipts and mortgages trustee available principal
receipts payable to Funding 2 under the mortgages trust will be initially
deposited in the Funding 2 GIC account. On each distribution date any balance
remaining in the Funding 2 cash accumulation ledger will be initially deposited
in the Funding 2 GIC account. On each monthly payment date, amounts required to
meet Funding 2's obligations to its various creditors will, with the consent of
the Funding 2 security trustee, be transferred from the Funding 2 GIC account
to the "FUNDING 2 TRANSACTION ACCOUNT" and applied by the cash manager in
accordance with the relevant Funding 2 priority of payments. Amounts
representing Funding 2's profits will be retained in the Funding 2 transaction
account.
The Funding 2 GIC account referred to above will be maintained with Northern
Rock but may be required to be transferred to another bank in certain
circumstances, including if the short-term, unguaranteed and unsecured ratings
ascribed to Northern Rock fall below "A-1+" (or in the circumstances described
below, "A-1") by Standard & Poor's, "F1" by Fitch and "P-1" by Moody's,
provided that where the relevant deposit amount is less than 20% of the
aggregate principal amount outstanding of the notes issued by the issuer and
the Funding issuers, then the short-term, unguaranteed and unsecured rating
required to be ascribed to Northern Rock by Standard & Poor's shall be at least
"A-1".
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CASHFLOWS
Distributions of Funding 2 available revenue receipts prior to the
enforcement of the Funding 2 security
DEFINITION OF FUNDING 2 AVAILABLE REVENUE RECEIPTS
"FUNDING 2 AVAILABLE REVENUE RECEIPTS" in respect of any monthly payment
date will be calculated by the cash manager on the distribution date
immediately preceding such monthly payment date and will be an amount equal to
the sum of:
(1) all mortgages trustee available revenue receipts distributed to
Funding 2 during the interest period ending on the relevant monthly
payment date;
(2) other net income of Funding 2 including all amounts of interest
received on the Funding 2 GIC account and the Funding 2 transaction
account, and/or all income from authorized investments, on the
distribution date(s) during the interest period ending on such
monthly payment date, in each case to be received on or prior to
such monthly payment date; and
(3) amounts received from the Funding 2 basis rate swap provider under
the Funding 2 basis rate swap agreement (excluding swap collateral
standing to the credit of the Funding 2 swap collateral accounts)
and any swap termination payments (other than such swap termination
payments applied or to be applied by Funding 2 in the purchase of
one or more replacement hedging transactions) recovered by Funding
2 under the Funding 2 basis rate swap agreement);
(4) (only to the extent required after making the determinations set
out in rule (2) of "RULES FOR APPLICATION OF FUNDING 2 AVAILABLE
REVENUE RECEIPTS") the aggregate of amounts standing to the credit
of the Funding 2 principal ledger or the Funding 2 cash
accumulation ledger (as applicable) which are to be applied on the
relevant monthly payment date to pay items (H), (J), (M), (O), and
(Q) of the Funding 2 pre-enforcement revenue priority of payments;
(5) the amount available to be drawn under the Funding 2 reserve fund,
subject to any limits or conditions on the purposes for which the
Funding 2 reserve fund may be utilized;
(6) the amount available to be drawn under the Funding 2 liquidity
reserve fund (if any) subject to any limits or conditions on the
purposes for which the Funding 2 liquidity reserve fund may be
utilized; and
(7) in so far as is needed, any amount available to be drawn under the
Funding 2 liquidity facility (if any) for the payment of interest
and expenses.
The limits and conditions on the utilization of the Funding 2 reserve fund
and the Funding 2 liquidity reserve fund, if any, are described under "CREDIT
STRUCTURE -- FUNDING 2 RESERVE FUND" and "CREDIT STRUCTURE -- FUNDING 2
LIQUIDITY RESERVE FUND"
RULES FOR APPLICATION OF FUNDING 2 AVAILABLE REVENUE RECEIPTS
The Funding 2 deed of charge sets out certain rules for the application by
Funding 2, or the cash manager on its behalf, of Funding 2 available revenue
receipts on each monthly payment date. The principal rules are as follows:
(1) If on any monthly payment date any Funding 2 available revenue
receipts are applied by Funding 2 in reducing any deficiency
recorded on the principal deficiency sub-ledger of any tier of loan
tranches (but only to the extent of any deficiency which has arisen
as a result of (i) losses on the mortgage loans allocated by
Funding 2 to that principal deficiency sub-ledger and/or (ii) the
application of Funding 2 available principal receipts to fund the
Funding 2 liquidity reserve fund but not as a result of any other
principal deficiency of
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Funding 2), then the Funding 2 available revenue receipts, so
applied shall constitute repayments of principal under the relevant
loan tranches and shall reduce the outstanding principal balance of
those loan tranches accordingly.
(2) To the extent that, on any monthly payment date Funding 2 available
revenue receipts will be insufficient to pay items (H), (J), (M),
(O) and (Q) of the Funding 2 pre-enforcement revenue priority of
payments, then the cash manager shall provide for that deficit by
applying amounts standing to the credit of (a) first, the Funding 2
principal ledger and (b) second, any amounts standing to the credit
of the Funding 2 cash accumulation ledger. Funding 2 principal
receipts may not be used to pay interest on any loan tranche if
such payment would create or increase a principal deficiency in
respect of a higher ranking tier of loan tranches. For the purposes
of this rule, the amount of Funding 2 available principal receipts
that may be applied to any deficit of Funding 2 available revenue
receipts will be reduced by the amount that would be available to
be drawn from the issuer reserve fund to cover any deficit in
issuer available revenue receipts to pay items (A) through (I) of
the issuer pre-enforcement revenue priority of payments, if no
Funding 2 available principal receipts were to be applied to such
deficit in Funding 2 available revenue receipts.
(3) The amount of Funding 2 available revenue receipts that may be
applied on any monthly payment date to pay items (B), (S), (U) and
(V) (to the extent such amounts are paid to the issuer) of the
Funding 2 pre-enforcement revenue priority of payments will be
reduced by the amount of interest earned on the issuer GIC account
and any and all income from authorized investments made on behalf
of the issuer, to the extent that such interest and income is
available to the issuer on such monthly payment date (subject to
the relevant issuer priority of payments) to pay the obligations of
the issuer referred to in items (B), (S), (U) and (V) (to the
extent that such amounts are then payable by the issuer).
DISTRIBUTION OF FUNDING 2 AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF
THE FUNDING 2 SECURITY
This section sets out the order of priority of payments of Funding 2
available revenue receipts as at the Funding 2 program date.
On each monthly payment date or, in respect of amounts due to third parties
by Funding 2 under item (C), when due, prior to enforcement of the Funding 2
security, the cash manager will, subject to the rules for application of
Funding 2 available revenue receipts, apply Funding 2 available revenue
receipts, in the following order of priority (the "FUNDING 2 PRE-ENFORCEMENT
REVENUE PRIORITY OF PAYMENTS"):
(A) first, to pay amounts due to the Funding 2 security trustee
(together with interest and (to the extent not already inclusive)
VAT on those amounts) and to provide for any amounts due or to
become due during the following interest period to the Funding 2
security trustee under the Funding 2 deed of charge or any other
transaction document;
(B) second, to pay amounts due to the issuer in respect of the issuer's
obligations specified in items (A) through (D) of the issuer pre-
enforcement revenue priority of payments or, as the case may be,
items (A) through (C) of the issuer post-enforcement priority of
payments;
(C) third, to pay amounts due to any third party creditors of Funding 2
(other than those referred to later in this order of priority of
payments or in the Funding 2 pre-enforcement principal priority of
payments) of which the cash manager has notice prior to the
relevant monthly payment date, which amounts have been incurred
without breach by Funding 2 of the transaction documents to which
it is a party (and for which payment has not been provided for
elsewhere) and to
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provide for any such amounts expected to become due and payable by
Funding 2 during the following interest period and to pay or
discharge any liability of Funding 2 for corporation tax on any
chargeable income or gain of Funding 2;
(D) fourth, to pay amounts due to the Funding 2 liquidity facility
provider under the Funding 2 liquidity facility agreement, if any
(except for amounts drawn thereunder to make Funding 2 liquidity
facility principal payments and any Funding 2 liquidity facility
subordinated amounts);
(E) fifth, towards payment of amounts due to the cash manager under the
cash management agreement (together with (to the extent not already
inclusive) VAT on those amounts);
(F) sixth, in no order of priority among them but in proportion to the
respective amounts due, towards payment of amounts, if any, due to
(i) the account bank under the terms of the Funding 2 bank account
agreement and (ii) the corporate services provider under the terms
of the corporate services agreement;
(G) seventh, in no order of priority among them but in proportion to
the respective amounts due, towards payment of all amounts
(including such part of any swap termination payment) due under the
Funding 2 basis rate swaps to the Funding 2 basis rate swap
provider but excluding any Funding 2 basis rate swap excluded
termination amount;
(H) eighth, in no order of priority among them but in proportion to the
respective amounts due, towards payment of interest due and payable
on the AAA loan tranches;
(I) ninth, towards a credit to the AAA principal deficiency sub-ledger
in an amount sufficient to eliminate any debit on that sub-ledger;
(J) tenth, in no order of priority among them but in proportion to the
respective amounts due, towards payment of interest due and payable
on the AA loan tranches;
(K) eleventh, after taking account of the replenishment of the Funding
2 liquidity reserve fund on the relevant monthly payment date from
Funding 2 available principal receipts, replenishing the Funding 2
liquidity reserve fund, if any, up to the Funding 2 liquidity
reserve required amount but only to the extent that there are AAA
loan tranches and AA loan tranches outstanding on such monthly
payment date;
(L) twelfth, towards a credit to the AA principal deficiency sub-ledger
in an amount sufficient to eliminate any debit on that sub-ledger;
(M) thirteenth, in no order of priority among them but in proportion to
the respective amounts due, towards payment of interest due and
payable on the A loan tranches;
(N) fourteenth, towards a credit to the A principal deficiency sub-
ledger in an amount sufficient to eliminate any debit on that sub-
ledger;
(O) fifteenth, in no order of priority among them but in proportion to
the respective amounts due, towards payment of interest due and
payable on the BBB loan tranches;
(P) sixteenth, towards a credit to the BBB principal deficiency sub-
ledger in an amount sufficient to eliminate any debit on that sub-
ledger;
(Q) seventeenth, in no order of priority among them but in proportion
to the respective amounts due, towards payment of interest due and
payable on the BB loan tranches;
(R) eighteenth, towards a credit to the BB principal deficiency sub-
ledger in an amount sufficient to eliminate any debit on that sub-
ledger;
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(S) nineteenth, to pay amounts due to the issuer in respect of the
issuer's obligations to make payments under the start-up loan
agreement(s) specified in item (J) of the issuer pre-enforcement
revenue priority of payments or, as the case may be, item (O) of
the issuer post-enforcement priority of payments;
(T) twentieth, after taking account any replenishment of the Funding 2
reserve fund on the relevant monthly payment date from Funding 2
available principal receipts, to credit the Funding 2 reserve
ledger up to an amount no less than the Funding 2 reserve required
amount (as defined in "CREDIT STRUCTURE -- FUNDING 2 RESERVE FUND")
or if an arrears or step-up trigger event has occurred, to credit
the Funding 2 reserve ledger with such additional amount as set out
in "CREDIT STRUCTURE -- FUNDING 2 RESERVE FUND";
(U) twenty-first, to the issuer in respect of its obligations (if any)
to make a swap termination payment to any issuer swap provider (but
excluding any issuer swap excluded termination amount);
(V) twenty-second, in no order of priority among them but in proportion
to the respective amounts due, to pay amounts due (without double
counting) to:
* the issuer in respect of its obligations (if any) to pay any
issuer swap excluded termination amount;
* the Funding 2 liquidity facility provider, if any, any Funding
2 liquidity facility subordinated amounts due under the Funding
2 liquidity facility agreement;
* the Funding 2 basis rate swap provider in respect of any
Funding 2 basis rate swap excluded termination amount.
(W) twenty-third, towards payment to Funding 2 of an amount equal to
0.01% per annum of the Funding 2 available revenue receipts
(excluding, for this purpose, amounts standing to the credit of the
Funding 2 reserve ledger), which amount will be retained by Funding
2 as profit less corporation tax in respect of those profits
provided for or paid at item (C) above (which amounts may be
distributed to the shareholders of Funding 2 by way of dividend);
(X) twenty-fourth, towards payment of any deferred contribution due to
the mortgages trustee pursuant to the terms of the mortgages trust
deed; and
(Y) last, any excess to Funding 2, which may (subject to applicable
laws) be distributed by Funding 2 to its shareholders by way of
dividend.
DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY
DEFINITION OF ISSUER AVAILABLE REVENUE RECEIPTS
"ISSUER AVAILABLE REVENUE RECEIPTS", in respect of any monthly payment date,
will be calculated by the issuer cash manager on the distribution date
immediately preceding that monthly payment date and will be an amount equal to
the sum of:
* interest, fees and any other amount (including the amounts standing
to the credit of the issuer expense sub-ledger but excluding
principal) paid by Funding 2 on or prior to the relevant monthly
payment date in respect of the global intercompany loan;
* other net income of the issuer including all amounts of interest
received on the issuer GIC account and the issuer transaction
account and/or all income from authorized investments (but
excluding swap collateral (if any) standing to the credit of the
issuer swap collateral account), in each case to be received on or
prior to the relevant monthly payment date; and
* the amounts available to be drawn under the issuer reserve fund,
subject to any limits or conditions on the purposes for which the
issuer reserve fund may be utilized (see "CREDIT STRUCTURE --
ISSUER RESERVE FUND").
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On each monthly payment date, all Funding 2 available revenue receipts
received by us from Funding 2:
(i) in respect of items (B), (S), (U) and (V) of the Funding 2 pre-
enforcement revenue priority of payments shall be credited to the
issuer expense sub-ledger; and
(ii) being interest paid on a loan tranche shall be credited to a sub-
ledger (in respect of the related series and class of notes) to the
issuer revenue ledger.
On each distribution date the issuer cash manager will calculate whether
there will be an excess or a deficit of issuer available revenue receipts to
pay items (A) through (N) of the issuer pre-enforcement revenue priority of
payments.
DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY
The issuer deed of charge sets out the order of priority of distribution by
the issuer cash manager, prior to the enforcement of the issuer security, of
issuer available revenue receipts on each monthly payment date. The order of
priority will be as described in this section as supplemented by the prospectus
supplement related to each series of notes.
On (i) each monthly payment date or (ii) the date when due in respect of
amounts due to third parties under paragraph (C) below, the issuer cash manager
will apply issuer available revenue receipts in the following order of priority
(the "ISSUER PRE-ENFORCEMENT REVENUE PRIORITY OF PAYMENTS"):
(A) first, in no order of priority among them but in proportion to the
amounts due, to pay amounts due to the note trustee and the issuer
security trustee, together with interest and (to the extent not
already inclusive) VAT on those amounts, and to provide for any
amounts due or to become due during the following interest period
to the note trustee and the issuer security trustee, under the
trust deed, the issuer deed of charge or any other transaction
document to which the issuer is a party;
(B) second, in no order of priority among them but in proportion to the
respective amounts due, to pay amounts due to the agent bank, the
paying agents, the transfer agent and the registrar together with
interest and (to the extent not already inclusive) VAT on those
amounts, and to provide for any costs, charges, liabilities and
expenses due or to become due during the following interest period
to the agent bank, the paying agents, the transfer agent and the
registrar, under the paying agent and agent bank agreement;
(C) third, to pay amounts due to any third party creditors of the
issuer (other than those referred to later in this order of
priority of payments or in the issuer pre-enforcement principal
priority of payments), of which the issuer cash manager has notice
prior to the relevant monthly payment date, which amounts have been
incurred without breach by the issuer of the transaction documents
to which it is a party and for which payment has not been provided
for elsewhere and to provide for any such amounts expected to
become due and payable during the following interest period by the
issuer and to pay or discharge any liability of the issuer for
corporation tax on any chargeable income or gain of the issuer;
(D) fourth, in no order or priority among them but in proportion to the
respective amounts due, to pay amounts due to the issuer cash
manager under the issuer cash management agreement, the corporate
services provider under the corporate services agreement and the
issuer account bank under the issuer bank account agreement
together with (to the extent not already inclusive) VAT on those
amounts, and to provide for any amounts due, or to become due in
the immediately succeeding interest period, to the issuer cash
manager under the
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issuer cash management agreement, to the corporate services
provider under the corporate services agreement and to the issuer
account bank under the issuer bank account agreement;
(E) fifth, from amounts (excluding principal) received by the issuer
from Funding 2 in respect of each AAA loan tranche (and, in respect
of (ii) below, the amounts (if any), excluding principal, received
from the issuer swap provider(s) under the issuer swap agreement(s)
in respect of the related series and class of notes):
(i) to pay the amounts due and payable to the relevant issuer swap
provider(s) (if any) in respect of the related series and class
of class A notes (including any swap termination payment but
excluding any issuer swap excluded termination amount) in
accordance with the terms of the relevant issuer swap
agreement(s);
(ii)to pay interest due and payable (if any) on the related series
and class of class A notes on such monthy payment date;
(F) sixth, from amounts (excluding principal) received by the issuer
from Funding 2 in respect of each AA loan tranche (and, in respect
of (ii) below, the amounts (if any), excluding principal, received
from the issuer swap provider(s) under the issuer swap agreement(s)
in respect of the related series and class of notes):
(i) to pay the amounts due and payable to the relevant issuer swap
provider(s) (if any) in respect of the related series and class
of class B notes (including any swap termination payment but
excluding any issuer swap excluded termination amount) in
accordance with the terms of the relevant issuer swap
agreement(s);
(ii)to pay interest due and payable (if any) on the related series
and class of class B notes on such monthy payment date;
(G) seventh, from amounts (excluding principal) received by the issuer
from Funding 2 in respect of each A loan tranche (and, in respect
of (ii) below, the amounts (if any), excluding principal, received
from the issuer swap provider(s) under the issuer swap agreement(s)
in respect of the related series and class of notes):
(i) to pay the amounts due and payable to the relevant issuer swap
provider(s) (if any) in respect of the related series and class
of class M notes (including any swap termination payment but
excluding any issuer swap excluded termination amount) in
accordance with the terms of the relevant issuer swap
agreement(s);
(ii)to pay interest due and payable (if any) on the related series
and class of class M notes on such monthy payment date;
(H) eighth, from amounts (excluding principal) received by the issuer
from Funding 2 in respect of each BBB loan tranche (and, in respect
of (ii) below, the amounts (if any), excluding principal, received
from the issuer swap provider(s) under the issuer swap agreement(s)
in respect of the related series and class of notes):
(i) to pay the amounts due and payable to the relevant issuer swap
provider(s) (if any) in respect of the related series and class
of class C notes (including any swap termination payment but
excluding any issuer swap excluded termination amount) in
accordance with the terms of the relevant issuer swap
agreement(s);
(ii) to pay interest due and payable (if any) on the related series
and class of class C notes on such monthy payment date;
(I) ninth, from amounts (excluding principal) received by the issuer
from Funding 2 in respect of each BB loan tranche (and, in respect
of (ii) below, the amounts (if any), excluding principal, received
from the issuer swap provider(s) under the issuer swap agreement(s)
in respect of the related series and class of notes):
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(i) to pay the amounts due and payable to the relevant issuer swap
provider(s) (if any) in respect of the related series and class
of class D notes (including any swap termination payment but
excluding any issuer swap excluded termination amount) in
accordance with the terms of the relevant issuer swap
agreement(s);
(ii) to pay interest due and payable (if any) on the related series
and class of class D notes on such monthly payment date;
(J) tenth, in no order of priority among them but in proportion to the
respective amounts due, towards payment of:
(i) interest amounts due to the start-up loan provider(s); and
(ii) principal amounts due to the start-up loan provider(s) (to the
extent of issuance fees received from Funding 2 under the
global intercompany loan agreement);
under the start-up loan agreement(s);
(K) eleventh, after taking account of any replenishment of the issuer
reserve fund on the relevant monthly payment date from issuer
available principal receipts, to credit the issuer reserve ledger
up to an amount no less than the issuer reserve required amount (as
defined in "CREDIT STRUCTURE -- ISSUER RESERVE FUND");
(L) twelfth, on the monthly payment date falling in December of each
year, to pay the issuer account bank an amount equal to the amount
of any debit balance in the issuer transaction account as permitted
by the issuer account bank and outstanding at such monthly payment
date;
(M) thirteenth, in no order of priority among them but in proportion to
the respective amounts due, to pay to any issuer swap excluded
termination payments to the issuer swap providers;
(N) fourteenth, in no order of priority among them but in proportion to
the respective amounts due, towards payment of principal amounts
due to the start-up loan provider(s) under the start-up loan
agreement(s);
(O) fifteenth, to pay to the issuer an amount equal to 0.01% per annum
of the interest received under the intercompany loan, which will be
retained by the issuer as profit (which may, subject to applicable
laws, be paid to the shareholders of the issuer as a dividend, less
corporation tax in respect of those profits provided for or paid at
item (C) above; and
(P) last, to pay amounts due to the issuer GIC provider under the
issuer guaranteed investment contract.
Prior to the enforcement of the issuer security, on each monthly payment
date, the amounts standing to the credit of any sub-ledger of the issuer
revenue ledger (in respect of a series and class of notes) may only be applied
by the issuer cash manager to pay the interest and other amounts due in respect
of such series and class of notes under the issuer pre-enforcement revenue
priority of payments provided that:
* to the extent that on any monthly payment date, amounts standing to the
credit of the issuer revenue ledger (excluding amounts standing to the
credit of the sub-ledgers for each series and class of notes) and the
issuer reserve ledger are insufficient to pay items (A) to (D) of the
issuer pre-enforcement revenue priority of payments, then the issuer cash
manager will, in no order of priority among them but in proportion to the
amount required, apply amounts standing to the credit of the sub-ledgers
of the issuer revenue ledger in respect of the class D notes of each
series on such date to meet such shortfall (until the balance of such
sub-ledgers is zero), then amounts standing to the credit of the sub-
ledgers of the issuer revenue ledger in respect of the class C notes of
each series (until the balance of such sub-ledgers is zero), then amounts
standing to the credit of the sub-ledgers of the issuer revenue
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ledger in respect of the class M of notes of each series (until the
balance of such sub-ledgers is zero), then amounts standing to the credit
of the sub-ledgers of the issuer revenue ledger in respect of the class B
notes (until the balance of such sub-ledgers is zero) and then amounts
standing to the credit of the sub-ledgers of the issuer revenue ledger in
respect of the class A notes (until the balance of such sub-ledgers is
zero); and
* where, on a note payment date for a series and class of notes, an amount
standing to the credit of the issuer reserve ledger is applied to pay
interest and other amounts due in respect of such notes under the issuer
pre-enforcement revenue priority of payments, then to the extent that, on
following note payment dates in respect of such notes (and following
payment of interest and other amounts due in respect of such notes),
there remains an amount credited to the sub-ledger to the issuer revenue
ledger in respect of such notes, the issuer cash manager will apply such
amount towards the replenishment of the issuer reserve fund in accordance
with item (K) of the issuer pre-enforcement revenue priority of payments.
To the extent that on any note payment date for a series and class of notes,
amounts standing to the credit of any sub-ledger of the issuer revenue ledger
(in respect of such notes) are insufficient to pay the interest and other
amounts due in respect of such series and class of notes under the issuer pre-
enforcement revenue priority of payments, then:
* the issuer cash manager will firstly apply amounts standing to the
credit of the issuer expense sub-ledger on such date to meet such
shortfall; and
* if amounts standing to the credit of the issuer expense sub-ledger
that are applied in accordance with the previous bullet are
insufficient to meet such shortfall on such date, then the issuer
cash manager will apply amounts standing to the credit of the
issuer reserve ledger on such date to meet such shortfall,
in each case, which are not otherwise required to pay the amounts set forth in
items (A) to (D) of the issuer pre-enforcement revenue priority of payments or
any shortfall in any other sub-ledger of the issuer revenue ledger (in respect
of a more senior class of notes) on such date.
Where a shortfall has arisen on a note payment date in respect of two or
more notes of the same class of any series, the amounts referred to above will
be applied to meet each shortfall in no order of priority among them but in
proportion to the amount required by each series and class of notes.
DISTRIBUTION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT
OF THE FUNDING 2 SECURITY
FUNDING 2 ALLOCATION OF MORTGAGES TRUSTEE PRINCIPAL RECEIPTS
Prior to each distribution date, the cash manager will determine whether
such distribution date is within a cash accumulation period relating to a
bullet repayment loan amount and will ascertain Funding 2's repayment
requirement.
The cash accumulation period will be calculated separately for each bullet
repayment loan amount.
The loan tranche supplement for each bullet loan tranche will set out the
bullet repayment date and bullet repayment loan amount in relation to each such
bullet loan tranche.
"CASH ACCUMULATION PERIOD" means the period beginning on the earlier to
occur of:
(a) the date determined after counting back in time from the bullet
repayment date of the relevant bullet loan repayment amount, the
number of months calculated in respect of the anticipated cash
accumulation period relating to the relevant bullet repayment loan
amount; and
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(b) in relation to an original bullet loan tranche, six months prior to
the bullet repayment date of that original bullet loan tranche;
and ending when Funding 2 has fully repaid the relevant bullet repayment
loan amount.
"ANTICIPATED CASH ACCUMULATION PERIOD" means, on any trust determination
date, the anticipated number of months required to accumulate sufficient
principal receipts to pay the relevant bullet repayment loan amount on its
bullet repayment date 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 bullet repayment loan amount;
K = the aggregate principal amount outstanding on that trust
determination date of:
* each other bullet repayment loan amount that was not fully
repaid on its bullet repayment date and is still outstanding;
and
* each other bullet repayment loan amount, the bullet repayment
date of which falls on or before the bullet repayment date of
the relevant bullet repayment loan amount;
L = the amounts standing to the credit of the Funding 2 cash
accumulation ledger at the start of that trust determination date
which are available to repay bullet repayment loan amounts;
M = means the sum of each monthly CPR on the 12 most recent trust
determination dates which have occurred prior to that date divided
by 12;
N = 0.85; and
O = the aggregate outstanding principal balance of the mortgage loans
included in the mortgage portfolio on the previous trust
determination date.
"MONTHLY CPR" means, on any trust determination date, the total mortgages
trustee principal receipts received by the mortgages trustee during the
immediately preceding trust calculation period divided by the aggregate
outstanding principal balance of the mortgage loans included in the mortgage
portfolio as at the immediately preceding trust determination date.
"CASH ACCUMULATION REQUIREMENT" means on a trust determination date:
* the principal amount outstanding in relation to each bullet
repayment loan amount that is within a cash accumulation period;
* plus amounts due on the next following monthly payment date in
items (A), (B) and (C) of the Funding 2 pre-enforcement principal
priority of payments;
* less the amount standing to the credit of the Funding 2 cash
accumulation ledger at the last monthly payment date (which amount
was not to be distributed on that monthly payment date to fund the
repayment of any bullet loan repayment amount loan tranche).
The "FUNDING 2 CASH ACCUMULATION LEDGER" means a ledger maintained by the
cash manager for Funding 2, which records amounts accumulated by Funding 2 to
pay bullet loan repayment amounts.
"REPAYMENT REQUIREMENT" means, on any trust determination date, the amount,
if any, equal to the sum of:
* the cash accumulation requirement;
* the controlled repayment requirement;
* the scheduled repayment requirement; and
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* the pass-through requirement.
"CONTROLLED REPAYMENT REQUIREMENT" means, on a trust determination date, the
amount required by Funding 2 to repay each controlled repayment loan amount
which is scheduled to be repaid or is otherwise due on any of the three monthly
payment dates immediately following such trust determination date (after taking
into account amounts standing to the credit of the Funding 2 principal ledger
on such trust determination date which are available therefor).
"PASS-THROUGH REQUIREMENT" means, on any trust determination date, the
lesser of:
* the outstanding principal balance of each pass-through loan tranche
(excluding any original bullet loan tranches) which is due on the
next following monthly payment date; and
* the greater of:
(a) the product of:
(i) the Funding 2 share percentage as at the start of the
immediately preceding trust calculation period (provided
that if an assignment date or a contribution date has
occurred during such trust calculation period then the
weighted average Funding 2 share percentage will be
used);
(ii) the aggregate amount of principal receipts received by
the mortgages trustee during the immediately preceding
trust calculation period; and
(iii) the aggregate outstanding principal balance, determined
as of the most recent monthly payment date, of the
pass-through loan tranches (excluding any original bullet
loan tranches) which are due (in the case of Rule (2) on
the next following monthly payment date),
divided by the aggregate outstanding principal balance of the
global intercompany loan as at the most recent monthly payment
date; and
(b) the product of:
(i) the Funding 2 share percentage as at the start of the
immediately preceding trust calculation period (provided
that if an assignment date or a contribution date has
occurred during such trust calculation period then the
weighted average Funding 2 share percentage will be
used);
(ii) the aggregate amount of principal receipts received by
the mortgages trustee during the immediately preceding
trust calculation period;
less
(iii) the sum of the cash accumulation requirement, the
scheduled amortisation requirement and the controlled
amortisation requirement as calculated for such trust
determination date as described above.
"SCHEDULED REPAYMENT REQUIREMENT" means, on a trust determination date, the
amount required by Funding 2 to repay:
* each scheduled repayment loan installment which is scheduled to be
repaid on any of the three monthly payment dates immediately
following such trust determination date; and
* the aggregate amount outstanding on that trust determination date
of each scheduled repayment loan installment then outstanding that
was not fully repaid on its scheduled repayment date,
after taking into account amounts standing to the credit of the Funding 2
principal ledger on such trust determination date which are available therefor.
Each of the scheduled repayment requirement, the controlled repayment
requirement and the pass-through requirement shall be calculated on the basis
there would be no deferral of loan tranches pursuant to Rule 1 under "--
REPAYMENT OF LOAN TRANCHES OF
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EACH TIER PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT AND PRIOR TO THE SERVICE
ON FUNDING 2 OF A FUNDING 2 INTERCOMPANY LOAN ENFORCEMENT NOTICE OR THE SERVICE
ON THE ISSUE OF AN ISSUER ENFORCEMENT NOTICE -- RULES FOR APPLICATION OF
FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS."
On each distribution date, all mortgages trustee principal receipts received
by Funding 2 from the mortgages trustee shall be deposited in the Funding 2 GIC
account. The cash manager shall (on behalf of Funding 2) apply such mortgages
trustee principal receipts firstly towards the satisfaction of the cash
accumulation requirement (and shall credit such amount to the Funding 2 cash
accumulation ledger). Any remaining mortgages trustee principal receipts shall
be credited by the cash manager (on behalf of Funding 2) to the Funding 2
principal ledger.
DEFINITION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS
"FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS" in respect of a monthly payment
date will be calculated by the cash manager or otherwise on behalf of Funding 2
(or, following enforcement of the Funding 2 security, the Funding 2 security
trustee) on the distribution date immediately preceding the relevant monthly
payment date and will be an amount equal to the sum of:
* all Funding 2 principal receipts standing to the credit of the
Funding 2 cash accumulation ledger which are to be applied on the
relevant monthly payment date to repay a bullet repayment loan
amount or to make a payment under items (A), (B) or (C) of the
Funding 2 pre-enforcement principal priority of payments and, if
such monthly payment date occurs on or after a trigger event or
enforcement of the issuer security, the remainder of such receipts
standing to the credit of the Funding 2 cash accumulation ledger;
* all other mortgages trustee principal receipts received by Funding
2 from the mortgages trustee which are to be applied on the
relevant monthly payment date to repay a scheduled repayment loan
installment, a controlled repayment loan amount or a principal
amount repayable in respect of a pass-through loan tranche standing
to the credit of the Funding 2 principal ledger;
* the amounts, if any, credited to the principal deficiency ledger
pursuant to items (I), (L), (N), (P) and (R) of the Funding 2 pre-
enforcement revenue priority of payments;
* in so far as needed to make a Funding 2 reserve principal payment
(as to which, see "CREDIT STRUCTURE -- FUNDING 2 RESERVE FUND"),
any amount available to be drawn under the Funding 2 reserve fund
less any amounts applied or to be applied on the relevant monthly
payment date in payment of interest and expenses under the Funding
2 pre-enforcement revenue priority of payments, plus any amounts to
be credited to the Funding 2 reserve ledger on the relevant monthly
payment date;
* in so far as needed to make a Funding 2 liquidity reserve principal
payment (as to which, see "CREDIT STRUCTURE -- FUNDING 2 LIQUIDITY
RESERVE FUND"), any amount available to be drawn under the Funding
2 liquidity reserve fund less any amounts applied or to be applied
on the relevant monthly payment date in payment of interest and
expenses under the Funding 2 pre-enforcement revenue priority of
payments, plus any amounts to be credited to the Funding 2
liquidity reserve ledger on the relevant monthly payment date;
* in so far as needed, any amount available to be drawn under the
Funding 2 liquidity facility to make a Funding 2 liquidity facility
principal payment`;
less
* amounts to be applied on the relevant monthly payment date to any
items (H), (J), (M), (O) and (Q) of the Funding 2 pre-enforcement
revenue priority payments.
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The repayment of any loan tranche prior to the occurrence of a trigger
event, enforcement of the issuer security by the issuer security trustee under
the issuer deed of charge or enforcement of the Funding 2 security by the
Funding 2 security trustee under the Funding 2 deed of charge will be made in
accordance with the terms of the global intercompany loan agreement.
The following sections set out various priorities of payments for Funding
available principal receipts under the following circumstances, and are
collectively referred to as the "FUNDING 2 PRE-ENFORCEMENT PRINCIPAL PRIORITY
OF PAYMENTS":
* repayment of loan tranches of each tier prior to the occurrence of
a trigger event and prior to the service on Funding 2 of a Funding
2 intercompany loan enforcement notice or the service on the issuer
of an issuer enforcement notice;
* repayment of loan tranches of each tier following the occurrence of
a non-asset trigger event but prior to the service on Funding 2 of
a Funding 2 intercompany loan enforcement notice or the service on
the issuer of an issuer enforcement notice;
* repayment of loan tranches of each tier following the occurrence of
an asset trigger event but prior to the service on Funding 2 of a
Funding 2 intercompany loan enforcement notice or the service on
the issuer of an issuer enforcement notice; and
* repayment of loan tranches of each tier following the service on
the issuer of an issuer enforcement notice but prior to the service
on Funding 2 of a Funding 2 intercompany loan enforcement notice.
REPAYMENT OF LOAN TRANCHES OF EACH TIER PRIOR TO THE OCCURRENCE OF A TRIGGER
EVENT AND PRIOR TO THE SERVICE ON FUNDING 2 OF A FUNDING 2 INTERCOMPANY LOAN
ENFORCEMENT NOTICE OR THE SERVICE ON THE ISSUER OF AN ISSUER ENFORCEMENT NOTICE
On each monthly payment date prior to the occurrence of a trigger event or
the service on Funding 2 of a Funding 2 intercompany loan enforcement notice or
the service on the issuer of an issuer enforcement notice, the cash manager
shall apply Funding 2 available principal receipts in the following order of
priority:
(A) first, in accordance with the terms of the Funding 2 liquidity
facility agreement, towards repayment of the amounts outstanding
under the Funding 2 liquidity facility (if any) that were drawn in
order to make Funding 2 liquidity facility principal payments;
(B) second, to the extent that monies have been drawn from the Funding
2 reserve fund to make Funding 2 reserve principal payments,
towards the replenishment of the Funding 2 reserve fund up to the
Funding 2 reserve required amount;
(C) third, if a Funding 2 liquidity reserve rating event has occurred
and is continuing (i) to initially fund the Funding 2 liquidity
reserve fund up to the Funding 2 liquidity reserve required amount
and (ii) once it has been initially funded, to the extent that
Funding 2 available revenue receipts are insufficient to do so, to
replenish the Funding 2 liquidity reserve fund up to the Funding 2
liquidity reserve required amount;
(D) fourth, in order of their final repayment dates, beginning with the
earliest such date (and if two or more AAA loan tranches have the
same final repayment date, in proportion to the respective amounts
due) to repay the principal amounts due (if any) on such monthly
payment date on the AAA loan tranches;
(E) fifth, in no order of priority among them but in proportion to the
respective amounts due, to repay the principal amounts due (if any)
on such monthly payment date on the AA loan tranches;
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(F) sixth, in no order of priority among them but in proportion to the
respective amounts due, to repay the principal amounts due (if any)
on such monthly payment date on the A loan tranches;
(G) seventh, in no order of priority among them but in proportion to
the respective amounts due, to repay the principal amounts due (if
any) on such monthly payment date on the BBB loan tranches;
(H) eighth, in no order of priority among them but in proportion to the
respective amounts due, to repay the principal amounts due (if any)
on such monthly payment date on the BB loan tranches;
(I) ninth, towards a credit to the Funding 2 cash accumulation ledger
until the balance is equal to Funding 2's cash accumulation
requirement (as calculated after any payments are made at item (D)
of this priority of payments); and
(J) tenth, the remainder to be credited to the Funding 2 principal
ledger.
In the applicable circumstances, the following rules apply in determining
the amounts to be paid under items (D), (E), (F), (G) and (H) of the priority
of payments set out above and below:
RULES FOR APPLICATION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS
The Funding 2 deed of charge sets out certain rules for application by
Funding 2, or the cash manager on its behalf, of Funding 2 available principal
receipts on each monthly payment date. The principal rules are as follows:
RULE (1) DEFERRAL OF REPAYMENT OF PASS-THROUGH LOAN TRANCHES, SCHEDULED
REPAYMENT LOAN TRANCHES AND/OR CONTROLLED REPAYMENT LOAN TRANCHES IN
CERTAIN CIRCUMSTANCES
(A) If on a loan payment date:
(i) there is a debit balance on the BB principal deficiency
sub- ledger, the BBB principal deficiency sub-ledger, the
A principal deficiency sub-ledger or the AA principal
deficiency sub-ledger after application of the Funding 2
available revenue receipts on that monthly payment date;
or
(ii) the adjusted Funding 2 reserve fund level is less than
the Funding 2 reserve fund threshold; or
(iii) the aggregate outstanding principal balance of mortgage
loans included in the mortgage portfolio, in respect of
which the aggregate amount in arrears is more than three
times the monthly payment then due, is more than 4 per
cent. of the aggregate outstanding principal balance of
mortgage loans included in the mortgage portfolio,
then until the relevant circumstances as described in sub-
paragraphs (i), (ii) or (iii) above has been cured or otherwise
ceases to exist, if:
(a) any AAA loan tranche (whether or not such AAA loan tranche is
then due) remains outstanding after making the payments under
item (D) of the Funding 2 pre-enforcement principal priority of
payments, the AA loan tranches will not be entitled to
principal repayments under item (E) of the Funding 2 pre-
enforcement principal priority of payments;
(b) any term AAA loan tranche or any AA loan tranche (whether or
not such AAA loan tranche or AA loan tranche is then due)
remains outstanding after making the payments under items (D)
and (E) of the Funding 2 pre-enforcement principal priority of
payments, then the A loan tranches will not be entitled to
principal repayments under item (F) of the Funding 2 pre-
enforcement principal priority of payments;
(c) any AAA loan tranche, any AA loan tranche, any A loan tranche
(whether or not such AAA loan tranche, AA loan tranche or A
loan tranche is then due) remains outstanding after making the
payments under items (D), (E)
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and (F) of the Funding 2 pre-enforcement principal priority of
payments, then the BBB loan tranches will not be entitled to
principal repayments under item (G) of the Funding 2 pre-
enforcement principal priority of payments; and/or
(d) any AAA loan tranche, any AA loan tranche, any A loan tranche
or any BBB loan tranche (whether or not such AAA loan tranche,
AA loan tranche, A loan tranche or BBB loan tranche is then
due) remains outstanding after making the payments under items
(D), (E), (F) and (G) of the Funding 2 pre-enforcement
principal priority of payments, then the BB loan tranches will
not be entitled to principal repayments under item (H) of the
Funding 2 pre-enforcement principal priority of payments.
(B) On a loan payment date in respect of which principal in respect of
any loan tranche is scheduled to be paid:
(i) for any AA loan tranche, the amount of principal due (or any
part thereof) in respect of the AA loan tranche may only be
paid if, after giving effect to such payment and the payment
to be made on such date in respect of the related series and
class of notes, the class A available subordinated amount is
at least equal to the class A required subordinated amount;
(ii) for any A loan tranche, the amount of principal due (or any
part thereof) in respect of the A loan tranche may only be
paid if, after giving effect to such payment and the payment
to be made on such date in respect of the related series and
class of notes, the class A available subordinated amount is
at least equal to the class A required subordinated amount
and the class B available subordinated amount is at least
equal to the class B required subordinated amount;
(iii) for any BBB loan tranche, the amount of principal due (or any
part thereof) in respect of the BBB loan tranche may only be
paid if, after giving effect to such payment and the payment
to be made on such date in respect of the related series and
class of notes, the class A available subordinated amount is
at least equal to the class A required subordinated amount,
the class B available subordinated amount is at least equal
to the class B required subordinated amount and the class M
available subordinated amount is at least equal to the class
M required subordinated amount; and
(iv) for any BB loan tranche, the amount of principal due (or any
part thereof) in respect of the BB loan tranche may only be
paid if, after giving effect to such payment and the payment
to be made on such date in respect of the related series and
class of notes, the class A available subordinated amount is
at least equal to the class A required subordinated amount,
the class B available subordinated amount is at least equal
to the class B required subordinated amount, the class M
available subordinated amount is at least equal to the class
M required subordinated amount and the class C available
subordinated amount is at least equal to the class C required
subordinated amount,
save that, in calculating the class A available subordinated
amount, the class B available subordinated amount, the class M
available subordinated amount, and the class C available
subordinated amount for the purposes of each of paragraph (i),
(ii), (iii) and (iv) above, excess spread will be deemed to be
zero.
See "ISSUANCE OF NOTES -- ISSUANCE" for a description of the various
required subordinated amounts and available subordinated amounts.
(C) If on any loan payment date:
(i) one or more bullet repayment loan amounts are within a cash
accumulation period at that time; and
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(ii) the quarterly CPR is less than 15 per cent.;
then, on or before their step-up dates, the scheduled repayment
loan tranches, the controlled repayment loan tranches and the pass-
through loan tranches will be entitled to principal repayments
under items (D), (E), (F), (G) and (H) (as applicable) of the
Funding 2 pre-enforcement principal priority of payments only if
there is no cash accumulation shortfall at such time.
In this prospectus:
"CASH ACCUMULATION LIABILITY" means on any monthly payment date prior to any
payment under item (D) of the above priority of payments the aggregate of the
bullet repayment loan amounts, each of which is then within a cash accumulation
period;
"CASH ACCUMULATION SHORTFALL" means at any time that the Funding 2 cash
accumulation ledger amount is less than the cash accumulation liability;
"FUNDING 2 CASH ACCUMULATION LEDGER AMOUNT" means at any time the amount
standing to the credit of the Funding 2 cash accumulation ledger at that time
(immediately prior to any drawing to be applied on any monthly payment date and
prior to any payment under item (I) of the above priority of payments);
RULE (2) REPAYMENT OF PASS-THROUGH LOAN TRANCHES AFTER THE OCCURRENCE OF A
STEP-UP DATE
Following the occurrence of the step-up date under a loan tranche ("LOAN
TRANCHE A") and provided that the Funding 2 share of the trust property is
greater than zero, the aggregate amount repayable on a loan payment date in
relation to loan tranche A under items (D), (E), (F), (G) and (H) of the
priority of payments set out above shall be limited to an amount calculated as
follows:
A x B x C
-----------
D
where, in respect of any distribution date:
A = the aggregate amount of mortgages trustee principal receipts
received by the mortgages trustee in the relevant trust calculation
period (excluding any initial contribution or further
contribution);
B = the Funding 2 share percentage calculated as at the start of the
relevant trust calculation period or, as applicable, the weighted
average Funding 2 share percentage;
C = the outstanding principal balance of loan tranche A; and
D = the aggregate outstanding principal balance of the global
intercompany loan.
RULE (3) DEFERRAL OF REPAYMENT OF SUBORDINATED TIERS OF LOAN TRANCHES IN
CERTAIN CIRCUMSTANCES
If on any loan payment date the issuer reserve requirement and the issuer
arrears test are not satisfied and the class A notes of any series and/or the
AAA loan tranches remain outstanding, then:
(i) the AA loan tranches will not be entitled to principal repayments
under item (E) of the above priority of payments;
(ii) the A loan tranches will not be entitled to principal repayments
under item (F) of the above priority of payments;
(iii) the BBB loan tranches will not be entitled to principal repayments
under item (G) of the above priority of payments; and
(iv) the BB loan tranches will not be entitled to principal repayments
under item (H) of the above priority of payments;
The "ISSUER ARREARS TEST" is satisfied on a loan payment date if the issuer
or the issuer cash manager on its behalf calculates on the distribution date
immediately preceding that loan payment date that, as of the last day of the
trust calculation period
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immediately preceding that distribution date (i) the aggregate current balance
of the mortgage loans in the mortgage portfolio which are then in arrears for
at least 3 months is less than 4% of the aggregate current balance of all
mortgage loans in the mortgage portfolio, unless the rating agencies have
confirmed that the then current ratings of the notes will not be reduced,
withdrawn or qualified if the issuer arrears test is not met at that time; and
(ii) the aggregate interest arrears in respect of all the mortgage loans in the
mortgage portfolio as a percentage of the aggregate gross interest due on such
mortgage loans during the previous 12 months does not exceed 2%, or such other
percentage as is then acceptable to the rating agencies at such time.
The "ISSUER RESERVE REQUIREMENT" is satisfied on a loan payment date if,
after taking account of any payment of Funding 2 available revenue receipts to
the credit of the Funding 2 reserve ledger and any payment of issuer available
revenue receipts to the issuer reserve ledger, the aggregate amount of funds in
the Funding 2 reserve fund and the issuer reserve fund is equal to the
programme reserve required amount.
ALLOCATIONS INVOLVING RULE (2)
Where Rule (2) 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). However, if the amount so allocated to one or more loan
tranches exceeds the amount permitted under Rule (2) (as applicable) to be paid
in respect of those loan tranches (the "CAPPED LOAN TRANCHES"), the excess
shall then be reallocated among any other relevant loan tranches at that level
using the method of allocation as applies at that level but without reference
to the capped loan tranches 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 firstly, between the capped loan
tranches in no order of priority among them but in proportion to the amounts
due and then at the next level of that priority of payments.
REPAYMENT OF LOAN TRANCHES OF EACH TIER FOLLOWING THE OCCURRENCE OF A NON-ASSET
TRIGGER EVENT BUT PRIOR TO THE SERVICE ON FUNDING 2 OF A FUNDING 2 INTERCOMPANY
LOAN ENFORCEMENT NOTICE OR THE SERVICE ON THE ISSUER OF AN ISSUER ENFORCEMENT
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 2 of a Funding 2 intercompany loan enforcement notice or the
service on the issuer of an issuer enforcement notice, the bullet loan tranches
and the scheduled repayment loan tranches and the controlled repayment loan
tranches in respect of the global intercompany loan will be deemed to be pass-
through loan tranches and on each monthly payment date Funding 2 will be
required to apply Funding 2 available principal receipts in the following order
of priority:
(A) first, in accordance with the terms of the Funding 2 liquidity
facility agreement, towards repayment of the amounts outstanding
under the Funding 2 liquidity facility (if any) that were drawn in
order to make Funding 2 liquidity facility principal payments;
(B) second, to the extent that monies have been drawn from the Funding
2 reserve fund to make Funding 2 reserve principal payments,
towards the replenishment of the Funding 2 reserve fund up to the
Funding 2 reserve required amount;
(C) third, if a Funding 2 liquidity facility reserve rating event has
occurred and is continuing (i) to initially fund the Funding 2
liquidity reserve fund up to the Funding 2 liquidity reserve
required amount and (ii) once it has been initially funded, to the
extent that Funding 2 available revenue receipts are insufficient
to do so, to replenish the Funding 2 liquidity reserve fund up to
the Funding 2 liquidity reserve required amount;
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(D) fourth, in order of their final repayment date, beginning with the
earliest such date (and if two or more AAA loan tranches have the
same final repayment date, in proportion to the respective amounts
due) to repay the AAA loan tranches until the AAA loan tranches are
fully repaid;
(E) fifth, in no order of priority among them but in proportion to the
respective amounts due, to repay the AA loan tranches until the AA
loan tranches are fully repaid;
(F) sixth, in no order of priority among each of them but in proportion
to the respective amounts due, to repay the A loan tranches until
the A loan tranches are fully repaid;
(G) seventh, in no order of priority among them but in proportion to
the respective amounts due, to repay the BBB loan tranches until
the BBB loan tranches are fully repaid; and
(H) eighth, in no order of priority among them but in proportion to the
respective amounts due, to repay the BB loan tranches until the BB
loan tranches are fully repaid.
REPAYMENT OF LOAN TRANCHES OF EACH SERIES FOLLOWING THE OCCURRENCE OF AN ASSET
TRIGGER EVENT BUT PRIOR TO THE SERVICE ON FUNDING 2 OF A FUNDING 2 INTERCOMPANY
LOAN ENFORCEMENT NOTICE OR THE SERVICE ON THE ISSUER OF AN ISSUER ENFORCEMENT
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
2 of a Funding 2 intercompany loan enforcement notice or the service on the
issuer of an issuer enforcement notice, the bullet loan tranches and the
scheduled repayment loan tranches and the controlled repayment loan tranches in
respect of the global intercompany loan will be deemed to be pass-through loan
tranches and on each monthly payment date Funding 2 will be required to apply
Funding 2 available principal receipts in the following order of priority:
(A) first, in accordance with the terms of the Funding 2 liquidity
facility agreement, towards repayment of the amounts outstanding
under the Funding 2 liquidity facility (if any) that were drawn in
order to make Funding 2 liquidity facility principal payments;
(B) second, to the extent that monies have been drawn from the Funding
2 reserve fund to make Funding 2 reserve principal payments,
towards the replenishment of the Funding 2 reserve fund up to the
Funding 2 reserve required amount;
(C) third, if a Funding 2 liquidity reserve rating event has occurred
and is continuing (i) to initially fund the Funding 2 liquidity
reserve fund up to the Funding 2 liquidity reserve required amount
and (ii) once it has been initially funded, to the extent that
Funding 2 available revenue receipts are insufficient to do so, to
replenish the Funding 2 liquidity reserve fund up to the Funding 2
liquidity reserve required amount;
(D) fourth, in no order of priority among them, but in proportion to
the respective amounts due, to repay the AAA loan tranches until
the AAA loan tranches are fully repaid;
(E) fifth, in no order of priority among them, but in proportion to the
respective amounts due, to repay the AA loan tranches until the AA
loan tranches are fully repaid;
(F) sixth, in no order of priority among them, but in proportion to the
respective amounts due, to repay the A loan tranches until the A
loan tranches are fully repaid;
(G) seventh, in no order of priority among them, but in proportion to
the respective amounts due, to repay the BBB loan tranches until
the BBB are fully repaid; and
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(H) eighth, in no order of priority among them, but in proportion to
the respective amounts due, to repay the BB loan tranches until the
BB loan tranches are fully repaid.
REPAYMENT OF LOAN TRANCHES OF EACH SERIES FOLLOWING THE SERVICE ON THE ISSUER
OF AN ISSUER ENFORCEMENT NOTICE BUT PRIOR TO THE SERVICE ON FUNDING 2 OF A
FUNDING 2 INTERCOMPANY LOAN ENFORCEMENT NOTICE
If an issuer enforcement notice is served on the issuer then that will not
result in automatic enforcement of the Funding 2 security under the Funding 2
deed of charge. In those circumstances, however, any bullet loan tranches and
any scheduled repayment loan tranches and any controlled repayment loan
tranches under the global intercompany loan will be deemed to be pass-through
loan tranches and on each monthly payment date Funding 2 will be required to
apply Funding 2 available principal receipts in the following order of
priority:
(A) first, in accordance with the terms of the Funding 2 liquidity
facility agreement, towards repayment of the amounts outstanding
under the Funding 2 liquidity facility (if any) that were drawn in
order to make Funding 2 liquidity facility principal payments;
(B) second, to the extent that monies have been drawn from the Funding
2 reserve fund to make Funding 2 reserve principal payments,
towards the replenishment of the Funding 2 reserve fund up to the
Funding 2 reserve required amount;
(C) third, if a Funding 2 liquidity reserve rating event has occurred
and is continuing (i) to initially fund the Funding 2 liquidity
reserve fund up to the Funding 2 liquidity reserve required amount
and (ii) once it has been initially funded, to the extent that
Funding 2 available revenue receipts are insufficient to do so, to
replenish the Funding 2 liquidity reserve fund up to the Funding 2
liquidity reserve required amount;
(D) fourth, in no order of priority among them, but in proportion to
the respective amounts due, to repay the AAA loan tranches until
the AAA loan tranches are fully repaid;
(E) fifth, in no order of priority among them, but in proportion to the
respective amounts due, to repay the AA loan tranches until the AA
loan tranches are fully repaid;
(F) sixth, in no order of priority among them, but in proportion to the
respective amounts due, to repay the A loan tranches until the A
loan tranches are fully repaid;
(G) seventh, in no order of priority among them, but in proportion to
the respective amounts due, to repay the BBB loan tranches until
the BBB loan tranches are fully repaid; and
(H) eighth, in no order of priority among them, but in proportion to
the respective amounts due to repay the BB loan tranches until the
BB loan tranches are fully repaid.
REPAYMENT OF LOAN TRANCHES WHEN FUNDING 2 RECEIVES THE AMOUNT OUTSTANDING UNDER
THE GLOBAL INTERCOMPANY LOAN
If Funding 2 receives the proceeds of a new loan tranche which is to be used
to refinance another loan tranche as described in "THE GLOBAL INTERCOMPANY LOAN
AGREEMENT -- ISSUANCE OF LOAN TRANCHES" (such proceeds being a "FULL REPAYMENT
AMOUNT"), then Funding 2 will not apply the full repayment amount as described
above in "DISTRIBUTION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS". Rather,
Funding 2 will apply, on the relevant date, the full repayment amount to repay
the relevant loan tranche. If at any time only one loan tranche is outstanding,
then Funding 2 shall apply the full repayment amount first to repay the Funding
2 liquidity facility provider any amounts
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outstanding under the Funding 2 liquidity facility, if any, to the extent that
such funds were drawn in order to repay the principal amounts of any previous
loan tranches and the remainder shall be applied to repay the relevant loan
tranche. Pending an application of the full repayment amount as described
above, such proceeds shall be credited to the Funding 2 GIC account and shall
not be available for any other purpose.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS
DEFINITION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS
Prior to enforcement of the issuer security, "ISSUER AVAILABLE PRINCIPAL
RECEIPTS" for the issuer in respect of any monthly payment date in respect of
the notes will be calculated by the issuer cash manager on the distribution
date immediately preceding that monthly payment date and will be an amount
equal to the sum of:
* all principal amounts to be repaid by Funding 2 to the issuer under
the global intercompany loan agreement on that monthly payment
date; and
* in so far as needed to make an issuer reserve principal payment (as
to which, see "CREDIT STRUCTURE -- ISSUER RESERVE FUND"), any
amount available to be drawn under the issuer reserve fund less any
amounts to be applied on the relevant monthly payment date in
payment of interest or expenses under the issuer pre-enforcement
revenue priority of payments, plus any amounts to be credited to
the issuer reserve ledger under the issuer pre-enforcement
principal priority of payments on the relevant monthly payment
date.
On each monthly payment date, all Funding 2 available principal receipts
received by the issuer from Funding 2 constituting principal repayments on a
loan tranche, will be credited to a sub-ledger (in respect of the related
series and class of notes) to the issuer principal ledger.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY
Prior to enforcement of the issuer security, the issuer, or the issuer cash
manager on its behalf, will apply issuer available principal receipts on each
monthly payment date in the following manner (the "ISSUER PRE-ENFORCEMENT
PRINCIPAL PRIORITY OF PAYMENTS"):
* to the extent that monies have been drawn from the issuer reserve
fund to make issuer reserve principal payments, towards the
replenishment of the issuer reserve fund up to the issuer reserve
required amount, such amount to be debited to the sub-ledger(s) of
the series and class(es) of notes in respect of which such issuer
reserve principal payments were made;
* The class A notes:
from principal amounts received by the issuer from Funding 2 in
respect of each AAA loan tranche (and, in respect of (ii) below,
the principal amounts received (if any) from the issuer swap
provider(s) under the relevant issuer swap agreement(s) in respect
of the related series and class of notes):
(i) to pay amounts due and payable (in respect of principal) on
such monthly payment date to the relevant issuer swap
provider(s) in respect of the related series and class of
class A notes in accordance with the terms of the relevant
issuer swap agreement(s); and
(ii) to pay amounts due and payable in respect of principal (if
any) on such monthly payment date on the related series and
class of class A notes;
* The class B notes:
from principal amounts received by the issuer from Funding 2 in
respect of each AA loan tranche (and, in respect of (ii) below, the
principal amounts received (if any) from the issuer swap
provider(s) under the relevant issuer swap agreement(s) in respect
of the related series and class of notes):
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(i) to pay amounts due and payable (in respect of principal) on
such monthly payment date to the relevant issuer swap
provider(s) in respect of the related series and class of
class B notes in accordance with the terms of the relevant
issuer swap agreement(s); and
(ii) to pay amounts due and payable in respect of principal (if
any) on such monthly payment date on the related series and
class of class B notes;
* The class M notes:
from principal amounts received by the issuer from Funding 2 in
respect of each A loan tranche (and, in respect of (ii) below, the
principal amounts received (if any) from the issuer swap
provider(s) under the relevant issuer swap agreement(s) in respect
of the related series and class of notes):
(i) to pay amounts due and payable (in respect of principal) on
such monthly payment date to the relevant issuer swap
provider(s) in respect of the related series and class of
class M notes in accordance with the terms of the relevant
issuer swap agreement(s); and
(ii) to pay amounts due and payable in respect of principal (if
any) on such monthly payment date on the related series and
class of class M notes;
* The class C notes:
from principal amounts received by the issuer from Funding 2 in
respect of each BBB loan tranche (and, in respect of (ii) below,
the principal amounts received (if any) from the issuer swap
provider(s) under the relevant issuer swap agreement(s) in respect
of the related series and class of notes):
(i) to pay amounts due and payable (in respect of principal) on
such monthly payment date to the relevant issuer swap
provider(s) in respect of the related series and class of
class C notes in accordance with the terms of the relevant
issuer swap agreement(s); and
(ii) to pay amounts due and payable in respect of principal (if
any) on such monthly payment date on the related series and
class of class C notes;
* The class D notes:
from principal amounts received by the issuer from Funding 2 in
respect of each BB loan tranche (and, in respect of (ii) below, the
principal amounts received (if any) from the issuer swap
provider(s) under the relevant issuer swap agreement(s) in respect
of the related series and class of notes):
(i) to pay amounts due and payable (in respect of principal) on
such monthly payment date to the relevant issuer swap
provider(s) in respect of the related series and class of
class D notes in accordance with the terms of the relevant
issuer swap agreement(s); and
(ii) to pay amounts due and payable in respect of principal (if
any) on such monthly payment date on the related series and
class of class D notes.
Generally, on each note payment date, the amounts standing to the credit of
any sub-ledger of the issuer principal ledger (in respect of a series and class
of notes) may only be applied by the issuer cash manager to pay the principal
amounts due (if any) in respect of such series and class of notes under the
issuer pre-enforcement principal priority of payments. If, however, on a note
payment date, an amount standing to the credit of the issuer reserve ledger is
applied to pay principal amounts due in respect of a series and class of notes
under the issuer pre-enforcement principal priority of payments, then to the
extent that, on a following note payment dates in respect of such series and
class of notes, there is an amount credited to the sub-ledger to the issuer
principal ledger in respect of such series and class of notes, the issuer cash
manager will apply such amount towards the replenishment of the issuer reserve
fund in accordance with the issuer pre-enforcement principal priority of
payments.
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DISTRIBUTION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS AND FUNDING 2 AVAILABLE
REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE FUNDING 2 SECURITY
The Funding 2 deed of charge sets out the order of priority of distribution
by the Funding 2 security trustee, following service of a Funding 2
intercompany loan enforcement notice, of amounts received or recovered by the
Funding 2 security trustee or a receiver appointed on its behalf.
The Funding 2 security trustee (or the cash manager on its behalf) will
apply amounts received or recovered (excluding swap collateral (if any)
standing to the credit of the Funding 2 swap collateral accounts) following
enforcement of the Funding 2 security on each monthly payment date in
accordance with the following order of priority (known as the "FUNDING 2 POST-
ENFORCEMENT PRIORITY OF PAYMENTS"):
(A) first, to pay amounts due to the Funding 2 security trustee and any
receiver appointed by the Funding 2 security trustee, together with
interest and (to the extent not already inclusive) VAT on those
amounts, and to provide for any amounts due or to become due to the
Funding 2 security trustee and the receiver in the following
interest period under the Funding 2 deed of charge or any other
transaction document;
(B) second, to pay amounts due to the issuer in respect of the issuer's
obligations specified in items (A) through (D) of the issuer pre-
enforcement revenue priority of payments or, as the case may be,
items (A) through (C) of the issuer post-enforcement priority of
payments as described under "-- DISTRIBUTION OF ISSUER AVAILABLE
REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY" and
"-- DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS AND ISSUER
AVAILABLE REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE ISSUER
SECURITY";
(C) third, towards payment of amounts due and payable to the cash
manager and any costs, charges, liabilities and expenses then due
or to become due and payable to the cash manager under the cash
management agreement, together with (to the extent not already
inclusive) VAT on those amounts;
(D) fourth, in no order of priority among them but in proportion to the
respective amounts due, towards payment of amounts (if any) due to
(i) the account bank under the terms of the Funding 2 bank account
agreement and (ii) the corporate services provider under the terms
of the corporate services agreement;
(E) fifth, towards payment of amounts (if any) due to the Funding 2
liquidity facility provider under the Funding 2 liquidity facility
(if any) (except for any Funding 2 liquidity subordinated amounts);
(F) sixth, in no order of priority among them but in proportion to the
respective amounts due towards payment of amounts due under the
Funding 2 basis rate swaps to the Funding 2 basis rate swap
provider (including any swap termination payment but excluding any
Funding 2 basis rate swap excluded termination amount);
(G) seventh, in no order of priority between them but in proportion to
the respective amounts due towards payment of amounts of interest,
principal and fees due on the AAA loan tranches;
(H) eighth, in no order of priority between them but in proportion to
the respective amounts due towards payment of amounts of interest,
principal and fees due on the AA loan tranches;
(I) ninth, in no order of priority between them but in proportion to
the respective amounts due towards payment of amounts of interest,
principal and fees due on the A loan tranches;
(J) tenth, in no order of priority between them but in proportion to
the respective amounts due towards payment of amounts of interest,
principal and fees due on the BBB loan tranches;
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(K) eleventh, in no order of priority between them but in proportion to
the respective amounts due towards payment of amounts of interest,
principal and fees due on the BB loan tranches;
(L) twelfth, to pay amounts due to the issuer in respect of the
issuer's obligations specified in item (J) of the issuer pre-
enforcement revenue priority of payments or, as the case may be,
item (O) of the issuer post-enforcement priority of payments;
(M) thirteenth, to pay amounts due to the issuer in respect of its
obligations, if any, to make a swap termination payment to any
issuer swap provider (but excluding any issuer swap excluded
termination amount);
(N) fourteenth, in no order of priority between them but in proportion
to the respective amounts due, towards payment of amounts due
(without double counting) to:
(i) the issuer in respect of its obligations (if any) to pay any
issuer swap excluded termination amount;
(ii) the Funding 2 liquidity facility provider, if any, any
Funding 2 liquidity facility subordinated amounts due under
the Funding 2 liquidity facility agreement;
(iii) the Funding 2 basis rate swap provider in respect of any
Funding 2 basis rate swap excluded termination amount;
(O) fifteenth, towards payment of any deferred contribution due to the
mortgages trustee under the mortgages trust deed; and
(P) last, to pay any amount remaining following the application of
principal and revenue set forth in items (A) through (O) above, to
Funding 2.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS AND ISSUER AVAILABLE
REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE ISSUER SECURITY
The issuer deed of charge sets out the order of priority of distribution by
or on behalf of the issuer security trustee, following enforcement of the
issuer security, of amounts received or recovered by the issuer security
trustee (or a receiver appointed on its behalf) pursuant to the issuer deed of
charge. If the Funding 2 security is enforced under the Funding 2 deed of
charge, then there will be a note event of default.
On each monthly payment date the issuer security trustee (or the issuer cash
manager on its behalf) will apply amounts received or recovered (excluding swap
collateral (if any) standing to the credit of the issuer swap collateral
accounts), following enforcement of the issuer security as follows:
(A) first, in no order of priority among them but in proportion to the
amounts due to pay amounts due to the note trustee and the issuer
security trustee (and any receiver appointed by the issuer security
trustee) together with the interest and VAT on those amounts and to
provide for any amounts then due or to become due and payable to
the note trustee and the issuer security trustee and the receiver
under the provisions of the trust deed, the issuer deed of charge
and any other transaction document;
(B) second, to pay, in no order of priority among them but in
proportion to the respective amounts due, the agent bank, the
paying agents, the transfer agent and the registrar, together with
interest and VAT on those amounts and to provide for any costs,
charges, liabilities and expenses then due or to become due and
payable to them under the provisions of the paying agent and agent
bank agreement;
(C) third, in no order of priority among them but in proportion to the
respective amounts due, towards payment of amounts (together with
VAT on those amounts) due and payable to the issuer cash manager
under the issuer cash
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management agreement, to the corporate services provider under the
corporate services agreement and to the issuer account bank under
the issuer bank account agreement;
(D) fourth, subject to item (E) below, in no order of priority among
them but in proportion to the respective amounts due, to pay
amounts due to the issuer swap providers for each series of class A
notes (excluding any swap termination payment);
(E) fifth, in no order of priority among them but in proportion to the
respective amounts due, to pay interest due or overdue on, and to
repay principal of, the applicable series of class A notes and to
pay any swap termination payment due to the issuer swap provider
for each series of class A notes (but excluding any issuer swap
excluded termination amount) provided that if the amounts available
for distribution under this item (E) (on the assumption that no
amounts are due and payable under item (D) and no amounts are
received from any issuer swap provider) would be insufficient to
pay the sterling equivalent of the amounts due and payable under
this item (E), the shortfall shall be divided amongst all such
amounts on a pro rata basis and the amount payable by the issuer to
the issuer swap provider in respect of any series of class A notes
under paragraph (D) above shall be reduced by the amount of the
shortfall applicable to that series of class A notes;
(F) sixth, subject to item (G) below, in no order of priority among
them but in proportion to the respective amounts due, to pay
amounts due to the issuer swap providers for each series of class B
notes (excluding any swap termination payment);
(G) seventh, in no order of priority among them but in proportion to
the respective amounts due, to pay interest due or overdue on, and
to repay principal of, the applicable series of class B notes and
to pay any swap termination payment due to the issuer swap provider
for each series of class B notes (but excluding any issuer swap
excluded termination amount) provided that if the amounts available
for distribution under this item (G) (on the assumption that no
amounts are due and payable under item (F) and no amounts are
received from any issuer swap provider) would be insufficient to
pay the sterling equivalent of the amounts due and payable under
this item (G), the shortfall shall be divided amongst all such
amounts on a pro rata basis and the amount payable by the issuer to
the issuer swap provider in respect of any series of class B notes
under paragraph (F) above shall be reduced by the amount of the
shortfall applicable to that series of class B notes;
(H) eighth, subject to item (I) below, in no order of priority among
them but in proportion to the respective amounts due, to pay
amounts due to the issuer swap providers for each series of class M
notes (excluding any swap termination payment);
(I) ninth, in no order of priority among them but in proportion to the
respective amounts due, to pay interest due or overdue on, and to
repay principal of, the applicable series of class M notes and to
pay any swap termination payment due to the issuer swap providers
for each series of class M notes (but excluding any issuer swap
excluded termination amount) provided that if the amounts available
for distribution under this item (I) (on the assumption that no
amounts are due and payable under item (H) and no amounts are
received from any issuer swap provider) would be insufficient to
pay the sterling equivalent of the amounts due and payable under
this item (I), the shortfall shall be divided amongst all such
amounts on a pro rata basis and the amount payable by the issuer to
the issuer swap provider in respect of any series of class M notes
under paragraph (H) above shall be reduced by the amount of the
shortfall applicable to that series of class M notes;
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(J) tenth, subject to item (K) below, in no order of priority among
them but in proportion to the respective amounts due, to pay
amounts due to the issuer swap providers for each series of class C
notes (excluding any swap termination payment);
(K) eleventh, in no order of priority among them but in proportion to
the respective amounts due, to pay interest due or overdue on, and
to repay principal of, the applicable series of class C notes and
to pay any swap termination payment due to the issuer swap provider
for each series of class C notes (but excluding any issuer swap
excluded termination amounts) provided that if the amounts
available for distribution under this item (K) (on the assumption
that no amounts are due and payable under item (J) and no amounts
are received from any issuer swap provider) would be insufficient
to pay the sterling equivalent of the amounts due and payable under
this item (K), the shortfall shall be divided amongst all such
amounts on a pro rata basis and the amount payable by the issuer to
the issuer swap provider in respect of any series of class C notes
under paragraph (J) above shall be reduced by the amount of the
shortfall applicable to that series of class C notes;
(L) twelfth, subject to item (M) below, in no order of priority among
them but in proportion to the respective amounts due, to pay
amounts due to the issuer swap providers for each series of class D
notes (excluding any swap termination payment);
(M) thirteenth, in no order of priority among them but in proportion to
the respective amounts due, to pay interest due or overdue on, and
to repay principal of, the applicable series of class D notes and
to pay any swap termination payment due to the issuer swap provider
for each series of class D notes (but excluding any issuer swap
excluded termination amounts) provided that if the amounts
available for distribution under this item (M) (on the assumption
that no amounts are due and payable under item (L) and no amounts
are received from any issuer swap provider) would be insufficient
to pay the sterling equivalent of the amounts due and payable under
this item (M), the shortfall shall be divided amongst all such
amounts on a pro rata basis and the amount payable by the issuer to
the issuer swap provider in respect of any series of class D notes
under paragraph (L) above shall be reduced by the amount of the
shortfall applicable to that series of class D notes;
(N) fourteenth, on the monthly payment date falling in December of each
year, to pay to the issuer account bank an amount equal to the
amount of any debit balance in the issuer transaction account as
permitted by the issuer account bank and outstanding at such
monthly payment date;
(O) fifteenth, in no order of priority among them but in proportion to
the respective amounts due, towards payment of:
(i) interest amounts due to the start-up loan provider(s); and
(ii) principal amounts due to the start-up loan provider(s) (to
the extent of issuance fees received from Funding 2 under the
global intercompany loan agreement);
under the start-up loan agreement(s);
(P) sixteenth, in no order of priority among them but in proportion to
the respective amounts due, to pay any issuer swap excluded
termination payments to the issuer swap providers;
(Q) seventeenth, in no order of priority among them but in proportion
to the respective amounts due, towards payment of principal amounts
due to the start-up loan provider(s) under the start-up loan
agreements;
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(R) last, to pay any amount remaining following the application of
principal and revenue set forth in items (A) through (Q) above, to
the issuer.
Notwithstanding the above, on the date that the issuer security is enforced,
amounts standing to the credit of any sub-ledger to the issuer revenue ledger
and/or the issuer principal ledger (in respect of a series and class of notes)
may only be applied by the issuer security trustee (or the issuer cash manager
on its behalf) to pay the interest, principal and other amounts due in respect
of such series and class of notes or any shortfall in the amounts available to
pay items (A) to (C) under the issuer post-enforcement priority of payments and
may not be applied in payment of interest principal and other amounts due in
respect of any other series and class of notes.
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CREDIT STRUCTURE
The notes will be an obligation of the issuer only and will not be
obligations of, or the responsibility of, or guaranteed by, any other party.
However, there are twelve main features of the transaction which enhance the
likelihood of timely receipt of payments to noteholders, as follows:
* Funding 2 available revenue receipts are expected to exceed
interest and fees payable to the issuer under the global
intercompany loan agreement and obligations that rank in priority
thereto;
* a revenue shortfall in Funding 2 available revenue receipts may be
met from Funding 2 available principal receipts;
* payments on the class D notes will be subordinated to payments on
the class A notes, the class B notes, the class M notes and the
class C notes;
* payments on the class C notes will be subordinated to payments on
the class A notes, the class B notes and the class M notes;
* payments on the class M notes will be subordinated to payments on
the class A notes and the class B notes;
* payments on the class B notes will be subordinated to payments on
the class A notes;
* the mortgages trustee GIC account, the Funding 2 GIC account and
the issuer GIC account each earn interest at a specified rate;
* a reserve fund will be available to the issuer to meet revenue
shortfalls in fees and interest due on the notes and principal of
the original bullet redemption notes that are class A notes;
* a reserve fund will be available to Funding 2 to meet revenue
shortfalls in fees and interest due on all loan tranches
outstanding under the global intercompany loan agreement and
principal of the original bullet loan tranches that are AAA loan
tranches;
* Funding 2 will be obliged to establish the Funding 2 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 then current ratings of the notes will not
be reduced, withdrawn or qualified by the ratings downgrade of the
seller);
* start-up loans will be provided to the issuer from time to time to
fund the issuer reserve fund; and
* Funding 2 may establish a liquidity facility to pay interest and
principal on loan tranches.
Each of these factors is considered more fully in the remainder of this
section.
CREDIT SUPPORT FOR THE NOTES PROVIDED BY MORTGAGES TRUSTEE AVAILABLE REVENUE
RECEIPTS
The interest rates charged on the mortgage loans vary according to product
type. It is expected, however, that during the life of the notes issued under
the program, the Funding 2 share of revenue receipts received from borrowers on
the mortgage loans will, assuming that all of the mortgage loans are fully
performing, be greater than the sum of the interest which Funding 2 is required
to pay on the loan tranches outstanding under the global intercompany loan
agreement and any other Funding 2 intercompany loan in order to fund (by
payment to a swap provider or otherwise) the interest payments due on such
notes and the other costs and expenses of the structure.
The actual amount of any excess will vary during the life of the notes. The
key factors determining such variation are as follows:
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* the weighted average interest rate on the mortgage loans included
in the mortgage portfolio; and
* the level of arrears experienced.
On any distribution date, any excess will be available to meet the payments
referred to in the mortgages trust allocation of revenue receipts and the
payment of amounts of deferred contribution to the mortgages trustee which, in
turn, will fund the payment of deferred purchase price to the seller. Any
deferred contribution so paid to the mortgages trustee cannot subsequently be
reclaimed by Funding 2.
INTEREST RATE ON THE MORTGAGE PORTFOLIO
The weighted average interest rate on the mortgage portfolio will depend on:
* the standard variable rate or other interest rate payable on, and
the aggregate current balance of, the variable rate mortgage loans
included in the mortgage portfolio from time to time; and
* the fixed rates of interest payable on, and the aggregate current
balance of, the fixed rate mortgage loans included in the mortgage
portfolio from time to time.
Funding 2 has entered into the Funding 2 basis rate swap agreement to hedge
against the variances on the rates payable on the mortgage loans. See "THE SWAP
AGREEMENTS".
Scheduled and unscheduled repayments will also affect the weighted average
interest rate on the mortgage loans in the mortgage portfolio. For historical
data on the level of scheduled and unscheduled repayments in the UK housing
market, see "CERTAIN CHARACTERISTICS OF THE UNITED KINGDOM RESIDENTIAL MORTGAGE
MARKET -- CPR RATES".
LEVEL OF ARREARS EXPERIENCED
If the level of arrears of interest payments made by the borrowers results
in Funding 2 experiencing an income deficit on any loan payment date, then the
Funding 2 reserve fund and the Funding 2 liquidity reserve fund, if any,
established by Funding 2 may be utilized by Funding 2 in making payments of
interest (or, in limited circumstances, repayments of principal) to the issuer
under the global intercompany loan agreement on that loan payment date. If the
level of arrears of interest payments made by borrowers results in the issuer
experiencing an income deficit on any note payment date, then the issuer
reserve fund may be utilised by the issuer in making payments of interest (or
in limited circumstances, payments of principal) to noteholders under the notes
on that note payment date.
ISSUER RESERVE FUND
The issuer reserve fund has been established:
* to help meet any deficit in issuer available revenue receipts
available for interest and fees due under the notes;
* to help meet expenses in connection with the issuance of notes by
the issuer; and
* to help meet any deficit in issuer available principal receipts
available for:
(a) prior to the occurrence of a trigger event, repayment of
principal due and payable in respect of the original bullet
redemption notes (which are class A notes); and
(b) on or after the occurrence of a trigger event, repayment of
principal due and payable in respect of the original bullet
redemption notes (which are class A notes) on their respective
final maturity dates only,
(each an "ISSUER RESERVE PRINCIPAL PAYMENT"),
in each case, prior to the service of an issuer enforcement notice.
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On each monthly payment date, funds standing to the credit of the issuer
reserve fund will be added to certain other funds of the issuer in calculating
issuer available revenue receipts and issuer available principal receipts.
The issuer reserve fund will be funded and replenished from:
* issuer available revenue receipts in accordance with item (K) of
the issuer pre-enforcement revenue priority of payments up to and
including an amount equal to the issuer reserve required amount;
* issuer available principal receipts, to the extent applied in
making issuer reserve principal payments, in accordance with the
issuer pre-enforcement principal priority of payments up to and
including an amount equal to such issuer reserve principal
payments;
* all or part of the proceeds of a start-up loan tranche made to the
issuer by a start-up loan provider under a start-up loan agreement.
The "ISSUER RESERVE REQUIRED AMOUNT", on any date, is the greater of:
(a) the issuer reserve minimum amount; and
(b) the programme reserve required amount less the amount standing to
the credit of the Funding 2 reserve fund on such date (after taking
account of amounts to be debited from and credited to the Funding 2
reserve fund on such date).
The "ISSUER RESERVE MINIMUM AMOUNT", on any date and except as described
below, is calculated as the product of (a) one per cent. and (b) the aggregate
principal amount outstanding of the notes (including the principal amount
outstanding of notes issued on such date).
We may adjust, at any time, the issuer reserve minimum amount or the method
of computing the issuer reserve minimum amount, without the consent of any
noteholders, so long as the issuer security trustee and we have an opinion of
counsel that for US federal income tax purposes (i) the change will not
adversely affect the tax characterization as debt of any outstanding series and
class of notes that were characterized as debt for US tax purposes at the time
of their issuance and (ii) such change will not cause or constitute an event in
which gain or loss would be recognized by any holder of such notes.
The "PROGRAMME RESERVE REQUIRED PERCENTAGE", on any date and subject to
amendment as described below, is the percentage specified as such in the most
recent prospectus supplement. The "PROGRAMME RESERVE REQUIRED AMOUNT", on any
date, is calculated as the product of (a) the programme reserve required
percentage and (b) the aggregate outstanding principal balance of all loan
tranches outstanding under the global intercompany loan agreement (including
the principal amount outstanding of any loan tranche (or the increase in the
principal amount outstanding of any existing loan tranche) that is made on such
date).
We may adjust, at any time, the programme reserve required percentage or the
method of computing the programme reserve required amount, at any time without
the consent of any noteholders, so long as the issuer security trustee and we
obtain confirmation from the rating agencies that such adjustments will not
cause a reduction, qualification or withdrawal of the ratings of any
outstanding notes.
The monies credited to the issuer reserve fund will be deposited into the
issuer GIC account. The issuer cash manager will maintain a separate issuer
reserve ledger to record the balance from time to time of the issuer reserve
fund.
If, on any monthly payment date prior to the enforcement of the issuer
security, the amount in the issuer reserve fund exceeds an amount (not to be
less than zero) equal to (a) the programme reserve required amount less (b) the
amount standing to the credit of the Funding 2 reserve fund, then we will apply
such excess (which will constitute issuer available revenue receipts), in no
order of priority but in proportion to the respective
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outstanding amounts, in repayment of principal under the start-up loans under
item (N) of the issuer pre-enforcement revenue priority of payments.
Following the repayment in full of all notes issued by us, the issuer
reserve fund may be utilized by us in payment of any other of our liabilities,
subject to and in accordance with the relevant issuer priority of payments.
Following enforcement of the issuer security, amounts standing to the credit
of the issuer reserve ledger may be applied in making payments of principal due
under the notes.
FUNDING 2 RESERVE FUND
The Funding 2 reserve fund has been established:
* to help meet any deficit in Funding 2 available revenue receipts
available for payment of interest and fees due under the global
intercompany loan agreement and to help meet any deficit recorded
on the Funding 2 principal deficiency ledger; and
* to help meet any deficit in Funding 2 available principal receipts
available for:
(a) prior to the occurrence of a trigger event, repayment of
principal due in respect of the original bullet loan tranches
(which are AAA loan tranches); and
(b) on or after the occurrence of a trigger event, repayment of
principal in respect of the original bullet loan tranches
(which are AAA loan tranches) on their respective final
repayment dates only,
(each a "FUNDING 2 RESERVE PRINCIPAL PAYMENT"),
in each case, prior to the service of a Funding 2 intercompany loan enforcement
notice.
On each monthly payment date funds standing to the credit of the Funding 2
reserve fund will be added to certain other income of Funding 2 in calculating
Funding 2 available revenue receipts and Funding 2 available principal
receipts.
Prior to the enforcement of the Funding 2 security, amounts standing to the
credit of the Funding 2 reserve fund may be utilized through their inclusion in
the calculation of the Funding 2 available revenue receipts to meet, and
thereby to satisfy, any deficit on each principal deficiency ledger.
The Funding 2 reserve fund will be funded and replenished from:
* Funding 2 available revenue receipts in accordance with item (T) of
the Funding 2 pre-enforcement revenue priority of payments up to an
amount equal to the Funding 2 reserve required amount;
* following the occurrence of an arrears or step-up trigger event,
any Funding 2 available revenue receipts to be paid in accordance
with item (T) of the Funding 2 pre-enforcement revenue priority of
payments up to and including an amount equal to the sum of the
Funding 2 reserve required amount and:
(a) if an arrears or step-up trigger event has occurred under item
(i) only of the arrears or step-up trigger event definition,
the amount specified in relation to such event in the most
recent prospectus supplement;
(b) if an arrears or step-up trigger event has occurred under item
(ii) only of the arrears or step-up trigger event definition,
the amount specified in relation to such event in the most
recent prospectus supplement;
(c) if an arrears or step-up trigger event has occurred under both
items (i) and (ii) of the arrears or step-up trigger event
definition, the amount specified in relation to such event in
the most recent prospectus supplement; and
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* Funding 2 available principal receipts, to the extent applied in
making Funding 2 reserve principal payments, in accordance with the
issuer pre-enforcement principal priority of payments up to an
amount equal to such Funding 2 reserve principal payments.
If an arrears or step-up trigger event has occurred under item (i), item
(ii) or items (i) and (ii) of the arrears or step-up trigger event definition
and such event(s) have been cured, the Funding 2 reserve fund will be reduced
by the applicable amount specified in relation to such event(s) in the most
recent prospectus supplement and the amount of such reduction will constitute
Funding 2 available revenue receipts;
The "FUNDING 2 RESERVE REQUIRED AMOUNT" is calculated, on any date, as the
amount (if any) by which the target reserve required amount exceeds the issuer
reserve minimum amount.
The "TARGET RESERVE REQUIRED AMOUNT", as at any date and subject to
amendment as described below, will be the amount specified as such in the most
recent prospectus supplement.
Funding 2 may adjust, at any time, the target reserve required amount, the
Funding 2 reserve required amount and/or the additional amounts as described
above, at any time without the consent of any noteholders, so long as the
Funding 2 security trustee and Funding 2 obtain confirmation from the rating
agencies that such adjustments will not cause a reduction, qualification or
withdrawal of the ratings of any outstanding notes.
The monies credited to the Funding 2 reserve fund will be deposited into the
Funding 2 GIC account. The cash manager will maintain a separate Funding 2
reserve ledger to record the balance from time to time of the Funding 2 reserve
fund.
Following the repayment in full of all loan tranches outstanding under the
global intercompany loan agreement, the Funding 2 reserve fund may be utilized
by Funding 2 in paying any other liability of Funding 2, subject to and in
accordance with the relevant Funding 2 priority of payments
Following enforcement of the Funding 2 security, amounts standing to the
credit of the Funding 2 reserve ledger may be applied in making payments of
principal due under the Funding 2 intercompany loan agreements.
FUNDING 2 LIQUIDITY RESERVE FUND
Funding 2 will be required to establish a liquidity reserve fund if the
long-term, unsecured, unsubordinated and unguaranteed debt obligations of the
seller cease to be rated at least A3 by Moody's or A- by Fitch (unless Moody's
or Fitch, as applicable, confirms that the then current ratings of the notes
will not be reduced, withdrawn or qualified by the ratings downgrade) (a
"FUNDING 2 LIQUIDITY RESERVE RATING EVENT").
Prior to enforcement of the Funding 2 security, the Funding 2 liquidity
reserve fund may be used:
* to help meet any deficit in Funding 2 available revenue receipts to
pay amounts due under the global intercompany loan agreement, but
only to the extent that such amounts are necessary to fund the
payment by Funding 2 of interest and fees due on the relevant
monthly payment date in respect of the AAA loan tranches and the AA
loan tranches and to help meet any deficit recorded on the
principal deficiency ledger in respect of the AAA loan tranches;
* (provided that there are no AAA loan tranches and AA loan tranches
outstanding) to help meet any deficit in Funding 2 available
revenue receipts which are allocated to pay all interest and fees
due under the global intercompany loan agreement; and
* to help meet any deficit in Funding 2 available principal receipts
available for:
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(a) prior to the occurrence of a trigger event, repayment of
principal due and payable in respect of original bullet loan
tranches (which are AAA loan tranches); and
(b) on or after the occurrence of a trigger event, repayment of
principal due and payable in respect of original bullet loan
tranches (which are AAA loan tranches) on their respective
final repayment dates,
(each a "FUNDING 2 LIQUIDITY RESERVE PRINCIPAL PAYMENT"),
in each case, prior to the service of a Funding 2 intercompany loan enforcement
notice.
The Funding 2 liquidity reserve fund, if any, will be funded initially from
Funding 2 available principal receipts to be paid in accordance with item (C)
the Funding 2 principal priority of payments. The Funding 2 liquidity reserve
fund will be funded up to the "FUNDING 2 LIQUIDITY RESERVE REQUIRED AMOUNT",
being an amount as of any monthly payment date equal to the excess, if any, of
3% of the aggregate outstanding balance of the notes on that monthly payment
date over the aggregate of the amounts standing to the credit of the Funding 2
reserve fund and the issuer reserve fund on that monthly payment date.
The monies credited to the Funding 2 liquidity reserve fund will be
deposited into the Funding 2 GIC account. All interest or income accrued on the
amount of the Funding 2 liquidity reserve fund while on deposit in the Funding
2 GIC account will belong to Funding 2. The cash manager will maintain a
separate Funding 2 liquidity reserve ledger to record the balance from time to
time of the Funding 2 liquidity reserve fund.
On each monthly payment date prior to enforcement of the Funding 2 security,
funds standing to the credit of the Funding 2 liquidity reserve fund will be
added to certain other funds of Funding 2 in calculating Funding 2 available
revenue receipts and Funding 2 available principal receipts to make payments
then due under the global intercompany loan agreement.
Once it has been initially funded, the Funding 2 liquidity reserve fund will
be replenished from any Funding 2 available revenue receipts or Funding 2
available principal receipts. Funding 2 available revenue receipts will only be
applied to replenish the Funding 2 liquidity reserve fund after paying amounts
due on the global intercompany loan to the extent that such amounts will fund
the payment of interest due on the AAA loan tranches and the AA loan tranches
and the reduction of any deficiency on the principal deficiency sub-ledger for
the AAA loan tranches (but not to fund any payment which would reduce any
deficiency on the principal deficiency sub-ledgers for the AA loan tranches,
the A loan tranches, the BBB loan tranches or the BB loan tranches as described
under "CASHFLOWS -- DISTRIBUTION OF FUNDING 2 AVAILABLE REVENUE RECEIPTS PRIOR
TO ENFORCEMENT OF THE FUNDING 2 SECURITY"). Funding 2 available principal
receipts will be applied, if necessary, on any monthly payment date to
replenish the Funding 2 liquidity reserve fund as described under "CASHFLOWS --
DISTRIBUTION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF
THE FUNDING 2 SECURITY".
Following enforcement of the Funding 2 security, amounts standing to the
credit of the Funding 2 liquidity reserve ledger may be applied in making
payments of principal then due and payable under the global intercompany loan
agreement.
PRINCIPAL DEFICIENCY LEDGER
A principal deficiency ledger has been established to record:
* any principal losses on the mortgage loans allocated to Funding 2;
* the application of Funding 2 available principal receipts to meet
any deficiency in Funding 2 available revenue receipts as described
under "-- USE OF FUNDING 2 PRINCIPAL RECEIPTS TO PAY FUNDING 2
INCOME DEFICIENCY"; and
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* the application of Funding 2 available principal receipts to fund
the Funding 2 liquidity reserve fund as described under "CASHFLOWS
-- DISTRIBUTION OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS PRIOR TO
ENFORCEMENT OF THE FUNDING 2 SECURITY".
The principal deficiency ledger is divided into five sub-ledgers which will
correspond to each of the AAA loan tranches, the AA loan tranches, the A loan
tranches, the BBB loan tranches, and the BB loan tranches respectively.
Losses on the mortgage loans or the application of principal receipts to pay
interest then due on the loan tranches under the global intercompany loan
agreement or the application by Funding 2 of Funding 2 available principal
receipts to fund the liquidity reserve fund will be recorded as follows:
* first, on the BB principal deficiency sub-ledger until the balance
of that sub-ledger is equal to the aggregate outstanding balance of
all BB loan tranches;
* second, on the BBB principal deficiency sub-ledger, until the
balance of that sub-ledger is equal to the aggregate outstanding
balance of all BBB loan tranches;
* third, on the A principal deficiency sub-ledger, until the balance
of that sub-ledger is equal to the aggregate outstanding balance of
all A loan tranches;
* fourth, on the AA principal deficiency sub-ledger, until the
balance of that sub-ledger is equal to the aggregate outstanding
balance of all AA loan tranches; and
* last, on the AAA principal deficiency sub-ledger, at which point
there will be an asset trigger event.
As described under "CASHFLOWS -- DISTRIBUTION OF FUNDING 2 AVAILABLE REVENUE
RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING 2 SECURITY", Funding 2 available
revenue receipts may, on each monthly payment date, be applied as follows:
* first, on the AAA principal deficiency sub-ledger;
* second, on the AA principal deficiency sub-ledger;
* third, on the A principal deficiency sub-ledger;
* fourth, on the BBB principal deficiency sub-ledger; and
* last, on the BB principal deficiency sub-ledger.
USE OF FUNDING 2 PRINCIPAL RECEIPTS TO PAY FUNDING 2 INCOME DEFICIENCY
On the distribution date immediately preceding each monthly payment date,
the cash manager will calculate whether there will be an excess or a deficit of
Funding 2 available revenue receipts to pay items (A) through (Q) of the
Funding 2 pre-enforcement revenue priority of payments.
If, after the application of the Funding 2 reserve fund and the Funding 2
liquidity reserve fund (if any), there is a deficit in the amount of Funding 2
available revenue receipts to pay items (A) through (H), (J), (M), (O) and (Q)
of the Funding 2 pre-enforcement revenue priority of payments, then the cash
manager shall pay or provide for that deficit by the application of funds which
constitute Funding 2 available principal receipts, if any, and the cash manager
shall make a corresponding debit entry in the relevant principal deficiency
sub-ledger, as described under "-- PRINCIPAL DEFICIENCY LEDGER" provided that
the amount of Funding 2 available principal receipts that may be applied to any
deficit of Funding 2 available revenue receipts will be reduced by the amount
that would be available to be drawn from the issuer reserve fund to cover any
deficit in issuer available revenue receipts to pay items (A) through (I) of
the issuer pre-enforcement revenue priority of payments, if no Funding 2
available principal receipts are to be applied to such deficit in Funding 2
available revenue receipts.
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Funding 2 available principal receipts may not be used to pay interest on
any loan tranche 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 loan tranche, and may not be used to
make up any deficit other than in respect of items (A) through (H), (J), (M),
(O) and (Q) of the Funding 2 pre-enforcement revenue priority of payments.
Principal therefore may not be used to pay interest on a loan tranche if the
balance on the relevant principal deficiency sub-ledger for such loan tranche is
equal to the principal amount outstanding on such loan tranche.
The cash manager shall apply any Funding 2 available revenue receipts to
extinguish any balance on the principal deficiency ledger, as described under
"-- PRINCIPAL DEFICIENCY LEDGER".
PRIORITY OF PAYMENTS AMONG THE CLASS A NOTES, THE CLASS B NOTES, THE CLASS M
NOTES, THE CLASS C NOTES AND THE CLASS D NOTES
The order of payments of interest to be made on the classes of notes will be
prioritized so that interest payments due on the class D notes on any note
payment date will be subordinated to interest payments on the class C notes,
the class M notes, the class B notes and the class A notes due on the same note
payment date, interest payments due on the class C notes on any note payment
date will be subordinated to interest payments on the class M notes, the class
B notes and the class A notes due on the same note payment date, interest
payments due on the class M notes on any note payment date will be subordinated
to interest payments on the class B notes and the class A notes due on the same
note payment date and interest payments due on the class B notes on any note
payment date will be subordinated to interest payments on the class A notes due
on the same note payment date, in each case in accordance with the issuer
priority of payments.
Any revenue shortfall in payments of interest due on any series of the class
B notes, the class M notes, the class C notes or the class D notes on any note
payment date in respect of such notes will be deferred until the immediately
succeeding note payment date in respect of such notes. On that immediately
succeeding note payment date, the amount of interest due on the relevant class
of notes will be increased to take account of any deferred interest. If on that
note payment date there is still a revenue shortfall, that revenue 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 notes, the class M notes, the
class C notes or the class D notes, then you may not receive all interest
amounts payable on those classes of notes.
We are not able to defer payments of interest due on any note payment date
in respect of the most senior class of notes then outstanding. The failure to
pay interest on such notes will be a note event of default.
The class A notes, the class B notes, the class M note, the class C notes
and the class D notes will be constituted by the trust deed and will share the
same security. Upon enforcement of that security or the occurrence of a trigger
event, the class A notes of each series will rank in priority to each series of
class B notes, each series of class M notes, each series of class C notes and
each series of class D notes; the class B notes of each series will rank in
priority to each series of class M notes, each series of class C notes and each
series of class D notes, each series of class M notes will rank in priority to
each series of class C notes and each series of class D notes and each series
of class C notes will rank in priority to each series of class D notes.
MORTGAGES TRUSTEE GIC ACCOUNT, FUNDING 2 GIC ACCOUNT AND ISSUER GIC ACCOUNT
All amounts held by the mortgages trustee which are not invested in
authorized investments will be deposited in the mortgages trustee GIC account
with the mortgages trustee GIC provider. The mortgages trustee GIC account is
subject to a guaranteed investment contract such that the mortgages trustee GIC
provider has agreed to pay a
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variable rate of interest on funds in the mortgages trustee GIC account of
0.15% per annum below LIBOR for three-month sterling deposits.
The mortgages trustee GIC account is currently maintained with Northern Rock
but may be required to be transferred to the stand-by GIC provider or other
bank in certain circumstances, including if the short-term, unguaranteed and
unsecured ratings ascribed to Northern Rock fall below "A-1+" (or in the
circumstances described below, "A-1") by Standard & Poor's, "F1" by Fitch and
"P-1" by Moody's, provided that where the relevant deposit amount is less than
20% of the aggregate principal amount outstanding of the notes issued by the
issuer and the Funding 2 issuers, then the short-term, unguaranteed and
unsecured rating required to be ascribed to Northern Rock by Standard & Poor's
shall be at least "A-1".
All amounts held by Funding 2 which are not invested in authorized
investments will be deposited in the Funding 2 GIC account. The Funding 2 GIC
account is maintained with Northern Rock. The Funding 2 GIC account is subject
to a guaranteed investment contract such that the Funding 2 GIC provider has
agreed to pay a variable rate of interest on funds in the Funding 2 GIC account
of 0.15% per annum below LIBOR for one-month sterling deposits.
All amounts held by the issuer which are not invested in authorized
investments will be deposited in the issuer GIC account. The issuer GIC account
is maintained with Northern Rock. The issuer GIC account is subject to a
guaranteed investment contract such that the issuer GIC provider has agreed to
pay a variable rate of interest on funds in the issuer GIC account of 0.15% per
annum below LIBOR for one-month sterling deposits.
Whilst Northern Rock maintains the issuer GIC account, it will be paid a fee
on each monthly payment date equal to the amount calculated by the issuer cash
manager as the excess of the issuer available revenue receipts on any monthly
payment date available to pay or provide for items (A) through (O) of the
issuer pre-enforcement revenue priority of payments on such monthly payment
date.
FUNDING 2 LIQUIDITY FACILITY
Funding 2 may, at any time after the Funding 2 program date and with the
prior written consent of the Funding 2 security trustee, establish the Funding
2 liquidity facility, which may be available to make interest and/or principal
payments on certain loan tranches and/or other senior expenses of Funding 2
(the payment of which ranks in priority to interest due on the loan tranches).
The consent of noteholders will not be obtained in relation to the
establishment of the Funding 2 liquidity facility.
The terms of the Funding 2 liquidity facility will be agreed with the
Funding 2 liquidity facility provider at the time Funding 2 enters into an
applicable agreement. It is expected that the terms of such agreement would
require the Funding 2 liquidity facility provider to make available to Funding
2, on the satisfaction of certain conditions, but subject to certain
restrictions and limitations, a facility to be utilized towards the making of
payments of interest and repayments of principal in respect of certain loan
tranches.
The obligation to pay interest or fees on any Funding 2 liquidity facility
will be senior to the obligation to pay amounts due to the Funding 2 basis rate
swap provider under the applicable Funding 2 pre-enforcement revenue priority
of payments and under the Funding 2 post-enforcement priority of payments.
Repayment of amounts drawn down under any Funding 2 liquidity facility will
be made by Funding 2 prior to making payments of interest and/or principal on
the loan tranches.
Any Funding 2 liquidity facility provider will be a secured creditor of
Funding 2 pursuant to the Funding 2 deed of charge. All amounts owing to the
Funding 2 liquidity facility provider will, on the service of a Funding 2
intercompany loan enforcement notice
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on Funding 2, rank in priority to all amounts of interest and principal then
outstanding from Funding 2 under the global intercompany loan agreement.
START-UP LOANS
The following section contains a summary of the material terms of the NR
start-up loan agreement. The summary does not purport to be complete and is
subject to the provisions of the NR start-up loan agreement, a form of which
has been filed as an exhibit to the registration statement of which this
prospectus is a part.
GENERAL DESCRIPTION
Pursuant to the NR start-up loan agreement, Northern Rock plc has agreed to
make available to us a start-up loan tranche on each closing date.
At any time after the Funding 2 program date, we may, with the prior written
consent of the issuer security trustee, enter into a new start-up loan
agreement with a new start-up loan provider under which such start-up loan
provider will also agree to make available to us a start-up loan tranche on
each closing date.
Each start-up loan tranche will be used to fund (in whole or in part) the
issuer reserve fund and to meet the costs and expenses incurred by Funding 2
and us in connection with the issuance of notes, the making of a loan tranche
and the acquisition by Funding 2 of the additional Funding 2 share of the trust
property. The amount of each start-up loan tranche to be made to us will be
described in the applicable prospectus supplement.
Each start-up loan tranche will constitute a separate debt, due from us to
the start-up loan provider. The aggregate of the start-up loan tranches, at any
time, will constitute the start-up loan.
INTEREST ON START-UP LOANS
Each start-up loan tranche will bear interest until repaid at a rate which
will be described in the applicable prospectus supplement until repaid. Any
unpaid interest will not fall due but will instead be due on the next following
monthly payment date on which sufficient funds are available to pay such unpaid
amount and pending such payment will itself bear interest. Interest is payable
by us on each monthly payment date in respect of such start-up loan tranche.
REPAYMENT OF START-UP LOANS
We will be obliged to repay the start-up loan only to the extent that we
have Funding 2 available revenue receipts after making payments ranking in
priority to payments to the start-up loan provider(s) as described under
"CASHFLOWS -- DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS PRIOR TO
ENFORCEMENT OF THE ISSUER SECURITY" or "CASHFLOWS -- DISTRIBUTION OF ISSUER
AVAILABLE PRINCIPAL RECEIPTS AND ISSUER AVAILABLE REVENUE RECEIPTS FOLLOWING
ENFORCEMENT OF THE ISSUER SECURITY". Amounts due to the start-up loan
provider(s) will be payable on any monthly payment date (and in no order of
priority among them, but in proportion to the amounts due) after amounts of
interest due to the noteholders. We will have no further recourse to the start-
up loan provider(s) after it has repaid the start-up loan(s).
EVENT OF DEFAULT
It will be an event of default under any start-up loan agreement if we have
available funds to pay amounts due to the start-up loan provider(s) and we do
not pay them.
ACCELERATION
Subject to the issuer deed of charge, the start-up loan will become
immediately due and payable upon service of a issuer enforcement notice.
GOVERNING LAW
Each start-up loan agreement will be governed by English law.
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THE SWAP AGREEMENTS
The following section describes, in summary, the material terms of the swap
agreements. The description does not purport to be complete and is subject to
the provisions of each of the swap agreements, forms of which have been filed
as exhibits to the registration statement of which this prospectus is a part.
THE FUNDING 2 BASIS RATE SWAPS
Some of the mortgage loans in the mortgage portfolio pay a variable rate of
interest for a period of time, which may be either linked to the seller's
standard variable rate or linked to an interest rate other than the seller's
standard variable rate, such as a variable rate offered by a basket of UK
mortgage lenders or an interest rate that tracks the Bank of England base rate.
Other mortgage loans pay a fixed rate of interest for a period of time.
The amount of revenue receipts that Funding 2 receives on the mortgage
portfolio will fluctuate according to the interest rates applicable to the
mortgage loans in the mortgages trust. The amount of interest payable by
Funding 2 to us under the loan tranches advanced pursuant to the global
intercompany loan agreement, from which amount we will fund, among other
things, our payment obligations under the issuer swaps and the notes, will
generally be calculated by reference to an interest rate based upon three-month
LIBOR, but will be payable in monthly instalments. In the light of this,
Funding 2 will enter into the Funding 2 basis rate swaps (which comprise
certain hedging arrangements).
The intention of these arrangements (which are entered into between Funding
2 and the Funding 2 basis swap provider) is to enable Funding 2 to receive from
the Funding 2 basis swap provider amounts equal to the interest payments due
under the global intercompany loan agreement in return for which Funding 2 will
pay to the Funding 2 basis swap provider amounts based on the rates of interest
on the mortgage loans in the mortgage portfolio applied to the Funding 2 share
of the trust property. In computing the rates of interest on the mortgage loans
in the mortgage portfolio, the hedging arrangements will assume that on
variable rate mortgage loans, the variable rate payable by the borrowers is
determined by reference to the average of the standard variable mortgage rates
or their equivalent charged to borrowers on residential mortgage loans as
published from time to time, after excluding the highest and the lowest rate,
of Abbey National PLC, Alliance & Leicester plc, Bradford & Bingley plc, HBOS
plc, Lloyds TSB Bank plc, National Westminster Bank plc and Woolwich plc (or
such other lenders as may replace such lenders in accordance with the terms and
conditions of the hedging arrangements).
If a payment is to be made by the Funding 2 basis rate swap provider under
the Funding 2 basis rate swaps, once received by Funding 2 that payment will be
included in the Funding 2 available revenue receipts and will be applied on the
relevant monthly payment date according to the relevant Funding 2 priority of
payments. If a payment is to be made by Funding 2 under the Funding 2 basis
rate swaps, it will be made according to the relevant Funding 2 priority of
payments.
In the event that any of the Funding 2 basis rate swaps terminates prior to
the service of a Funding 2 intercompany loan enforcement notice or the latest
occuring final repayment date of any loan tranche advanced under the global
intercompany loan agreement, Funding 2 shall use its best efforts to enter into
a replacement swap transaction on terms acceptable to the rating agencies and
the Funding 2 security trustee and with a swap provider whom the rating
agencies have previously confirmed in writing to Funding 2 and the Funding 2
security trustee will not cause the then current ratings of our notes to be
reduced, withdrawn or qualified.
Under the terms of the Funding 2 basis rate swaps, in the event that the
relevant rating of the Funding 2 basis rate swap provider (or any guarantor of
the Funding 2 basis
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rate swap provider) is downgraded by a rating agency below the rating(s)
specified in the Funding 2 basis rate swap agreement (in accordance with the
requirements of the rating agencies) and, where applicable, the then-current
ratings of the notes would or may, as applicable, be adversely affected as a
result of the downgrade, the Funding 2 basis rate swap provider will, as a
result of the downgrade, be required to take certain remedial measures. Such
measures may include providing collateral for its obligations under the Funding
2 basis rate swaps, arranging for its rights and obligations under the Funding
2 basis rate swaps to be transferred to an entity with the ratings required by
the relevant rating agency, procuring another entity with the ratings required
by the relevant rating agency to become a co-obligor in respect of its
obligations under the Funding 2 basis rate swaps or taking such other action as
it may agree with the relevant rating agency. A failure to take such steps will
allow Funding 2 to terminate the Funding 2 basis rate swaps, provided that in
the event that Funding 2 wishes to designate an early termination date (as
defined in the Funding 2 basis rate swap agreement) and there is a payment due
to the Funding 2 basis rate swap provider, Funding 2 may only designate such an
early termination date if it has found a replacement swap provider.
THE ISSUER SWAPS
To protect us against certain interest rate, currency and/or other risks in
respect of amounts received by us from Funding 2 under the global intercompany
loan agreement and amounts payable by us under each series and class of notes,
we will, on the closing date for a series and class of notes (and where it is
required to hedge such risks) enter into an issuer swap agreement with an
issuer swap provider.
Under each issuer swap:
(a) we are scheduled to pay to the issuer swap provider:
(i) on the applicable closing date, where a series and class of
notes has been issued in a specified currency other than
sterling, an amount in the specified currency equal to the
net proceeds of the issue of such notes;
(ii) where a series and class of notes has been issued in a
specified currency other than sterling, on each note payment
date in respect of such series and class of notes, an amount
in sterling equal to the principal payment (in the specified
currency) to be made on such series and class of notes on
that note payment date, such amount to be calculated by
reference to the relevant specified currency swap rate;
(iii) on each monthly payment date, an amount in sterling
calculated by applying a three month sterling LIBOR rate (or
an interpolated sterling LIBOR rate, as applicable) to the
principal amount outstanding of such notes; and
(b) the issuer swap provider is scheduled to pay to us:
(i) on the applicable closing date, where a series and class of
notes has been issued in a specified currency other than
sterling, an amount in sterling equal to the net proceeds of
the issue of such series and class of notes, converted from
the specified currency into sterling at the specified
currency swap rate;
(ii) where a series and class of notes has been issued in a
specified currency other than sterling, on each note payment
date in respect of such series and class of notes, an amount
in the specified currency equal to the principal payments to
be made on the relevant series and class of notes on that
note payment date;
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(iii) on each note payment date in respect of such series and
class notes, an amount in the specified currency equal to
the interest to be paid in the specified currency on such
series and class of notes on that note payment date.
On the earlier to occur of a step-up-date in respect of a series and class
of notes and a pass-through trigger event, the issuer swap agreement in respect
of that series and class of notes will be adjusted to provide for payments
under the issuer swap agreement to be due monthly in order to reflect the
monthly payments of interest on the applicable series and class of notes.
In the event that any issuer swap is terminated prior to the service of an
issuer enforcement notice or the final maturity date in respect of the
applicable series and class of notes (and where such notes have not been repaid
in full), we shall use our best efforts to enter into a replacement issuer swap
in respect of that series and class of notes. Any replacement issuer swap must
be entered into on terms acceptable to the rating agencies and the issuer
security trustee and with a replacement issuer swap provider that the rating
agencies have confirmed will not cause the then-current ratings of the
applicable notes to be reduced, withdrawn or qualified.
Under the terms of each issuer swap, in the event that the relevant rating
of any issuer swap provider (or any guarantor of the issuer swap provider) is
downgraded by a rating agency below the rating(s) specified in the relevant
issuer swap agreement (in accordance with the requirements of the rating
agencies) (a "SWAP DOWNGRADE EVENT") and, where applicable, the then-current
ratings of the notes would or may, as applicable, be adversely affected as a
result of the downgrade, such issuer swap provider will be required to take
certain remedial measures. Such measures may include providing collateral for
its rights and obligations under the relevant issuer swap agreement, arranging
for its obligations under the relevant issuer swap agreement to be transferred
to an entity with the ratings required by the relevant rating agency, procuring
another entity with the ratings required by the relevant rating agency to
become a co-obligor in respect of, or guarantor of, its obligations under the
relevant issuer swap agreement or taking such other action as it may agree with
the relevant rating agency. A failure to take such steps will allow us to
terminate the relevant issuer swap agreement, provided that in the event that
we wish to designate an early termination date (as defined in the relevant
issuer swap agreement) and there is a payment due to the relevant issuer swap
provider, we may only designate such an early termination date if it has found
a replacement swap provider.
TERMINATION OF THE SWAP TRANSACTIONS
A swap transaction could also be terminated in certain other circumstances
set out in the relevant swap agreement each referred to as a "SWAP EARLY
TERMINATION EVENT" which include, but are not limited to, the following
circumstances:
* at the option of one party to the swap transaction, if there is a
failure by the other party to pay any amounts due and payable in
accordance with the terms of that swap. Certain amounts may be due
but not payable in accordance with the terms of the swap as
described below under "-- LIMITED RECOURSE AND SWAP PAYMENT
OBLIGATION";
* in the case of the issuer swaps, the note trustee serving an issuer
enforcement notice and, in the case of the Funding 2 basis rate
swaps, the Funding 2 security trustee serving a Funding 2
intercompany loan enforcement notice;
* if withholding taxes are imposed on a swap provider's payments due
to a change in law;
* upon the occurrence of certain insolvency events in relation to the
parties or its credit support provider, if applicable, or the
merger of the relevant swap provider or its credit support
provider, if applicable, without an assumption of the
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obligations under the swap transactions or the relevant credit
support document (as the case may be), or changes in law resulting
in the obligations of one of the parties or its credit support
provider becoming illegal.
Upon the occurrence of a swap early termination event in relation to the
Funding 2 basis rate swap agreement, Funding 2 or the Funding 2 basis rate swap
provider may be liable to make a swap termination payment to the other. Upon
the occurrence of a swap early termination event in relation to an issuer swap
agreement, we or the relevant swap provider may be liable to make a swap
termination payment to the other. This swap termination payment will be
calculated and made in sterling. The amount of any swap termination payment
will be based on the market value of the terminated swap based on market
quotations of the cost of entering into a swap with the same terms and
conditions that would have the effect of preserving the respective full payment
obligations of the parties (or based upon loss in the event that no market
quotation can be obtained). Any such swap termination payment could be
substantial.
If any swap termination payment is due by us to an issuer swap provider,
then pursuant to our obligations under the global intercompany loan agreement,
Funding 2 shall pay to us the amount required by us to pay the swap termination
payment due to the relevant swap provider. Following the termination of an
issuer swap, as a result of a swap provider default with respect to the
relevant issuer swap provider, any such swap termination payment will be made
by us to the issuer swap provider only after paying interest amounts due on the
notes, However, if we cause a default to occur that results in a swap
termination payment becoming due from us to an issuer swap provider, such
payment will be made by us in the same priority as we pay the relevant interest
amounts due on that series and class of notes. We shall apply amounts received
from Funding 2 under the global intercompany loan agreement in respect of swap
termination payments in accordance with the issuer pre-enforcement revenue
priority of payments, the issuer pre-enforcement principal priority of payments
or, as the case may be, the issuer post-enforcement priority of payments. The
application by us of swap termination payments due to a swap provider may
affect the funds available to pay amounts due to the noteholders (see "RISK
FACTORS -- YOU MAY BE SUBJECT TO EXCHANGE RATE AND INTEREST RATE RISKS").
Following termination of a Funding 2 basis rate swap, as a result of a swap
provider default with respect to the Funding 2 basis rate swap provider, where
a swap termination payment becomes due from Funding 2 to the Funding 2 basis
rate swap provider, such payment will be made only after paying interest
amounts due on the global intercompany loan and after satisfying any debit
balance on the principal deficiency ledger. However, if Funding 2 causes a
default to occur that results in a swap termination payment becoming due from
Funding 2 to the basis rate swap provider, such payment will be made in
priority to the payment of interest amounts due on the global intercompany
loan. The application by Funding 2 of swap termination payments due to a
Funding 2 basis rate swap provider may affect the funds available to pay
amounts due to noteholders (see "RISK FACTORS -- SWAP TERMINATION PAYMENTS MAY
ADVERSELY AFFECT THE FUNDS AVAILABLE TO MAKE PAYMENTS ON THE NOTES").
If Funding 2 receives a swap termination payment from the Funding 2 basis
rate swap provider, then Funding 2 shall use those funds towards meeting its
costs in effecting applicable hedging transactions until a replacement swap
transaction is entered into and/or to acquire a replacement swap transaction.
We will not receive extra amounts (over and above interest and principal
payable under the global intercompany loan agreement) as a result of Funding 2
receiving a swap termination payment.
If we receive a swap termination payment from an issuer swap provider, then
we shall use those funds towards meeting our costs in effecting any applicable
hedging transactions until a new issuer swap is entered into and/or to acquire
a new issuer swap. You will not receive extra amounts (over and above interest
and principal payable on the notes) as a result of us receiving a swap
termination payment.
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TAXATION
Neither we nor Funding 2 are obliged under any of the swap transactions to
gross up payments made by them if withholding taxes are imposed on payments
made under the swaps.
A swap provider is always obliged to gross up payments made by it to Funding
2 or us (as applicable) if withholding taxes are imposed on payments made under
the swap transactions. If such withholding taxes are imposed due to a change in
tax law, a swap provider may have the right to terminate the applicable swap
transaction.
LIMITED RECOURSE AND SWAP PAYMENT OBLIGATION
On any scheduled payment date under the Funding 2 basis rate swaps, Funding
2 will only be obliged to pay an amount to the Funding 2 basis rate swap
provider to the extent that Funding 2 has received sufficient funds in respect
of the Funding 2 share of the trust property to pay that amount to the Funding
2 basis rate swap provider, subject to and in accordance with the relevant
Funding 2 priority of payments. On any scheduled payment date under the Funding
2 basis rate swaps, the Funding 2 basis rate swap provider will only be obliged
to pay to Funding 2 an amount that is proportionate to the amount of the
payment that it has received from Funding 2 on that date.
Prior to the enforcement of the issuer security, on any scheduled payment
date under the issuer swaps, we will only be obliged to pay an amount to an
issuer swap provider in respect of an issuer swap agreement relating to a
series and class of notes to the extent that we have received from Funding 2
sufficient funds under the loan tranche related to such series and class of
notes to pay that amount to that issuer swap provider, subject to and in
accordance with the relevant issuer priority of payments. On any scheduled
payment date under the issuer swaps, each issuer swap provider will only be
obliged to pay to us an amount that is proportionate to the amount of the
payment that it has received from us on or prior to that date.
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CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING 2
The material terms of the cash management agreement are summarized in this
section. The summary does not purport to be complete and it is subject to the
provisions of the cash management agreement. A form of the cash management
agreement has been filed as an exhibit to the registration statement of which
this prospectus is a part.
Northern Rock has been appointed by the mortgages trustee, Funding, Funding
2, the security trustee and the Funding 2 security trustee to provide cash
management services in relation to the mortgages trustee, Funding and Funding
2.
CASH MANAGEMENT SERVICES TO BE PROVIDED IN RELATION TO THE MORTGAGES TRUST
The cash manager's duties in relation to the mortgages trust include, but
are not limited to:
(A) determining the current shares and share percentages of Funding,
Funding 2 and the seller in the trust property (including the
relevant weighted average Funding share percentage, the relevant
weighted average Funding 2 share percentage and the relevant
weighted average seller share percentage, as applicable) in
accordance with the terms of the mortgages trust deed;
(B) maintaining the following ledgers on behalf of the mortgages
trustee:
* the Funding share/Funding 2 share/seller share ledger, which
will record the current shares of Funding, Funding 2 and the
seller in the trust property;
* the losses ledger, which will record losses on the mortgage
loans;
* the principal ledger, which will record principal receipts on
the mortgage loans received by the mortgages trustee, payments
of principal from the mortgages trustee GIC account to Funding,
Funding 2 and the seller and any mortgages trustee retained
principal receipts;
* the revenue ledger, which will record revenue receipts on the
mortgage loans received by the mortgages trustee and payments
of revenue receipts from the mortgages trustee GIC account to
Funding, Funding 2 and the seller;
* the overpayments ledger, which will record each revenue receipt
and/or principal receipt paid by a borrower in excess of the
amount required under the terms of the relevant mortgage loan
(and in the case of any non-flexible mortgage loan by an amount
equal to or less than [GBP]199.99), and which will be sub-
divided into sub-ledgers to record overpayments made on non-
flexible mortgage loans and flexible mortgage loans;
* the non-flexible underpayments ledger, which will record
underpayments on non-flexible mortgage loans;
* the re-draws ledger, which will record re-draws on the flexible
mortgage loans and which will be sub-divided into sub-ledgers
to record cash re-draws and non-cash re-draws;
* the contributions ledger, which will record the making by
Funding, Funding 2 and the seller of contributions to the
mortgages trust and the application of such contributions in
accordance with the terms of the mortgages trust deed; and
* the further draw ledger which will record further draws on
personal secured loans.
(C) distributing the mortgages trustee available revenue receipts and
the mortgages trustee available principal receipts to Funding,
Funding 2 and the seller in accordance with the terms of the
mortgages trust deed;
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(D) providing the mortgages trustee, Funding, Funding 2, the security
trustee, the Funding 2 security trustee and the rating agencies
with a quarterly report in relation to the trust property; and
(E) providing the mortgages trustee and Funding 2 with quarterly
management accounts.
CASH MANAGEMENT SERVICES TO BE PROVIDED TO FUNDING 2
The cash manager's duties in relation to Funding 2 include, but are not
limited to:
(A) determining no later than the distribution date immediately
preceding the relevant monthly payment date:
* the amount of Funding 2 available revenue receipts to be
applied on that relevant monthly payment date to pay interest
and fees then due under the global intercompany loan agreement;
and
* the amount of Funding 2 available principal receipts to be
applied on that relevant monthly payment date to repay
principal then due under the global intercompany loan
agreement;
(B) maintaining the following ledgers on behalf of Funding 2:
* the Funding 2 cash accumulation ledger which will record the
principal receipts accumulated by Funding 2 to repay each
bullet loan tranche;
* the Funding 2 principal ledger, which will record the all other
principal receipts received by Funding 2 on each distribution
date;
* the Funding 2 revenue ledger, which will record all other
amounts received by Funding 2 on each distribution date;
* the Funding 2 reserve ledger, which will record the amount
credited to the Funding 2 reserve fund from time to time, and
subsequent withdrawals and deposits in respect of the Funding 2
reserve fund; and
* the Funding 2 intercompany loan ledger, which will record
payments of interest and repayments of principal on each of the
loan tranches made under the global intercompany loan
agreement;
(C) investing sums standing to the credit of the Funding 2 GIC account
or any other Funding 2 bank account in short-term authorized
investments (as defined in the glossary) on behalf of Funding 2 or
the Funding 2 security trustee (as the case may be);
(D) making withdrawals from the Funding 2 reserve account as and when
required;
(E) making any required withdrawals under the Funding 2 liquidity
reserve fund(s), if any;
(F) applying the Funding 2 available revenue receipts and Funding 2
available principal receipts in accordance with the relevant order
of priority of payments for Funding 2 contained in the Funding 2
deed of charge;
(G) providing Funding 2, the issuer, the Funding 2 security trustee and
the rating agencies with a monthly report in relation to Funding 2;
(H) making all returns and filings in relation to Funding 2 and the
mortgages trustee and providing or procuring the provision of
company secretarial and administration services to them; and
(I) maintaining the Funding 2 principal deficiency ledger.
For the definitions of Funding 2 available revenue receipts, Funding 2
available principal receipts and the Funding 2 pre-enforcement priorities of
payments, see "CASHFLOWS".
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COMPENSATION OF CASH MANAGER
The cash manager is paid an annual fee of [GBP]100,000 for its services
which is paid in equal installments monthly in arrear on a monthly payment
date. The fee is inclusive of VAT. The fee is subject to adjustment if the
applicable rate of VAT changes.
In addition, the cash manager is entitled to be indemnified for any expenses
or other amounts properly incurred by it in carrying out its duties. The cash
manager is paid by the mortgages trustee, Funding 2 and Funding proportionately
in accordance with and subject to the terms of the mortgages trust deed, the
relevant Funding 2 priority of payments and the Funding priority of payments,
prior to amounts due to the issuer under the global intercompany loan
agreement.
RESIGNATION OF CASH MANAGER
The cash manager may resign only on giving 12 months' prior written notice
to the each Funding security trustee, each Funding beneficiary and the
mortgages trustee provided that the Funding security trustees and the Funding
beneficiaries and the mortgages trustee each consent in writing to the cash
manager's resignation and provided further that:
* a substitute cash manager has been appointed and a new cash
management agreement is entered into on terms satisfactory to the
Funding security trustees, the Funding beneficiaries and the
mortgages trustee; and
* the then current ratings of the issuer's notes and the Funding
issuers' notes would not be reduced, withdrawn or qualified as a
result of that replacement.
TERMINATION OF APPOINTMENT OF CASH MANAGER
The Funding security trustees, the Funding beneficiaries and/or the
mortgages trustee may, upon written notice to the cash manager, terminate the
cash manager's rights and obligations immediately on the occurrence of certain
events including:
* the cash manager defaults in the payment of any amount due and
fails to remedy such default for a period of 5 London business days
after the earlier of becoming aware of the default and receiving a
written notice of such default from the Funding security trustees;
* the cash manager fails to comply with any of its other obligations
under the cash management agreement which in the opinion of the
Funding 2 security trustee, is materially prejudicial to the
interests of the holders of the notes issued by the issuer and does
not remedy that failure within 20 days after the earlier of
becoming aware of the failure and receiving written notice from the
Funding security trustees; or
* the cash manager suffers an insolvency event.
Upon termination of the appointment of the cash manager, each Funding
security trustee has agreed to use its reasonable endeavors to appoint a
substitute cash manager. Any such substitute cash manager will be required to
enter into an agreement on substantially the same terms as the provisions of
the cash management agreement and any appointment is conditional upon the
rating agencies having previously confirmed in writing to the mortgages
trustee, each Funding beneficiary and each Funding security trustee that the
then current ratings of the issuer's notes and the notes of the Funding issuers
will not be reduced, withdrawn or qualified.
If the appointment of the cash manager is terminated or it resigns, the cash
manager must deliver its books of account relating to the mortgage loans to or
at the direction of the mortgages trustee, the Funding beneficiaries or the
Funding security trustees, as the case may be. The cash management agreement
will terminate automatically when both Funding and Funding 2 have no further
interest in the trust property and all amounts
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outstanding under the global intercompany loan agreement and each Funding
intercompany loan agreement have been repaid or otherwise discharged.
GOVERNING LAW
The cash management agreement is governed by English law.
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CASH MANAGEMENT FOR THE ISSUER
The material terms of the issuer cash management agreement are summarized in
this section. The summary does not purport to be complete and it is subject to
the terms of the issuer cash management agreement. A form of the issuer cash
management agreement has been filed as an exhibit to the registration statement
of which this prospectus is a part.
On the Funding 2 program date, we appointed Northern Rock to provide cash
management services to us.
CASH MANAGEMENT SERVICES TO BE PROVIDED TO THE ISSUER
The issuer cash manager's duties include, but are not limited to:
(A) determining no later than the distribution date immediately
preceding the relevant monthly payment date:
* the issuer available revenue receipts to be applied to pay
interest on the notes on that relevant monthly payment date to
the applicable issuer swap provider or to the noteholders, as
applicable, and to pay amounts due to other creditors of the
issuer;
* the issuer available principal receipts to be applied to pay
the applicable swap provider and to repay principal of the
notes on that relevant monthly payment date; and
* such other amounts as are expressed to be calculations and
determinations made by the issuer cash manager under the
conditions of the notes;
(B) applying issuer available revenue receipts and issuer available
principal receipts in accordance with the relevant order of
priority of payments for the issuer set out in the issuer cash
management agreement;
(D) providing the issuer, Funding 2, the note trustee, the issuer
security trustee and the rating agencies with quarterly reports in
relation to the issuer;
(E) making all returns and filings required of the issuer and procuring
the provision of company secretarial and administration services to
the issuer;
(F) arranging payment of all fees to the London Stock Exchange plc or,
as applicable, the Financial Services Authority;
(G) performing, if necessary, all currency and interest rate
conversions free of charge, cost or expense at the relevant
exchange rate; and
(H) calculating required subordinated amounts and determining whether
issuance tests and conditions to the repayment of notes have been
met.
ISSUER'S BANK ACCOUNT
As at the Funding 2 program date, the issuer maintains a bank account with
the issuer account bank (the "ISSUER TRANSACTION ACCOUNT") and a bank account
with Northern Rock (the "ISSUER GIC ACCOUNT"). The issuer may, with the prior
written consent of the issuer security trustee, open additional or replacement
bank accounts.
If the short-term, unguaranteed and unsubordinated ratings of the issuer
account bank cease to be rated "A-1+" by Standard & Poor's, "P-1" by Moody's or
"F1+" by Fitch, then the issuer transaction account will be closed and a new
issuer transaction account opened with a bank that has the requisite ratings.
COMPENSATION OF ISSUER CASH MANAGER
The issuer cash manager will be paid for its services an annual fee of
[GBP]100,000 which will be paid in equal installments monthly in arrear on a
monthly payment date. The
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fee is inclusive of VAT. The fees will be subject to adjustment if the
applicable rate of VAT changes.
In addition, the issuer cash manager will be entitled to reimbursement for
any expenses or other amounts properly incurred by it in carrying out its
duties. The issuer cash manager will be paid by the issuer prior to amounts due
on the notes.
RESIGNATION OF ISSUER CASH MANAGER
The issuer cash manager may resign only on giving 12 months' prior written
notice to the issuer security trustee and us provided that we and the issuer
security trustee have consented in writing to the issuer cash manager's
resignation and provided further that:
* a substitute issuer cash manager has been appointed and a new
issuer cash management agreement is entered into on terms
satisfactory to the issuer security trustee and us; and
* that replacement would not cause the then current ratings of the
notes to be reduced, withdrawn or qualified.
TERMINATION OF APPOINTMENT OF ISSUER CASH MANAGER
The issuer or the issuer security trustee may, upon written notice to the
issuer cash manager, terminate the issuer cash manager's rights and obligations
immediately if any of the following events occurs:
* the issuer cash manager defaults in the payment of any amount due
and fails to remedy such default for a period of 5 London business
days after the earlier of becoming aware of the default and
receiving written notice of such default from us or the issuer
security trustee;
* the issuer cash manager fails to comply with any of its other
obligations under the issuer cash management agreement which in the
opinion of the issuer security trustee is materially prejudicial to
the noteholders and does not remedy that failure within 20 days
after the earlier of becoming aware of the failure and receiving a
notice from the issuer security trustee; or
* the issuer cash manager suffers an insolvency event.
Upon termination of the appointment of the issuer cash manager, the issuer
security trustee will agree to use its reasonable endeavors to appoint a
substitute issuer cash manager. Any such substitute issuer cash manager will be
required to enter into an agreement on substantially the same terms as the
provisions of the issuer cash management agreement and any appointment is
conditional upon the rating agencies having previously confirmed in writing to
the issuer and the issuer security trustee that the then current ratings of the
issuer's notes will not be reduced, withdrawn or qualified.
If the appointment of the issuer cash manager is terminated or the issuer
cash manager resigns, the issuer cash manager must deliver its books of account
relating to the notes to or at the direction of the issuer security trustee.
The issuer cash management agreement will terminate automatically when the
notes have been fully redeemed.
GOVERNING LAW
The issuer cash management agreement will be governed by English law.
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SECURITY FOR FUNDING 2'S OBLIGATIONS
To provide security for its obligations under the global intercompany loan
agreement and the other transaction documents, Funding 2 has entered into the
Funding 2 deed of charge with the Funding 2 secured creditors. A summary of the
material terms of the Funding 2 deed of charge is set out below. The summary
does not purport to be complete and is subject to the provisions of the Funding
2 deed of charge. This prospectus forms part of the registration statement and
a form of the Funding 2 deed of charge has been filed as an exhibit to that
registration statement.
Subject as provided in the following paragraph, Funding 2 has granted the
following security to be held by the Funding 2 security trustee for itself and
on trust for the benefit of the Funding 2 secured creditors:
* an assignment by way of first fixed security of the Funding 2 share
of the trust property;
* an assignment by way of first fixed security of all of Funding 2's
right, title, interest and benefit in the transaction documents
(including for the avoidance of doubt rights against the mortgages
trustee under the mortgages trust deed, but excluding all of
Funding 2's right, title, interest and benefit in the Funding 2
deed of charge) to which Funding 2 is a party from time to time;
* a first fixed charge (which may take effect as a floating charge)
of Funding 2's right, title, interest and benefit in the Funding 2
GIC account, the Funding 2 transaction account, any Funding 2 swap
collateral account and each other account (if any) of Funding 2 and
all amounts standing to the credit of those accounts (including all
interest accrued on such amounts);
* a first fixed charge (which may take effect as a floating charge)
of Funding 2's right, title, interest and benefit in all authorized
investments made by or on behalf of Funding 2 including all income
on such investments; and
* a first floating charge over all the assets and the undertaking of
Funding 2 which are not otherwise effectively subject to a fixed
charge or assignment by way of security as described in the
preceding paragraphs (and also extending over all Funding 2's
Scottish assets whether or not effectively charged or assigned by
way of security as aforesaid).
Security which is expressed to be fixed in nature may take effect as
floating security depending on the degree of control which the secured party is
given over the relevant assets and the degree to which the secured party
actually exercises such control.
NATURE OF SECURITY -- FIXED CHARGE OR FLOATING CHARGE
For an asset to be regarded as being subject to a fixed charge, as a general
rule, Funding 2 should not be permitted to deal with such assets without the
consent of the Funding 2 security trustee. In this way, the security is said to
"fix" over those assets which are expressed to be subject to a fixed charge.
Unlike fixed charges, a floating charge encumbers a class of assets which
may change from time to time. Funding 2 is able to deal with assets which are
subject to a floating charge only and to give third parties title to those
assets free from the floating charge in the event of sale, discharge or
modification, provided that such dealings and transfers of title are in the
ordinary course of Funding 2's business. Assets which are acquired by Funding 2
after the Funding 2 program date (including assets acquired upon the
disposition of any other asset) and which are not subject to any fixed charge
will be subject to the floating charge created by the Funding 2 deed of charge.
The existence of the floating charge will allow the Funding 2 security
trustee to appoint a receiver as an administrative receiver of Funding 2 as
long as the capital market exemption is available. The main advantage of the
receiver being an administrative receiver is that a person entitled to appoint
an administrative receiver can prevent the
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appointment of an administrator, ensuring that in the event of enforcement
proceedings commenced in respect of amounts due and owing by Funding 2, the
Funding 2 security trustee will be able to control those proceedings in the
best interest of the Funding 2 secured creditors. If an administrator of
Funding 2 were appointed this would prevent the appointment of a receiver and
freeze the enforcement by the Funding 2 secured creditors and the Funding 2
security trustee of rights and remedies without the consent of the
administrator or leave of the court.
The interest of the Funding 2 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 Funding 2 security. Section 250 of the Enterprise Act
2002 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 1986 (as inserted by Section 251 of the Enterprise Act 2002)
requires a "prescribed part" (up to a maximum amount of [GBP]600,000) of the
floating charge realisations available for distribution to be set aside to
satisfy the claims of unsecured creditors. This means that the expenses of any
liquidation or administration, the claims of preferential creditors and the
beneficiaries of the prescribed part will be paid out of the proceeds of
enforcement of the floating charge ahead of amounts due to Funding 2 secured
creditors. 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 Funding 2 deed of charge may
"crystallize" and become a fixed charge over the relevant class of assets owned
by Funding 2 at the time of crystallization. Crystallization will occur
automatically following the occurrence of specific events set out in the
Funding 2 deed of charge, including, among other events, service of a Funding 2
intercompany loan enforcement notice on Funding 2 (except in relation to
Scottish assets, in respect of which the floating charge will crystallize only
on the appointment of a receiver under it or upon Funding 2 going into
liquidation within the meaning of section 247(2) of the Insolvency Act 1986). A
crystallized floating charge will continue to rank behind the claims of
preferential creditors (as referred to in this section) on enforcement of the
Funding 2 security.
We expect that the appointment of an administrative receiver by the Funding
2 security trustee under the Funding 2 deed of charge will not be prohibited by
Section 72A of the Insolvency Act 1986 as the appointment will fall within the
exception set out under Section 72B of the Insolvency Act 1986 (First
exception: capital market).
FUNDING 2 PRE-ENFORCEMENT AND POST-ENFORCEMENT PRIORITY OF PAYMENTS
The Funding 2 deed of charge sets out the order of priority, as at the
Funding 2 program date, for the application by the cash manager, prior to the
service of a Funding 2 intercompany loan enforcement notice, of amounts
standing to the credit of the Funding 2 transaction account on each monthly
payment date. This order of priority is described under "CASHFLOWS --
DISTRIBUTION OF FUNDING 2 AVAILABLE REVENUE RECEIPTS PRIOR TO THE ENFORCEMENT
OF THE FUNDING 2 SECURITY" and CASHFLOWS -- DISTRIBUTION OF FUNDING 2 AVAILABLE
PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT OF THE FUNDING 2 SECURITY".
The Funding 2 deed of charge sets out the order or priority, as at the
Funding 2 program date, for the application by the Funding 2 security trustee
(or the cash manager on behalf of the Funding 2 security trustee), following
service of a Funding 2 intercompany loan enforcement notice, of amounts
received or recovered by the Funding 2 security trustee or a receiver appointed
on its behalf. This order of priority is described under "CASHFLOWS --
DISTRIBUTION OF MONIES FOLLOWING ENFORCEMENT OF THE FUNDING 2 SECURITY".
If any other Funding 2 issuers are established to issue notes and
accordingly to make advances to Funding 2, such Funding 2 issuers and other
applicable creditors of Funding 2 will enter into deeds of accession or
supplemental deeds in relation to the
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Funding 2 deed of charge which may, depending on the type of notes to be
issued, require amendments, amongst other things, to any of the Funding 2 pre-
enforcement revenue priority of payments, the Funding 2 pre-enforcement
principal priority of payments, and the Funding 2 post-enforcement priority of
payments.
ENFORCEMENT
The Funding 2 deed of charge sets out the circumstances upon which and the
procedures by which the Funding 2 security trustee may take steps to enforce
the Funding 2 security. The Funding 2 security will become enforceable upon the
service on Funding 2 by the Funding 2 security trustee of a Funding 2
intercompany loan enforcement notice (see "THE GLOBAL INTERCOMPANY LOAN
AGREEMENT -- FUNDING 2 INTERCOMPANY LOAN EVENTS OF DEFAULT") provided that, if
the Funding 2 security has become enforceable otherwise than by reason of a
default in payment of any amount due in respect of the AAA loan tranches, the
Funding 2 security trustee will not be entitled to dispose of all or part of
the assets comprised in the Funding 2 security unless either:
* a sufficient amount would be realized to allow a full and immediate
discharge of all amounts owing in respect of all AAA loan tranches
and all prior ranking amounts due by Funding 2; or
* the Funding 2 security trustee is of the opinion (which shall be
binding on the Funding 2 secured creditors), reached after
considering the advice of any financial or professional advisers
selected by the Funding 2 security trustee (and if the Funding 2
security trustee is unable to obtain such advice having made
reasonable efforts to do this, this condition shall not apply),
that the cash flow expected to be received by Funding 2 will not,
or that there is a significant risk that it will not, be sufficient
(as certified to it by Funding 2), having regard to any other
relevant actual, contingent or prospective liabilities of Funding 2
to discharge in full over time all amounts owing in respect of all
AAA loan tranches and all prior ranking amounts due by Funding 2.
The Funding 2 security trustee shall not be bound to make the determinations
set out above unless it shall have been indemnified and/or secured to its
satisfaction against all liabilities to which it may thereby become liable or
which it may incur by so doing.
CONFLICTS
The Funding 2 deed of charge provides that, when exercising its discretion
and/or when exercising the rights, benefits, powers, trusts, authorities,
directions and obligations expressed to be granted by the Funding 2 deed of
charge, the Funding 2 security trustee shall act only at the request or
direction of the issuer security trustee. The authority of the issuer security
trustee to direct the Funding 2 security trustee to act derives from the
issuer's assignment to the issuer security trustee of its rights under the
Funding 2 deed of charge.
DELEGATION BY THE FUNDING 2 SECURITY TRUSTEE TO AN AUTHORISED THIRD PARTY
Subject as provided further in the transaction documents, the Funding 2
security trustee shall be entitled to delegate certain of its functions and
rights under the transaction documents pursuant to the administration agreement
to one or more authorized third parties whom the rating agencies have
previously confirmed in writing to the Funding 2 security trustee and the
issuer will not result in the ratings on the notes being reduced, qualified or
withdrawn. In the event of any such appointment, the Funding 2 security trustee
shall not be required to monitor or supervise the third party's performance and
shall not be responsible for any act or omission of such third party or for any
loss caused thereby.
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NO ENFORCEMENT BY FUNDING 2 SECURED CREDITORS
Each of the Funding 2 secured creditors (other than the Funding 2 security
trustee and any receiver) has agreed under the Funding 2 deed of charge that
only the Funding 2 security trustee may enforce the security created by the
Funding 2 deed of charge.
MODIFICATION AND WAIVER, FEES, RETIREMENT AND RESPONSIBILITIES OF THE FUNDING 2
SECURITY TRUSTEE
MODIFICATION AND WAIVER
Without the consent of any of the Funding 2 secured creditors, the Funding 2
security trustee may:
* agree to modifications to the transaction documents provided that
the Funding 2 security trustee is of the opinion that any such
modification would not be materially prejudicial to the interests
of the Funding 2 secured creditors or that such modification is of
a formal, minor or technical nature or is required by the rating
agencies in respect of any other Funding 2 issuer or other person
which accedes to the Funding 2 deed of charge; and
* authorize or waive a proposed or actual breach of any provisions of
the transaction documents provided that the Funding 2 security
trustee is of the opinion that such breach would not be materially
prejudicial to the interests of the Funding 2 secured creditors.
Any such modification, authorization or waiver will be binding on the
Funding 2 secured creditors.
When formulating its opinion and/or when exercising the rights, benefits,
trusts, authorities, directions and obligations under the transaction documents
to which it is a party, the Funding 2 security trustee shall as a result of the
operation of the provisions of the Funding 2 deed of charge and the issuer deed
of charge and the assignment by us of our rights under the Funding 2 deed of
charge to the issuer security trustee, act only at the request or direction of
the issuer security trustee.
FEES, EXPENSES AND INDEMNITY
Funding 2 shall reimburse the Funding 2 security trustee for all its costs
and expenses properly incurred in acting as Funding 2 security trustee. In
addition, Funding 2 shall pay to the Funding 2 security trustee a fee of such
amount and on such dates as will be agreed from time to time by the Funding 2
security trustee and Funding 2. Funding 2 shall indemnify the Funding 2
security trustee from and against all proceedings, claims, demands, losses,
costs, charges, expenses and liabilities incurred by it or to which it may
become liable in connection with the exercise of its trusts, powers,
authorities and discretions, or otherwise in respect of any matter done or not
done relating to the transaction documents, except where the same is caused by
the fraud, gross negligence, willful default or breach of the terms of the
Funding 2 deed of charge by the Funding 2 security trustee or any of its
officers or employees.
RETIREMENT AND REMOVAL
Subject to the appointment of a successor security trustee, the Funding 2
security trustee may retire after giving three months' notice in writing to
Funding 2. If within 60 days of having given notice of its intention to retire,
Funding 2 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 2 deed of charge). Funding 2 may remove the Funding 2
security trustee or appoint a new Funding 2 security trustee at any time
provided that it has the approval, which must not be unreasonably withheld or
delayed, of the issuer security trustee (who must consult with the Funding 2
secured creditors). In addition, the Funding 2 security trustee may subject to
conditions specified in the Funding 2 deed of charge, appoint a co-trustee to
act jointly with it.
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ADDITIONAL PROVISIONS OF THE FUNDING 2 DEED OF CHARGE
The Funding 2 deed of charge contains a range of provisions limiting the
scope of the Funding 2 security trustee's duties and liabilities. These
provisions include, among others, that the Funding 2 security trustee:
* may rely on instructions or directions given to it by the issuer
security trustee as being given in compliance with the issuer deed
of charge and on the advice of any lawyer, banker, accountant or
other expert;
* is not responsible for the legality, admissibility in evidence,
adequacy or enforceability of the Funding 2 deed of charge or any
other transaction document;
* may rely on documents believed by it to be genuine provided by any
of the mortgages trustee, Funding 2 or the cash manager;
* may assume that no Funding 2 intercompany loan event of default has
occurred unless it has received notice from a Funding 2 secured
creditor or the issuer security trustee stating that a Funding 2
intercompany loan event of default has occurred and describing that
Funding 2 intercompany loan event of default;
* is not required to monitor or supervise the functions of the
account bank or of any other person under any transaction document;
* has the power to determine all questions arising in relation to the
Funding 2 deed of charge or other transaction document and every
determination made shall bind all of the Funding 2 secured
creditors;
* each Funding 2 secured creditor must make its own independent
appraisal, without reliance on the Funding 2 security trustee, as
to the financial condition and affairs of Funding 2;
* the Funding 2 security trustee will not be liable for any loss,
cost, damage or expense which may be caused by anything done or not
done by it under the Funding 2 deed of charge or any other
transaction document unless caused by the Funding 2 security
trustee's fraud, gross negligence, willful default or breach of the
terms of the Funding 2 deed of charge;
* the Funding 2 security trustee may accept such title as Funding 2
has to the Funding 2 charged property and will not be required to
investigate or make inquiry into Funding 2's title to such
property; and
* the Funding 2 security trustee will not be responsible for any
shortfall which may arise because it is liable to tax in respect of
the Funding 2 charged property or the proceeds of the enforcement
of such property.
The Funding 2 security trustee makes no statement or representation in this
prospectus, has not authorized or caused the issue of any part of it and takes
no responsibility for any part of it. The Funding 2 security trustee does not
guarantee the performance of the notes or the payment of principal or interest
on the notes.
GOVERNING LAW
The Funding 2 deed of charge will be governed by and construed in accordance
with English law, except for any terms of the Funding 2 deed of charge which
are particular to the law of Scotland, which shall be construed in accordance
with Scots law.
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SECURITY FOR THE ISSUER'S OBLIGATIONS
To provide security for its obligations under the notes and the other
transaction documents, the issuer has entered into the issuer deed of charge
with the issuer secured creditors. A summary of the material terms of the
issuer deed of charge is set out below. The summary does not purport to be
complete and is subject to the provisions of the issuer deed of charge. This
prospectus is a part of the registration statement, and a form of the issuer
deed of charge has been filed as an exhibit to that registration statement.
ISSUER SECURITY
The issuer has granted the following security to be held by the issuer
security trustee for itself and on trust for the benefit of the issuer secured
creditors (which definition includes the noteholders):
* an assignment by way of first fixed security of the issuer's rights
and claims in respect of all security and other rights held on
trust by the Funding 2 security trustee pursuant to the Funding 2
deed of charge;
* an assignment by way of first fixed security of the issuer's right,
title, interest and benefit in the transaction documents to which
it is a party, including the global intercompany loan agreement,
the Funding 2 deed of charge, each issuer swap agreement, the
paying agent and agent bank agreement, the programme agreement,
each subscription agreement, each underwriting agreement, the
corporate services agreement, the issuer bank account agreement,
the issuer cash management agreement and the trust deed;
* a first fixed charge (which may take effect as a floating charge)
of the issuer's right, title, interest and benefit in the issuer
transaction account, the issuer GIC account, any issuer swap
collateral account and each other account (if any) of the issuer,
and all amounts or securities standing to the credit of those
accounts (including all interest or other income or distributions
earned on such amounts or securities);
* a first fixed charge (which may take effect as a floating charge)
of the issuer's right, title, interest and benefit in all
authorized investments made by or on behalf of the issuer,
including all monies and income payable under those investments;
and
* a first floating charge over all the assets and undertaking of the
issuer which are not otherwise effectively subject to a fixed
charge or assignment by way of security as described in the
preceding paragraphs.
Security which is expressed to be fixed in nature may take effect as
floating security depending on the degree of control which the secured party is
given over the relevant assets and the degree to which such secured party
exercises such control.
NATURE OF SECURITY -- FIXED CHARGE OR FLOATING CHARGE
For a description of the nature and certain consequences of taking fixed
charges and floating charges see "SECURITY FOR FUNDING 2'S OBLIGATIONS --
NATURE OF SECURITY -- FIXED CHARGE OR FLOATING CHARGE". We expect that an
appointment of an administrative receiver by the issuer security trustee under
the issuer deed of charge will not be prohibited by Section 72A of the
Insolvency Act 1986 as the appointment will fall within the exception set out
under Section 72B of the Insolvency Act 1986 (First exception: Capital Market).
ISSUER PRE-ENFORCEMENT AND POST-ENFORCEMENT PRIORITY OF PAYMENTS
The issuer deed of charge sets out the order of priority for the application
of cash by the issuer cash manager prior to the service of an issuer
enforcement notice. This payment order of priority is described under
"CASHFLOWS".
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The issuer deed of charge sets out the order of priority for the application
by the issuer security trustee (or the issuer cash manager on its behalf),
following service of an issuer enforcement notice, of amounts received or
recovered by the issuer security trustee or a receiver appointed on its behalf.
This order of priority is described under "CASHFLOWS".
On the issuance of any series and class of notes, any new issuer swap
providers or start-up loan providers will enter into deeds of accession or
supplemental deeds in relation to the issuer deed of charge which may,
depending on the type of notes to be issued, require amendments, amongst other
things, to any of the issuer pre-enforcement revenue priority of payments, the
issuer pre-enforcement principal priority of payments, and the issuer post-
enforcement priority of payments.
ENFORCEMENT
The issuer security will become enforceable upon the service on the issuer
of an issuer enforcement notice.
CONFLICTS
The issuer deed of charge contains provisions which require the issuer
security trustee, whilst the notes are outstanding, to act only at the
direction of the note trustee. If, in the sole opinion of the note trustee,
there may be a conflict as among noteholders, the note trustee will have regard
to the interests of the class of noteholders with the highest-ranking notes
only. If there is a conflict between the interests of the class A noteholders
of one series and the class A noteholders of another series or group of series,
or conflict between the class B noteholders of one series and the class B
noteholders of another series or group of series, or conflict between the class
M noteholders of one series and the class M noteholders of another series or
group of series, or conflict between the class C noteholders of one series and
the class C noteholders of another series or group of series or conflict
between the class D noteholders of one series and the class D noteholders of
another series or group of series, then a resolution directing the note trustee
to take any action shall be deemed to have been duly passed only if passed at
separate meetings of the holders of each series of the class A notes or, as
applicable, each series of the class B notes, each series of the class M notes,
each series of the class C notes or each series of the class D notes subject to
the conflict. In all cases, the issuer security trustee will only be obliged to
act if it is indemnified to its satisfaction. For more information on how
conflicts between noteholders are resolved, see "DESCRIPTION OF THE US NOTES --
11. MEETINGS OF NOTEHOLDERS, MODIFICATIONS AND WAIVER".
NO ENFORCEMENT BY ISSUER SECURED CREDITORS
Each of the issuer secured creditors (other than the issuer security trustee
and the note trustee acting on behalf of the noteholders) agrees under the
issuer deed of charge that only the issuer security trustee may enforce the
security created by the issuer deed of charge and it will not take steps
directly against the issuer to recover amounts owing to it by the issuer unless
the issuer security trustee has become bound to enforce the issuer security but
has failed to do so within 30 days of becoming so bound.
MODIFICATION AND WAIVER, FEES, RETIREMENT AND RESPONSIBILITIES OF THE ISSUER
SECURITY TRUSTEE
MODIFICATION AND WAIVER
Without the consent of any of the noteholders or any of the other issuer
secured creditors, the issuer security trustee may:
* agree to modifications to the transaction documents provided that
the issuer security trustee is of the opinion that such
modification will not be materially prejudicial to the interests of
the issuer secured creditors or that such modification is of a
formal, minor or technical nature; and
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* authorize or waive a proposed or actual breach of any provisions of
the notes or of any other transaction documents provided that the
issuer security trustee is of the opinion that such breach will not
be materially prejudicial to the interests of the issuer secured
creditors.
Any such modification, authorization or waiver will be binding on the issuer
secured creditors.
As a result of the operation of the provisions of the issuer deed of charge,
when formulating its opinion and/or when exercising the rights, benefits,
trusts, authorities, directions and obligations under the transaction documents
to which it is a party, the issuer security trustee shall, whilst any of the
notes are outstanding, act only at the request or direction of the note
trustee.
FEES, EXPENSES AND INDEMNITY
The issuer will reimburse the issuer security trustee for all costs and
expenses properly incurred in acting as issuer security trustee. In addition,
the issuer shall pay to the issuer security trustee a fee of such amount and on
such dates as will be agreed from time to time by the issuer security trustee
and the issuer. The issuer shall indemnify the issuer security trustee from and
against all proceedings, claims, demands, losses, costs, charges, expenses and
liabilities incurred by it or to which it may become liable in connection with
the exercise of its trusts, powers, authorities and discretions, or otherwise
in respect of any matter done or not done relating to the transaction
documents, except where the same is caused by the fraud, gross negligence,
willful default or breach of the terms of the issuer deed of charge by the
issuer security trustee or any of its officers or employees.
RETIREMENT AND REMOVAL
Subject to the appointment of a successor issuer security trustee, the
issuer security trustee may retire after giving three months' notice in writing
to the issuer. If within 60 days of having given notice of its intention to
retire, the issuer has failed to appoint a replacement issuer security trustee,
the outgoing issuer security trustee will be entitled to appoint a successor
(provided that such successor is acceptable to the rating agencies and agrees
to be bound by the terms of the issuer deed of charge). The issuer may remove
the issuer security trustee or appoint a new issuer security trustee at any
time provided that it has the approval, which must not be unreasonably withheld
or delayed, of the issuer secured creditors. In addition, the issuer security
trustee may, subject to the conditions specified in the issuer deed of charge,
appoint a co-trustee to act jointly with it.
ADDITIONAL PROVISIONS OF THE ISSUER DEED OF CHARGE
The issuer deed of charge will contain a range of provisions regulating the
scope of the issuer security trustee's duties and liabilities. These include
the following:
* the issuer security trustee is not responsible for the legality,
admissibility in evidence, adequacy or enforceability of the issuer
deed of charge or any other transaction document;
* the issuer security trustee may assume that no note event of
default has occurred unless the issuer security trustee has
received express notice from an issuer secured creditor stating
that a note event of default has occurred and describing that note
event of default;
* the issuer security trustee is not required to monitor or supervise
the functions of the issuer account bank or of any other person
under any transaction document;
* the issuer security trustee has the power to determine all
questions arising in relation to the issuer deed of charge or other
transaction document entered into by the issuer and every
determination made shall bind the noteholders and all of the other
issuer secured creditors;
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* each noteholder and each other issuer secured creditor must make
its own independent appraisal, without reliance on the issuer
security trustee, as to the financial condition and affairs of the
issuer;
* the issuer security trustee will not be liable for any loss, cost,
damage or expense which may be caused by anything done or not done
by it under the issuer deed of charge or any other transaction
document unless caused by the issuer security trustee's fraud,
gross negligence, willful default or breach of the terms of the
issuer deed of charge;
* the issuer security trustee may accept such title as the issuer has
to the issuer charged property and will not be required to
investigate or make inquiry into the issuer's title to such
property;
* the issuer security trustee will not be responsible for any
shortfall which may arise because it is liable to tax in respect of
the issuer charged property or the proceeds of such property; and
* the issuer security trustee is not required to take steps or action
in connection with the transaction documents (including enforcing
the issuer security) unless (1) whilst the notes are outstanding it
has been directed or instructed to do so the noteholders in
accordance with Conditions 10 and 11 (see "DESCRIPTION OF THE US
NOTES") or (2) following the redemption of the notes, by any other
issuer secured creditor provided that, in each case, it has been
indemnified and/or secured to its satisfaction against all costs,
liabilities and claims which it may incur or in respect of which it
may become liable.
The issuer security trustee makes no statement or representation in this
prospectus, has not authorized or caused the issue of any part of it and takes
no responsibility for any part of it. The issuer security trustee does not
guarantee the performance of the notes or the payment of principal or interest
on the notes.
GOVERNING LAW
The issuer deed of charge is governed by English law.
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DESCRIPTION OF THE TRUST DEED
The principal agreement governing the notes is the trust deed dated on or
about the Funding 2 program date and made between the issuer and the note
trustee. A summary of the material terms of the trust deed is set out below.
The summary does not purport to be complete and it is subject to the provisions
of the trust deed. A form of the trust deed has been filed as an exhibit to the
registration statement and this prospectus forms part of the registration
statement.
The trust deed sets out the forms of the global note certificates and the
individual note certificates. It also sets out the conditions for the issue of
individual note certificates and/or the cancellation of any notes. The paying
agent and agent bank agreement contains detailed provisions regulating the
appointments of the paying agents and other agents.
The trust deed also contains covenants made by the issuer in favor of the
note trustee and the noteholders. The main covenants are that the issuer will
pay interest on, and repay the principal of, each of the notes when due. Some
of the covenants also appear in the terms and conditions of the notes (see
"DESCRIPTION OF THE US NOTES"). The issuer also covenants that it will do all
things necessary to maintain the listing on the official list of the UK Listing
Authority and to maintain trading of the notes on the London Stock Exchange and
to keep in place a common depository, paying agents and an agent bank, and
further covenants with the note trustee that it will comply with and perform
and observe all its obligations in the trust deed. The trust deed provides for
delivery to the note trustee of an annual statement signed by two directors of
the issuer to the effect that no note event of default exists or has existed
since the date of the previous annual statement and that the issuer has
complied with all its obligations under the issuer transaction doucuments (to
which it is a party) throughout the preceding financial year, except as
specified in such statement.
The trust deed provides that the class A noteholders' interests take
precedence for so long as class A notes of any series are outstanding and
thereafter the interests of class B noteholders take precedence for so long as
the class B notes of any series are outstanding and thereafter the interests of
class M noteholders take precedence for so long as the class M notes of any
series are outstanding and thereafter the interests of the class C noteholders
take precedence for so long as the class C notes of any series are outstanding
and thereafter the interests of the class D notes take precedence for so long
as the class D notes of any series are outstanding. Certain basic terms of each
class of notes may not be amended without the consent of the majority of the
holders of that class of note and the consent of the majority of the holders of
the other classes of affected notes outstanding (see "DESCRIPTION OF THE US
NOTES").
The trust deed sets out the terms under which the note trustee is appointed,
the indemnification of the note trustee, the payment it receives and the extent
of the note trustee's authority to act beyond its statutory powers under
English law. The note trustee is also given the ability to appoint a delegate
or agent in the execution of any of its duties under the trust deed. The trust
deed sets out the circumstances in which the note trustee may resign or retire.
The trust deed includes certain provisions required by the US Trust
Indenture Act of 1939. These provisions include, but are not limited to:
(a) maintenance of a noteholder list by the note trustee;
(b) provision of annual reports and other information by the issuer to
the note trustee;
(c) ability of noteholders to waive certain past defaults of the
issuer;
(d) duty of the note trustee (following a note event of default) to use
the same degree of care in exercising its responsibilities as would
be exercised by a prudent person conducting their own affairs;
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(e) duty of the note trustee to notify all noteholders of any note
event 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.
Finally, the trust deed provides that until the notes have been paid in
full, they shall be entitled to the benefit of and be bound by the terms and
conditions of the trust deed. The trust deed will be discharged with respect to
the collateral securing the notes upon the delivery to the note trustee for
cancellation of all the notes or, with certain limitations, upon deposit with
the note trustee of funds sufficient for the payment in full of all the notes.
TRUST INDENTURE ACT PREVAILS
The trust deed contains a stipulation that, if any provision of the trust
deed limits, qualifies or conflicts with another provision which is required to
be included in the trust deed by, and is not subject to a contractual waiver
under, the US Trust Indenture Act of 1939, as amended, the required provision
of that Act shall be deemed to be incorporated into the trust deed and shall
prevail.
GOVERNING LAW
The trust deed will be governed by English law.
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THE NOTES
Each issuance of notes will be authorized by a resolution of the board of
directors of the issuer prior to the relevant closing date. Each issue of notes
will be constituted by a deed or deeds supplemental to the trust deed between
the issuer and the note trustee, as trustee for, among others, the holders for
the time being of the notes. The trust deed includes provisions which enable it
to be modified or supplemented and any reference to the trust deed is a
reference also to the document as modified or supplemented in accordance with
its terms.
The material terms of the notes are described in this prospectus. However,
the statements set out in this section with regard to the notes and the global
note certificates representing the notes are subject to the detailed provisions
of the trust deed. The trust deed will include the forms of the global note
certificates and the forms of the individual note certificates. A paying agent
and agent bank agreement between the issuer, the note trustee, Citibank, N.A.
in London as "PRINCIPAL PAYING AGENT", the other paying agents (together with
the principal paying agent, called the "PAYING AGENTS"), the transfer agent,
the registrar and the agent bank, regulates how payments will be made on the
notes and how determinations and notifications will be made. The parties to the
paying agent and agent bank agreement will include, on an ongoing basis, any
successor party appointed in accordance with its terms.
Each class of each series of notes will be represented initially by a global
note certificate in registered form without interest coupons attached. The US
notes will initially be offered and sold pursuant to a registration statement,
of which this prospectus forms a part, filed with the SEC. The Reg S notes,
which are not being offered by this prospectus, will initially be offered and
sold outside the United States to non-US persons pursuant to Regulation S under
the Securities Act. The global note certificates representing the US notes
offered by this prospectus (the "US GLOBAL NOTE CERTIFICATES") will be
deposited with Citibank, N.A., as the custodian for, and registered in the name
of Cede & Co., as nominee of The Depository Trust Company, referred to in this
prospectus as "DTC". On confirmation from the custodian that it holds the US
global note certificates, DTC will record book-entry interests in the
beneficial owner's account or the participant account through which the
beneficial owner holds its interests in the notes. These book-entry interests
will represent the beneficial owner's beneficial interest in the relevant US
global note certificates.
The amount of notes represented by each global note certificate is evidenced
by the register maintained for that purpose by the registrar. Together, the
notes represented by the global note certificates and any outstanding
individual note certificates will equal the aggregate principal amount of the
notes outstanding at any time. However, except as described under "--
INDIVIDUAL NOTE CERTIFICATES", individual note certificates shall not be
issued.
Beneficial owners may hold their interests in the global note certificates
only through DTC, Clearstream, Luxembourg or Euroclear, as applicable, or
indirectly through organizations that are participants in any of those systems.
Ownership of these beneficial interests in a global note certificate will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC, Clearstream, Luxembourg or Euroclear (with respect
to interests of their participants) and the records of their participants (with
respect to interests of persons other than their participants). By contrast,
ownership of direct interests in a global note certificate will be shown on,
and the transfer of that ownership will be effected through, the register
maintained by the registrar. Because of this holding structure of the notes,
beneficial owners of notes may look only to DTC, Clearstream, Luxembourg or
Euroclear, as applicable, or their respective participants for their beneficial
entitlement to those notes. The issuer expects that DTC, Clearstream,
Luxembourg or Euroclear will take any action permitted to be taken by a
beneficial owner of notes only at the direction of one or more participants to
whose account the interests in a global note certificate is credited and only
in respect of that portion of the aggregate
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principal amount of notes as to which that participant or those participants
has or have given that direction.
Beneficial owners will be entitled to the benefit of, will be bound by and
will be deemed to have notice of, all the provisions of the trust deed and the
paying agent and agent bank agreement. Beneficial owners can see copies of
these agreements at the principal office for the time being of the note
trustee, which is, as of the date of this document, The Bank of New York,
London Branch and at the specified office for the time being of each of the
paying agents. Pursuant to its obligations under the Listing Rules made by the
UK Listing Authority, the issuer will maintain a paying agent in the United
Kingdom until the date on which the listed notes are finally redeemed.
PAYMENT
Principal and interest payments on the US notes will be made via the paying
agents to DTC or its nominee, as the registered holder of the US global note
certificates. DTC's practice is to credit its participants' accounts on the
applicable note 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 note payment date.
Payments by DTC, Clearstream, Luxembourg and Euroclear participants to the
beneficial owners of notes will be governed by standing instructions, customary
practice, and any statutory or regulatory requirements as may be in effect from
time to time, as is now the case with securities held by the accounts of
customers registered in "STREET NAME". These payments will be the
responsibility of the DTC, Clearstream, Luxembourg or Euroclear participant and
not of DTC, Clearstream, Luxembourg, Euroclear, any paying agent, the note
trustee or the issuer. None of the issuer, the note trustee, any underwriter
nor any paying agent will have any responsibility or liability for any aspect
of the records of DTC, Clearstream, Luxembourg or Euroclear relating to or
payments made by DTC, Clearstream, Luxembourg or Euroclear on account of
beneficial interests in the global note certificates or for maintaining,
supervising or reviewing any records of DTC, Clearstream, Luxembourg or
Euroclear relating to those beneficial interests.
CLEARANCE AND SETTLEMENT
THE CLEARING SYSTEMS
DTC has advised us and the underwriters that it intends to follow the
following procedures:
DTC will act as securities depository for the US global note certificates.
The US notes represented by the US global note certificates will be issued as
securities registered in the name of Cede & Co. (DTC's nominee).
DTC has advised us that it is a:
* limited-purpose trust company organized under New York Banking Law;
* "banking organization" within the meaning of New York Banking Law;
* member of the Federal Reserve System;
* "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
* "clearing agency" registered under the provisions of Section 17A of
the Exchange Act.
DTC holds securities for its participants and facilitates the clearance and
settlement among its participants of securities transactions, including
transfers and pledges, in deposited securities through electronic book-entry
changes in its participants' accounts. This eliminates the need for physical
movement of securities certificates. DTC participants include securities
brokers and dealers, banks, trust companies, clearing corporations and other
organizations. Indirect access to the DTC system is also available to others
including securities brokers and dealers, banks and trust companies that clear
through or
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maintain a custodial relationship with a participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the SEC.
Transfers between participants on the DTC system will occur under DTC rules.
Transfers between participants on the Clearstream, Luxembourg system and
participants in the Euroclear system will occur under their rules and operating
procedures.
Purchases of notes under the DTC system must be made by or through DTC
participants, which will receive a credit for the notes on DTC's records. The
ownership interest of each actual beneficial owner is in turn to be recorded on
the DTC participants' and indirect participants' records. Beneficial owners
will not receive written confirmation from DTC of their purchase. However,
beneficial owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their holdings,
from the DTC participant or indirect participant through which the beneficial
owner entered into the transaction. Transfer of ownership interests in the US
notes are to be accomplished by entries made on the books of DTC participants
acting on behalf of beneficial owners. Beneficial owners will not receive
certificates representing their ownership interest in notes unless use of the
book-entry system for the notes described in this section is discontinued.
To facilitate subsequent transfers, all offered global note certificates
deposited with DTC are registered in the name of DTC's nominee, Cede & Co. The
deposit of these offered global note certificates with DTC and their
registration in the name of Cede & Co. effect no change in beneficial
ownership. DTC has no knowledge of the ultimate beneficial owners of the notes.
DTC's records reflect only the identity of the DTC participants to whose
accounts the beneficial interests are credited, which may or may not be the
actual beneficial owners of the notes. The DTC participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC participants,
by DTC participants to indirect participants, and by DTC participants and
indirect participants to beneficial owners will be governed by arrangements
among them and by any statutory or regulatory requirements in effect from time
to time.
Redemption notices for the US notes represented by the offered global note
certificates will be sent to DTC. If less than all of those notes are being
redeemed by investors, DTC's practice is to determine by lot the amount of the
interest of each participant in those notes to be redeemed.
Neither DTC nor Cede & Co. will consent or vote on behalf of the US notes.
Under its usual procedures, DTC will mail an omnibus proxy to the issuer as
soon as possible after the record date, which assigns the consenting or voting
rights of Cede & Co. to those DTC participants to whose accounts the book-entry
interests are credited on the record date, identified in a list attached to the
proxy.
The issuer understands that under existing industry practices, when the
issuer requests any action of noteholders or when a beneficial owner desires to
give or take any action which a noteholder is entitled to give or take under
the trust deed, DTC generally will give or take that action, or authorize the
relevant participants to give or take that action, and those participants would
authorize beneficial owners owning through those participants to give or take
that action or would otherwise act upon the instructions of beneficial owners
through them.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the issuer believes to be reliable, but the
issuer takes no responsibility for the accuracy thereof.
Clearstream, Luxembourg and Euroclear each hold securities for their
participating organizations and facilitate the clearance and settlement of
securities transactions between their respective participants through
electronic book-entry changes in accounts of those participants, thereby
eliminating the need for physical movement of securities. Clearstream,
Luxembourg and Euroclear provide various services including safekeeping,
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administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream, Luxembourg and Euroclear
also deal with domestic securities markets in several countries through
established depository and custodial relationships.
Clearstream, Luxembourg and Euroclear have established an electronic bridge
between their two systems across which their respective participants may settle
trades with each other. Transactions may be settled in Clearstream, Luxembourg
and Euroclear in any of numerous currencies, including United States dollars
and euro. Clearstream, Luxembourg is incorporated under the laws of Luxembourg
as a professional depository. Clearstream, Luxembourg participants are
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, and clearing corporations.
Indirect access to Clearstream, Luxembourg is also available to others,
including banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Clearstream, Luxembourg participant,
either directly or indirectly.
The Euroclear system was created in 1968 to hold securities for its
participants and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment. The Euroclear system is operated by Euroclear Bank S.A./N.V. (the
"EUROCLEAR OPERATOR"). All operations are conducted by the Euroclear operator.
All Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear operator.
Euroclear participants include banks -- including central banks --
securities brokers and dealers and other professional financial intermediaries.
Indirect access to the Euroclear system is also available to other firms that
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing use of Euroclear and the
related Operating Procedures of the Euroclear system. These terms and
conditions govern transfers of securities and cash within the Euroclear system,
withdrawal of securities and cash from the Euroclear system, and receipts of
payments for securities in the Euroclear system. All securities in the
Euroclear system are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear operator
acts under these terms and conditions only on behalf of Euroclear participants
and has no record of or relationship with persons holding through Euroclear
participants.
As the holders of book-entry interests, beneficial owners will not have the
right under the trust deed to act on solicitations by the issuer for action by
noteholders. Beneficial owners will only be able to act to the extent they
receive the appropriate proxies to do so from DTC, Clearstream, Luxembourg or
Euroclear or, if applicable, their respective participants. No assurances are
made about these procedures or their adequacy for ensuring timely exercise of
remedies under the trust deed.
No beneficial owner of an interest in a note represented by a global note
certificate will be able to transfer that interest except in accordance with
applicable procedures, in addition to those provided for under the trust deed,
of DTC, Clearstream, Luxembourg and Euroclear, as applicable. The laws of some
jurisdictions require that some purchasers of securities take physical delivery
of those securities in definitive form. These laws and limitations may impair
the ability to transfer beneficial interests in a note represented by a global
note certificate. See "RISK FACTORS -- YOU WILL NOT RECEIVE PHYSICAL NOTES,
WHICH MAY CAUSE DELAYS IN DISTRIBUTIONS AND HAMPER YOUR ABILITY TO PLEDGE OR
RESELL THE NOTES".
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CLEARANCE AND SETTLEMENT
INITIAL SETTLEMENT
The offered global note certificates for each series and class of notes will
be delivered on the relevant closing date to Citibank, N.A., as custodian for
DTC. Customary settlement procedures will be followed for participants of each
system on that closing date. Notes will be credited to investors' securities
accounts on the relevant closing date against payment in same-day funds.
SECONDARY TRADING
Secondary market sales of book-entry interests in US notes between DTC
participants will occur in the ordinary way in accordance with DTC rules and
will be settled using the procedures applicable to conventional United States
corporate debt obligations.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to these
procedures to facilitate transfers of interests in securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are not
obligated to perform these procedures. Additionally, these procedures may be
discontinued at any time. None of the issuer, any agent, the underwriters or
any affiliate of any of the foregoing, or any person by whom any of the
foregoing is controlled for the purposes of the Securities Act, will have any
responsibility for the performance by DTC, Clearstream, Luxembourg, Euroclear
or their respective direct or indirect participants or accountholders of their
respective obligations under the rules and procedures governing their
operations or for the sufficiency for any purpose of the arrangements described
in this prospectus.
INDIVIDUAL NOTE CERTIFICATES
Beneficial owners of US notes will only be entitled to receive individual
note certificates under the following limited circumstances:
* as a result of any amendment to, or change in, the laws or
regulations of the United Kingdom (or any political subdivision
thereof) or of any authority therein or thereof having power to tax
or in the interpretation or administration of such laws or
regulations which becomes effective on or after the relevant
closing date, the issuer or any paying agent is or will be required
to make any deduction or withholding from any payment on the notes
that would not be required if the notes were represented by
individual note certificates; or
* DTC notifies the issuer that it is unwilling or unable to hold the
offered global note certificates or is unwilling or unable to
continue as, or has ceased to be, a clearing agency registered
under the Exchange Act and, in each case, the issuer cannot appoint
a successor within 90 days of such notification.
In no event will individual note certificates in bearer form be issued. Any
individual note certificate will be issued in registered form in minimum
denominations as specified in the related prospectus supplement. Any individual
note certificates will be registered in that name or those names as the
registrar shall be instructed by DTC, Clearstream, Luxembourg and Euroclear, as
applicable. It is expected that these instructions will be based upon
directions received by DTC, Clearstream, Luxembourg and Euroclear from their
participants reflecting the ownership of book-entry interests. To the extent
permitted by law, the issuer, the note trustee and any paying agent shall be
entitled to treat the person in whose names any individual note certificate is
registered as the absolute owner thereof. The paying agent and agent bank
agreement contains provisions relating to the maintenance by a registrar of a
register reflecting ownership of the notes and other provisions customary for a
registered debt security.
Any person receiving individual note certificates will not be obligated to
pay or otherwise bear the cost of any tax or governmental charge or any cost or
expense relating to insurance, postage, transportation or any similar charge,
which will be solely the responsibility of the issuer. No service charge will
be made for any registration of transfer or exchange of any individual note
certificates.
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DESCRIPTION OF THE US NOTES
The following is a summary of the material terms and conditions of the US
notes, numbered 1 to 16. This summary does not need to be read with the actual
terms and conditions of the US notes in order to learn all the material terms
and conditions of the US notes. The complete terms and conditions of the US
notes are set out in the trust deed, a form of which has been filed as an
exhibit to the registration statement, and in the event of a conflict, the
terms and conditions of the notes set out in the trust deed will prevail.
References in this section to the "NOTES" mean collectively the class A
notes, the class B notes, the class M notes, the class C notes and the class D
notes of each series. Furthermore, this section, as elsewhere in this
prospectus, provides information on the Reg S notes that are not being offered
to the public in the United States by this prospectus. This information is
provided only to enhance your understanding of the US notes. Each series and
class of notes will be the subject of the following documents:
* a trust deed dated the Funding 2 program date between the note
trustee and us and a deed or deeds supplemental to the trust deed
entered into between the note trustee and us from time to time;
* a paying agent and agent bank agreement dated the Funding 2 program
date between the principal paying agent, the agent bank, the other
paying agents, the transfer agent, the registrar, the note trustee
and us;
* an issuer deed of charge dated the Funding 2 program date between
issuer security trustee, the note trustee, the issuer swap
providers, certain other parties and us; and
* if applicable to a series and class of notes, an issuer swap
agreement dated the closing date in respect of such series and
class of notes, between the issuer swap provider and us.
When we refer to the parties to these documents, the reference includes any
successor to that party validly appointed.
Initially the parties will be as follows:
* Granite Master Issuer plc, as issuer;
* Citibank, N.A., as principal paying agent, US paying agent, agent
bank, transfer agent and registrar; and
* The Bank of New York, as Funding 2 security trustee, issuer
security trustee and note trustee.
The noteholders will be bound by and deemed to have notice of all of the
provisions of the trust deed (including each deed supplemental thereto), the
issuer deed of charge, the global intercompany loan agreement, the Funding 2
deed of charge, the issuer cash management agreement, the paying agent and
agent bank agreement and the issuer swap agreements which are applicable to
them. Noteholders can view drafts of those documents at our registered office
and the specified office of any of the paying agents after the Funding 2
program date.
There is no English law that prohibits US residents from holding notes
solely because of their residence outside the UK.
There are no UK governmental laws or regulations other than in relation to
withholding tax, as described under "MATERIAL UNITED KINGDOM TAX CONSEQUENCES
- -- WITHHOLDING TAX", that restrict payments made to non-UK resident
noteholders.
1. FORM, DENOMINATION, REGISTER, TITLE AND TRANSFERS
The US notes are being offered and sold to the public in the United States
and to institutional investors outside the United States.
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The US notes are in global registered form, without coupons attached.
Transfers and exchanges of beneficial interests in notes represented by
global note certificates are made in accordance with the rules and procedures
of DTC, Euroclear and/or Clearstream, Luxembourg, as applicable.
Global note certificates will be exchanged for individual note certificates
in definitive registered form only under certain limited circumstances. If
individual note certificates are issued, they will be serially numbered and
issued in an aggregate principal amount equal to the principal amount
outstanding of the relevant global note certificates and in registered form
only.
The registrar will maintain a register in respect of the US notes in
accordance with the provisions of the paying agent and agent bank agreement.
References in this section to a "HOLDER" of a US note means the person in whose
name such US note is for the time being registered in the register (or, in the
case of a joint holding, the first named thereof) and "NOTEHOLDER" shall be
construed accordingly. A "NOTE CERTIFICATE" will be issued to each noteholder
in respect of its registered holding. Each note certificate will be numbered
serially with an identifying number that will be recorded in the register.
The holder of each US note shall (except as otherwise required by law) be
treated as the absolute owner of such US note for all purposes (whether or not
it is overdue and regardless of any notice of ownership, trust or any other
interest therein, any writing on the note certificate relating thereto (other
than the endorsed form of transfer) or any notice of any previous loss or theft
of such note certificate) and no person shall be liable for so treating such
holder.
Subject to the provisions below, a US note may be transferred upon surrender
of the relevant note certificate, with the endorsed form of transfer duly
completed, at the specified offices of the registrar or any transfer agent
specified in the paying agent and agent bank agreement, together with such
evidence as the registrar or (as the case may be) such transfer agent may
reasonably require to prove the title of the transferor and the authority of
the individuals who have executed the form of transfer; provided, however, that
a US note may not be transferred unless the principal amount of US notes
transferred and (where not all of the US notes held by a holder are being
transferred) the principal amount of the balance of US notes not transferred
are authorized holdings. Where not all the US notes represented by the
surrendered note certificate are the subject of the transfer, a new note
certificate in respect of the balance of the US notes will be issued to the
transferor.
Within five commercial business days of such surrender of a note
certificate, the registrar will register the transfer in question and deliver a
new note certificate of a like principal amount to the US notes transferred to
each relevant holder at its specified office or (as the case may be) the
specified office of any transfer agent or (at the request and risk of any such
relevant holder) by uninsured first class mail (and by airmail if the holder is
overseas) to the address specified for the purpose by such relevant holder. In
this paragraph, "COMMERCIAL BUSINESS DAY" means a day on which commercial banks
are open for business (including dealings in foreign currencies) in the city
where the registrar or (as the case may be) the relevant transfer agent has its
specified office.
The transfer of a US note will be effected without charge by or on behalf of
us, the registrar or any transfer agent but against such indemnity as the
registrar or (as the case may be) such transfer agent may require in respect of
any tax or other duty of whatsoever nature which may be levied or imposed in
connection with such transfer.
Noteholders may not require transfers to be registered during the period of
15 days ending on the due date for any payment of principal or interest in
respect of the US notes.
All transfers of US notes and entries on the register are subject to the
detailed regulations concerning the transfer of US notes scheduled to the
paying agent and agent bank agreement. We may change the regulations with the
prior written approval of the
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note trustee and the registrar. A copy of the current regulations will be
mailed (free of charge) by the registrar to any noteholder who requests in
writing a copy of such regulations.
2. STATUS, SECURITY AND PRIORITY
The notes of each series and class are our direct, secured and unconditional
obligations and will at all times rank equally, without preference or priority
amongst themselves.
Subject to the provisions of numbers 4 and 5 and subject to the other
payment conditions set out in the applicable prospectus supplement and the
other transaction documents:
* the class A notes of each series will rank without preference or
priority between themselves but in priority to the class B notes,
the class M notes, the class C notes and the class D notes of any
series;
* the class B notes of each series will rank without preference or
priority between themselves but in priority to the class M notes,
the class C notes and the class D notes of any series;
* the class M notes of each series will rank without any preference
or priority between themselves but in priority to the class C notes
and the class D notes of any series; and
* the class C notes of each series will rank without any preference
or priority between themselves but in priority to the class D notes
of any series; and
* the Class D notes of each series will rank without preference or
priority between themselves.
The note trustee is required to have regard to the interests of all classes
of noteholders equally. However, except where the transaction documents
expressly provide otherwise, if there are any class A notes outstanding (of any
series) and if there is or may be a conflict between the interests of the class
A noteholders and the interests of the class B noteholders and/or the class M
noteholders and/or the class C noteholders and/or the class D noteholders (of
that series or any other series), then the note trustee will have regard to the
interests of the class A noteholders only. Except where the transaction
documents expressly provide otherwise, if there are no class A notes
outstanding and there are any class B notes outstanding (of any series), and if
there is or may be a conflict between the interests of the class B noteholders
and the interests of the class M noteholders and/or the class C noteholders
and/or the class D noteholders (of that series or any other series), then the
note trustee will have regard to the interests of the class B noteholders only.
Except where the transaction documents expressly provide otherwise, if there
are no class A notes outstanding and no class B notes outstanding and there are
any class M notes outstanding (of any series), and if there is or may be a
conflict between the interests of the class M noteholders and the interests of
the class C noteholders and/or the class D noteholders (of that series or any
other series), then the note trustee will have regard to the interests of the
class M noteholders only. Except where the transaction documents expressly
provide otherwise, if there are no class A notes outstanding, no class B notes
outstanding and no class M notes outstanding and there are class C notes
outstanding (of any series), and if there is or may be a conflict between the
interests of the class C noteholders and the interests of the class D
noteholders (of that series or any other series), then the note trustee will
have regard to the interests of the class C noteholders only.
Except in certain limited circumstances described in number 11, there is no
limitation on the power of class A noteholders to pass an effective
extraordinary resolution the exercise of which is binding on the class B
noteholders, the class M noteholders, the class C noteholders and the class D
noteholders. As described in number 11 there are provisions limiting the power
of the class B noteholders, the class M noteholders, the
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class C noteholders and the class D noteholders to pass an effective
extraordinary resolution, depending on its effect on the class A noteholders.
Likewise, except in the limited circumstances described in number 11, there is
no limitation on the power of class B noteholders to pass an effective
extraordinary resolution the exercise of which is binding on the class M
noteholders, the class C noteholders and the class D noteholders. As described
in number 11 there are provisions limiting the power of the class M
noteholders, the class C noteholders and the class D noteholders to pass an
effective extraordinary resolution, depending on its effect on the class B
noteholders. Likewise, except in the limited circumstances described in number
11, there is no limitation on the power of class M noteholders to pass an
effective extraordinary resolution the exercise of which is binding on the
class C noteholders and the class D noteholders. As described in number 11
there are provisions limiting the power of the class C noteholders and the
class D noteholders to pass an effective extraordinary resolution, depending on
its effect on the class M noteholders. Likewise, except in the limited
circumstances described in number 11, there is no limitation on the power of
class C noteholders to pass an effective extraordinary resolution the exercise
of which is binding on the class D noteholders. As described in number 11 there
are provisions limiting the power of the class D noteholders to pass an
effective extraordinary resolution, depending on its effect on the class C
noteholders.
The note trustee, in determining whether any exercise by it of any power,
discretion or duty under the transaction documents will not be materially
prejudicial to the interests of the noteholders (or any series and/or class of
noteholders), will have regard to confirmations (if issued) from each of the
rating agencies that the then current ratings of the relevant notes will not be
reduced, withdrawn or qualified by that exercise and any other confirmation
which it considers, in its sole and absolute discretion, is appropriate. The
rating agencies will not be obliged to provide such confirmations if so
requested by the note trustee.
The security for the payment of amounts due under the notes is created by
the issuer deed of charge. We have created the security in favor of the issuer
security trustee who will hold it for itself and on behalf of the issuer
secured creditors (which definition includes the note trustee and the
noteholders).
3. COVENANTS
If any note is outstanding, we will not, unless it is provided in or
permitted by the terms and conditions of the notes or the terms of the
transaction documents to which we are a party or by the written consent of the
note trustee:
* create or permit to subsist any mortgage, standard security,
pledge, lien, charge or other security interest on the whole or any
part of its present or future assets or undertakings;
* sell, assign, transfer, lease or otherwise dispose of or grant any
option or right to acquire over, all or any of its assets,
properties or undertakings or any interest or benefit in its assets
or undertakings;
* permit any other person other than itself and the issuer 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 our bank accounts
maintained pursuant to the transaction documents;
* carry on any business other than as described in this prospectus
(as revised supplemented and/or amended from time to time) or as
contemplated in the transaction documents relating to the issue of
the notes;
* incur any indebtedness in respect of borrowed money whatsoever or
give any guarantee or indemnity in respect of any indebtedness or
obligation of any person;
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* consolidate with or merge with any person or transfer substantially
all of its properties or assets to any person;
* waive or consent to the modification or waiver of any of the
obligations relating to the issuer security;
* have any employees, premises or subsidiaries;
* pay any dividend or make any other distributions to its
shareholders or issue any further shares or alter any rights
attaching to its shares as at the date of the issuer deed of
charge;
* purchase or otherwise acquire any notes; or
* engage in any activities in the United States (directly or through
agents), or derive any income from United States sources as
determined under United States income tax principles, or hold any
property if doing so would cause it to be engaged in a trade or
business within the United States as determined under United States
income tax principles.
4. INTEREST
(A) Interest on fixed rate notes
Each fixed rate note bears interest on its principal amount outstanding from
(and including) the interest commencement date at the rate(s) per annum equal
to the rate(s) of interest payable, subject as provided in the terms and
conditions, in arrear on the note payment date(s) in each year specified for
such note in the applicable prospectus supplement up to (and including) the
final maturity date.
Except as provided in the applicable prospectus supplement, the amount of
interest payable in respect of any fixed rate note on each note payment date
for a fixed interest period ending on (but excluding) such date will amount to
the fixed coupon amount. Payments of interest on any note payment date will, if
so specified for such note in the applicable prospectus supplement, amount to
the broken amount so specified.
If interest is required to be calculated in respect of any fixed rate note
for a period other than a fixed interest period, such interest shall be
calculated by applying the rate of interest specified for such note in the
applicable prospectus supplement to the principal amount outstanding on such
note, multiplying such sum by the applicable day count fraction, and rounding
the resultant figure to the nearest sub-unit of the relevant specified
currency, half of any such sub-unit being rounded upwards or otherwise in
accordance with applicable market convention.
"DAY COUNT FRACTION" means, in respect of the calculation of an amount of
interest in respect of a fixed rate note:
(i) if "Actual/Actual (ISMA)" is specified for such note in the
applicable prospectus supplement:
(a) in the case of notes where the number of days in the relevant
period from (and including) the most recent note payment date
for such notes (or, if none, the interest commencement date) to
(but excluding) the relevant note payment date (the "ACCRUAL
PERIOD") is equal to or shorter than the determination period
during which the accrual period ends, the number of days in
such accrual period divided by; the product of:
(1) the number of days in such determination period and
(2) the number of determination dates (as specified in the
applicable prospectus supplement) that would occur in one
calendar year; or
(b) in the case of notes where the accrual period is longer than
the determination period during which the accrual period ends,
the sum of:
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(1) the number of days in such accrual period falling in the
determination period in which the accrual period begins
divided by the product of (x) the number of days in such
determination period and (y) the number of determination
dates that would occur in one calendar year; and
(2) the number of days in such accrual period falling in the
next determination period divided by the product of (x) the
number of days in such determination period and (y) the
number of determination dates that would occur in one
calendar year; and
(ii) if "30/360" is specified for such note in the applicable prospectus
supplement, the number of days in the period from (and including) the most
recent note payment date for such note (or, if none, the interest commencement
date) to (but excluding) the relevant note payment date (such number of days
being calculated on the basis of a year of 360 days with twelve 30-day months)
divided by 360.
(B) Interest on floating rate notes and index linked interest notes
(i) Note payment dates
Each floating rate note or index linked interest note bears
interest on its principal amount outstanding from (and including)
the interest commencement date and such interest will be payable in
arrear on the note payment date(s) in each year specified for such
note in the applicable prospectus supplement. Such interest will be
payable in respect of each interest period.
If a business day convention is specified for a floating rate note
or index linked interest note in the applicable prospectus
supplement and (x) if there is no numerically corresponding day in
the calendar month in which a note payment date should occur or (y)
if any note payment date would otherwise fall on a day that is not
a business day, then, if the business day convention specified is:
(a) in any case where specified periods are specified in accordance
with paragraph (i)(b) above, the "floating rate convention",
the note payment date for such note (i) in the case of (x)
above, shall be the last day that is a business day in the
relevant month and the provisions of (B) below shall apply
mutatis mutandis or (ii) in the case of (y) above, shall be
postponed to the next day which is a business day unless it
would thereby fall into the next calendar month, in which event
(A) such note payment date shall be brought forward to the
immediately preceding business day and (B) each subsequent note
payment date shall be the last business day in the month which
falls the specified period after the preceding applicable note
payment date occurred; or
(b) the "following business day convention", the note payment date
for such note shall be postponed to the next day which is a
business day; or
(c) the "modified following business day convention", the note
payment date for such note shall be postponed to the next day
which is a business day unless it would thereby fall into the
next calendar month, in which event such note payment date
shall be brought forward to the immediately preceding business
day; or
(d) the "preceding business day convention", the note payment date
for such note shall be brought forward to the immediately
preceding business day.
(ii) Rate of interest
The rate of interest payable from time to time in respect of a
floating rate note or index linked interest note will be determined
in the manner specified in the applicable prospectus supplement.
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(a) ISDA Determination for floating rate notes
Where "ISDA Determination" is specified for such note in the
applicable prospectus supplement as the manner in which the
rate of interest is to be determined, the rate of interest for
each interest period will be the relevant ISDA rate plus or
minus (as indicated for such note in the applicable prospectus
supplement) the margin (if any). For the purposes of this sub-
paragraph (a), "ISDA RATE" for an interest period means a rate
equal to the floating rate that would be determined by the
principal paying agent or other person specified in the
applicable prospectus supplement under an interest rate swap
transaction if the principal paying agent or that other person
were acting as calculation agent for that swap transaction
under the terms of an agreement incorporating the ISDA
definitions and under which:
(1) the floating rate option is as specified for such note in
the applicable prospectus supplement;
(2) the designated maturity is the period specified for such
note in the applicable prospectus supplement; and
(3) the relevant reset date is either (i) if the applicable
floating rate option is based on LIBOR or EURIBOR for a
currency, the first day of that interest period, or (ii) in
any other case, as specified for such note in the
applicable prospectus supplement.
For the purposes of this sub-paragraph (a), "FLOATING RATE",
"CALCULATION AGENT", "FLOATING RATE OPTION", "DESIGNATED
MATURITY" and "RESET DATE" have the meanings given to those
terms in the ISDA definitions.
(b) Screen rate determination for floating rate notes
Where "Screen Rate Determination" is specified for a floating
rate note in the applicable prospectus supplement as the manner
in which the rate of interest for such note is to be
determined, the rate of interest for each interest period will,
subject as provided below, be either:
(1) the offered quotation (if there is only one quotation on
the relevant screen page); or
(2) the arithmetic mean (rounded if necessary to the fifth
decimal place, with 0.000005 being rounded upwards) of the
offered quotations,
(expressed as a percentage rate per annum) for the reference
rate which appears or appear, as the case may be, on the
relevant screen page as at 11.00 a.m. (London time, in the case
of LIBOR, or Brussels time, in the case of EURIBOR) on the
interest determination date in question plus or minus the
margin (if any), all as determined by the agent bank. If five
or more of such offered quotations are available on the
relevant screen page, the highest (or, if there is more than
one such highest quotation, one only of such quotations) and
the lowest (or, if there is more than one such lowest
quotation, one only of such quotations) shall be disregarded by
the agent bank for the purpose of determining the arithmetic
mean (rounded as provided above) of such offered quotations.
The issuer paying agent and agent bank agreement contains
provisions for determining the rate of interest pursuant to
this sub-paragraph (b) in the event that the relevant screen
page is not available or if, in the case of (1) above, no such
offered quotation appears or, in the case of (2) above, fewer
than three such offered quotations appear, in each case as at
the time specified in the preceding paragraph.
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If the reference rate from time to time in respect of a
floating rate note is specified for such note in the applicable
prospectus supplement as being other than LIBOR or EURIBOR, the
rate of interest in respect of such note will be determined as
provided for such note in the applicable prospectus supplement.
(iii) Minimum rate of interest and/or maximum rate of interest
If the applicable prospectus supplement specifies a minimum rate of
interest for a floating rate note or index linked interest note for
any interest period, then, in the event that the rate of interest
for such note in respect of such interest period determined in
accordance with the provisions of paragraph (ii) above is less than
such minimum rate of interest, the rate of interest for such note
for such interest period shall be such minimum rate of interest.
If the applicable prospectus supplement specifies a maximum rate of
interest for such note for any interest period, then, in the event
that the rate of interest for such note in respect of such interest
period determined in accordance with the provisions of paragraph
(ii) above is greater than such maximum rate of interest, the rate
of interest for such note for such interest period shall be such
maximum rate of interest.
(iv) Determination of rate of interest and calculation of interest
amounts
The agent bank, in the case of floating rate notes, and the
calculation agent (as specified in the applicable prospectus
supplement), in the case of index linked interest notes, will at or
as soon as practicable after each time at which the rate of
interest is to be determined, determine the rate of interest for
the relevant interest period. In the case of index linked interest
notes, the calculation agent will notify the agent bank of the rate
of interest for the relevant interest period as soon as practicable
after calculating the same.
The agent bank will calculate the amount of interest payable on the
floating rate notes or index linked interest notes in respect of
each specified denomination (each an "INTEREST AMOUNT") for the
relevant interest period. each interest amount shall be calculated
by applying the rate of interest to the principal amount
outstanding of each note, multiplying such sum by the applicable
day count fraction, and rounding the resultant figure to the
nearest sub-unit of the relevant specified currency, half of any
such sub-unit being rounded upwards or otherwise in accordance with
applicable market convention.
"DAY COUNT FRACTION" means, in respect of the calculation of an
amount of interest for a floating rate note or index linked
interest note in accordance with this paragraph (iv) for any
interest period:
(a) if "Actual/365" or "Actual/Actual (ISDA)" is specified for such
note in the applicable prospectus supplement, the actual number
of days in the interest period divided by 365 (or, if any
portion of that interest period falls in a leap year, the sum
of (a) the actual number of days in that portion of the
interest period falling in a leap year divided by 366 and (b)
the actual number of days in that portion of the interest
period falling in a non-leap year divided by 365);
(b) if "Actual/365 (Fixed)" is specified for such note in the
applicable prospectus supplement, the actual number of days in
the interest period divided by 365;
(c) if "Actual/365 (Sterling)" is specified for such note in the
applicable prospectus supplement, the actual number of days in
the interest period divided by 365 or, in the case of a note
payment date falling in a leap year, 366;
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(d) if "Actual/360" is specified for such note in the applicable
prospectus supplement, the actual number of days in the
interest period divided by 360;
(e) if "30/360", "360/360" or "Bond Basis" is specified for such
note in the applicable prospectus supplement, the number of
days in the interest period divided by 360 (the number of days
to be calculated on the basis of a year of 360 days with twelve
30-day months (unless (a) the last day of the interest period
is the 31st day of a month but the first day of the interest
period is a day other than the 30th or 31st day of a month, in
which case the month that includes that last day shall not be
considered to be shortened to a 30-day month, or (b) the last
day of the interest period is the last day of the month of
February, in which case the month of February shall not be
considered to be lengthened to a 30-day month)); and
(f) if "30E/360" or "Eurobond Basis" is specified for such note in
the applicable prospectus supplement, the number of days in the
interest period divided by 360 (the number of days to be
calculated on the basis of a year of 360 days with twelve 30-
day months, without regard to the date of the first day or last
day of the interest period unless, in the case of the final
interest period, the final maturity date (or, as the case may
be, extended due for note payment date) is the last day of the
month of February, in which case the month of February shall
not be considered to be lengthened to a 30-day month).
(v) Notification of rate of interest and interest amounts
The agent bank will cause the rate of interest and each interest
amount for each interest period and the relevant note payment date
to be notified to the note trustee, the issuer security trustee,
the issuer cash manager, the paying agents, the registrar and to
any stock exchange or other relevant competent authority or
quotation system on which the relevant floating rate notes or index
linked interest notes are for the time being listed, quoted and/or
traded or by which they have been admitted to listing and to be
published in accordance with condition 14 as soon as possible after
their determination but in no event later than the fourth business
day thereafter. Each interest amount and note payment date so
notified may subsequently be amended (or appropriate alternative
arrangements made by way of adjustment) without notice in the event
of an extension or shortening of the interest period. Any such
amendment or alternative arrangements will be promptly notified to
the note trustee and each stock exchange or other relevant
authority on which the relevant floating rate notes or index linked
interest notes are for the time being listed or by which they have
been admitted to listing and to noteholders in accordance with
number 14.
(vi) Determination or calculation by note trustee
If for any reason at any relevant time after the closing date, the
agent bank or, as the case may be, the calculation agent defaults
in its obligation to determine the rate of interest for a floating
rate note or index linked interest note or the agent bank defaults
in its obligation to calculate any interest amount for such note in
accordance with sub-paragraph (ii)(a) or (b) above or as otherwise
specified in the applicable note supplement, as the case may be,
and in each case in accordance with paragraph (iv) above, the note
trustee shall determine the rate of interest at such rate as, in
its absolute discretion (having such regard as it shall think fit
to the foregoing provisions of this condition, but subject always
to any minimum rate of interest or maximum rate of interest
specified for such note in the applicable note supplement), it
shall deem fair and reasonable in all the circumstances or, as the
case may be, the note trustee shall calculate the interest
amount(s) in such manner as it shall deem fair and reasonable in
all
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the circumstances and each such determination or calculation shall
be deemed to have been made by the agent bank or the calculation
agent, as the case may be.
(vii) Certificates to be final
All certificates, communications, opinions, determinations,
calculations, quotations and decisions given, expressed, made or
obtained for the purposes of the provisions set out in this number
4(b), whether by the agent bank or the calculation agent or the
note trustee shall (in the absence of willful default, bad faith or
manifest error) be binding on the us, the issuer cash manager, the
principal paying agent, the calculation agent, the other paying
agents, the note trustee and all noteholders and (in the absence of
willful default or bad faith) no liability to us or the noteholders
shall attach to the agent bank or the calculation agent or the note
trustee in connection with the exercise or non-exercise by it of
its powers, duties and discretions pursuant to such provisions.
(C) Interest on dual currency interest notes
In the case of a dual currency interest note where the rate or amount of
interest falls to be determined by reference to an exchange rate, the rate or
amount of interest shall be determined in the manner specified for such note in
the applicable prospectus supplement.
(D) Accrual of interest
Interest (if any) will cease to accrue on each note (or in the case of the
redemption of part only of a note, that part only of such note) on the due date
for redemption thereof unless, upon due presentation thereof, payment of
principal is improperly withheld or refused in which event, interest will
continue to accrue as provided in the trust deed.
(E) Deferred interest
To the extent that the funds available to us, subject to and in accordance
with the relevant issuer priority of payments, to pay interest on any series
and class of notes (other than the most senior class of notes of any series
then outstanding) on a note payment date (after discharging our liabilities of
a higher priority) are insufficient to pay the full amount of such interest,
payment of the shortfall attributable to such series and class of notes
("DEFERRED INTEREST"), will not then fall due but will instead be deferred
until the first note payment date for such notes thereafter on which sufficient
funds are available (after allowing for our liabilities of a higher priority
and subject to and in accordance with the relevant issuer priority of payments)
to fund the payment of such deferred interest to the extent of such available
funds.
Such deferred interest will accrue interest ("ADDITIONAL INTEREST") at the
rate of interest applicable from time to time to the applicable series and
class of notes and payment of any additional interest will also be deferred
until the first note payment date for such notes thereafter on which funds are
available (after allowing for our liabilities of a higher priority subject to
and in accordance with the relevant issuer priority of payments) to us to pay
such additional interest to the extent of such available funds.
Amounts of deferred interest and additional interest shall not be deferred
beyond the final maturity date of the applicable series and class of notes,
when such amounts will become due and payable.
Payments of interest due on a note payment date in respect of the most
senior class of notes of any series then outstanding will not be deferred. In
the event of the delivery of an issuer enforcement notice (as described in
number 9), the amount of interest in respect of such notes that was due but not
paid on such note payment date will itself bear interest at the applicable rate
until both the unpaid interest and the interest on that interest are paid.
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5. REDEMPTION, PURCHASE AND CANCELLATION
(A) Final redemption
If the US notes have not previously been redeemed in full as described in
this number 5, we will redeem each series and class of notes at their then
principal amount outstanding together with all accrued interest on the final
maturity date in respect of such series and class of notes.
(B) Mandatory redemption of the notes in part
On each note payment date, other than a note payment date on which a series
and class of notes are to be redeemed under numbers 5(A), (D), (E) or (F), we
shall repay principal in respect of such notes in an amount equal to:
(i) (a) prior to the earlier to occur of the step-up date (if any) in
respect of such notes and a pass-through trigger event (and
subject to the terms of the issuer deed of charge regarding the
funding, replenishment and application of the issuer reserve
fund) the lower of:
(1) the amount due to be paid on such note payment date as
specified for such notes in the applicable prospectus
supplement; and
(2) the amount (if any) repaid on the corresponding loan
payment date in respect of the related loan tranche and
pursuant to the global intercompany loan agreement (and
which is available, under the terms of the issuer deed of
charge and the issuer cash management agreement to repay
principal in respect of such notes) converted, where the
specified currency for such notes is not sterling, into the
specified currency at the specified currency exchange rate
for such notes;
provided that, in the case of any series and class of pass-through
notes, the amount of principal to be repaid by us in respect of
such notes on the applicable note payment date shall be calculated
in accordance with sub-paragraph (2) above; or
(b) following the earlier to occur of the step-up date (if any) in
respect of such notes and a pass-through trigger event
(whereupon each following monthly payment date shall constitute
a note payment date) and subject to the terms of the issuer
deed of charge regarding the funding, replenishment and
application of the issuer reserve fund, the amount (if any)
repaid on the corresponding loan payment date in respect of the
related loan tranche and pursuant to the global intercompany
loan agreement converted, where the specified currency for such
notes is not sterling, into the specified currency at the
specified currency exchange rate; and
(ii) the amount standing to the credit of the issuer reserve fund which
is available (subject to the terms of the issuer deed of charge) to
repay principal in respect of such notes converted where the
specified currency for such notes is not sterling, into sterling at
the specified currency exchange rate for such notes.
To the extent that there are insufficient funds available to us to repay the
amount due to be paid on such note payment date, we will be required to repay
the shortfall, to the extent that we receive funds therefor (and subject to the
terms of the issuer deed of charge and the issuer cash management agreement) on
subsequent note payment dates in respect of such notes.
(C) Note principal payments and principal amount outstanding
On the distribution date immediately preceding each note payment date (the
"NOTE DETERMINATION DATE"), the issuer cash manager or we will determine the
following:
* the amount of each principal payment payable on each US note of
each series and class, called the "NOTE PRINCIPAL PAYMENT";
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* the principal amount outstanding of each US note of that series and
class on the note determination date which is the specified
denomination of each US note of that series and class as at the
applicable closing date less the aggregate of all note principal
payments that have been paid in respect of that note; and
* the fraction, or pool factor, obtained by dividing the principal
amount outstanding of each US note by the specified denomination of
each note of that series and class as at the applicable closing
date.
We will notify the amounts and dates determined to the agent bank, paying
agents, note trustee, the issuer security trustee, the registrar and each stock
exchange on which the notes are listed and we shall also publish such amounts
and dates in accordance with number 14 by no later than the business day after
the relevant note payment date.
If we or the issuer cash manager fails to make a determination as described,
the note trustee will calculate the note principal payment, principal amount
outstanding and pool factor as described in this paragraph (C) in the manner
the note trustee in its discretion considers fair and reasonable in the
circumstances, having regard to paragraph (C) above, and each of these
determinations or calculations will be deemed to have been made by us. If this
happens, the issuer cash manager and the noteholders and we will be bound by
the determinations made.
(D) Optional redemption in full
We may, by giving not less than 30 and not more than 60 days prior notice to
the note trustee and the noteholders, redeem a series and class of notes at the
then redemption amount together with any accrued interest on the following
dates:
* the date specified as the "STEP-UP DATE" for such notes in the
applicable prospectus supplement and on any payment date for such
notes thereafter. This gives us the option to redeem a series and
class of notes on or after the step-up date for interest for that
series and class of notes; and
* any such note payment date for such notes on which the aggregate
principal amount outstanding of such notes and all other classes of
notes of the same series is less than 10% of the aggregate
principal amount outstanding of such series of notes as at the
closing date on which such notes were issued.
We may only redeem the notes as described above if we have prior to the date
of such notice provided to the note trustee a certificate to the effect that
(1) we will have funds available to make the required payment of principal and
interest due in respect of the notes on the relevant note payment date,
including any amounts required to be paid in priority to or in the same
priority as the notes outstanding in accordance with the issuer deed of charge
and the cash management agreement and (2) the repayment tests will be satisfied
following the making of such redemptions.
(E) Optional redemption for tax and other reasons
If we satisfy the note trustee that on the next note payment date for a
series and class of notes either:
(i) we would be required to withhold or deduct from amounts due on a
series and class of notes, any amount on account of any present or
future taxes or duties or governmental charges; or
(ii) Funding 2 would be required to withhold or deduct from amounts due
in respect of the loan tranche under the global intercompany loan
agreement which was funded by such notes, any amount on account of
any present or future taxes or duties or governmental charges; and
(iii) such obligation of us or Funding 2, as the case may be, cannot be
avoided by us or Funding 2, as the case may be, taking reasonable
measures available to us or it,
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then we will use reasonable endeavors to arrange the substitution of a company
incorporated in another jurisdiction and approved by the note trustee in order
to avoid such a situation, provided that we will not be required to do so if
that would require registration of any new security under US securities laws or
would materially increase the disclosure requirements under US law or the costs
of issuance.
If we are unable to arrange a substitution as described above, then we may,
by giving not less than thirty and not more than sixty days' prior notice to
the note trustee and the noteholders, redeem all (but not some only) of such
notes at their redemption amount together with any accrued interest on the next
following note payment date in respect of such notes, provided that, prior to
giving any such notice, we shall deliver to the note trustee (1) a certificate
signed by two of our directors stating that the circumstances referred to in
(i) or (ii) and (iii) above prevail and setting out details of such
circumstances, and (2) an opinion in form and substance satisfactory to the
note trustee of independent legal advisers of recognized standing to the effect
that we have or will become obliged to pay such additional amounts as a result
of such change or amendment. The note trustee shall be entitled to accept such
certificate and opinion as sufficient evidence of the satisfaction of the
circumstance set out in (i) or (ii) and (iii) above, in which event they shall
be conclusive and binding on the noteholders. We may only redeem the notes as
described above if we have prior to the date of such notice provided to the
note trustee a certificate to the effect (1) that we will have funds available
to make the required payment of principal and interest due in respect of the
notes on the relevant note payment date, including any amounts required to be
paid in priority to or in the same priority as the notes outstanding in
accordance with the issuer deed of charge and the issuer cash management
agreement and (2) the repayment tests will be satisfied following the making of
such redemptions.
In addition to the foregoing, if at any time it becomes unlawful for us to
make, fund or allow to remain outstanding under the global intercompany loan
agreement, then we may require Funding 2 upon giving not more than 60 nor less
than 30 days' (or such shorter period as may be required under any relevant
law) prior written notice to us, the issuer security trustee and the note
trustee (whereupon we will notify you in accordance with number 14), to prepay
the global intercompany loan on any loan payment date subject to and in
accordance with the provisions of the global intercompany loan agreement to the
extent necessary to cure such illegality. Such monies received by us shall be
used to prepay the notes in full, together with any accrued interest, on the
equivalent note payment date.
(F) Optional Redemption for Implementation of Capital Requirements Directive
If the Capital Requirements Directive has been implemented in the United
Kingdom, whether by rule of law, recommendation or best practice or by any
other regulation, then on the note payment date for a series and class of notes
specified in the applicable prospectus supplement (if any) and any note payment
date for such notes thereafter, we may, by giving not more than 60 nor less
than 30 days' (or such shorter period as may be required under any relevant
law) prior notice to the note trustee and the noteholders, redeem all (but not
some only) of such series and class of notes at their redemption amount
together with any accrued interest on the next following note payment date for
such notes, provided that an issuer enforcement notice has not been served. We
may only redeem the notes as described above if we have prior to the date of
such notice provided to note trustee a certificate to the effect that (1) we
will have the funds available to make the required payment of principal and
interest due in respect of the notes on the relevant note payment date,
including any amounts required to be paid in priority to or in the same
priority as the notes outstanding in accordance with the issuer deed of charge
and the cash management agreement, and (2) the repayment tests will be
satisfied following the making of such redemptions.
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(G) Redemption amounts
For the purposes of this Condition 5, "REDEMPTION AMOUNT" means, in respect
of any series and class of notes, the amount specified in relation to such
notes in the applicable prospectus supplement or, if not specified:
(i) in respect of each note (other than a zero coupon note), the
principal amount outstanding of such note; and
(ii) in respect of each zero coupon note, an amount (the "AMORTISED FACE
AMOUNT") calculated in accordance with the following formula:
redemption amount = RP x (1 + AYy)
where:
RP = the reference price;
AY = the accrual yield expressed as a decimal; and
y = a fraction, the numerator of which is equal to the number
of days (calculated on the basis of a 360-day year
consisting of 12 months of 30 days each) from (and
including) the first closing date of the applicable series
and class of notes to (but excluding) the date fixed for
redemption or, as the case may be, the date upon which such
note becomes due and payable and the denominator of which
is 360.
If the amount payable in respect of any zero coupon note upon redemption of
such zero coupon note pursuant to number 5(A), (B), (D), (E) or (F) above or
upon its becoming due and repayable as provided in number 9 is improperly
withheld or refused, the amount due and repayable in respect of such note shall
be the amount calculated as provided in paragraph (b) above as though the
reference therein to the date fixed for the redemption or, as the case may be,
the date upon which such note becomes due and payable were replaced by
reference to the date which is the earlier of:
(i) the date on which all amounts due in respect of such note have been
paid; and
(ii) the date on which the full amount of the moneys payable in respect
of such note has been received by the principal paying agent or the
note trustee or the registrar and notice to that effect has been
given to the noteholders in accordance with number 14.
6. PAYMENTS
Payments of principal and interest in respect of the notes will be made to
the persons in whose names the global note certificates are registered on the
register at the opening of business in the place of the registrar's specified
office on the fifteenth day before the due date for such payment. Such date is
called the "RECORD DATE". Payments shall be made by wire transfer of
immediately available funds, if such registered holder shall have provided
wiring instructions no less than five business days prior to the record date,
or otherwise by check mailed to the address of such registered holder as it
appears in the register at the opening of business on the record date. In the
case of the final redemption, and provided that payment is made in full,
payment will only be made against surrender of those global note certificates
to the registrar.
All payments on the US notes are subject to any applicable fiscal or other
laws and regulations. Noteholders will not be charged commissions or expenses
on these payments.
If the due date for payment of any amount on the US notes is not a payment
business day, noteholders will not be entitled to payment of the amount due in
that place until the next payment business day 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 a US note, the registrar will
endorse on that US global note certificate a statement indicating the amount
and date of that payment.
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If payment of principal of a US note is improperly withheld or refused, the
interest which continues to accrue will still be payable in accordance with the
usual procedures.
We can, at any time, vary or terminate the appointment of any paying agent
and can appoint successor or additional paying agents, registrar or transfer
agent. If we do this, we must ensure that we maintain a paying agent in London,
a paying agent in New York and a registrar. We 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.
Subject as described earlier in relation to the deferral of interest, if
payment of interest on a note is not paid for any other reason when due and
payable, the unpaid interest will itself bear interest at the applicable rate
until both the unpaid interest and the interest on that interest are paid.
7. PRESCRIPTION
Claims against us for payment of interest and principal on redemption will
become void if the relevant note certificates are not surrendered for payment
within the time limit for payment. That time limit is ten years from the due
date of such notes. If there is a delay in the paying agents or, as applicable,
the note trustee, receiving the funds, then the due date, for the purposes of
this time limit, is the date on which it notifies you, in accordance with
number 14, that it has received the relevant payment.
8. TAXATION
Payments of interest and principal will be made without making any
withholding or deduction for or on account of any tax unless a withholding or
deduction is required by any applicable law. If a withholding or deduction for
or on account of tax is made, the relevant paying agent or we will account to
the relevant authority for the amount so withheld or deducted. Neither we nor
any paying agent are required to make any additional payments to noteholders
for such withholding or deduction.
9. EVENTS OF DEFAULT
(A) Class A noteholders
The note trustee in its absolute discretion may give notice to us of a class
A note event of default (as defined below) in respect of the class A notes (a
"CLASS A ISSUER ENFORCEMENT NOTICE"), and shall give such notice if it is
indemnified to its satisfaction and it is:
* requested to do so in writing by the holders of at least one
quarter of the aggregate principal amount outstanding of the class
A notes (which for this purpose and the purpose of any
extraordinary resolution referred to in this number 9(A) means the
class A notes of all series instituted by the trust deed); or
* directed to do so by an extraordinary resolution passed at a
meeting of the noteholders of the class A notes.
If any of the following events occurs and is continuing it is called a
"CLASS A NOTE EVENT OF DEFAULT":
* we fail to pay for a period of seven business days any amount of
principal of the class A notes of any series when such payment
ought to have been paid in accordance with the conditions or we
fail to pay for a period of fifteen business days any amount of
interest on the class A notes of any series when such payment ought
to have been paid in accordance with the conditions; or
* we fail to perform or observe any of its other obligations under
the class A notes of any series, the trust deed, the issuer deed of
charge or any other transaction document, and (except where the
note trustee certifies that, in its opinion, such failure is
incapable of remedy, in which case no notice will be required) it
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remains unremedied for 30 days after the note trustee has given
notice of it to us 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 holders of the class
A notes of such series; or
* except for the purposes of an amalgamation or restructuring as
described in the point immediately following, we cease or threaten
to cease carrying on all or a substantial part of our business or
we are deemed unable to pay our 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 become unable to
pay our debts within the meaning of section 123(2) of the
Insolvency Act 1986 (as that section may be amended, modified or
re-enacted); or
* an order is made or an effective resolution is passed for our
winding up except for the purposes of or pursuant to an
amalgamation, restructuring or merger previously approved by the
note trustee in writing or by an extraordinary resolution (as
defined in the trust deed) of the holders of the class A notes; or
* proceedings are otherwise initiated against us under any applicable
liquidation, insolvency, composition, reorganization or other
similar laws (including, but not limited to, presentation of a
petition or the making of an application for administration or the
filing of documents with the court for an administration) and
(except in the case of presentation of a petition for an
administration order) such proceedings are not, in the opinion of
the note trustee, being disputed in good faith with a reasonable
prospect of success, a formal notice is given of intention to
appoint an administrator in relation to us or an administration
order being granted or an administrative receiver or other
receiver, liquidator or other similar official being appointed in
relation to us or in relation to the whole or any substantial part
of the undertaking or assets of us, or an encumbrancer taking
possession of the whole or any substantial part of the undertaking
or assets of us, or a distress, execution, diligence or other
process being levied or enforced upon or sued out against the whole
or any substantial part of the undertaking or assets of us and such
possession or process (as the case may be) not being discharged or
not otherwise ceasing to apply within 30 days, or we initiating or
consenting to judicial proceedings relating to itself under
applicable liquidation, insolvency, composition, reorganization or
other similar laws or making a conveyance or assignment for the
benefit of our creditors generally or a composition or similar
arrangement with the creditors or takes steps with a view to
obtaining a moratorium in respect of our indebtedness, including
without limitation, the filing of documents with the court; or
* if a Funding 2 intercompany loan enforcement notice is served in
respect of any Funding 2 intercompany loan agreement while the
class A notes of any series are outstanding.
(B) Class B Noteholders
The terms described in this number 9(B) will have no effect so long as any
class A notes of any series are outstanding. Subject thereto, for so long as
any class B notes are outstanding, the note trustee may, in its absolute
discretion, give notice of a class B note event of default (as defined below)
in respect of the class B notes (a "CLASS B ISSUER ENFORCEMENT NOTICE"), and
shall give such notice if it is indemnified to its satisfaction and it is:
* requested to do so in writing by the holders of not less than 25
per cent. in aggregate principal amount outstanding the class B
Notes (which for this purpose and the purpose of any extraordinary
resolution referred to in this number 9(B) means the class B notes
of all series constituted by the trust deed); or
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* directed to do so by an extraordinary resolution passed at a
meeting of the holders of the class B notes.
If any of the following events occurs and is continuing it is called a
"CLASS B NOTE EVENT OF DEFAULT":
* we fail to pay a period of seven business days any amount of
principal of the class B notes of any series when such payment
ought to have been paid in accordance with the conditions or we
fail to pay for a period of fifteen business days any amount of
interest on the class B notes of any series when such payment ought
to have been paid in accordance with the conditions; or
* the occurrence of any of the events in number 9(A) above but so
that any reference to class A notes and class A noteholders shall
be read as references to class B notes and class B noteholders.
(C) Class M Noteholders
The terms described in this number 9(C) will have no effect so long as any
class A notes or class B notes of any series are outstanding. Subject thereto,
for so long as any class M notes are outstanding, the note trustee may, in its
absolute discretion, give notice of a class M note event of default (as defined
below) in respect of the class M notes (a "CLASS M ISSUER ENFORCEMENT NOTICE"),
and shall give such notice if it is indemnified to its satisfaction and it is:
* requested to do so in writing by the holders of not less than 25
per cent. in aggregate principal amount outstanding of the class M
Notes, (which for this purpose and the purposes of any
extraordinary resolution referred to in this number 9(C) means the
class M note, of all series constituted by the trust deed); or
* directed to do so by an extraordinary resolution passed at a
meeting of the holders of the class M notes.
If any of the following events occurs and is continuing it is called a
"CLASS M NOTE EVENT OF DEFAULT":
* we fail to pay a period of seven business days any amount of
principal of the class M notes of any series when such payment
ought to have been paid in accordance with the conditions or we
fail to pay for a period of fifteen business days any amount of
interest on the class M notes of any series when such payment ought
to have been paid in accordance with the conditions; or
* the occurrence of any of the events in number 9(A) above but so
that any reference to class A notes and class A noteholders shall
be read as references to class M notes and class M noteholders.
(D) Class C Noteholders
The terms described in this number 9(D) will have no effect so long as any
class A notes, class B notes or class M notes of any series are outstanding.
Subject thereto, for so long as any class C notes are outstanding, the note
trustee may, in its absolute discretion, give notice of a class C note event of
default (as defined below) in respect of the class C notes (a "CLASS C ISSUER
ENFORCEMENT NOTICE"), and shall give such notice if it is indemnified to its
satisfaction and it is:
* requested to do so in writing by the holders of not less than 25
per cent. in aggregate principal amount outstanding of the class C
notes (which for this purpose and the purpose of any extraordinary
resolution referred to in this number 9(D) means the class C notes
of all series constituted by the trust deed); or
* directed to do so by an extraordinary resolution passed at a
meeting of the holders of the class C notes.
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If any of the following events occurs and is continuing it is called a
"CLASS C NOTE EVENT OF DEFAULT":
* we fail to pay a period of seven business days any amount of
principal of the class C notes of any series when such payment
ought to have been paid in accordance with the conditions or we
fail to pay for a period of fifteen business days any amount of
interest on the class C notes of any series when such payment ought
to have been paid in accordance with the conditions; or
* the occurrence of any of the events in number 9(A) above but so
that any reference to class A notes and class A noteholders shall
be read as references to class C notes and class C noteholders.
(E) Class D Noteholders
The terms described in this number 9(E) will have no effect so long as any
class A notes, class B notes, class M notes or class C notes of any series are
outstanding. Subject thereto, for so long as any class D notes are outstanding,
the note trustee may, in its absolute discretion, give notice of a class D note
event of default (as defined below) in respect of the class D notes (a "CLASS D
ISSUER ENFORCEMENT NOTICE"), and shall give such notice if it is indemnified to
its satisfaction and it is:
* requested to do so in writing by the holders of not less than 25
per cent. in aggregate principal amount outstanding of the class D
notes (which for this purpose and the purpose of any extraordinary
resolution referred to in this number 9(E) means the class D notes
of all series constituted by the trust deed); or
* directed to do so by an extraordinary resolution passed at a
meeting of the holders of the class D notes.
If any of the following events occurs and is continuing it is called a
"CLASS D NOTE EVENT OF DEFAULT":
* we fail to pay a period of seven business days any amount of
principal of the class D notes of any series when such payment
ought to have been paid in accordance with the conditions or we
fail to pay for a period of fifteen business days any amount of
interest on the class D notes of any series when such payment ought
to have been paid in accordance with the conditions; or
* the occurrence of any of the events in number 9(A) above but so
that any reference to class A notes and class A noteholders shall
be read as references to class D notes and class D noteholders.
An issuer enforcement notice is a written notice from the note trustee to
the issuer security trustee, the Funding 2 security trustee and to us declaring
the notes to be immediately due. When it is given, the notes of all series and
classes will become immediately due at their principal amount outstanding
together with accrued and unpaid interest (or, in the case of a zero coupon
note, at its redemption amount calculated in accordance with number 5(G))
without further action or formality.
10. ENFORCEMENT OF NOTES
The note trustee may, at its discretion and without notice at any time and
from time to time, take such steps and institute such proceedings against us or
any other person as it may think fit to enforce the provisions of the notes or
the trust deed (including the terms and conditions of the notes) or any of the
other transaction documents to which it is a party and may, at its discretion
and without notice, at any time after the issuer security has become
enforceable (including after the service of an issuer enforcement notice in
accordance with number 9), instruct the issuer security trustee to take such
steps as it may think fit to enforce the issuer security. The note trustee
shall not be bound to take steps or institute such proceedings unless:
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* (subject in all cases to restrictions contained in the trust deed
to protect the interests of any higher ranking class of
noteholders) it shall have been so directed by an extraordinary
resolution (as described in number 11) of the class A noteholders,
the class B noteholders, the class M noteholders, the class C
noteholders or the class D noteholders or so requested in writing
by the holders of at least one quarter in principal amount
outstanding of the class A notes, the class B notes, the class M
notes, the class C notes or the class D notes (as the case may be);
and
* it shall have been indemnified and/or secured to its satisfaction.
The issuer security trustee shall not be bound to take such steps or take
any such other action unless it is so directed by the note trustee and
indemnified and/or secured to its satisfaction.
Amounts available for distribution after enforcement of the issuer security
shall be distributed in accordance with the terms of the issuer deed of charge.
No noteholder may institute any proceedings against us to enforce its rights
under or in respect of the notes, the trust deed or the issuer deed of charge
unless (1) the note trustee or the issuer security trustee, as applicable, has
become bound to institute proceedings and has failed to do so within 30 days of
becoming so bound and (2) such failure is continuing; provided that,
notwithstanding the foregoing and notwithstanding any other provision of the
trust deed, the right of any noteholder to receive payment of principal of and
interest on its notes on or after the due date for such principal or interest,
or to institute suit for the enforcement of payment of that principal or
interest, may not be impaired or affected without the consent of that
noteholder. In addition, no class B noteholder, class M noteholder, class C
noteholder or class D noteholder will be entitled to commence proceedings for
the winding up or administration of us unless there are no outstanding notes of
a class with higher priority, or if notes of a class with higher priority are
outstanding, there is consent of noteholders of at least one quarter of the
aggregate principal amount of the class or classes of notes outstanding (as
defined in the trust deed) with higher priority.
In the event that:
* the issuer security is enforced and the issuer security determines
that (a) the proceeds of such enforcement, after distribution of
such proceeds to the persons entitled thereto ranking in priority
to the notes under the issuer deed of charge and to the noteholders
(to the extent entitled thereto) are insufficient to pay in full
all principal and interest and other amounts whatsoever due in
respect of the notes and any claims ranking equally with such
claims (b) such proceeds of enforcement have been so distributed in
accordance with the terms of the issuer deed of charge and (c)
there are no further assets available to pay principal and interest
and other amounts whatsoever due in respect of the notes; or
* within 20 days following the final maturity date of the latest
maturing note the issuer security trustee certifies that there is
no further amount outstanding under the global intercompany loan
agreement,
then all interests in each global note certificate will be automatically
exchanged for equivalent interests in an equivalent amount of notes in an
equivalent principal amount outstanding in individual note certificates and
each such global note certificate will be cancelled on the date of such
exchange.
The note trustee is required to transfer or (as the case may be) procure
transfer of all (but not some only) of the notes, for the consideration of one
penny per note, to the post enforcement call option holder pursuant to the
option granted to it by the note trustee (as agent for the noteholders). The
option is granted to acquire all of the notes plus accrued interest on the
notes. This is called the post enforcement call option. Immediately upon such
transfer, no such former noteholder shall have any further interest in the
notes. each of the noteholders acknowledges that the note trustee has the
authority and the
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power to bind the noteholders in accordance with the terms and conditions set
out in the issuer post-enforcement call option agreement and each noteholder,
by subscribing for or purchasing notes, agrees to be so bound.
11. MEETINGS OF NOTEHOLDERS, MODIFICATIONS AND WAIVER
(1) MEETINGS OF NOTEHOLDERS
The trust deed contains provisions for convening meetings of noteholders to
consider any matter affecting their interests, including the sanctioning by
extraordinary resolution of a modification of any provision of the terms and
conditions of the notes or the provisions of any of the transaction documents.
In respect of the class A notes, the trust deed provides that:
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class A notes of one
series only shall be deemed to have been duly passed if passed at a
meeting of the holders of the class A notes of that series;
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class A notes of any
two or more series but does not give rise to a conflict of interest
between the holders of such two or more series of class A notes,
shall be deemed to have been duly passed if passed at a single
meeting of the holders of such two or more series of class A notes;
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class A notes of any
two or more series and gives or may give rise to a conflict of
interest between the holders of such two or more series of class A
notes, shall be deemed to have been duly passed only if, in lieu of
being passed at a single meeting of the holders of such two or more
series of class A notes, it shall be passed at separate meetings of
the holders of such two or more series of class A notes.
In respect of the class B notes, the trust deed provides that:
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class B notes of one
series only shall be deemed to have been duly passed if passed at a
meeting of the holders of the class B notes of that series;
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class B notes of any
two or more series but does not give rise to a conflict of interest
between the holders of such two or more series of class B notes,
shall be deemed to have been duly passed if passed at a single
meeting of the holders of such two or more series of class B notes;
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class B notes of any
two or more series and gives or may give rise to a conflict of
interest between the holders of such two or more series of class B
notes, shall be deemed to have been duly passed only if, in lieu of
being passed at a single meeting of the holders of such two or more
series of class B notes, it shall be passed at separate meetings of
the holders of such two or more series of class B notes.
In respect of the class M notes, the trust deed provides that:
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class M notes of one
series only shall be deemed to have been duly passed if passed at a
meeting of the holders of the class M notes of that series;
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* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class M notes of any
two or more series but does not give rise to a conflict of interest
between the holders of such two or more series of class M notes,
shall be deemed to have been duly passed if passed at a single
meeting of the holders of such two or more series of class M notes;
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class M notes of any
two or more series and gives or may give rise to a conflict of
interest between the holders of such two or more series of class M
notes, shall be deemed to have been duly passed only if, in lieu of
being passed at a single meeting of the holders of such two or more
series of class M notes, it shall be passed at separate meetings of
the holders of such two or more series of class M notes.
In respect of the class C notes, the trust deed provides that:
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class C notes of one
series only shall be deemed to have been duly passed if passed at a
meeting of the holders of the class C notes of that series;
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class C notes of any
two or more series but does not give rise to a conflict of interest
between the holders of such two or more series of class C notes,
shall be deemed to have been duly passed if passed at a single
meeting of the holders of such two or more series of class C notes;
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class C notes of any
two or more series and gives or may give rise to a conflict of
interest between the holders of such two or more series of class C
notes, shall be deemed to have been duly passed only if, in lieu of
being passed at a single meeting of the holders of such two or more
series of class C notes, it shall be passed at separate meetings of
the holders of such two or more series of class C notes.
In respect of the class D notes, the trust deed provides that:
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class D notes of one
series only shall be deemed to have been duly passed if passed at a
meeting of the holders of the class D notes of that series;
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class D notes of any
two or more series but does not give rise to a conflict of interest
between the holders of such two or more series of class D notes,
shall be deemed to have been duly passed if passed at a single
meeting of the holders of such two or more series of class D notes;
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class D notes of any
two or more series and gives or may give rise to a conflict of
interest between the holders of such two or more series of class D
notes, shall be deemed to have been duly passed only if, in lieu of
being passed at a single meeting of the holders of such two or more
series of class D notes, it shall be passed at separate meetings of
the holders of such two or more series of class D notes.
In respect of a class of notes of any series constituting two or more sub-
classes, the trust deed provides that:
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of notes of one sub-class only
of such class, shall be deemed to have been duly passed if passed
at a meeting of the holders of the notes of such sub-class;
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* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of more than one sub-class of
notes of such class but does not give rise to a conflict of
interest between the holders of such sub-classes of notes, shall be
deemed to have been duly passed if passed at a single meeting of
the holders of all such sub-classes of notes; and
* a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of more than one sub-class of
notes of such class and gives or may give rise to a conflict of
interest between the holders of such sub-classes of notes, shall be
deemed to have been duly passed only if, in lieu of being passed at
a single meeting of the holders of such sub-classes of notes, it
shall be passed at separate meetings of the holders of such sub-
classes of notes.
Subject as provided in the following paragraph, the quorum for any meeting
of the noteholders of any series and class of notes or any one or more series
of notes of the same class convened to consider an extraordinary resolution
will be one or more persons holding or representing not less than half of the
aggregate principal amount outstanding of such series and class of notes or
such one or more series of notes of the same class or, at any adjourned
meeting, one or more persons being or representing noteholders of such series
and class of notes or such one or more series of notes of the same class,
whatever the total principal amount of the outstanding notes so represented.
Certain terms including the alteration of the amount, rate or timing of
payments on a series and class of notes, the currency of payment, the issuer
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
aggregate principal amount outstanding of the relevant series and class of
notes or of the relevant one or more series of notes of the same class or, at
any adjourned meeting, at least one quarter of the aggregate principal amount
outstanding of such series and class of notes or such one or more series of
notes of the same class. These modifications are called "BASIC TERMS
MODIFICATIONS".
A resolution signed by or on behalf of all the noteholders of the relevant
series and class or of the relevant one or more series of notes of the same
class who for the time being are entitled to receive notice of a meeting under
the trust deed shall for all purposes be as valid and effective as an
extraordinary resolution passed at a meeting of such series and class of
noteholders.
Subject as provided in number 11(3):
* no extraordinary resolution of the class B noteholders of any
series shall take effect while the class A notes (of that series or
of any other series) remain outstanding unless sanctioned by an
extraordinary resolution of the class A noteholders of each series,
or the note trustee, is of the opinion that it would not be
materially prejudicial to the interests of the class A noteholders
of each series.
* no extraordinary resolution of the class M noteholders of any
series shall take effect while the class A notes or class B notes
(in each case, of that series or of any other series) remain
outstanding unless sanctioned by an extraordinary resolution of the
class A noteholders and an extraordinary resolution of the class B
noteholders, in each case of each series, or the note trustee, is
of the opinion that it would not be materially prejudicial to the
respective interests of the class A noteholders and/or the class B
noteholders of each series (as applicable).
* no extraordinary resolution of the class C noteholders of any
series shall take effect while the class A notes, class B notes or
class M notes (in each case, of that series or of any other series)
remain outstanding unless sanctioned by an extraordinary resolution
of the class A noteholders, an extraordinary resolution of the
class B noteholders and an extraordinary resolution of the class M
noteholders, in each case of each series, or the note trustee, is
of the opinion
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that it would not be materially prejudicial to the respective
interests of the class A noteholders, the class B noteholders and
the class M noteholders of each series (as applicable).
* no extraordinary resolution of the class D noteholders of any
series shall take effect while the class A notes, class B notes,
class M notes or class C notes (in each case, of that series or of
any other series) remain outstanding unless sanctioned by an
extraordinary resolution of the class A noteholders, an
extraordinary resolution of the class B noteholders, an
extraordinary resolution of the class M noteholders and an
extraordinary resolution of the class C noteholders, in each case
of each series, or the note trustee, is of the opinion that it
would not be materially prejudicial to the respective interests of
the class A noteholders, the class B noteholders, the class M
noteholders and/or the class C noteholders of each series (as
applicable).
(2) PROGRAMME RESOLUTION
Notwithstanding the provisions set out in number 11(1), any extraordinary
resolution of the noteholders of any class of notes to direct the note trustee
to take any enforcement action pursuant set out in numbers 9 and 10 (a
"PROGRAMME RESOLUTION") shall only be capable of being passed at a single
meeting of the noteholders of all series of such class of notes. The quorum at
any such meeting for passing a programme resolution shall be two or more
persons holding or representing more than half of the aggregate principal
amount outstanding of the notes of such class or, at any adjourned and
reconvened meeting, two or more persons being or representing noteholders of
such class of notes, whatever the aggregate principal amount outstanding of
such class of notes so held or represented by them.
(3) APPROVAL OF MODIFICATIONS AND WAIVERS BY NOTEHOLDERS
No extraordinary resolution of the noteholders of any one or more series of
class A notes to sanction a modification of, or any waiver or authorisation of
any breach, or proposed breach of, any of the provisions of the issuer
transaction documents or the terms and conditions of such notes shall take
effect unless it has been sanctioned by an extraordinary resolution of the
class B noteholders, an extraordinary resolution of the class M noteholders, an
extraordinary resolution of the class C noteholders and an extraordinary
resolution of the class D noteholders, in each case of each series, or the note
trustee is of the opinion that it would not be materially prejudicial to the
respective interests of the class B noteholders, the class M noteholders, the
class C noteholders and the class D noteholders of each series.
After the class A notes have been fully redeemed, no extraordinary
resolution of the noteholders of any one or more series of class B notes to
sanction a modification of, or any waiver or authorisation of any breach, or
proposed breach of, any of the provisions of the issuer transaction documents
or the terms and conditions of such notes shall take effect unless it has been
sanctioned by an extraordinary resolution of the class M noteholders, an
extraordinary resolution of the class C noteholders and an extraordinary
resolution of the class D noteholders, in each case of each series, or the note
trustee is of the opinion that it would not be materially prejudicial to the
respective interests of the class M noteholders, the class C noteholders and
the class D noteholders of each series.
After the class A notes and class B notes have been fully redeemed, no
extraordinary resolution of the noteholders of any one or more series of class
M notes to sanction a modification of, or any waiver or authorisation of any
breach, or proposed breach of, any of the provisions of the issuer transaction
documents or the terms and conditions of such notes shall take effect unless it
has been sanctioned by an extraordinary resolution of the class C noteholders
and an extraordinary resolution of the class D noteholders, in each case of
each series, or the note trustee is of the opinion that it would not be
materially prejudicial to the respective interests of the class C noteholders
and the class D noteholders of each series.
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After the class A notes, class B notes and class M notes have been fully
redeemed, no extraordinary resolution of the noteholders of any one or more
series of class C notes to sanction a modification of, or any waiver or
authorisation of any breach, or proposed breach of, any of the provisions of the
issuer transaction documents or the terms and conditions of such notes shall
take effect unless it has been sanctioned by an extraordinary resolution of the
class D noteholders, in each case of each series, or the note trustee is of the
opinion that it would not be materially prejudicial to the interests of the
class D noteholders of each series.
(4) MODIFICATIONS AND WAIVERS BY THE NOTE TRUSTEE
The note trustee, may, without the consent of the noteholders, (1) agree to
any modification of, or to the waiver or authorization of any breach or
proposed breach of, the terms and conditions of any series and class of notes
or any of the transaction documents which is not, in the opinion of the note
trustee, materially prejudicial to the interests of the noteholders of such
series and class of notes or any other series and class of notes or (2)
determine that any note event of default in respect of a series and class of
notes shall not be treated as such, provided that, in any such case, it is not
in the opinion of the note trustee materially prejudicial to the interest of
the noteholders of such series and class of notes or of any other series and
class of notes or (3) agree to any modification of any of the terms and
conditions or any of the transaction documents which, in the opinion of the
note trustee, is of a formal, minor or technical nature or is to correct a
manifest error, or an error established as such to the satisfaction of the note
trustee.
For the avoidance of doubt (in the context of deciding material prejudice in
respect of the above provisions), if the note trustee or, as the case may be,
the issuer security trustee, considers in its sole opinion that the noteholders
of the same class of one or more series to which the modification or waiver
relates are materially prejudiced, the note trustee will not be able to
sanction such modification or waiver itself, and will instead require an
extraordinary resolution of the noteholders of the notes of such class
outstanding to be passed by means of a meeting. In accordance with the general
provisions contained herein, such extraordinary resolution must also be
ratified by the noteholders of the notes of the higher class or classes in
order for the extraordinary resolution that seeks approval of the modification
or waiver to be valid and effective.
Any of these modifications, authorizations or waivers will be binding on the
noteholders and, unless the note trustee or, as the case may be, the issuer
security trustee, agrees otherwise, shall be promptly notified to the
noteholders and the rating agencies in accordance with number 14 as soon as
practicable thereafter.
Where the note trustee is required in connection with the exercise of its
powers to have regard to the interests of the noteholders of a class, series or
series and class thereof it shall have regard to the interests of such
noteholders as a class. In particular, the note trustee shall not have regard
to, or be liable for, the consequences of such exercise for individual
noteholders resulting from their being domiciled or resident in or connected
with any particular territory. In connection with any such exercise, the note
trustee shall not be entitled to require, and no noteholder shall be entitled
to claim, from us 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 ISSUER SECURITY TRUSTEE
The note trustee and the issuer security trustee are entitled to be
indemnified and relieved from responsibility in certain circumstances,
including provisions, among others, relieving them from taking enforcement
proceedings unless indemnified to their satisfaction. The note trustee and the
issuer security trustee are also entitled to be paid their costs and expenses
in priority to any interest payments to noteholders.
The note trustee and the issuer security trustee and their related companies
are entitled to enter into business transactions with us, Northern Rock plc or
related
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companies of either of them and to act as note trustee or as security trustee
for the holders of any new notes and for any person who is a party to any
transaction document or whose obligations are comprised in the issuer security
or any of their subsidiary or associated companies, without accounting for any
profit resulting from those transactions.
The note trustee and the issuer security trustee will not be responsible for
any loss or liability suffered as a result of any assets in the issuer security
being uninsured or inadequately insured or being held by clearing operations or
their operators or by intermediaries on behalf of the note trustee or the
issuer security trustee, as applicable.
Furthermore, the note trustee and the issuer security trustee will be
relieved of liability for making searches or other inquiries in relation to the
assets comprising the issuer security. The note trustee and the issuer security
trustee do not have any responsibility in relation to the legality and the
enforceability of the trust arrangements and the related issuer security.
Neither the note trustee nor the issuer security trustee will be obliged to
take any action that might result in its incurring personal liabilities.
Neither the note trustee nor the issuer security trustee is obliged to monitor
or investigate the performance of any other person under the issuer related
documents or the documents relating to the global intercompany loan and the
mortgages trust and is entitled to assume, until it has actual knowledge to the
contrary, that all such persons are properly performing their duties, unless it
receives express notice to the contrary.
Neither the note trustee nor the issuer security trustee will be responsible
for any deficiency that may arise because it is liable to tax in respect of the
proceeds of any security.
Similar provisions in respect of the indemnification of the Funding 2
security trustee are set out in the transaction documents.
13. REPLACEMENT OF NOTES
If individual note certificates are lost, stolen, mutilated, defaced or
destroyed, the noteholder can replace them at the specified office of any
paying agent. The noteholder will be required both to pay the expenses of
producing a replacement and to comply with the registrar's, the paying agent's
and our reasonable requests for evidence and indemnity. The noteholder must
surrender any defaced or mutilated note certificates before replacements will
be issued.
If a global note certificate is lost, stolen, mutilated, defaced or
destroyed, we will deliver a replacement global note certificate to the
registered holder upon satisfactory evidence and surrender of any defaced or
mutilated global note certificate. A replacement will only be made upon payment
of the expenses for a replacement and compliance with the registrar's, the
paying agents' and our reasonable requests as to evidence and indemnity.
14. NOTICE TO NOTEHOLDERS
Any notice to noteholders shall be validly given if such notice is:
(i) 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; and
(ii) published in The Financial Times; and
(iii) for so long as amounts are outstanding on the US notes, in a daily
newspaper of general circulation in New York (which is expected to
be The New York Times);
or, if any of such newspapers set out above shall cease to be published or
timely publication therein shall not be practicable, in a leading English
language daily newspaper having general circulation in the United Kingdom or
the United States (as applicable) provided that if, at any time, we procure
that the information concerned in such notice shall be published on the
relevant screen, publication in the newspapers set out above or
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such other newspaper or newspapers shall not be required with respect to such
information.
Any notices so published shall be deemed to have been given on the fourth
day after the date of posting, or as the case may be, on the date of such
publication or, if published more than once on different dates, on the first
date on which publication shall have been made in the newspaper or newspapers
in which (or on the relevant screen on which) publication is required.
While the Notes are represented by global note certificates, any notice to
noteholders will be validly given if such notice is provided in accordance with
the previous paragraphs of this number 14 or (at our option) if delivered to
DTC (in the case of the US notes) or Euroclear and/or Clearstream, Luxembourg
(in the case of the Reg S notes). Any notice delivered to the DTC and/or
Euroclear and/or Clearstream, Luxembourg will be deemed to be given on the day
of delivery.
The note trustee shall be at liberty to sanction some other method of giving
notice to noteholders or any series or class or category of them if, in its
opinion, such other method is reasonable having regard to market practice then
prevailing and to the requirements of the stock exchanges on which the notes
are then listed and provided that notice of such other method is given to the
noteholders in such manner as the note trustee shall require.
15. FURTHER ISSUES
We shall be at liberty from time to time, without the consent of the
noteholders, to create and issue further notes of a certain class having terms
and conditions the same as the notes of any series of the same class or the
same in all respects save for the amount and date of the first payment of
interest thereon, issue date and/or purchase price and so that the same shall
be consolidated and form a single series and class with the outstanding notes
of such series and class.
16. GOVERNING LAW
The transaction documents and the notes will be governed by English law,
unless specifically stated to the contrary. Certain provisions in the
transaction documents relating to property situated in Scotland are governed by
Scots law. Unless specifically stated to the contrary (i) the courts of England
are to have non-exclusive jurisdiction to settle any disputes which may arise
out of or in connection with the transaction documents and the notes and (ii)
the parties to the transaction documents irrevocably submit to the non-
exclusive jurisdiction of the courts of England.
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MATERIAL LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE RELATED SECURITY
The following discussion describes, in summary, the material legal aspects
in respect of the assignment of the mortgage loans and related security and of
English and Scottish residential property and mortgages. It is a brief summary
and not an exhaustive analysis of the relevant law.
ENGLISH MORTGAGE LOANS
GENERAL
The parties to a mortgage are the mortgagor, who is homeowner and who grants
the mortgage over his property, and the mortgagee, who is the lender. Each
mortgage loan is secured by a mortgage on the property (the mortgaged
property). Since the most common form of creating a mortgage on residential
property, namely, by means of a legal charge by deed, means that a mortgagor
does not cease to be the owner of the property, generally a mortgagor will be
free to create further mortgages on the mortgaged property (subject to any
restrictions imposed by the mortgagee in the mortgage deed). Each mortgage loan
to be assigned to the mortgages trustee will be secured by a mortgage which has
a first ranking priority (except in the case of a regulated personal secured
loan) over all other mortgages secured on the mortgaged property and over all
unsecured creditors of the borrower, except in respect of certain statutory
rights, which are granted statutory priority. There are two forms of title to
land in England and Wales: registered and unregistered. Both systems of title
can include both freehold and leasehold estates.
REGISTERED TITLE
Title to registered land is registered at the Land Registry. The registrar
allocates a unique title number. Consequently if there are freehold and
leasehold registered interests in the same property, then there will be more
than one register of title and a separate title number is allocated to each
interest in such property. Each individual register consists of three parts:
the property register, the proprietorship register and the charges register.
The property register describes the land and the type of estate, freehold or
leasehold that is the subject of that title number. In some instances it may
also refer to third party rights that burden the property although these may
also be mentioned in the charges register as prior to the Land Registration Act
2002, practice varied between the various District Land Registries around the
country.
The proprietorship register details the following:
* The class of registered title. There are three classes of
registered title for freehold and four classes for leasehold. The
most common title (and the best grade of title available) is
absolute title. A person registered with absolute title owns the
specified estate in the land free from all interests other than
those entered on the register, those classified as notice, caution,
unregistered interests which override registered disposition
(referred to below) and (in the case of leasehold land) all express
and implied covenants, obligations and liabilities imposed by the
lease or incidental to the land.
* Restrictions on the ability of the registered proprietor to deal
with the property e.g. a restriction imposed by a mortgagee
prohibiting registration of subsequent mortgagees.
The charges register details security interests and encumbrances registered
against the property.
The property is also identified by a plan retained at the Land Registry
indicating the location of the related land (the "FILED PLAN"). However, the
filed plan is not conclusive as to matters such as the location of boundaries.
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The Land Registration Act 2002 provides that some interests in land will
bind the land even though they are not capable of registration at the Land
Registry. These fall into two categories:
* Overriding interests; and
* adverse rights affecting the title to the estate or charge.
Title to registered land is established and evidenced by the entries on the
register and the title plan recorded at the Land Registry containing official
copies of the entries on the register relating to that land.
UNREGISTERED TITLE
All land in England and Wales is now subject to compulsory registration on
the happening of any of a number of trigger events. The most common trigger
event is a sale of the land, but since April 1998 the triggers have also
included the creation of a first priority legal mortgage over unregistered
land. However, an increasingly small but still significant proportion of land
in England and Wales (typically where the land has been in the same ownership
for a number of years) is still unregistered. Title to unregistered land is
proved by establishing a chain of documentary evidence to title going back at
least 15 years. Where the land is affected by third party rights, some of those
rights or interests, including a legal mortgage where the mortgagee has taken
possession of the title deeds, can be proved by documentary evidence or by
proof of continuous exercise of the rights for a prescribed period and do not
require registration. However, other interests, including equitable charges,
must be registered at the Land Charges Registry in order to be effective
against a subsequent purchaser or mortgagee of the land.
TAKING SECURITY OVER LAND
A legal charge of registered land may only be effected once the charge has
been registered with the Land Registry. Prior to registration, it will take
effect only as an equitable mortgage or charge. A registered legal charge is
subject to pre-existing registered legal charges but has priority over pre-
existing mortgages which are not registered and legal charges registered
subsequent to it. Where land is registered therefore, a mortgagee must register
its legal charge at the Land Registry in order to secure priority over any
subsequent holder of a legal charge. Priority of mortgages (whether legal,
including legal charges, or equitable) over registered land is generally
governed by the date of registration of the mortgage rather than the date of
creation. However, a prospective mortgagee is able to obtain a priority period
within which to register its legal charge. If the mortgagee submits a proper
application for registration during this period, its interest will take
priority over any application for registration of any interest which is
received by 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 mortgaged property. Without the
title deeds to the mortgaged property, the borrower is unable to establish the
necessary chain of ownership, and is therefore prevented from dealing with his
land without the consent of the mortgagee. Priority of mortgages over
unregistered land depends on a number of factors including, whether the
mortgagee has taken possession of the title deeds, whether the interest is
registerable and whether it has been registered at the Land Charges Registry
and the date of creation of the mortgage/legal charge. Generally speaking where
all else is equal between two competing mortgages, the priority will be
determined by the date of creation of the mortgage/legal charge.
THE SELLER AS MORTGAGEE
The sale to the mortgages trustee of the mortgage loans together with their
related security will take effect in equity only and the mortgages trustee will
not apply to the Land Registry or the 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
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TO THE MORTGAGE LOANS AND THEIR RELATED SECURITY WHICH MAY ADVERSELY AFFECT
PAYMENTS ON THE NOTES".
ENFORCEMENT OF MORTGAGES
If a borrower breaches the mortgage conditions of its mortgage loan, the
mortgage loan generally provides that all monies under the mortgage loan will
become immediately due and payable. The mortgagee would then be entitled to
recover all outstanding principal, interest and fees under the covenant of the
borrower contained expressly or impliedly in the mortgage conditions to pay or
repay those amounts. In addition, the mortgagee would then be entitled to
enforce its mortgage in relation to the defaulted mortgage loan. Enforcement
may occur in a number of ways, including the following:
* The mortgagee may enter into possession of the mortgaged property.
If it does so, it does so in its own right and not as agent of the
mortgagor, and so may be personally liable for mismanagement of the
mortgaged property and to third parties as occupier of the
mortgaged property.
* The mortgagee may lease the mortgaged property to third parties.
* The mortgagee may appoint a receiver to deal with income from the
mortgaged property or exercise other rights delegated to the
receiver by the mortgagee. A receiver is the agent of the mortgagor
and so, unlike when the mortgagee enters into possession of the
mortgaged property, in theory the mortgagee is not liable for the
receiver's acts or as occupier of the mortgaged property. In
practice, however, the receiver will require indemnities from the
mortgagee that appoints it. Similar duties of care will apply to a
sale by a receiver as set out below in relation to a sale by a
mortgagee.
* The mortgagee may sell the mortgaged property, subject to various
duties to ensure that the mortgagee exercises proper care in
relation to the sale. This power of sale arises under the Law of
Property Act 1925. The purchaser of a mortgaged property sold
pursuant to a mortgagee's power of sale becomes the owner of the
mortgaged property.
* The mortgagee may foreclose on the mortgaged property. Under
foreclosure procedures, the mortgagor's title to the mortgaged
property is extinguished so that the mortgagee becomes the owner of
the mortgaged property. The remedy is, because of procedural
constraints, rarely used.
Notwithstanding the above, in order to enforce a power of sale in respect of
a mortgaged property, the mortgagee must generally obtain possession of the
mortgaged property (to sell the mortgaged property with vacant possession)
either voluntarily or by a court order. Actions for possession are regulated by
statute and the courts have certain powers to adjourn possession proceedings,
to stay any possession order or postpone the date for delivery of possession.
The court will exercise such powers in favor of a borrower broadly where it
appears to the court that the borrower is likely to be able, within a
reasonable time period, to pay any sums due under the mortgage loan or to
remedy any other breach of obligation under the mortgage loan or its related
security. If a possession order in favor of the mortgagee is granted it may be
suspended to allow the borrower more time to pay. Once possession is obtained
the mortgagee has a duty to the borrower to take reasonable care to obtain a
proper price for the mortgaged property. Failure to do so will put the
mortgagee at risk of an action by the borrower for breach of such duty,
although it is for the borrower to prove breach of such duty. There is also a
risk that a borrower may also take court action to force the relevant mortgagee
to sell the property within a reasonable time.
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SCOTTISH MORTGAGE 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 the property (the "SECURED PROPERTY") and is generally the only
party to execute the standard security. The second party, who is the lender, is
termed the heritable creditor. As the grantor of a standard security remains
the owner of the secured property, generally the grantor will be free to grant
further standard securities over the secured property (subject to any
restriction imposed by the heritable creditor in the standard security). Each
Scottish mortgage loan (other than any regulated personal secured loan) in the
mortgage portfolio will be secured by a standard security which has a first
ranking priority over all other standard securities granted over the secured
property and which will also rank in priority to all unsecured creditors of the
borrower.
The 1970 Act automatically imports a statutory set of "STANDARD CONDITIONS"
into all standard securities, although the majority of these may be varied by
agreement between the parties. The seller, along with most major lenders in the
residential mortgage market in Scotland, has elected to vary the Standard
Conditions by means of its own set of Scottish mortgage conditions, the terms
of which are in turn imported into each standard security. The main provisions
of the Standard Conditions which cannot be varied by agreement relate to
enforcement, and in particular the notice and other procedures required as a
preliminary to the exercise of the heritable creditor's rights on a default by
the borrower.
NATURE OF PROPERTY AS SECURITY
While title to all land in Scotland is registered there are currently two
possible forms of registration namely the Land Register and Sasine Register.
Both systems of registration can include both heritable (the Scottish
equivalent to freehold) and long leasehold land.
LAND REGISTER
This system of registration was established by the Land Registration
(Scotland) Act 1979. Since that time it has been introduced on a county by
county basis, and with effect from 1 April 2003 has applied to the whole of
Scotland. Once a county has been designated as falling within the system, the
first sale of any parcel of land (including a long leasehold) therein or the
occurrence of certain other events in relation thereto (but not the granting of
a standard security alone) triggers 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 Land
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 and certain interests implied by law) affecting the land. The land
certificate will also contain a plan indicating the location of the land. While
this plan is not in all circumstances conclusive as to the location of the
boundaries of the land, it cannot be amended if this would be to the prejudice
of a proprietor in possession of the land, unless this indemnity has been
expressly excluded in the land certificate itself.
SASINE REGISTER
Title to all land in Scotland where no event has yet occurred to trigger
registration in the Land Register falls to be recorded in the General Register
of Sasines. Title to such
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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 to 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 secured property. Priority of standard securities is (subject to
express agreement to the contrary between the security holders) governed by the
date of registration (being the date of creation) rather than the date of
execution. There is no equivalent in Scotland to the priority period system
which operates in relation to registered land in England and Wales.
THE SELLER AS HERITABLE CREDITOR
The sale of the Scottish mortgage loans by the seller to the mortgages
trustee will be given effect by a declaration of trust by the seller (and any
sale of Scottish mortgage loans in the future will be given effect by further
declarations of trust), by which the beneficial interest in the Scottish
mortgage loans will be transferred to the mortgages trustee. Such beneficial
interest (as opposed to the legal title) cannot be registered in the Land or
Sasine Registers. The consequences of this are explained in the section "RISK
FACTORS -- THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE MORTGAGES
TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGE LOANS AND THEIR RELATED SECURITY
WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES".
ENFORCEMENT OF MORTGAGES
If a borrower defaults under a mortgage loan, the Scottish mortgage
conditions provide that all monies under the mortgage loan will become
immediately due and payable. The seller 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 as heritable creditor may enforce its standard security in
relation to the defaulted mortgage loan. Enforcement may occur in a number of
ways, including the following (all of which arise under the 1970 Act):
(i) the heritable creditor may enter into possession of the secured
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 secured property and to third parties as
occupier of the secured property;
(ii) the heritable creditor may lease the secured property to third
parties;
(iii) the heritable creditor may sell the secured 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; and
(iv) the heritable creditor may, in the event that a sale cannot be
achieved, foreclose on the secured property. Under foreclosure
procedures the borrower's title to the property is extinguished so
that the heritable creditor becomes the owner of the property. This
remedy is however rarely used.
In contrast to the position in England and Wales, the heritable creditor has
no power to appoint a receiver under the standard security.
Notwithstanding the above, in order to enforce its security in respect of a
secured property, the heritable creditor must generally obtain possession of
the secured property
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(for example, in order to sell the secured property with vacant possession)
either voluntarily or by a court order. Actions for possession are regulated by
statute (in particular the 1970 Act and the Mortgage Rights (Scotland) Act 2001
(the "2001 ACT")) and, since the coming into effect of the 2001 Act on December
3, 2001, the courts have certain powers to suspend the enforcement of the
security. The court will exercise such powers in favour of a borrower broadly
where it appears to the court that the borrower is likely to be able, within a
reasonable time period, to pay any sums due under the mortgage loan or to
remedy any other breach of obligation under the mortgage loan or its related
security, or to permit the borrower time to find alternative accommodation.
Once possession is obtained the heritable creditor has a duty to the borrower
to obtain the best price that can reasonably be obtained for the secured
property. Failure to do so will put the heritable creditor at risk of an action
by the borrower for breach of such duty, although it is for the borrower to
prove breach of such duty. There is also a risk that a borrower may also take
court action to force the relevant heritable creditor to sell the secured
property within a reasonable time.
BORROWER'S RIGHT OF REDEMPTION
Under Section 11 of the Land Tenure Reform (Scotland) Act 1974 the grantor
of any standard security has an absolute right, on giving appropriate notice,
to redeem that standard security once it has subsisted for a period of 20 years
subject only to the payment of certain sums specified in Section 11 of that
Act. These specified sums consist essentially of the principal monies advanced
by the lender, interest thereon and expenses incurred by the lender in relation
to that standard security.
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MATERIAL UNITED KINGDOM TAX CONSEQUENCES
The following, which applies only to persons who are the absolute beneficial
owners of notes, is a summary of our understanding of current UK tax law and
Inland Revenue practice as at the date of this prospectus relating to certain
aspects of the UK taxation of the notes. Sidley Austin Brown & Wood, our UK tax
advisers ("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 all payments made pursuant to the final
documentation are calculated on arms' length terms. The summary is not a
comprehensive analysis of the tax consequences arising in respect of the notes
and some aspects of the summary do not apply to certain classes of taxpayer
(such as dealers). If you are in any doubt about your tax position or if you
may be subject to tax in a jurisdiction other than the UK you should seek your
own professional advice.
WITHHOLDING TAX
Where interest is payable on notes which have a maturity of less than one
year (and which are not issued under arrangements the effect of which is to
render such notes part of a borrowing with a total term of a year or more), the
interest will not be "yearly interest" for the purposes of the Income and
Corporation Taxes Act 1988 (the "TAXES ACT") and accordingly payments of
interest on such notes may be made without deduction or withholding for or on
account of UK income tax.
In respect of all other notes, interest bearing notes will constitute
"quoted Eurobonds" within the meaning of section 349 of the Taxes Act while the
notes are listed on a "RECOGNISED STOCK EXCHANGE" within the meaning of section
841 of the Taxes Act. The London Stock Exchange is such a recognised stock
exchange. Under an Inland Revenue published practice, securities will be
treated as listed on the London Stock Exchange they are admitted to the
Official List by the United Kingdom Listing Authority and admitted to trading
by the London Stock Exchange. Payments of interest on such notes as fall
outside the scope of the preceding paragraph, but which are quoted Eurobonds,
may be made without deduction or withholding for or on account of UK income tax
irrespective of whether the notes are in global form or in definitive form. In
other cases, UK income tax may have to be withheld at the lower rate (currently
20 per cent.) from payments of interest on the notes, subject to any direction
to the contrary from the Inland Revenue in respect of such relief as may be
available pursuant to the provisions of an applicable double taxation treaty or
to the interest being paid to the persons (including companies within the
charge to UK corporation tax) and in the circumstances specified in sections
349A to 349D of the Taxes Act.
Where notes are to be, or may be redeemed at, a premium, any such element of
premium may constitute a payment of interest. Payments of interest are subject
to deduction or withholding for or on account of UK income tax as outlined
above.
Any discount element associated with zero coupon notes will not be subject
to deduction or withholding for or on account of UK income tax.
Payments of interest and principal with respect to the notes will be subject
to any applicable withholding taxes and the issuer will not be obliged to pay
additional amounts in relation thereto.
DIRECT ASSESSMENT OF NON-UK RESIDENT HOLDERS OF THE NOTES TO UK TAX ON INTEREST
Interest on the notes constitutes UK source income and, as such, may be
subject to income tax by direct assessment even where paid without deduction or
withholding for or on account of UK tax, 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.
237
However, interest with a UK source received without deduction or withholding
for or on account of UK income tax will not be chargeable to UK tax in the hands
of a noteholder (other than certain trustees) who is not resident for tax
purposes in the UK unless that noteholder carries on a trade, profession or
vocation through a branch or agency (or, in the case of a noteholder which is a
company, which carries on a trade through a permanent establishment) in the UK
in connection with which the interest is received or to which the notes are
attributable. There are exemptions for interest received by certain categories
of agent (such as some brokers and investment managers).
Where interest has been paid under deduction or withholding for or on
account of UK income tax, noteholders who are not resident in the UK may be
able to recover all or part of the tax deducted or withheld if there is an
appropriate provision under an applicable double taxation treaty.
TAXATION OF RETURNS: COMPANIES WITHIN THE CHARGE TO UK CORPORATION TAX
In general, noteholders which are within the charge to UK corporation tax in
respect of the notes will be charged to UK corporation tax and obtain relief as
income on all returns (including interest), profits or gains arising on, and
fluctuations in value of such notes (whether attributable to currency
fluctuations or otherwise) broadly in accordance with their statutory
accounting treatment.
TAXATION OF RETURNS: OTHER NOTEHOLDERS
Noteholders who are not within the charge to UK corporation tax and who are
resident or ordinarily resident in the UK for tax purposes or who carry on a
trade, profession or vocation in the UK through a branch or agency in
connection with which interest on the notes is received or to which the notes
are attributable will generally be liable to UK income tax on the amount of any
interest received in respect of such notes.
It is expected that notes denominated in sterling 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 such notes is not expected to give rise to a chargeable gain or
an allowable loss for the purposes of the UK taxation of chargeable gains.
Notes which are not denominated in sterling will not be regarded by the
Inland Revenue as constituting "QUALIFYING CORPORATE BONDS" within the meaning
of Section 117 of the Taxation of Chargeable Gains Act 1992. Accordingly, a
disposal of any such notes may give rise to a chargeable gain or an allowable
loss for the purposes of the UK taxation of chargeable gains.
There are provisions to prevent any particular gain (or loss) from being
charged (or relieved) at the same time under these provisions and also under
the provisions of the "ACCRUED INCOME SCHEME" described below.
On a disposal of notes by a noteholder, any interest which has accrued since
the last note payment date may be chargeable to tax as income under the rules
of the "ACCRUED INCOME SCHEME" if that noteholder is resident or ordinarily
resident in the UK or carries on a trade in the UK through a branch or agency
to which such notes are attributable. For 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. Notes
which have a step-up date for interest will constitute variable rate securities
for this purpose.
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 United Kingdom who either pays
interest to or receives interest for the benefit of an individual, or who
either pays amounts payable on the redemption of Notes to or receives such
amounts for the benefit of an individual although
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Inland Revenue published practice indicates that the Inland Revenue will not
exercise its power to require this information where such amounts are paid on
or before April 5, 2005. Information so obtained may, in certain circumstances,
be exchanged by the Inland Revenue with the tax authorities of the jurisdiction
in which the Noteholder is resident for tax purposes.
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 notes, whether such notes are in global or definitive form.
EUROPEAN UNION DIRECTIVE ON THE TAXATION OF SAVINGS INCOME
The European Union has adopted a Directive regarding the taxation of savings
income. Subject to a number of important conditions being met, it is proposed
that member states will be required from July 1, 2005, to provide to the tax
authorities of other member states details of payments of interest and other
similar income paid by a person to an individual in another member state,
except that Austria, Belgium and Luxembourg will instead impose a withholding
system for a transitional period unless during such period they elect otherwise
(the ending of such transitional period being dependent upon the conclusion of
certain other agreements relating to information exchange with certain other
countries).
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MATERIAL UNITED STATES TAX CONSEQUENCES
GENERAL
The following section is a general summary of the anticipated material
United States federal income tax consequences of the purchase, ownership and
disposition of the US notes that may be relevant to a holder of US notes which
are denominated in US dollars (the "US DOLLAR DENOMINATED NOTES") that is a
"UNITED STATES PERSON" (as defined later in this section) or that otherwise is
subject to US federal income taxation on a net income basis in respect of a US
dollar denominated note (any such United States person or holder, a "US
HOLDER"), subject to the qualifications set forth in the applicable prospectus
supplement.
In general, the summary assumes that a holder acquires a US dollar
denominated note at original issuance at its issue price (generally the first
price at which a substantial amount of substantially similar notes are sold for
money, excluding sales to bond houses, brokers, or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers) and holds such note as a capital asset. It does not purport to be
a comprehensive description of all the tax considerations that may be relevant
to a decision to purchase the US dollar denominated notes. In particular, it
does not discuss special tax considerations that may apply to certain types of
taxpayers, including dealers in stocks, securities or notional principal
contracts; traders in securities electing to mark to market; insurance
companies; tax-exempt organizations; banks, savings and loan associations and
similar financial institutions; taxpayers whose functional currency is other
than the US dollar; taxpayers that hold a US dollar denominated note as part of
a hedge or straddle or synthetic security or a conversion transaction, within
the meaning of section 1258 of the US Internal Revenue Code of 1986, as amended
(the "CODE"); and subsequent purchasers of US dollar denominated notes. In
addition, this summary does not describe any tax consequences arising under the
laws of any taxing jurisdiction other than the US federal government.
This summary is based on the US federal income tax laws, regulations,
rulings and decisions in effect or available as of the date of this prospectus.
All of the foregoing are subject to change, and any change may apply
retroactively and could affect the continued validity of this summary. Further,
the following summary assumes that the issuer, Funding 2 and the mortgages
trustee, in its capacity as trustee for the mortgage trust, will conduct their
affairs as described in this prospectus and in accordance with assumptions made
by, and representations made to, counsel.
Sidley Austin Brown & Wood LLP, US federal income tax advisers to the issuer
US federal income tax counsel"), has prepared and reviewed this summary of
material US federal income tax consequences. As described under "-- TAX STATUS
OF THE ISSUER, FUNDING 2, MORTGAGES TRUSTEE AND MORTGAGES TRUST", US federal
income tax counsel will issue its opinion that the mortgages trustee acting as
trustee of the mortgages trust, Funding 2, and the issuer will not be subject
to US federal income tax as a result of their contemplated activities. As
described further under "-- CHARACTERIZATION OF THE US DOLLAR DENOMINATED
NOTES", US federal income tax counsel will also issue its opinion that,
although there is no authority on the treatment of instruments substantially
similar to the US dollar denominated notes, and while not free from doubt, the
US dollar denominated 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 federal income tax counsel will render no
opinions relating to the notes or the parties to the transaction.
An opinion of US federal income 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. As a
result, the IRS or a court may disagree with all or part of the discussion
herein. ACCORDINGLY, THE ISSUER SUGGESTS THAT PERSONS CONSIDERING THE PURCHASE
OF US DOLLAR DENOMINATED NOTES CONSULT THEIR OWN TAX
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ADVISORS AS TO THE US TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE US DOLLAR DENOMINATED NOTES, INCLUDING THE POSSIBLE
APPLICATION OF STATE, LOCAL, NON-US OR OTHER TAX LAWS, AND OTHER US FEDERAL
INCOME TAX ISSUES AFFECTING THE TRANSACTION.
As used in this section the term "UNITED STATES PERSON" means (a) an
individual who is a citizen or resident of the United States, (b) an entity
treated as a corporation or partnership for United States federal income tax
purposes that is organized or created under the law of the United States, a
State thereof, or the District of Columbia, (c) any estate the income of which
is subject to taxation in the United States regardless of source, and (d) any
trust if a court within the United States is able to exercise primary
supervision over its administration and one or more United States persons have
the authority to control all substantial decisions of the trust, or the trust
was in existence on August 20, 1996 and is eligible to elect, and has made a
valid election, to be treated as a United States person despite not meeting
those requirements.
If an entity that is treated as a partnership for US federal income tax
purposes holds US dollar denominated notes, the US federal income tax treatment
generally will depend upon the activities of the partnership and the status of
the partners.
TAX STATUS OF THE ISSUER, FUNDING 2, MORTGAGES TRUSTEE AND MORTGAGES TRUST
Under the transaction documents, each of the issuer, Funding 2, and the
mortgages trustee, acting in its capacity as trustee of the mortgages trust,
covenants not to engage in any activities in the United States (directly or
through agents), not to derive any income from sources within the United States
as determined under US federal income tax principles, and not to hold any
mortgaged property if doing so would cause it to be engaged or deemed to be
engaged in a trade or business within the United States as determined under US
federal income tax principles. US federal income tax counsel is of the opinion
that, assuming compliance with the transaction documents, none of the issuer,
Funding 2 or the mortgages trustee, acting in its capacity as trustee of the
mortgages trust, will be subject to US federal income tax. No elections will be
made to treat the issuer, Funding 2, or the mortgage trust or any of their
assets as a REMIC (a type of securitization vehicle having a special tax status
under the Code).
CHARACTERIZATION OF THE US DOLLAR DENOMINATED NOTES
Although there is no authority regarding the treatment of instruments that
are substantially similar to the US dollar denominated notes, and while not
free from doubt, it is the opinion of US federal income tax counsel that the US
dollar denominated notes will be treated as debt for US federal income tax
purposes. The issuer intends to treat the US dollar denominated notes as
indebtedness of the issuer for all purposes, including US federal income tax
purposes. The discussion in the next section assumes this result. By their
purchase of US dollar denominated notes, the respective holders will be deemed
to have agreed to treat such US dollar denominated notes as indebtedness for US
federal income tax purposes, including for any US federal income tax reporting
purposes. In general, the characterization of an instrument for US federal
income tax purposes as indebtedness or equity by its issuer as of the time of
issuance is binding on a holder (but not the IRS), unless the holder takes an
inconsistent position and discloses such position on its US federal income tax
return.
The US dollar denominated notes will not be qualifying real property
mortgage loans in the hands of domestic savings and loan associations, real
estate investment trusts, or REMICs under sections 7701(a)(19)(C), 856(c) or
860G(a)(3) of the Code, respectively.
TAXATION OF US HOLDERS OF THE US DOLLAR DENOMINATED NOTES
Qualified Stated Interest and Original Issue Discount ("OID"). For purposes
of this summary, it is assumed that the US dollar denominated notes will accrue
interest at a rate equal to LIBOR plus a margin (or other qualified floating
rate within the meaning of
241
Treas. Reg. {section mark} 1.1275-5), and, hence the US dollar denominated notes
will be treated as "variable rate debt instruments" for US federal income tax
purposes. Please consult the applicable prospectus supplement in the event the
US dollar denominated notes accrue interest at a rate other than a qualified
floating rate.
With respect to US dollar denominated notes that have a stated maturity of
more than one year (i.e., other than short-term obligations, discussed below),
the issuer intends to treat interest on the US notes as "QUALIFIED STATED
INTEREST" under United States Treasury regulations relating to original issue
discount (hereafter, the "OID REGULATIONS"). As a consequence, assuming that
such interest is treated as qualified stated interest, discount on such US
dollar denominated notes arising from an issuance at less than par will only be
required to be accrued under the OID regulations if such discount exceeds a
statutorily defined de minimis amount. Qualified stated interest, which
generally must be unconditionally payable at least annually, is taxed under a
holder's normal method of accounting. De minimis OID is included in income on a
pro rata basis as principal payments are made on such US dollar denominated
notes. It is possible that interest on certain US dollar denominated notes
could be treated as OID because such interest is subject to deferral in certain
limited circumstances (as described under "DESCRIPTION OF THE US NOTES -- 4(E)
DEFERRED INTEREST").
A US holder of a US dollar denominated note issued with OID must include OID
in income over the term of such US dollar denominated note under a constant
yield method that takes into account the compounding of interest. Under the
Code, OID is calculated and accrued using prepayment assumptions where payments
on a debt instrument may be accelerated by reason of prepayments of other
obligations securing such debt instrument. Moreover, the legislative history to
the provisions provides that the same prepayment assumptions used to price a
debt instrument be used to calculate OID, as well as to accrue market discount
and amortize premium. Here, prepayment of the mortgage loans is not expected to
alter the scheduled principal payments on the dollar notes and accordingly, the
issuer intends to assume that the US dollar denominated 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.
With respect to US dollar denominated notes that have a stated maturity of
not greater than one year ("SHORT-TERM OBLIGATIONS"), US holders who report
income for US federal income tax purposes under the accrual method are required
to accrue OID on short-term obligations on a straight-line basis unless an
election is made to accrue the OID under a constant yield method (based on
daily compounding). A US holder who is an individual or other cash method
holder is not required to accrue OID on a short-term obligation unless such
holder elects to do so. If such an election is not made, any gain recognized by
such holder on the sale, exchange or maturity of such short-term obligation
will be ordinary income to the extent of the holder's ratable share of OID
accrued on a straight-line basis, or upon election under the constant yield
method (based on daily compounding), through the date of the sale, exchange or
maturity.
As an alternative to the above treatments, US holders may elect to include
in gross income all interest with respect to the US dollar denominated notes,
including stated interest, acquisition discount, OID, de minimis OID, market
discount, de minimis market discount, and unstated interest, as adjusted by any
amortizable bond premium or acquisition premium, using the constant yield
method described above.
Sales and Retirement. In general, a US holder of a US dollar denominated
note will have a basis in such note equal to the cost of the note to such
holder, and reduced by any payments thereon other than payments of qualified
stated interest. Upon a sale or exchange of the note, a US holder will
generally recognize gain or loss equal to the difference between the amount
realized (less any accrued interest, which would be taxable as such) and the
holder's tax basis in the note. Such gain or loss will be long-term capital
gain or loss if the US holder has held the note for more than one year at the
time of
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disposition. In certain circumstances, US holders that are individuals may be
entitled to preferential treatment for net long-term capital gains. The ability
of US holders to offset capital losses against ordinary income is limited.
Alternative Characterization of the US dollar denominated Notes. The proper
characterization of the arrangement involving the issuer and the holders of the
US dollar denominated notes is not clear because there is no authority on
transactions comparable to that contemplated herein. The issuer intends to
treat the US dollar denominated notes as debt of the issuer for all US federal
income tax purposes. Prospective investors should consult their own tax
advisors with respect to the potential impact of an alternative
characterization of the US dollar denominated notes for US tax purposes. One
possible alternative characterization is that the IRS could assert that the
lowest subordinated class of notes or any other class of notes should be
treated as equity in the issuer for US federal income tax purposes. If any such
class of US dollar denominated notes were treated as equity, US holders of such
notes would be treated as owning equity in a passive foreign investment company
("PFIC") which, depending on the level of ownership of such US holder and
certain other factors, might also constitute an interest in a controlled
foreign corporation for such US holder. This would have certain timing and
character consequences for US holders and could require certain elections and
disclosures that would need to be made shortly after acquisition to avoid
potentially adverse US federal income tax consequences.
If the issuer was treated as a PFIC, unless a United States person makes a
"QEF ELECTION" or "MARK TO MARKET ELECTION", such person will be subject to a
special tax regime (i) in respect of gains realized on the sale or other
disposition of its US dollar denominated notes, and (ii) in respect of
distributions on its US dollar denominated notes held for more than one taxable
year to the extent those distributions constitute "EXCESS DISTRIBUTIONS".
Although not free from doubt, the PFIC rules should not apply to gain realized
in respect of any US dollar denominated notes disposed of during the same
taxable year in which such US dollar denominated notes are acquired. An excess
distribution generally includes dividends or other distributions received from
a PFIC in any taxable year to the extent the amount of such distributions
exceeds 125% of the average distributions for the three preceding years (or, if
shorter, the investor's holding period). Because the US dollar denominated
notes pay interest at a floating rate, it is possible that a United States
person will receive "EXCESS DISTRIBUTIONS" as a result of fluctuations in the
rate of three-month US dollar LIBOR over the term of the US dollar denominated
notes. In general, under the PFIC rules, a United States person will be
required to allocate such excess distributions and any gain realized on a sale
of its US dollar denominated notes to each day during the such person's holding
period for the US dollar denominated notes, and will be taxable at the highest
rate of taxation applicable to the US dollar denominated notes for the year to
which the excess distribution or gain is allocable (without regard to the such
person's other items of income and loss for such taxable year) (the "DEFERRED
TAX"). The deferred tax (other than the tax on amounts allocable to the year of
disposition or receipt of the distribution) will then be increased by an
interest charge computed by reference to the rate generally applicable to
underpayments of tax (which interest charge generally will be non-deductible
interest expense for individual taxpayers). The issuer does not intend to
provide information that would enable a holder of a US dollar denominated note
to make a QEF election and the mark to market election will only be available
during any period in which the US dollar denominated notes are traded on a
qualifying exchange or market.
BACKUP WITHHOLDING
Backup withholding of US Federal income tax may apply to payments made in
respect of the notes to registered owners who are not "EXEMPT RECIPIENTS" and
who fail to provide certain identifying information (such as the registered
owner's taxpayer identification number) in the required manner. Generally,
individuals are not exempt recipients, whereas corporations and certain other
entities generally are exempt recipients.
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Payments made in respect of the US dollar denominated notes to a United States
person must be reported to the IRS, unless such person is an exempt recipient
or establishes an exemption. With respect to non-United States persons
investing in the US dollar denominated notes, to ensure they qualify for an
exemption, the paying agent will require such beneficial holder to provide a
statement from the individual or corporation that:
* is signed under penalties of perjury by the beneficial owner of the
note,
* certifies that such owner is not a United States person, and
* provides the beneficial owner's name and address.
Generally, this statement is made on an IRS Form W-8BEN ("W-8BEN"), which is
effective for the remainder of the year of signature plus three full calendar
years unless a change in circumstances makes any information on the form
incorrect. The noteholder must inform the paying agent within 30 days of such
change and furnish a new W-8BEN. A noteholder that is not an individual or an
entity treated as a corporation for US federal income tax purposes or that is
not holding the notes on its own behalf may have substantially increased
reporting requirements. For example, a non-US partnership or non- US trust
generally must provide the certification from each of its partners or
beneficiaries along with certain additional information. Certain securities
clearing organizations, and other entities who are not beneficial owners, may
be able to provide a signed statement to the paying agent. However, in such
case, the signed statement may require a copy of the beneficial owner's W-8BEN
(or the substitute form).
In addition, upon the sale of a note to (or through) a broker, the broker
must report the sale and backup withhold on the entire purchase price, unless
(i) the broker determines that the seller is a corporation or other exempt
recipient, (ii) the seller certifies (as described above) that such seller is a
non-United States person and certain other conditions are met or (iii) the
broker has the taxpayer identification number of the recipient properly
certified as correct.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's US federal income tax provided the required information is
furnished to the IRS.
Prospective investors should consult their own tax advisors with respect to
the foregoing withholding tax requirements.
THE US FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON AN OWNER'S PARTICULAR
SITUATION. HOLDERS OF US DOLLAR DENOMINATED NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND
DISPOSITION OF US DOLLAR DENOMINATED NOTES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL AND OTHER TAX LAWS.
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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 will be resident in Jersey for taxation purposes and will be liable to
income tax in Jersey at a rate of 20% in respect of the profits it makes from
acting as trustee of the mortgages trust. The mortgages trustee will not be
liable for any income tax in Jersey in respect of any income it receives in its
capacity as mortgages trustee on behalf of the beneficiaries of the mortgages
trust.
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ERISA CONSIDERATIONS
The US dollar denominated notes are eligible for purchase by employee
benefit plans and other plans subject to the US Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and/or the provisions of Section
4975 of the Code and by governmental plans that are subject to state, local or
other federal law of the United States that is substantially similar to ERISA
or Section 4975 of the Code, subject to consideration of the issues described
in this section. ERISA imposes certain requirements on "EMPLOYEE BENEFIT PLANS"
(as defined in Section 3(3) of ERISA) subject to ERISA, including entities such
as collective investment funds and separate accounts whose underlying assets
include the assets of such plans (collectively, "ERISA PLANS") and on those
persons who are fiduciaries with respect to ERISA Plans. Investments by ERISA
Plans are subject to ERISA's general fiduciary requirements, including the
requirements of investment prudence and diversification and the requirement
that an ERISA Plan's investments be made in accordance with the documents
governing the Plan. The prudence of a particular investment must be determined
by the responsible fiduciary of an ERISA Plan by taking into account the ERISA
Plan's particular circumstances and all of the facts and circumstances of the
investment including, but not limited to, the matters discussed under "RISK
FACTORS" and the fact that in the future there may be no market in which such
fiduciary will be able to sell or otherwise dispose of the notes.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those plans that
are not subject to ERISA but which are subject to Section 4975 of the Code,
such as individual retirement accounts (together with ERISA Plans, the
"PLANS")) and certain persons (referred to as "PARTIES IN INTEREST" or
"DISQUALIFIED PERSONS") having certain relationships to such Plans, unless a
statutory or administrative exemption is applicable to the transaction. A party
in interest or disqualified person who engages in a prohibited transaction may
be subject to excise taxes and other penalties and liabilities under ERISA and
the Code.
The seller, the issuer, the administrator, the mortgages trustee, Funding 2
or any other party to the transactions contemplated by the transaction
documents may be parties in interest or disqualified persons with respect to
many Plans. Prohibited transactions within the meaning of Section 406 of ERISA
or Section 4975 of the Code may arise if any of the US dollar denominated notes
is acquired or held by a Plan with respect to which the issuer, the
administrator, the mortgages trustee, Funding 2 or any other party to such
transactions, is a party in interest or a disqualified person. Certain
exemptions from the prohibited transaction provisions of Section 406 of ERISA
and Section 4975 of the Code may be applicable, however, depending in part on
the type of Plan fiduciary making the decision to acquire any such notes and
the circumstances under which such decision is made. Included among these
exemptions are Prohibited Transaction Class Exemption ("PTCE") 91-38 (relating
to investments by bank collective investment funds), PTCE 84-14 (relating to
transactions effected by a "QUALIFIED PROFESSIONAL ASSET MANAGER"), PTCE 95-60
(relating to transactions involving insurance company general accounts), PTCE
90-1 (relating to investments by insurance company pooled separate accounts)
and PTCE 96-23 (relating to transactions determined by in-house asset
managers). There can be no assurance that any of these class exemptions or any
other exemption will be available with respect to any particular transaction
involving the notes.
Each purchaser and subsequent transferee of any US dollar denominated note
will be deemed by such purchase or acquisition of any such note to have
represented and warranted, on each day from the date on which the purchaser or
transferee acquires such note through and including the date on which the
purchaser or transferee disposes of such note, either that (A) it is not an
ERISA Plan or other Plan, an entity whose underlying assets include the assets
of any such ERISA Plan or other Plan, or a governmental plan which is subject
to any federal, state or local law of the United States that is substantially
similar to the provisions of section 406 of ERISA or section 4975 of the Code
or (B) its purchase, holding and disposition of such note will not result in a
246
prohibited transaction under section 406 of ERISA or section 4975 of the Code
(or, in the case of a governmental plan, any substantially similar federal,
state or local law of the United States) for which an exemption is not
available.
In addition, the US Department of Labor has promulgated a regulation, 29
C.F.R. Section 2510.3-101 (the "PLAN ASSET REGULATION"), describing what
constitutes the assets of a Plan with respect to the Plan's investment in an
entity for purposes of certain provisions of ERISA, including the fiduciary
responsibility provisions of Title I of ERISA, and Section 4975 of the Code.
Under the Plan Asset Regulation, if a Plan invests in an "EQUITY INTEREST" of
an entity that is neither a "PUBLICLY-OFFERED SECURITY" nor a security issued
by an investment company registered under the 1940 Act, the Plan's assets
include both the equity interest and an undivided interest in each of the
entity's underlying assets, unless one of the exceptions to such treatment
described in the Plan Asset Regulation applies. Under the Plan Asset
Regulation, a security which is in debt form may be considered an "EQUITY
INTEREST" if it has "SUBSTANTIAL EQUITY FEATURES". If the issuer were deemed
under the Plan Asset Regulation to hold plan assets by reason of a Plan's
investment in any of the US dollar denominated notes, such plan assets would
include an undivided interest in the assets held by the issuer and transactions
by the issuer would be subject to the fiduciary responsibility provisions of
Title I of ERISA and the prohibited transaction provisions of ERISA and Section
4975 of the Code. INVESTORS SHOULD NOTE THAT CONCERNS IN RESPECT OF THE
FOREGOING MAY BE MAGNIFIED HERE, PARTICULARLY IN THE CASE OF THE LOWEST
SUBORDINATED CLASS OF NOTES. In addition, in analyzing these issues with their
own counsel, prospective purchasers of notes should consider, among other
things, that, although special tax counsel has concluded that the notes are
debt for federal income tax purposes, see "MATERIAL UNITED STATES TAX
CONSEQUENCES", it is not clear whether the debt would be treated for tax
purposes as issued by the issuer. If the underlying assets of the issuer are
deemed to be Plan assets, the obligations and other responsibilities of Plan
sponsors, Plan fiduciaries and Plan administrators, and of parties in interest
and disqualified persons, under parts 1 and 4 of subtitle B of title I of ERISA
and section 4975 of the Code, as applicable, may be expanded, and there may be
an increase in their liability under these and other provisions of ERISA and
the Code (except to the extent (if any) that a favorable statutory or
administrative exemption or exception applies). In addition, various providers
of fiduciary or other services to the issuer, and any other parties with
authority or control with respect to the issuer, could be deemed to be Plan
fiduciaries or otherwise parties in interest or disqualified persons by virtue
of their provision of such services.
Any insurance company proposing to purchase any of the US dollar denominated
notes using the assets of its general account should consider the extent to
which such investment would be subject to the requirements of ERISA in light of
the US Supreme Court's decision in John Hancock Mutual Life Insurance Co. v.
Harris Trust and Savings Bank and under any subsequent guidance that may become
available relating to that decision. In particular, such an insurance company
should consider the retroactive and prospective exemptive relief granted by the
Department of Labor for transactions involving insurance company general
accounts in PTCE 95-60, 60 Fed. Reg. 35925 (July 12, 1995), the enactment of
Section 401(c) of ERISA by the Small Business Job Protection Act of 1996
(including, without limitation, the expiration of any relief granted
thereunder) and the regulations thereunder.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold any of the US dollar
denominated notes should determine whether, under the documents and instruments
governing the Plan, an investment in the notes is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment mortgage portfolio. Any Plan proposing to
invest in such notes (including any governmental plan) should consult with its
counsel to confirm, among other things, that such investment will not result in
a non-exempt prohibited transaction and will satisfy the other requirements of
247
ERISA and the Code (or, in the case of a governmental plan, any substantially
similar state, local or other federal law).
The sale of any notes to a Plan is in no respect a representation by the
seller, the issuer, the administrator, the mortgages trustee, Funding 2 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.
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ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES
The issuer is a UK public company incorporated with limited liability in
England and Wales.
Any final and conclusive judgment of any New York State or United States
Federal Court sitting in the Borough of Manhattan in the City of New York
having jurisdiction recognized by England or Wales in respect of an obligation
of the issuer in respect of the notes for a fixed sum of money and which has
not been stayed or satisfied in full, would be enforceable by action against
the issuer in the courts of England and Wales without a re-examination of the
merits of the issues determined by the proceedings in the New York State or
United States Federal Court.
This will be the case unless the following occurs:
* the proceedings in the New York State or the United States Federal
Court in which the judgment was obtained were contrary to the
principles of natural or substantive justice;
* enforcement of the judgment is contrary to the public policy of
England or Wales;
* the judgment was obtained by fraud or duress or was based on a
clear mistake of fact;
* the judgment is of a public nature (for example, a penal or revenue
judgment);
* there has been a prior judgment in another court concerning the
same issues between the same parties as are dealt with in the
judgment of the New York State or the United States Federal Court;
* the enforcement would contravene section 5 of the Protection of
Trading Interests Act 1980; or
* the enforcement proceedings are not instituted within six years
after the date of the judgment.
The issuer expressly submits to the non-exclusive jurisdiction of the courts
of England for the purpose of any suit, action or proceedings arising out of
this offering. A judgment by a court may be given in some cases only in
sterling.
All of the directors of the issuer reside outside the United States.
Substantially all of the assets of all or many of such persons are located
outside the United States. As a result, it may not be possible for the
noteholders to effect service of process within the United States upon such
persons with respect to matters arising under the federal securities laws of
the United States or to enforce against them judgments obtained in United
States courts predicated upon the civil liability provisions of such laws.
The issuer has been advised by Sidley Austin Brown & Wood, its English
counsel, that there is doubt as to the enforceability in England and Wales, in
original actions or in actions for enforcement of judgments of United States
courts, of civil liabilities predicated upon the Federal securities laws of the
United States based on the restrictions referred to above.
249
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS
None of the notes is a "MORTGAGE RELATED SECURITY" under the United States
Secondary Mortgage Market Enhancement Act of 1984, as amended.
The appropriate characterization of the notes under various legal investment
restrictions and, consequently, the ability of investors subject to these
restrictions to purchase such notes, is subject to significant interpretative
uncertainties. These uncertainties may adversely affect the liquidity of, and
the creation of any secondary market for, the notes. Accordingly, investors
should consult their own legal advisors in determining whether and the extent
to which the notes constitute legal investments or are subject to investment,
capital or other restrictions.
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LEGAL MATTERS
Certain matters of English law and United States law regarding the notes,
including matters relating to the validity of the issuance of the notes, will
be passed upon for the issuer by Sidley Austin Brown & Wood, London. Certain
matters of United States law regarding matters of United States federal income
tax law with respect to the US notes will be passed upon for the issuer by
Sidley Austin Brown & Wood LLP, New York. Certain matters of English law and
United States law will be passed upon for the underwriters by Allen & Overy
LLP, London.
Certain matters of Jersey (Channel Islands) law regarding the mortgages
trustee will be passed upon for the mortgages trustee by Mourant du Feu &
Jeune, London.
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UNDERWRITING
UNITED STATES
A prospectus supplement will be prepared for each series of US notes which
will describe the method of offering being used for that series and will set
forth the identity of any of its underwriters and either the price at which
each class or sub-class of such series is being offered, the nature and amount
of any underwriting discounts or additional compensation to the underwriters
and the proceeds of the offering to us, or the method by which the price at
which the underwriters will sell those US notes will be determined. Each
prospectus supplement for an underwritten offering will also contain
information regarding the nature of the underwriters' obligations, any material
relationship between any underwriter and us and, where appropriate, information
regarding any discounts or concessions to be allowed or reallowed to dealers or
others and any arrangements to stabilize the market for the US notes so
offered. US notes may be acquired by the underwriters for their own accounts
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale.
The seller and we will agree to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act.
The underwriters or their affiliates may engage in over-allotment
transactions (also known as short sales), stabilizing transactions, syndicate
covering transactions and penalty bids for the US notes under Regulation M
under the Exchange Act.
* Over-allotment transactions involve sales by an underwriter in
excess of the total offering size, which creates what is known as a
naked short position. A naked short position is more likely to be
created if the underwriters are concerned that there may be
downward pressure on the price of the notes in the open market
after pricing that could adversely affect investors who purchase in
the offering.
* Stabilizing transactions permit bids to purchase the US notes so
long as the stabilizing bids do not exceed a specified maximum.
* Short covering transactions involve purchases of the US notes in
the open market after the distribution has been completed in order
to cover naked short positions.
* Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the notes originally sold
by that syndicate member are purchased in a syndicate covering
transaction.
Similar to other purchase transactions, these transactions may have the
effect of raising or maintaining the market price of the US notes or preventing
or retarding a decline in the market price of the US notes. As a result, these
transactions may cause the prices of the US notes to be higher than they would
otherwise be in the absence of those transactions. Neither we 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 US notes will be registered under the Securities Act. Any underwriters
of the US notes that are not US registered broker dealers will agree that they
will offer and sell the US notes within the United States through US registered
broker-dealers.
The US 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 and related prospectus supplement via e-mail to persons who
have given, and not withdrawn, their prior consent to receive copies of this
prospectus and related prospectus supplement in that format.
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UNITED KINGDOM
Each underwriter will represent and agree that:
* in relation to US notes which have a maturity of one year or more
and which are to be admitted to the Official List, it has not
offered or sold, and will not offer or sell any US notes to persons
in the United Kingdom prior to admission of such US 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;
* in relation to US notes which have a maturity of one year or more
and which are not to be admitted to the Official List, it has not
offered or sold and, prior to the expiry of a period of six months
from the closing date of such US notes, will not offer or sell any
such US notes to persons in the United Kingdom 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);
* it has only communicated or caused to be communicated and will only
communicate or cause to be communicated any invitation or
inducement to engage in investment activity (within the meaning of
section 21 of the FSMA) received by it in connection with the issue
or sale of any US 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 US
notes in, from or otherwise involving the United Kingdom.
ITALY
Each underwriter will represent and agree that it has not, directly or
indirectly, offered or sold and will not, directly or indirectly, offer or sell
any US notes in the Republic of Italy.
SPAIN
Each underwriter will represent and agree that it has not, directly or
indirectly, offered or sold and will not, directly or indirectly, offer or sell
any US notes in Spain by means of a public offer as defined and construed by
Spanish law unless such public offer is made in compliance with the
requirements of Law 24/1988 of July 28 (as amended by Law 37/1998, of November
16), on the Spanish Securities Market and the Royal Decree 291/1992, of March
27 (as amended by Royal Decree 2590/1998, of December 7 and Royal Decree 705/
2002, of July 19), on issues and public offers for the sale of securities.
IRELAND
Each underwriter will represent and agree that it has not, directly or
indirectly, offered or sold and will not, directly or indirectly, offer or sell
in Ireland any US notes other than to persons whose ordinary business it is to
buy or sell shares or debentures whether as principal or agent.
THE NETHERLANDS
Each underwriter will represent and agree that it has not, directly or
indirectly, offered or sold and will not, directly or indirectly, offer or sell
any US notes in The Netherlands.
253
GENERAL
The underwriters will represent and agree that they have complied and will
comply with all applicable securities laws and regulations in force in any
jurisdiction in which they purchase, offer, sell or deliver US notes or possess
them or distribute the prospectus or any other offering material and will
obtain any consent, approval or permission required by them for the purchase,
offer, sale or delivery by them of US notes under the laws and regulations in
force in any jurisdiction to which they are subject or in which they make such
purchases, offers, sales or deliveries and the issuer shall have no
responsibility for them. Furthermore, the underwriters will represent and agree
that they have not and will not directly or indirectly offer, sell or deliver
any notes or distribute or publish any prospectus, form of application,
offering circular, advertisement or other offering material except under
circumstances that will, to the best of its knowledge and belief, result in
compliance with any applicable laws and regulations, and all offers, sales and
deliveries of US notes by it will be made on the same terms.
Neither the issuer nor the underwriters represent that US notes may at any
time lawfully be sold in compliance with any application, registration or other
requirements in any jurisdiction (other than as described above), or pursuant
to any exemption available thereunder, or assume any responsibility for
facilitating such sale.
The underwriters will agree that they will, unless prohibited by applicable
law, furnish to each person to whom they offer or sell notes a copy of the
prospectus and a related prospectus supplement, in each case as then amended or
supplemented or, unless delivery of the prospectus is required by applicable
law, inform each such person that a copy will be made available upon request.
The underwriters are not authorized to give any information or to make any
representation not contained in the prospectus in connection with the offer and
sale of notes to which the prospectus relates.
254
REPORTS TO NOTEHOLDERS
The administrator will prepare quarterly and annual reports that will
contain information about the notes. The financial information contained in the
reports will not be prepared in accordance with generally accepted accounting
principles of any jurisdiction. The reports will be sent to Cede & Co. and
Citivic, as applicable, as the holder of the notes, unless and until individual
note certificates are issued. Reports will not be sent to investors by the
administrator.
255
LISTING AND GENERAL INFORMATION
AUTHORIZATION
The issue of each series of notes from time to time has been authorized by
resolution of the board of directors of the issuer passed on January 18, 2005.
LISTING OF NOTES
Application has been made to the FSA in its capacity as competent authority
for the purposes of Part VI of the FSMA for the notes issued during the period
of 12 months from the date of this prospectus to be admitted to the official
list. Application has also been made to the London Stock Exchange for each
class of the notes to be admitted to trading by the London Stock Exchange. It
is expected that such applications will be granted on or about January 21,
2005.
The admission of the notes to the official list will be expressed as a
percentage of their nominal amount (excluding accrued interest). It is expected
that each series and class of notes which is to be admitted to the official
list and to trading on the London Stock Exchange will be admitted separately,
as and when issued, subject only to the issue of a global note certificate or
individual note certificates representing the notes of each series and class.
This prospectus has been prepared in compliance with the listing rules made
under Section 74 of the FSMA by the UK Listing Authority. Copies have been
delivered to the Registrar of Companies in England and Wales for registration
in accordance with Section 83 of that Act.
The issuer and the directors of the issuer accept responsibility for the
information contained in this prospectus. To the best of the knowledge and
belief of the issuer and the directors of the issuer (who have taken all
reasonable care to ensure that such is the case), the information contained in
this prospectus is in accordance with the facts and does not omit anything
likely to affect the import of such information. The issuer and the directors
of the issuer accept responsibility accordingly.
CLEARING AND SETTLEMENT
Transactions in respect of the US notes will normally be effected for
settlement in US dollars and for delivery on the third working day after the
date of the transaction. Prior to listing, however, dealings will be permitted
by the London Stock Exchange plc in accordance with its rules.
The US notes have been accepted for clearance through DTC, Clearstream,
Luxembourg and Euroclear. The appropriate CUSIP numbers, common codes and ISINs
for each series and class of notes will be specified in the applicable
prospectus supplement.
LITIGATION
None of the issuer or Funding 2, (the "FUNDING 2 GROUP"), Holdings, the
post-enforcement call option holder or the mortgages trustee is or has been
involved since its incorporation in any legal or arbitration proceedings which
may have, or have had since its incorporation, a significant effect upon the
financial position of the issuer, the Funding 2 Group, Holdings, the post-
enforcement call option holder or the mortgages trustee (as the case may be)
nor, so far as the issuer, the Funding 2 Group, Holdings, the post-enforcement
call option holder or the mortgages trustee (respectively) is aware, are any
such legal or arbitration proceedings pending or threatened.
ACCOUNTS
No statutory or non-statutory accounts within the meaning of Section 240(5)
of the Companies Act 1985 in respect of any financial year of the issuer have
been prepared. So long as the notes are listed on the official list of the UK
Listing Authority and are
256
trading by the London Stock Exchange plc the most recently published audited
annual accounts of the issuer from time to time shall be available at the
specified office of the UK principal paying agent in London. The issuer does
not publish interim accounts.
Since the date of its incorporation, the issuer has not entered into any
contracts or arrangements not being in the ordinary course of business.
CONSENTS
PricewaterhouseCoopers LLP an independent registered public accounting firm
whose address is 89 Sandyford Road, Newcastle upon Tyne, NE99 1PL, given and
have not withdrawn its consent to the inclusion in this prospectus of their
reports on the issuer and Funding 2 and the references to its name in the form
and context in which it appears, and have authorized the contents of that part
of the listing particulars containing its report for the purposes of Article
6(1)(e) of the UK Financial Services and Markets Act 2000 (Official Listing of
Securities) Regulations 2001.
SIGNIFICANT OR MATERIAL CHANGE
Other than as described in this prospectus, since the date of incorporation
of the issuer (5 October, 2004) and Funding 2 (4 October, 2004), the date of
incorporation of Holdings (December 14, 2000), the date of incorporation of the
mortgages trustee (February 14, 2001), and the date of incorporation of the
post-enforcement call option holder (December 15, 2000), there has been:
* no material adverse change in the financial position or prospects
of the issuer, Funding 2 Group, Holdings, the post-enforcement call
option holder or the mortgages trustee; and
* no significant change in the financial or trading position of the
issuer, Funding 2 Group, Holdings, the post-enforcement call option
holder or the mortgages trustee.
DOCUMENTS AVAILABLE
For so long as any series and class of notes issued by the issuer may be
admitted to the official list, copies of the following documents may, when
published, be inspected at the registered offices of the Issuer and from the
specified office of the principal paying agent during usual business hours, on
any weekday (public holidays excepted):
(A) the Memorandum and Articles of Association of each of the issuer,
Funding 2, Holdings, the mortgages trustee and the post-enforcement
call option holder;
(B) the balance sheet of the issuer and Funding 2 as at January 14,
2005 and the independent accountants' report thereon;
(C) the most recently published financial statements of the Issuer and
Funding 2;
(D) a copy of the prospectus
(E) any future offering circulars, prospectuses, information memoranda
and supplement including prospectus supplements (save that a
prospectus supplement relating to an unlisted series and class of
notes will be available for inspection only by the underwriters or
dealers, as applicable, specified in the prospectus supplement or,
upon proof satisfactory to the principal paying agent or the
registrar, as the case may be, as to the identity of the holder of
any note to which the prospectus supplement relates) to the
prospectus and any other documents incorporated therein or therein
by reference.
(F) each of the following documents:
* the programme agreement;
* each subscription agreement
* each underwriting agreement;
257
* the global intercompany loan agreement;
* the mortgages trust deed;
* the controlling beneficiary deed;
* the mortgage sale agreement;
* the issuer deed of charge;
* each deed of accession to the issuer deed of charge
* the Funding 2 deed of charge;
* each deed of accession to the Funding 2 deed of charge
* the Funding 2 basis rate swap agreement;
* each issuer swap agreement;
* the trust deed;
* the paying agent and agent bank agreement;
* the administration agreement;
* the cash management agreement;
* the issuer cash management agreement;
* the issuer guaranteed investment contract;
* the Funding 2 guaranteed investment contract;
* the mortgages trustee guaranteed investment contract;
* the post-enforcement call option agreement;
* the bank account agreement;
* the Funding 2 bank account agreement;
* the issuer bank account agreement;
* the collection bank agreement;
* the master definitions schedule;
* each start-up loan agreement;
* the corporate services agreement;
* any other deeds of accession or supplemental deeds relating to
any such documents; and
(E) independent accountant's consent letter.
258
GLOSSARY
All of the defined terms that are used in this prospectus are defined in the
following glossary. These terms are defined as follows:
"$", "US$", "USD", "US The lawful currency for the time being of the United
DOLLARS" or States of America
"DOLLARS"
"[e]" or "EURO" The currency of the member states of the European Union
that adopt the single currency in accordance with the
Treaty of Rome of March 25, 1957, establishing the
European Community, as amended from time to time
"[GBP]", "STERLING" The lawful currency for the time being of the United
or "POUNDS Kingdom of Great Britain and Northern Ireland
STERLING"
"AAA LOAN TRANCHES" The loan tranches made by the issuer to Funding 2 under
the global intercompany loan agreement from the proceeds
of issue of any series of class A notes
"AA LOAN TRANCHES" The loan tranches made by the issuer to Funding 2 under
the global intercompany loan agreement from the proceeds
of issue of any series of class B notes
"A LOAN TRANCHES" The loan tranches made by the issuer to Funding 2 under
the global intercompany loan agreement from the proceeds
of issue of any series of class M notes
"ADDITIONAL The meaning given to it on page 214
INTEREST"
"AAA PRINCIPAL One of five sub-ledgers on the principal deficiency
DEFICIENCY ledger which records any principal deficiency in respect
SUB-LEDGER" of any AAA loan tranches
"AA PRINCIPAL One of five sub-ledgers on the principal deficiency
DEFICIENCY ledger which records any principal deficiency in respect
SUB-LEDGER" of any AA loan tranches
"A PRINCIPAL One of five sub-ledgers on the principal deficiency
DEFICIENCY ledger which records any principal deficiency in respect
SUB-LEDGER" of any A loan tranches
"ACCRUAL YIELD" In respect of any series and class of notes, the yield
specified as such in the applicable prospectus
supplement
"ADDITIONAL MORTGAGE Any mortgage loan (being an English mortgage loan or a
LOAN" Scottish mortgage loan, as applicable) which the seller
anticipated assigning to the mortgages trustee on an
assignment date under the terms of the mortgage sale
agreement and referenced by its mortgage loan identifier
number and comprising the aggregate of all principal
sums, interest, costs, charges, expenses and other
monies (including all further advances) due or owing
with respect to that mortgage loan under the relevant
mortgage conditions by a borrower on the security of a
mortgage from time to time outstanding or, as the
context may require, the borrower's obligations in
respect of the same
"ADDITIONAL MORTGAGE The portfolio of additional mortgage loans, their
PORTFOLIO" related security, accrued interest and other amounts
derived from such additional mortgage loans that the
seller, as of each cut-off date, anticipates assigning
to the mortgages trustee from time to time
259
"ADJUSTED FUNDING 2
RESERVE FUND LEVEL" The sum of:
(a) the aggregate amount standing to the credit of the
issuer reserve ledger and the Funding 2 reserve
ledger; and
(b) the amount (if any) then to be credited to the issuer
reserve ledger in accordance with to the issuer pre-
enforcement principal priority of payments and the
amount (if any) then to be credited to the Funding 2
reserve ledger in accordance with to the Funding 2
pre-enforcement principal priority of payments
"ADMINISTRATION FEE" The fee payable by the mortgages trustee to the
administrator on each distribution date in payment for
the administering of the mortgage loans by the
administrator. The administration fee equals 0.08% per
annum (inclusive of VAT) on the amount of the Funding 2
share of the trust property as determined on that
distribution date in respect of the then current trust
calculation period, but is payable on each distribution
date only to the extent that the mortgages trustee has
sufficient funds available to pay that amount in
accordance with the mortgages trust allocation of
revenue receipts
"ADMINISTRATION The administration, arrears and enforcement policies and
PROCEDURES" procedures forming part of the seller's policy from time
to time or, at any time when the administrator is not
also the seller, the policies and procedures from time
to time which would be adopted by a reasonable, prudent
mortgage lender
"ADMINISTRATOR" Northern Rock or such other person as may from time to
time be appointed as administrator of the mortgage
portfolio under the administration agreement
"ADMINISTRATOR The meaning given to it on page 106
TERMINATION
EVENT"
"AGENT BANK" Citibank, N.A, acting through its London branch at 5
Carmelite Street, London EC4Y 0PA, or such other person
for the time being acting as agent bank under the paying
agent and agent bank agreement
"ALTERNATIVE Requirements which vary the insurance provisions of the
INSURANCE mortgage conditions
REQUIREMENTS"
"ANTICIPATED CASH The meaning given to it on page 151
ACCUMULATION
PERIOD"
"ARREARS OF As at any date and for any mortgage loan, interest
INTEREST" (other than capitalized interest or accrued interest) on
that mortgage loan which is currently due and payable on
that date
"ARREARS OR STEP-UP An arrears or step-up trigger event occurs when (i) the
TRIGGER outstanding principal balance of the mortgage loans in
EVENT" arrears for more than 90 days divided by the outstanding
principal balance of all of the mortgage loans in the
mortgages trust (expressed as a percentage) exceeds 2%
or (ii) if the issuer fails to exercise its option to
redeem any of its notes on the relevant step-up date
pursuant to the terms and conditions of such notes
"ASSET TRIGGER The meaning given to it on page 130
EVENT"
"ASSIGNMENT DATE" The date of assignment of any new mortgage portfolio to
the mortgages trustee
260
"AUTHORIZED In respect of the US notes, $100,000 and integral
HOLDINGS" multiples of $1,000 in excess thereof or, in relation to
a series and class of notes, as otherwise specified in
the applicable prospectus supplement
"AUTHORIZED (a) sterling gilt-edged securities; and
INVESTMENTS"
(b) sterling demand or time deposits, certificates of
deposit and short-term debt obligations (including
commercial paper) (which may include deposits into
any account which earns a rate of interest related to
LIBOR) provided that in all cases these investments
have a maturity date of 90 days or less and mature on
or before the next following note payment date or
loan payment date (as applicable) or, in relation to
any mortgages trustee bank account, the next
following distribution date and the short-term
unsecured, unguaranteed and unsubordinated debt
obligations of the issuing or guaranteeing entity or
the entity with which the demand or time deposits are
made (being an authorized institution under the FSMA)
are rated at least equal to "A-1+" by Standard &
Poor's, "P-1" by Moody's and "F1+" by Fitch or which
are otherwise acceptable to the rating agencies (if
they are notified in advance) to maintain the then
current rating of the notes
"AUTHORIZED The meaning given to it on page 78
UNDERPAYMENT"
"AXA" The AXA Group of Companies
"BANK ACCOUNT The agreement dated March 26, 2001, as amended from time
AGREEMENT" to time, among the account bank, the cash manager, the
mortgages trustee, Funding, Funding 2, the security
trustee and the Funding 2 Security Trustee which governs
the operation of the mortgages trustee bank accounts and
the Funding 2 bank accounts
"BANK OF ENGLAND The Bank of England's official dealing rate (the repo
BASE RATE" rate) as set by the UK Monetary Policy Committee, and in
the event that this rate ceases to exist or becomes
inappropriate as an index for the base rate pledge, such
alternative rate or index, which is not controlled by
the seller, that the seller considers to be the most
appropriate in the circumstances
"BARCLAYS" Barclays Bank PLC, acting through its office at City
Group Office, Percy Street, Newcastle upon Tyne NE99 1JP
"BARCLAYS COLLECTION The account of the administrator held at Barclays as may
ACCOUNT" be utilized from time to time for the purpose of
collecting amounts which are paid to the seller on the
mortgage loans and/or the related security
"BASE RATE PLEDGE" The meaning given to it on page 76
"BASEL COMMITTEE" The meaning given to it on page 52
"BASIC TERMS The meaning given to it on page 226
MODIFICATIONS"
261
"BASIS RATE SWAPS" The Funding 2 basis rate swaps and the swap agreements
entered into by each of the Funding issuers with
Northern Rock plc as swap provider to hedge exposure to
interest rates on the mortgage loans and the interest
rates on the notes issued by such Funding issuers
"BBB LOAN TRANCHES" The loan tranches made by the issuer to Funding 2 under
the global intercompany loan agreement from the proceeds
of issue of any series of class C notes
"BB LOAN TRANCHE" The loan tranches made by the issuer to Funding 2 under
the global intercompany loan agreement from the proceeds
of the issue of any series of class D notes
"BBB PRINCIPAL One of five sub-ledgers or the principal deficiency
DEFICIENCY ledger which records any principal deficiency in respect
SUB-LEDGER" of any BBB loan tranches
"BB PRINCIPAL One of five sub-ledgers or the principal deficiency
DEFICIENCY ledger which records any principal deficiency in respect
SUB-LEDGER" of any BB loan tranches
"BENEFICIARIES" Funding, Funding 2 and the seller, collectively as
beneficiaries of the mortgages trust
"BENEFIT PLAN An investor in a pension, profit-sharing or other
INVESTORS" employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans, as described
further in "ERISA CONSIDERATIONS"
"BORROWER" For each mortgage loan, the person or persons who is or
are named and defined as such in the relevant mortgage
deed, or the other person or persons (other than a
guarantor) who shall become legally obligated to comply
with the borrower's obligations under the related
mortgage
"BROKEN AMOUNT" In Rrespect of any series and class of notes, an amount
specified as such (if any) in the applicable prospectus
supplement
"BULLET LOAN Any loan tranche which is scheduled to be repaid in full
TRANCHE" on one loan payment date. Bullet loan tranches will be
deemed to be pass-through loan tranches if:
(a) a date specified in relation to the same in the
applicable loan tranche supplement occurs;
(b) a pass-through trigger event occurs; or
(c) the step-up date (if any) in relation to such loan
tranche occurs.
"BULLET REDEMPTION The bullet redemption date for any series and class of
DATE" bullet redemption notes will be the monthly payment date
specified as such for such series and class of notes in
the applicable prospectus supplement
262
"BULLET REDEMPTION Any series and class of notes which is scheduled to be
NOTES" repaid in full on one note payment date. Bullet
redemption notes will be deemed to be pass-through notes
if:
(a) a date specified in relation to the same in the
prospectus supplement occurs
(b) a pass-through trigger event occurs; or
(c) the step-up date (if any) in relation to such notes
occurs.
"BULLET REPAYMENT The bullet repayment date for any bullet loan tranche
DATE" will be the monthly payment date specified as such for
such loan tranche in the applicable loan tranche
supplement.
"BULLET REPAYMENT The amount required to be repaid on the bullet repayment
LOAN AMOUNT" date in respect of a bullet loan tranche in order to
repay such loan tranche in full;
"CALENDAR YEAR" A year from the beginning of January 1 to the end of
December 31
"CAPITAL BALANCE" For any mortgage loan at any date, the principal balance
of that mortgage loan to which the seller applies the
relevant interest rate at which interest on that
mortgage loan accrues
"CAPITAL PAYMENT" The meaning given to it on page 73
"CAPITALIZED" In respect of a fee, an interest amount or any other
amount, means that amount which is added to the capital
balance of a mortgage loan
"CAPITALIZED For any mortgage loan at any date, interest or other
ARREARS" amounts which are overdue in respect of that mortgage
loan and which as at that date have been added to the
capital balance of that mortgage loan either in
accordance with the mortgage conditions or otherwise by
arrangement with the relevant borrower
"CAPITALIZED For any mortgage loan at any date, interest which is
INTEREST" overdue in respect of that mortgage loan and which as at
that date has been added to the capital balance of that
mortgage loan in accordance with the mortgage conditions
or otherwise by arrangement with the relevant borrower
(excluding for the avoidance of doubt any arrears of
interest which have not been so capitalized on that
date)
"CAPITAL The meaning given to it on page 52
REQUIREMENTS
DIRECTIVE"
"CAPPED RATE Mortgage loans that are subject to a maximum rate of
MORTGAGE interest and charge interest at the lesser of the
LOANS" seller's standard variable rate or the specified capped
rate
"CASH ACCUMULATION The meaning given to it on page 157
LIABILITY"
"CASH ACCUMULATION means at any time that the Funding 2 cash accumulation
SHORTFALL" ledger amount is less than the cash accumulation
liability;
263
"CASH ACCUMULATION The meaning given to it on page 150
PERIOD"
"CASH ACCUMULATION The meaning given to it on page 151
REQUIREMENT"
"CASHBACK MORTGAGE A type of mortgage loan, the primary characteristics of
LOAN" which are described on page 71
"CAT STANDARD A type of flexible mortgage loan, the primary
MORTGAGE LOAN" characteristics of which are described on page 71
"CCA" The Consumer Credit Act 1974
"CITIBANK, N.A." Citibank, N.A., acting through its London branch at 5
Carmelite Street, London EC4Y 0PA
"CLASS" Any of the class A notes, the class B notes, the class M
notes, the class C notes and the class D notes
"CLASS A AVAILABLE The meaning given to it on page 64
SUBORDINATED
AMOUNT"
"CLASS A ISSUER The meaning given to it on page 219
ENFORCEMENT NOTICE"
"CLASS A NOTE EVENT The meaning given to it on page 219
OF DEFAULT"
"CLASS A The holders of the class A notes
NOTEHOLDERS"
"CLASS A NOTES" The notes of any series designated as such in the
applicable prospectus supplement
"CLASS A REQUIRED The meaning given to it on page 64
SUBORDINATED
AMOUNT"
"CLASS A REQUIRED On any date, the percentage specified as such in the most
SUBORDINATED recent prospectus supplement.
PERCENTAGE"
"CLASS B AVAILABLE The meaning given to it on page 65
SUBORDINATED
AMOUNT"
"CLASS B ISSUER The meaning given to it on page 220
ENFORCEMENT NOTICE"
"CLASS B NOTE EVENT The meaning given to it on page 221
OF
DEFAULT"
"CLASS B The holders of the class B notes
NOTEHOLDERS"
"CLASS B NOTES" The notes of any series designated as such in the
applicable prospectus supplement
"CLASS B REQUIRED The meaning given to it on page 64
SUBORDINATED
AMOUNT"
"CLASS B REQUIRED On any date, the percentage specified as such in the most
SUBORDINATED recent prospectus supplement.
PERCENTAGE"
"CLASS C AVAILABLE The meaning given to it on page 66
SUBORDINATED
AMOUNT"
"CLASS C ISSUER The meaning given to it on page 221
ENFORCEMENT NOTICE"
"CLASS C NOTE EVENT The meaning given to it on page 222
OF DEFAULT"
"CLASS C The holders of the class C notes
NOTEHOLDERS"
264
"CLASS C NOTES" The notes of any series designated as such in the
applicable prospectus supplement
"CLASS C REQUIRED The meaning given to it on page 65
SUBORDINATED
AMOUNT"
"CLASS C REQUIRED On any date, the percentage specified as such in the most
SUBORDINATED recent prospectus supplement.
PERCENTAGE"
"CLASS D ISSUER The meaning given to it on page 222
ENFORCEMENT NOTICE"
"CLASS D NOTE EVENT The meaning given to it on page 222
OF
DEFAULT"
"CLASS D The holders of the class D notes
NOTEHOLDERS"
"CLASS D NOTES" The notes of any series designated as such in the
applicable prospectus supplement
"CLASS M AVAILABLE The meaning given to it on page 65
SUBORDINATED
AMOUNT"
"CLASS M ISSUER The meaning given to it on page 221
ENFORCEMENT NOTICE"
"CLASS M NOTE EVENT The meaning given to it on page 221
OF
DEFAULT"
"CLASS M The holders of the class M notes
NOTEHOLDERS"
"CLASS M NOTES" The notes of any series designated as such in the
applicable prospectus supplement
"CLASS M REQUIRED The meaning given to it on page 65
SUBORDINATED
AMOUNT"
"CLASS M REQUIRED On any date, the percentage specified as such in the most
SUBORDINATED recent prospectus supplement.
PERCENTAGE"
"CLEARING AGENCY" An agency registered under the provisions of section 17A
of the Exchange Act
"CLEARING A corporation within the meaning of the New York Uniform
CORPORATION" Commercial Code
"CLEARSTREAM, Clearstream Banking, societe anonyme
LUXEMBOURG"
"CLOSING DATE" The closing date for the issuance of any series and
class of notes as specified in the prospectus supplement
for such notes
"CML" The Council of Mortgage Lenders of which the seller is a
member
"CML CODE" The meaning given to it on page 48
"CODE" United States Internal Revenue Code of 1986, as amended
265
"COLLECTION ACCOUNT" The Barclays collection account, the Lloyds TSB
collection account and each other account in the name of
the administrator which is from time to time used for
the purpose of collecting, directly or indirectly,
monies due in respect of mortgage loans and/or the
related security
"COLLECTION BANKS" Barclays Bank PLC acting through its branch at Percy
Street, Newcastle upon Tyne NE99 1JP and Lloyds TSB Bank
plc acting through its branch at City Office, Bailey
Drive, Gillingham Business Park, Kent ME8 0LS and each
other bank as may be appointed as such under and in
accordance with the transaction documents
"COLLECTION BANK The agreement dated March 26, 2001, as amended from time
AGREEMENT" to time, among the mortgages trustee, Funding, Funding
2, the seller, the administrator, the security trustee
and the collection banks
"COMBINATION A mortgage loan that combines the features of a
MORTGAGE repayment mortgage loan and an interest-only loan in
LOAN" that only part of the principal of the mortgage loan
will be repaid by way of monthly payments
"COMBINED CREDIT The meaning given to it on page 69
BALANCE"
"COMBINED DEBIT The meaning given to it on page 69
BALANCE"
"CONNECTIONS The meaning given to it on page 70
BENEFIT"
"CONNECTIONS The meaning given to it on page 70
COMBINED
CREDIT BALANCE"
"CONNECTIONS DEBIT The meaning given to it on page 70
BALANCE"
"CONNECTIONS The meaning given to it on page 70
INTEREST"
"CONNECTIONS A type of flexible mortgage loan, the primary
MORTGAGE characteristics of which are described on page 69
LOAN"
"CONTRIBUTION" The consideration in the form of cash provided to the
mortgages trustee by any beneficiary in respect of the
share of that beneficiary in the trust property under
the mortgages trust deed, being any of an initial
contribution, a further contribution or a deferred
contribution
"CONTRIBUTION DATE" Any date (including, the initial closing date) on which
Funding 2 or Funding makes a further contribution to the
mortgages trustee in connection with the purchase of an
increased beneficial interest in the trust property, on
which date the mortgages trustee will also pay to the
seller or to Funding a special distribution equal to the
amount of such further contribution
"CONTRIBUTIONS The ledger on which contributions to the mortgages trust
LEDGER" made by Funding, Funding 2 and the seller to the
mortgages trustee and the application of such
contributions in accordance with the terms of the
mortgages trust deed shall be recorded
"CONTROLLED On any controlled redemption date before the occurrence
AMORTIZATION of a trigger event or the enforcement of the issuer
INSTALLMENT" security for any note or series and class of notes which
are controlled amortization notes, the maximum aggregate
principal amount which may be repaid by the issuer to
the relevant noteholder
266
or noteholders of such series and class on that
controlled redemption date in accordance with the terms
and conditions of the relevant notes
"CONTROLLED Any series and class of notes the conditions of which
AMORTIZATION impose a limit on the amount of principal which may be
NOTE" repaid on such notes on each controlled redemption date
for such notes. Controlled amortization notes will be
deemed to be pass-through notes if:
(a) a date specified in relation to the same in the
prospective supplement occurs;
(b) a pass-through trigger event occurs; or
(c) the step-up date (if any) in relation to such notes
occurs.
"CONTROLLED The controlled redemption dates for any series and class
REDEMPTION of controlled amortization notes will be the monthly
DATES" payment dates specified as such for such series and
class of notes in the applicable prospectus supplement
"CONTROLLED The controlled repayment dates for any controlled
REPAYMENT repayment loan tranche will be the monthly payment dates
DATES" specified as such for such loan tranche in the
applicable loan tranche supplement
"CONTROLLED On any controlled repayment date before the occurrence
REPAYMENT of a trigger event or the enforcement of the Funding 2
LOAN AMOUNT" security, for any controlled repayment loan tranche, the
maximum aggregate principal amount which may be repaid
by Funding 2 to the issuer on that controlled repayment
date
"CONTROLLED Any loan tranche which by its terms imposes a limit on
REPAYMENT the amount of principal which may be repaid on such loan
LOAN TRANCHE" tranche on any controlled repayment date for such loan
tranche. Controlled repayment loan tranches will be
deemed to be pass-through loan tranche if:
(a) a date specified in relation to the same in the
applicable loan tranche supplement occurs;
(b) a pass-through trigger event occurs; or
(c) the step-up date (if any) in relation to such loan
tranche occurs
"CONTROLLED The meaning given to it on page 152
REPAYMENT
REQUIREMENT"
"CONTROLLING The beneficiary deed entered into on the Funding 2
BENEFICIARY program date, as amended from time to time, among
DEED" Funding, Funding 2, the security trustee, the Funding 2
security trustee, the note trustee to the Funding
issuers and the seller
"CONTROLLING The meaning given on page 137
DIRECTIONS"
"CORE TERMS" The main subject matter of the contract
"CORPORATE SERVICES With respect to the issuer and Funding 2, the corporate
AGREEMENT" services agreement, as amended from time to time,
entered into on or before the Funding 2 program date
among, inter alios, the corporate services provider,
Holdings, the post enforcement call option holder,
Funding 2 and the issuer and, with respect to the
mortgages trustee, the corporate services
267
agreement entered into on March 26, 2001, as amended
from time to time, among, inter alios, the corporate
services provider, Funding and the mortgages trustee
"CORPORATE SERVICES With respect to the issuer and Funding 2, Law Debenture
PROVIDER" Corporate Services Limited and with respect to the
mortgages trustee, Mourant & Co. Limited, or any other
person or persons for the time being acting as corporate
services provider under the corporate services agreement
"CPR" or "CONSTANT Unless otherwise defined in this prospectus, represents
PAYMENT RATE" a constant rate of scheduled and unscheduled repayments
on the mortgage loans in the mortgage portfolio each
month relative to the aggregate principal amount
outstanding of those mortgage loans
"CREDIT SUPPORT The 1995 Credit Support Annex (Bilateral Form ---
ANNEX" Transfer) published by the International Swaps and
Derivatives Association, Inc., entered into or to be
entered into by Funding 2 or the issuer and a swap
provider
"CRYSTALLIZE" When a floating charge becomes a fixed charge
"CURRENT BALANCE" For any mortgage loan as at any given date, the
aggregate (but avoiding double counting) of:
(1) the original principal amount advanced to the
relevant borrower and any further amount advanced on
or before the given date to the relevant borrower
secured or intended to be secured by the related
mortgage; and
(2) the amount of any re-draw under any flexible mortgage
loan or any further draw under any personal secured
loan secured or intended to be secured by the related
mortgage; and
(3) any interest, disbursement, legal expense, fee,
charge, rent, service charge, premium or payment
which has been properly capitalized in accordance
with the relevant mortgage conditions or with the
relevant borrower's consent and added to the amounts
secured or intended to be secured by that mortgage
loan (including interest capitalized on any re-draw
under a flexible mortgage loan); and
(4) any other amount (other than unpaid interest) which
is due or accrued (whether or not due) and which has
not been paid by the relevant borrower and has not
been capitalized in accordance with the relevant
mortgage conditions or with the relevant borrower's
consent but which is secured or intended to be
secured by that mortgage loan
as at the end of the London business day immediately
preceding that given date less any repayment or
payment of any of the foregoing made on or before the
end of the London business day immediately preceding
that given date and excluding any retentions made but
not released and any further advances committed to be
made but not made by the end of the London business
day immediately preceding that given date
268
"CURRENT FUNDING 2 The amount of trust property beneficially owned by
SHARE" Funding 2 from time to time, as described further in
"THE MORTGAGES TRUST"
"CURRENT FUNDING 2 The percentage share of Funding 2's interest in the
SHARE trust property from time to time, as described further
PERCENTAGE" in "THE MORTGAGES TRUST"
"CURRENT SELLER The amount of trust property beneficially owned by the
SHARE" seller from time to time, as described further in "THE
MORTGAGES TRUST"
"CURRENT SELLER The percentage share of the seller's interest in the
SHARE trust property from time to time, as described further
PERCENTAGE" in "THE MORTGAGES TRUST"
"CUT-OFF DATE" The cut-off date in relation to the issuance of any
series of notes, which will be specified in the
prospectus supplement for such notes
"CUT-OFF DATE As of any cut-off date, the initial mortgage portfolio
MORTGAGE and the further mortgage portfolios (taking account of,
PORTFOLIO" among other things, amortization of mortgage loans in
that portfolio and the addition and/or removal of any
mortgage loans to or from that portfolio since March 26,
2001) combined with the additional mortgage portfolio
"DEALERS" Barclays Bank PLC, Citigroup Global Markets Limited and
Merrill Lynch International and any other dealers
appointed from time to time in accordance with the
programme agreement
"DEFERRED The consideration in the form of cash payable by Funding
CONTRIBUTION" 2 to the mortgages trustee from time to time in respect
of the Funding 2 share of the trust property pursuant to
and in accordance with the mortgages trust deed and/or
the Funding 2 deed of charge, which contribution will
fund the payment by the mortgages trustee to the seller
of the deferred purchase price payable by the mortgages
trustee to the seller from time to time pursuant to and
in accordance with the mortgage sale agreement
"DEFERRED INTEREST" The meaning given to it on page 214
"DEFERRED PURCHASE That portion of the purchase price for the initial
PRICE" mortgage portfolio and of the purchase price (if any) of
any other mortgage portfolio assigned to the mortgages
trustee which was not paid to the seller on the initial
closing date or (in the case of any other mortgage
portfolio) the relevant assignment date and which is to
be paid by the mortgages trustee from time to time to
the seller from deferred contributions received by the
mortgages trustee from Funding 2 and otherwise in
accordance with the mortgage sale agreement
"DETERMINATION DATE" In respect of any series and class of notes, the date(s)
specified as such in the applicable prospectus
supplement
"DETERMINATION Each period from (and including) a determination date to
PERIOD" (but excluding) the next determination date (including,
where either the interest commencement date or the
applicable final note payment date is not a
determination date, the period commencing on the first
determination date prior to, and ending on the first
determination date falling after, such date)
269
"DIRECT DEBIT" A payment made directly by a borrower from its bank
account to a collection account
"DISCOUNT RATE A type of mortgage loan, the primary characteristics of
MORTGAGE which are described on page 71
LOAN"
"DISTRIBUTION DATE" The date on which the mortgages trust terminates and the
London business day determined by the cash manager
falling no later than 6 business days after each trust
determination date
"DTC" The Depository Trust Company
"DTI" The UK Department of Trade and Industry
"DUAL CURRENCY A note, the interest basis of which is specified in the
INTEREST applicable prospectus supplement as being dual currency
NOTES" interest
"ENGLISH MORTGAGE Each mortgage loan secured over a property located in
LOAN" England or Wales
"ERISA" The United States Employee Retirement Income Security
Act of 1974, as amended. See further "ERISA
CONSIDERATIONS"
"EURIBOR" The Euro-zone inter-bank offered rate, as determined by
the agent bank in accordance with the paying agent and
agent bank agreement
"EUROCLEAR" The Euroclear system
"EUROCLEAR OPERATOR" Euroclear Bank S.A./N.V., as operator of the Euroclear
system
"EUROZONE" The region comprised of the member states of the
European Union that adopt the single currency in
accordance with the Treaty of Rome of March 25, 1957,
establishing the European Community, as amended from
time to time
"EVENT OF DEFAULT" as the context requires, any of the following:
(a) for any notes, an event of default under the terms
and condition of those notes; or
(b) for the global intercompany loan, the occurrence of
an event of default under the terms and conditions of
the global intercompany loan agreement
"EXCESS SPREAD" The meaning given to it on page 66
"EXCHANGE ACT" The United States Securities Exchange Act of 1934, as
amended
"EXISTING BORROWERS' At any date, the fixed rate then being offered to those
RE-FIX RATE" of the seller's existing borrowers who at that date are
seeking to fix the rate of interest payable under their
existing fixed rate mortgage loans
"FILED PLAN" With respect to the identification of a property, a plan
retained at the Land Registry indicating the location of
the related land
"FINAL MATURITY In respect of any series and class of notes, the date
DATE" specified as such for such series and class of notes in
the related prospectus supplement
270
"FINAL REPAYMENT In relation to any loan tranche the date specified as
DATE" such for such loan tranche in the related loan tranche
supplement
"FINANCIAL SERVICES The Legislative Decree No.58 of February 24, 1998 of the
ACT" Republic of Italy
"FITCH" Fitch Ratings Ltd., including any successor to its
ratings business
"FIXED COUPON In respect of any series and class of notes, the amount
AMOUNT" specified as such (if any) in the applicable prospectus
supplement
"FIXED RATE MORTGAGE A mortgage loan which is subject to a fixed rate of
LOAN" interest set by reference to a predetermined rate or
series of rates for a fixed period or periods or is
subject to a maximum rate of interest (and charge
interest at the lesser of a variable rate and such
maximum rate) for a fixed period or periods (and shall,
for the avoidance of doubt, exclude variable rate
mortgage loans and flexible mortgage loans save for
flexible mortgage loans which are, at the relevant time,
subject to such fixed rates of interest or such maximum
rates of interest arrangements and shall also exclude
any fixed rate mortgage loans which have become re-fixed
mortgage loans since the immediately preceding loan
payment date)
"FIXED RATE NOTE" A note, the interest basis of which is specified in the
applicable prospectus supplement as being fixed rate
"FIXED RATE PERIOD" For any fixed rate mortgage loan or other mortgage loan
offered with a fixed rate, the period agreed between the
borrower and the seller as set out under the mortgage
conditions, during which the interest rate applicable to
that mortgage loan will remain fixed and after which the
borrower may be entitled to apply for a new fixed rate
of interest
"FIXED SECURITY" A form of security which means that the chargor is not
allowed to deal with the assets subject to the charge
without the consent of the chargee
"FLEXIBLE CAPPED Flexible mortgage loans with the same basic features as
RATE a Together mortgage loan (other than allowing the
MORTGAGE LOANS" borrower to obtain an unsecured loan) which are subject
to a maximum rate of interest for a specified period of
time, and at the expiration of that period are generally
subject to the seller's standard variable rate
"FLEXIBLE CASH RE- The meaning given to it on page 127
DRAW CAPACITY"
"FLEXIBLE FIXED RATE Flexible mortgage loans with the same basic features as
MORTGAGE LOAN" a Together mortgage loan (other than allowing the
borrower to obtain an unsecured loan) which are subject
to a fixed rate of interest for a specified period of
time, and at the expiration of that period are generally
subject to the seller's standard variable rate
"FLEXIBLE MORTGAGE A type of mortgage loan product that typically
LOAN" incorporates features that give the borrower options
(which may be subject to certain conditions) to, among
other things, make further drawings on the mortgage loan
account, and/or to overpay or underpay interest and
principal in a given month and/or to take a payment
holiday (and shall, for the avoidance of doubt,
271
exclude: (i) flexible mortgage loans which are, at the
relevant time, subject to fixed rates of interest set by
reference to a pre-determined interest rate or series of
interest rates for a fixed period or are subject to a
maximum rate of interest (and charge interest at the
lesser of a variable rate and such maximum rate) for a
fixed period or periods (which shall, for such fixed
period, constitute fixed mortgage loans); and (ii)
variable rate mortgage loans). The types of flexible
mortgage loan products currently offered by the seller
are described under "THE MORTGAGE LOANS --
CHARACTERISTICS OF THE MORTGAGE LOANS -- FLEXIBLE
MORTGAGE LOANS"
"FLEXIBLE TRACKER A type of flexible mortgage loan, the primary
RATE MORTGAGE characteristics of which are described on page 71
LOANS"
"FLOATING RATE NOTE" A note, the interest basis of which is specified in the
applicable prospectus supplement as being floating rate
"FLOATING SECURITY" A form of security which is not attached to specific
assets but which "floats" over a class of them and which
allows the chargor to deal with those assets in the
every day course of its business, up until the point
that the floating security is enforced if other
specified events occur (most often a default), at which
point it crystallizes into a fixed security
"FSA" The UK Financial Services Authority
"FSMA" The UK Financial Services and Markets Act 2000
"FUNDING" Granite Finance Funding Limited
"FUNDING Funding and Funding 2 in their capacity as beneficiaries
BENEFICIARIES" of the mortgages trust
"FUNDING GIC An account in the name of Funding held at Northern Rock
ACCOUNT" and maintained pursuant to the terms of a guaranteed
investment contract
"FUNDING The intercompany loans between Funding and each of the
INTERCOMPANY Funding issuers
LOANS"
"FUNDING (ISSUER) A reserve fund established in the name of Funding for
RESERVE the benefit of a Funding issuer
FUND"
"FUNDING ISSUERS" The several note issuers, each of which is a subsidiary
of Funding and has lent the proceeds of notes issued by
it to Funding pursuant to a separate intercompany loan,
the repayment of which is secured by Funding's
beneficial interest in the mortgages trust
"FUNDING RESERVE A reserve fund established in the name of Funding
FUND"
"FUNDING SECURITY" The mortgages, charges, assignments, pledges and/or
other security created by Funding under or pursuant to
deeds of charge in favour of the security trustee for
the benefit of the secured creditors or Funding.
"FUNDING SECURITY The security trustee and the Funding 2 security trustee
TRUSTEES"
"FUNDING SHARE" The current Funding share of the property calculated in
the manner set out in "THE MORTGAGE TRUST -- FUNDING
SHARE OF THE TRUST PROPERTY"
272
"FUNDING SHARE/ The ledger maintained by the cash manager, on behalf of
FUNDING 2 the mortgages trustee and the beneficiaries, to record
SHARE/SELLER SHARE the current Funding 2 share, the current Funding 2 share
LEDGER" percentage, the current seller share and the current
seller share percentage of the trust property
"FUNDING SHARE The current Funding share percentage of the trust
PERCENTAGE" property calculated in the manner set out in "THE
MORTGAGES TRUST -- FUNDING SHARE OF THE TRUST PROPERTY"
"FUNDING 2" Granite Finance Funding 2 Limited
"FUNDING 2 AVAILABLE The meaning given to it on page 153
PRINCIPAL RECEIPTS"
"FUNDING 2 AVAILABLE The meaning given to it on page 143
REVENUE RECEIPTS"
"FUNDING 2 BANK The agreement entered into on or about the Funding 2
ACCOUNT program date, as amended from time to time, among the
AGREEMENT" account bank, the cash manager, Funding 2 and the
Funding 2 security trustee which governs the operation
of the Funding 2 bank accounts
"FUNDING 2 BANK The Funding 2 GIC account, and the Funding 2 transaction
ACCOUNTS" account, each as further described under "FUNDING 2'S
BANK ACCOUNTS" and each other bank account (if any)
opened in the name of Funding 2
"FUNDING 2 BASIS The swap transactions as described further under "THE
RATE SWAPS" SWAP AGREEMENTS --- THE FUNDING 2 BASIS RATE SWAPS" and
documented under the Funding 2 basis rate swap agreement
"FUNDING 2 BASIS The ISDA master agreement, the schedule thereto and the
RATE SWAP confirmations thereunder to be entered into on or before
AGREEMENT" the Funding 2 program date, and any credit support annex
entered into at any time, as amended from time to time,
among Funding 2 and the Funding 2 basis rate swap
provider, which includes any additional and/or
replacement swap agreement entered into by Funding 2
from time to time in connection with the global
intercompany loan
"FUNDING 2 BASIS Northern Rock and/or, as applicable, any other basis
RATE SWAP rate swap provider appointed from time to time in
PROVIDER" accordance with the transaction documents
"FUNDING 2 BASIS means, in relation to the Funding 2 basis rate swap
RATE SWAP EXCLUDED agreement, an amount equal to:
TERMINATION AMOUNT"
(a) the amount of any swap termination payment due and
payable to the Funding 2 basis rate swap provider as
a result of a swap provider default in respect of the
Funding 2 basis rate swap provider; less
(b) the swap replacement premium (if any) received by
Funding 2 upon entry by Funding 2 into an agreement
to replace such swap agreement which has terminated
as a result of such swap provider default
"FUNDING 2 CASH The meaning given to it on page 151
ACCUMULATION
LEDGER"
273
"FUNDING 2 CASH The meaning given to it on page 157
ACCUMULATION LEDGER
AMOUNT"
"FUNDING 2 CHARGED The property, assets and undertaking of Funding 2 which
PROPERTY" from time to time are or are expressed to be mortgaged,
charged, assigned, pledged or otherwise encumbered to,
or in favor of the Funding 2 security trustee for itself
and for the Funding 2 secured creditors under the
Funding 2 deed of charge
"FUNDING 2 DEED OF The deed of charge entered into on the Funding 2 program
CHARGE" date, as amended and restated from time to time, among
Funding 2, the Funding 2 security trustee, and the
Funding 2 secured creditors as at the Funding 2 program
date including any deeds of accession or supplements
thereto
"FUNDING 2 EXPENSE The ledger on which receipts and payments of Funding 2
SUB-LEDGER" revenue receipts allocable to the payment of expenses
will be recorded by the cash manager
"FUNDING 2 GIC The account in the name of Funding 2 held at Northern
ACCOUNT" Rock and maintained subject to the terms of the Funding
2 guaranteed investment contract, the Funding 2 bank
account agreement and the Funding 2 deed of charge, or
any additional or replacement account as may for the
time being be in place with the prior consent of the
security trustee
"FUNDING 2 GIC Northern Rock or any other person or persons as are for
PROVIDER" the time being the Funding 2 GIC provider under the
applicable Funding 2 guaranteed investment contract
"FUNDING 2 The guaranteed investment contract entered into on the
GUARANTEED Funding 2 program date, as amended, restated,
INVESTMENT supplemented or otherwise modified from time to time,
CONTRACT" among Funding 2, the Funding 2 GIC provider and others,
in each case under which or the Funding 2 GIC provider,
agrees to pay Funding 2 a guaranteed rate of interest on
the balance from time to time of the Funding 2 GIC
account
"FUNDING 2 A loan (or the aggregate of a number of separate loans)
INTERCOMPANY of the net proceeds of any issue (or all issues) of
LOAN" notes by a Funding 2 issuer, such loan(s) being advanced
to Funding 2 by such Funding 2 issuer pursuant to the
terms of a Funding 2 intercompany loan agreement;
"FUNDING 2 means a loan agreement entered into between Funding 2
INTERCOMPANY and a Funding 2 issuer in relation to a Funding 2
LOAN AGREEMENT" intercompany loan;
"FUNDING 2 An enforcement notice served by the Funding 2 security
INTERCOMPANY trustee on Funding 2 for the enforcement of the Funding
LOAN ENFORCEMENT 2 security following the occurrence of Funding 2
NOTICE" intercompany loan event of default
"FUNDING 2 An event of default under the global intercompany loan
INTERCOMPANY agreement and/or under any other Funding 2 intercompany
LOAN EVENT OF loan agreement
DEFAULT"
"FUNDING 2 ISSUER" A wholly-owned subsidiary of Funding 2, which is
established to issue notes and to make a Funding 2
intercompany loan to Funding 2
274
"FUNDING 2 LIQUIDITY means a liquidity facility entered into at any time
FACILITY" after the Funding 2 program date
"FUNDING 2 LIQUIDITY means the provider of the Funding 2 liquidity facility
FACILITY PROVIDER"
"FUNDING 2 LIQUIDITY The amounts specified as such in the Funding 2 liquidity
FACILITY facility agreement (if any)
SUBORDINATED
AMOUNTS"
"FUNDING 2 LIQUIDITY The payments specified as such in the Funding 2
FACILITY PRINCIPAL liquidity facility agreement (if any)
PAYMENT"
"FUNDING 2 LIQUIDITY The liquidity reserve fund in Funding 2's name which
RESERVE FUND" Funding 2 will be required to establish if the long-
term, unsecured, unsubordinated and unguaranteed debt
obligations of the seller cease to be rated at least A3
by Moody's or A- by Fitch (unless Moody's or Fitch, as
applicable, confirms that the then current ratings of
the notes will not be adversely affected). The Funding 2
liquidity reserve fund, if any, will be funded up to the
Funding 2 liquidity reserve required amount
"FUNDING 2 LIQUIDITY A ledger maintained by the cash manager to record the
RESERVE LEDGER" balance from time to time of the Funding 2 liquidity
reserve fund, if any and, if the context so requires
"FUNDING 2 LIQUIDITY The meaning given to it on page 173
RESERVE PRINCIPAL
PAYMENT"
"FUNDING 2 LIQUIDITY The meaning given to it on page 172
RESERVE RATING
EVENT"
"FUNDING 2 LIQUIDITY The meaning given to it on page 173
RESERVE REQUIRED
AMOUNT"
"FUNDING 2 POST- The provisions and the order of priority set out in a
ENFORCEMENT PRIORITY schedule to the Funding 2 deed of charge in which
OF PAYMENTS" Funding 2 available revenue receipts, Funding 2
available principal receipts and all other monies,
income, receipts and recoveries of Funding 2 or the
Funding 2 security trustee or any receiver of Funding 2
and the proceeds of enforcement of the Funding 2
security are to be applied following service of a
Funding 2 intercompany loan enforcement notice or
otherwise following an enforcement of the Funding 2
security, as described under "CASHFLOWS -- DISTRIBUTION
OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS AND FUNDING 2
AVAILABLE REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE
FUNDING 2 SECURITY"
"FUNDING 2 PRE- The provisions and the order of priority of payments set
ENFORCEMENT out in a schedule to the Funding 2 deed of charge in
PRINCIPAL which Funding 2 available principal receipts will be
PRIORITY OF applied until enforcement of the Funding 2 security,
PAYMENTS" which is as described under "CASHFLOWS -- DISTRIBUTION
OF FUNDING 2 AVAILABLE PRINCIPAL RECEIPTS PRIOR TO
ENFORCEMENT OF THE FUNDING 2 SECURITY"
275
"FUNDING 2 PRE- The provisions and the order of priority of payments set
ENFORCEMENT REVENUE out in a schedule to the Funding 2 deed of charge in
PRIORITY OF which Funding 2 available revenue receipts will be
PAYMENTS" applied until enforcement of the Funding 2 security,
which is as described under "CASHFLOWS -- DISTRIBUTION
OF FUNDING 2 AVAILABLE REVENUE RECEIPTS"
"FUNDING 2 PRINCIPAL The ledger maintained by the Funding 2 cash manager
DEFICIENCY LEDGER" which will be established on the Funding 2 program date
and will be sub-divided into sub-ledgers corresponding
to the loan tranches made under the global intercompany
loan agreement in order to record losses allocated to
the global intercompany loan which are to be applied to
the notes or the application of Funding 2 available
principal receipts in paying interest on the loan
tranches and certain amounts ranking in priority thereto
in accordance with the Funding 2 pre-enforcement revenue
priority of payments
"FUNDING 2 PRINCIPAL The ledger on which receipts and payments of Funding 2
LEDGER" principal receipts (other than amounts recorded on the
Funding 2 cash accumulation ledger) will be recorded by
the cash manager
"FUNDING 2 PRINCIPAL The mortgage trustee principal receipts paid by the
RECEIPTS" mortgages trustee to Funding 2 on each distribution date
"FUNDING 2 PRIORITY As the context requires, any of the Funding 2 pre-
OF enforcement revenue priority of payments, the Funding 2
PAYMENTS" pre-enforcement principal priority of payments and/or
the Funding 2 post-enforcement priority of payments
"FUNDING 2 PROGRAM January 19, 2005
DATE"
"FUNDING 2 RESERVE The reserve fund established in the name of Funding 2 up
FUND" to an amount not exceeding the Funding 2 reserve maximum
amount as further described under "CREDIT STRUCTURE --
FUNDING 2 RESERVE FUND"
"FUNDING 2 RESERVE On any date, the lesser of:
FUND THRESHOLD"
(a) the target reserve required amount; or
(b) the highest amount which the adjusted Funding 2
reserve fund level has been since the first loan
payment date upon which interest is due and payable
in respect of loan tranches advanced or the closing
date relating to the then most recent issue of notes
"FUNDING 2 RESERVE The ledger maintained by the cash manager in the name of
LEDGER" Funding 2 to record the amount credited to the Funding 2
reserve fund and withdrawals from and deposits into the
Funding 2 reserve fund
"FUNDING 2 RESERVE As of any date of determination, the amount calculated
REQUIRED AMOUNT" in accordance with the formula set out on page 172
"FUNDING 2 REVENUE The ledger on which the cash manager records all monies
LEDGER" received and paid out by Funding 2 during an interest
period other than the Funding 2 principal receipts and
swap collateral standing to the credit of the Funding 2
swap collateral accounts
276
"FUNDING 2 SECURED The Funding 2 security trustee (and any receiver of
CREDITORS" Funding 2 appointed under the Funding 2 deed of charge),
the issuer, the corporate services provider in respect
of Funding 2, the account bank, the Funding 2 GIC
provider, the mortgages trustee, the cash manager and
any new Funding 2 secured creditor who accedes to the
Funding 2 deed of charge from time to time under a deed
of accession or supplemental deed
"FUNDING 2 SECURITY" The mortgages, charges, assignments, pledges and/or any
other security created by Funding 2 under or pursuant to
the Funding 2 deed of charge in favor of the Funding 2
security trustee for the benefit of the Funding 2
secured creditors
"FUNDING 2 SECURITY The Bank of New York, acting through its office at 48th
TRUSTEE" floor, One Canada Square, London E14 5AL or such other
person for the time being acting as Funding 2 security
trustee under the Funding 2 deed of charge
"FUNDING 2 SHARE" The current Funding 2 share of the trust property
calculated in accordance with the formula set out on
pages 122 and 123
"FUNDING 2 SHARE The current Funding 2 share percentage of the trust
PERCENTAGE" property calculated in accordance with the formula set
out on pages 122 and 123
"FUNDING 2 SWAP The accounts, if any, opened in the name of Funding 2
COLLATERAL for the purpose of holding swap collateral delivered to
ACCOUNTS" Funding 2 and maintained in accordance with the terms of
the cash management agreement
"FUNDING 2 The account in the name of Funding 2 held with the
TRANSACTION account bank and maintained subject to the terms of the
ACCOUNT" Funding 2 bank account agreement and the Funding 2 deed
of charge, or any additional or replacement account as
may, for the time being, be in place with the prior
consent of the Funding 2 security trustee
"FUNDING 2 Each of the following documents:
TRANSACTION
DOCUMENTS" (a) the mortgages trust deed;
(b) the mortgage sale agreement;
(c) the administration agreement;
(d) the Funding 2 deed of charge;
(e) the corporate services agreement;
(f) the bank account agreement;
(g) the Funding 2 bank account agreement;
(h) the Funding 2 guaranteed investment contract;
(i) the cash management agreement;
(j) the collection bank agreement;
(k) the global intercompany loan agreement;
(l) the controlling beneficiary deed;
(m) each other transaction document to which Funding 2 is
a party;
277
(n) each other deed, document, agreement, instrument or
certificate entered into or to be entered into by
Funding 2 under or in connection with any of the
documents set out in paragraphs (a) through (m) above
or the transactions contemplated in them
"FURTHER ADVANCE" For any mortgage loan, any advance of further money to
the relevant borrower following the making of the
initial advance of monies under the mortgage and which
is secured by the same mortgage, excluding the amount of
any retention in respect of the initial advance and
excluding any re-draw in respect of any flexible
mortgage loan or further draw in respect of any personal
secured loan. For the avoidance of doubt, an unregulated
personal secured loan is not a further advance in
relation to a mortgage loan (other than any other
unregulated personal secured loan) which is secured by
the same mortgage
"FURTHER The consideration in the form of cash payable by any
CONTRIBUTION" beneficiary to the mortgages trustee to increase the
Funding share, the Funding 2 share or, as the case may
be, the seller share of the trust property pursuant to
and in accordance with the terms of the mortgages trust
deed, but excluding any initial contribution or deferred
contribution paid by Funding or Funding 2
"FURTHER DRAW" The meaning given to it on page 72
"FURTHER DRAW The meaning given to it on page 127
CAPACITY"
"FURTHER DRAW The ledger on which further draws under personal secured
LEDGER" loans will be recorded by the cash manager
"FURTHER MORTGAGE Any mortgage loan which was assigned by the seller to
LOAN" the mortgages trustee after March 26, 2001 under the
terms of the mortgage sale agreement and referenced by
its mortgage loan identifier number and comprising the
aggregate of all principal sums, interest, costs,
charges, expenses and other monies (including all
further advances) due or owing with respect to that
mortgage loan under the relevant mortgage conditions by
a borrower on the security of a mortgage from time to
time outstanding or, as the context may require, the
borrower's obligations in respect of the same
"FURTHER MORTGAGE The portfolios of further mortgage loans, their related
PORTFOLIOS" security, accrued interest and other amounts derived
from such further mortgage loans that the seller
assigned to the mortgages trustee after March 26, 2001
"GLOBAL NOTE The note certificates representing the notes in global
CERTIFICATES" form
"HERITABLE CREDITOR" The meaning given to it on page 90
"HOLDER" In respect of the issuer, each person in whose name a
note is for the time being registered in the register
"HOLDINGS" Granite Finance Holdings Limited
"HOUSING INDICES" The UK Nationwide House Price Index and Halifax Price
Index
"IFRS" The meaning given to it on page 53
"IN ARREARS" For a mortgage account, occurs when one or more monthly
payments on that mortgage account have become due and
unpaid by a borrower
278
"INDEX LINKED A note, the interest basis of which is specified in the
INTEREST NOTE" applicable prospectus supplement as being index linked
interest
"INDIVIDUAL NOTE The note certificates representing the notes in
CERTIFICATES" definitive form
"INITIAL CLOSING March 26, 2001
DATE"
"INITIAL The consideration in the form of cash paid by Funding 2
CONTRIBUTION" to the mortgages trustee in respect of the Funding 2
share of the trust property pursuant to and in
accordance with the mortgages trust deed, which
contribution is to fund the payment to the seller by the
mortgages trustee of (and is equal to) the initial
purchase price in respect of the initial mortgage
portfolio or, as the case may be, the further mortgage
portfolio or (if any is payable) any new mortgage
portfolio assigned to the mortgages trustee and is to be
funded from the proceeds of a loan tranche, as the case
may be
"INITIAL MORTGAGE The portfolio of mortgage loans, their related security,
PORTFOLIO" accrued interest and other amounts, proceeds, powers,
rights, benefits and interests derived from such
mortgage loans that the seller assigned to the mortgages
trustee on March 26, 2001
"INITIAL PURCHASE That portion of the purchase price paid by the mortgages
PRICE" trustee to the seller on the initial closing date in
consideration for the assignment to the mortgages
trustee of the initial mortgage portfolio or that
portion of the purchase price (if any) payable by the
mortgages trustee to the seller on the relevant
assignment date in consideration for the assignment to
the mortgages trustee of the further mortgage portfolios
or any new mortgage portfolio, in each case in
accordance with the provisions of the mortgage sale
agreement
"INITIAL TRUST The sum of [GBP]100 that the corporate services provider
PROPERTY" settled on trust and held on trust absolutely as to both
capital and income by the mortgages trustee for the
benefit of the beneficiaries
"INSOLVENCY EVENT" For the seller, the administrator, the cash manager or
the issuer cash manager (each, for the purposes of this
definition, a "RELEVANT ENTITY"):
(a) an order is made or an effective resolution passed
for the winding up of the relevant entity or the
appointment of an administrator over the relevant
entity (except, in any such case, a winding-up or
dissolution for the purpose of a reconstruction or
amalgamation the terms of which have been previously
approved by the security trustee);
(b) the relevant entity ceases or threatens to cease to
carry on its business or stops payment or threatens
to stop payment of its debts or is deemed unable to
pay its debts within the meaning of section 123(a),
(b), (c) or (d) of the Insolvency Act 1986 (as
amended, modified or re-enacted) or becomes unable to
pay its debts as they fall due or the value of its
assets falls to less than the amounts of its
liabilities (taking into account, for both these
purposes, contingent and prospective liabilities) or
otherwise becomes insolvent;
279
(c) (i) proceedings are initiated against the relevant
entity under any applicable liquidation,
insolvency, composition, reorganization (other
than a reorganization where the relevant
entity is solvent) or other similar laws
(including, but not limited to, application or
pending application for an administration
order or presentation of a petition for a
winding up order), except where these
proceedings are being contested in good faith;
or
(ii) an administration order being granted or, an
administrative or other receiver,
administrator, liquidator or other similar
official is appointed in relation to the whole
or any substantial part of the undertaking or
assets of the relevant entity; or
(iii) a distress, execution, diligence or other
process is enforced upon the whole or any
substantial part of the undertaking or assets
of the relevant entity and in any of the
foregoing cases it is not discharged within 30
London business days; or
(iv) if the relevant entity initiates or consents
to judicial proceedings relating to itself
under any applicable liquidation,
administration, insolvency, reorganization or
other similar laws or makes a conveyance or
assignment for the benefit of its creditors
generally; and
in respect of Funding 2 or the issuer (each, for the
purposes of this definition, a "RELEVANT ENTITY")
means:
(a) except for the purposes of an amalgamation or
restructuring as described under the point
immediately following, the relevant entity ceases or
threatens to cease to carry on all or a substantial
part of its business or the relevant entity is deemed
unable to pay its debts within the meaning of section
123(1)(a), (b), (c) or (d) of the Insolvency Act 1986
(as that section may be amended, modified or re-
enacted) or becomes unable to pay its debts within
the meaning of section 123(2) of the Insolvency Act
1986 (as that section may be amended, modified or re-
enacted); or
(b) an order is made or an effective resolution is passed
for the winding up of the relevant entity or the
appointment of an administrator over the relevant
entity (except for the purposes of or pursuant to an
amalgamation, restructuring or merger previously
approved by the note trustee or the issuer security
trustee, as the case may be, or as approved in
writing by an extraordinary resolution (as defined in
the trust deed) of the class A noteholders); or
(c) (i) proceedings are otherwise initiated against
the relevant entity under any applicable
liquidation, insolvency, composition,
reorganization or other similar laws
(including, but not limited to, application or
pending application for an administration
order or presentation of a petition for a
winding up order) and
280
(except in the case of presentation of
application or pending application a petition
for an administration order) such proceedings
are not, in the opinion of the note trustee or
the issuer security trustee (as the case may
be), being disputed in good faith with a
reasonable prospect of success; or
(ii) an administration order being granted or an
administrative receiver or other receiver,
administrator, liquidator or other similar
official being appointed in relation to the
relevant entity or in relation to the whole or
any substantial part of the undertaking or
assets of the relevant entity; or
(iii) an encumbrancer taking possession of the whole
or any substantial part of the undertaking or
assets of the relevant entity, or a distress,
execution, diligence or other process being
levied or enforced upon or sued out against
the whole or any substantial part of the
undertaking or assets of the relevant entity
and such possession or process (as the case
may be) not being discharged or not otherwise
ceasing to apply within 30 days; or
(iv) the relevant entity initiating or consenting
to judicial proceedings relating to itself
under applicable liquidation, administration,
insolvency, composition, reorganization or
other similar laws or making a conveyance or
assignment for the benefit of its creditors
generally
"INTEREST In respect of any series and class of notes, the closing
COMMENCEMENT date of such notes or such other date as may be
DATE" specified as such in the applicable prospectus
supplement
In respect of any loan tranche, the closing date of the
related series and class of notes or such other date as
may be specified as such in the applicable loan tranche
supplement
"INTEREST In respect of any series and class of notes, the date(s)
DETERMINATION specified as such (if any) in the applicable prospectus
DATE" supplement
"INTEREST PERIOD" or In respect of any series and class of notes, (i) with
"FIXED INTEREST respect to the first note payment date for such notes,
PERIOD" the period from (and including) the applicable interest
commencement date to (but excluding) such first note
payment date, and (ii) thereafter, with respect to each
note payment date for such notes, the period from and
including the preceding note payment date to but
excluding such current note payment date
In respect of any loan tranche, (i) with respect to the
first loan payment date for such loan tranche, the
period from (and including) the applicable interest
commencement date to (but excluding) such first loan
payment date, and (ii) thereafter, with respect to each
loan payment date for such loan tranche, the period from
(and including) the preceding loan payment date to (but
excluding) such current loan payment date
281
"INTERIM CALCULATION The meaning given to it on page 121
PERIOD"
"INVESTMENT PLAN" For an interest-only loan, a repayment mechanism
selected by the borrower and intended to provide
sufficient funds to redeem the full principal of a
mortgage loan at maturity
"IRS" The US Internal Revenue Service
"ISA" An individual savings account within the Individual
Savings Account Regulations 1998 (as amended) and which
shelters investments in the account from income Tax or
capital gains tax
"ISDA DEFINITIONS" The 2000 ISDA Definitions, as published by the
International Swaps and Derivatives Association, Inc.
and as amended and updated as at the closing date of the
first series of notes
"ISSUANCE FEES" The fees payable by Funding 2 to the issuer under the
global intercompany loan agreement being an amount equal
to the expenses incurred by the issuer and Funding 2
(and paid by the issuer under the global intercompany
loan agreement) in connection with the issuance of
notes, the making of loan tranches and the acquisition
by Funding 2 of an additional share of the trust
property
"ISSUANCE TESTS" The tests set out in "ISSUANCE OF THE NOTES -- ISSUANCE"
"ISSUER" Granite Master Issuer plc
"ISSUER ACCOUNT Citibank, N.A., acting through its London branch at 5
BANK" Carmelite Street, London EC4Y 0PA or any other
authorized entity as the issuer may choose with the
prior written approval of the issuer security trustee
"ISSUER ARREARS The meaning given to it on page 157
TEST"
"ISSUER AVAILABLE The meaning given to it on page 161
PRINCIPAL
RECEIPTS"
"ISSUER BANK ACCOUNT The bank account agreement entered into on or about the
AGREEMENT" Funding 2 program date, as amended from time to time,
among the issuer, the issuer cash manager, the issuer
account bank and the issuer security trustee
"ISSUER CASH The issuer cash management agreement entered into on or
MANAGEMENT about the Funding 2 program date, as amended from time
AGREEMENT" to time, among the issuer cash manager, the issuer and
the issuer security trustee, as described further in
"CASH MANAGEMENT FOR THE ISSUER"
"ISSUER CASH Northern Rock or such other person or persons for the
MANAGER" time being acting, under the issuer cash management
agreement, as agent for the issuer and (following
enforcement of the issuer security) the issuer security
trustee for the purposes of, inter alia, managing all
cash transactions and maintaining certain ledgers on
behalf of the issuer and (following enforcement of the
issuer security) the issuer security trustee
"ISSUER DEED OF The deed of charge entered into on the Funding 2 program
CHARGE" date, as amended from time to time, between, the issuer,
the issuer security trustee and the issuer secured
creditors as at the Funding 2 program date including any
deeds of accession or supplements thereto, under which
the issuer charges the
282
issuer security in favor of the issuer secured
creditors, as described further under "SECURITY FOR THE
ISSUER'S OBLIGATIONS"
"ISSUER ENFORCEMENT A notice served by the note trustee for the acceleration
NOTICE" of the amounts outstanding in respect of the notes and
the enforcement of the issuer security following a note
event of default
"ISSUER EXPENSE SUB- The sub-ledger of the issuer revenue ledger relating to
LEDGER" certain expenses of the issuer
"ISSUER GIC ACCOUNT" The account in the name of the issuer held at Northern
Rock and maintained subject to the terms of the issuer
guaranteed investment contract, the issuer bank account
agreement and the issuer deed of charge, or any
additional or replacement account as may for the time
being be in place with the prior consent of the issuer
security trustee
"ISSUER GIC Northern Rock or any other person or persons as are for
PROVIDER" the time being the issuer GIC provider under the
applicable issuer guaranteed investment contract
"ISSUER GUARANTEED The guaranteed investment contract entered into on the
INVESTMENT Funding 2 program date, as amended, restated
CONTRACT" supplemented or otherwise modified from time to time,
among the issuer, the issuer GIC provider and others,
under which the issuer GIC provider, agrees to pay the
issuer a guaranteed rate of interest on the balance from
time to time of the issuer GIC account
"ISSUER PRINCIPAL The ledger on which the issuer cash manager records
LEDGER" issuer available principal receipts received and paid
out by the issuer
"ISSUER POST- The provisions and the order of priority set out in a
ENFORCEMENT schedule to the issuer deed of charge in which all
PRIORITY OF issuer available revenue receipts, issuer available
PAYMENTS" principal receipts and all other monies, income,
receipts and recoveries of the issuer or the issuer
security trustee or any receiver of the issuer security
are to be applied following service of an issuer
enforcement notice or otherwise following an enforcement
of the issuer security which on the Funding 2 program
date will be as described under "CASHFLOWS --
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS AND
ISSUER AVAILABLE REVENUE RECEIPTS FOLLOWING ENFORCEMENT
OF THE ISSUER SECURITY"
"ISSUER PRE- The provisions and the order of priority of payments set
ENFORCEMENT out in a schedule to the issuer cash management
PRINCIPAL PRIORITY agreement in which the issuer available principal
OF receipts will be applied until enforcement of the issuer
PAYMENTS" security, which on the Funding 2 program date will be as
described under "CASHFLOWS -- DISTRIBUTION OF ISSUER
AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY AND/OR OCCURRENCE OF A TRIGGER EVENT"
"ISSUER PRE- The provisions and the order of priority of payments set
ENFORCEMENT out in a schedule to the issuer cash management
REVENUE PRIORITY OF agreement in which the issuer available revenue receipts
PAYMENTS" will be applied until enforcement of the issuer
security, which on the Funding 2 program date will be as
described under "CASHFLOWS -- DISTRIBUTION OF ISSUER
AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY"
283
"ISSUER PRIORITY OF An issuer pre-enforcement revenue priority of payments,
PAYMENTS" the issuer pre-enforcement principal priority of
payments and the issuer post-enforcement priority of
payments
"ISSUER RESERVE The reserve fund established in the name of the issuer
FUND" up to an amount not exceeding the issuer reserve
required amount as further described under "CREDIT
STRUCTURE -- ISSUER RESERVE FUND".
"ISSUER RESERVE The ledger maintained by the issuer cash manager to
LEDGER" record the amount credited to the issuer reserve fund
and withdrawals from and deposits into the issuer
reserve fund.
"ISSUER RESERVE As of any date of determination, an amount calculated in
MINIMUM accordance with the formula set out on page 170
AMOUNT"
"ISSUER RESERVE The meaning given to it on page 169
PRINCIPAL
PAYMENT"
"ISSUER RESERVE As of any date of determination, an amount calculated in
REQUIRED accordance with the formula set out on page 168
AMOUNT"
"ISSUER RESERVE The meaning given to it on page 170
REQUIREMENT"
"ISSUER REVENUE The ledger on which the issuer cash manager records
LEDGER" issuer available revenue receipts received and paid out
by the issuer
"ISSUER SECURED The issuer security trustee (and any receiver appointed
CREDITORS" under the issuer deed of charge), the note trustee, the
issuer swap providers, any start-up loan provider the
corporate services provider in respect of the issuer,
the issuer account bank, the issuer cash manager, the
paying agents, the agent bank, the transfer agent, the
registrar and the noteholders and any new issuer secured
creditor who accedes to the issuer deed of charge from
time to time under a deed of accession or a supplemental
deed
"ISSUER SECURITY" The mortgages, charges, assignments, pledges and/or any
other security created by the issuer under the issuer
deed of charge in favor of the issuer security trustee
for the benefit of the issuer secured creditors
"ISSUER SWAP The ISDA master agreements, schedules thereto and
AGREEMENTS" confirmations thereunder relating to the issuer swaps to
be entered into on or about each closing date, and any
credit support annexes or other credit support documents
entered into at any time, as amended from time to time,
among the issuer and the applicable issuer swap provider
and/or any credit support provider and includes any
additional and/or replacement issuer swap agreement
entered into by the issuer from time to time in
connection with the notes
"ISSUER SWAP The accounts, if any, opened in the name of the issuer
COLLATERAL for the purpose of holding swap collateral delivered to
ACCOUNTS" the issuer and maintained in accordance with the terms
of the issuer cash management agreement
"ISSUER SWAP In relation to an issuer swap agreement an amount equal
EXCLUDED to:
TERMINATION AMOUNT"
(a) the amount of any swap termination payment due and
payable to the relevant swap provider as a result of
a swap provider default in relation to such issuer
swap provider
284
less
(b) the swap replacement premium (if any) received by the
issuer upon entry by the issuer into an agreement to
replace such swap agreement which has terminated as a
result of such swap provider default
"ISSUER SWAP The institutions identified in respect of each issuer
PROVIDERS" swap in the prospectus supplement related to the
relevant series and class of notes
"ISSUER SWAPS" The swap transactions which will entitle the issuer to
receive and pay amounts under the global intercompany
loan agreement in sterling and to receive and pay
amounts under the notes not denominated in sterling in
the applicable specified currency and/or which will
hedge the issuer's payment obligations against movements
in interest rates where there is a possible difference
between an interest rate applicable to amounts received
by the issuer under a loan tranche and the interest rate
applicable to amounts to be paid by the issuer in
respect of the related series and class of notes, as
described further under "THE SWAP AGREEMENTS -- THE
ISSUER SWAPS"
"ISSUER TRANSACTION The day to day bank accounts of the issuer, held with
ACCOUNT" the issuer account bank as at the Funding 2 program date
or that may be opened, with the prior approval of the
issuer security trustee, after the Funding 2 program
date
"LEAD UNDERWRITERS" The institutions specified in the prospectus supplement
relating to any series and class of notes
"LENDING CRITERIA" The lending criteria of the seller, or that other
criteria as would be acceptable to a reasonable, prudent
mortgage lender
"LIBOR" The London Interbank Offered Rate for deposits in the
relevant currency, as determined by the agent bank in
accordance with the paying agent and agent bank
agreement
"LLOYDS TSB" Lloyds TSB Bank plc acting through its office at City
Office, Bailey Drive, Gillingham Business Park, Kent ME8
0LS, England
"LLOYDS TSB The account of the administrator held at Lloyds TSB as
COLLECTION may be utilized from time to time for the purpose of
ACCOUNT" collecting amounts which are paid to the seller on the
mortgage loans and/or the related security
"LOAN PAYMENT In respect of a loan tranche, the monthly payment
DATE" date(s) specified in the loan tranche supplement for the
payment of interest and/or principal, subject to the
terms of the global intercompany loan agreement
"LOAN TRANCHE The designated rating assigned to a loan tranche which
RATING" corresponds to the rating of the series and class of
notes when first issued to provide funds for that loan
tranche so that, for example, any AAA loan tranche has a
loan tranche rating of "AAA" to reflect the ratings of
AAA/Aaa/AAA then assigned to the corresponding series
and class of notes
"LOAN TRANCHES" The AAA loan tranches, the AA loan tranches, the A loan
tranches, the BBB loan tranches and the BB loan
tranches, being the advances made by the issuer to
Funding 2 pursuant
285
to the global intercompany loan agreement, each being
funded from proceeds received by the issuer from the
issue of a series and class of notes
"LOAN TRANCHE In relation to any loan tranche, means the document
SUPPLEMENT" between, amongst others, Funding 2 and the issuer
recording the principal terms of such loan tranche;
"LONDON BUSINESS A day (other than a Saturday, Sunday or public holiday)
DAY" on which banks are generally open for business in London
"LONDON STOCK London Stock Exchange plc
EXCHANGE"
"LOSSES" The realized losses experienced on the mortgage loans in
the mortgage portfolio
"LOSSES LEDGER" The ledger created and maintained by the cash manager
under the cash management agreement to record the losses
on the mortgage portfolio
"LTV RATIO" or "LOAN In respect of any mortgage loan assigned to the
TO VALUE RATIO" mortgages trust, the ratio of the outstanding balance of
such mortgage loan to the value of the mortgaged
property securing such mortgage loan; and in respect of
the seller's decision as to whether to make a mortgage
loan to a prospective borrower and for purposes of
determining whether a MIG policy is necessary in
connection with a mortgage loan, the ratio of the
outstanding balance of such mortgage loan to the lower
of the purchase price or valuation of the mortgaged
property securing such mortgage loan as determined by
the relevant valuation by the seller
"LTV TESTS" Two tests which assign a credit enhancement value (i) to
each mortgage loan in the mortgage portfolio based on
its current LTV ratio and the amount of mortgage
indemnity cover on that mortgage loan, and (ii)
calculated to include any related unsecured portion of a
mortgage loan in respect of the Together product based
on its current LTV ratio and the amount of mortgage
indemnity cover on that mortgage loan. The weighted
average credit enhancement value for the mortgage
portfolio is then determined
"MANDATE HOLDERS" The meaning given to it on page 83
"MARGIN" In respect of any series and class of notes, the amount
specified as such in the applicable prospectus
supplement
"MASTER DEFINITIONS Together, the master definitions schedule dated January
SCHEDULE" 19, 2005, as amended from time to time, and the issuer
master definitions schedule dated January 19, 2005, as
amended from time to time, which are schedules of
definitions used in the transaction documents
"MAXIMUM RATE OF In respect of any series and class of notes, the rate of
INTEREST" interest specified as such in the applicable prospectus
supplement
"MCOB" The meaning given to it on page 48
"MIG POLICIES" The mortgage indemnity guarantee policies on certain of
the mortgage loans which are intended to cover losses
which may be incurred following repossession and sale of
a mortgaged property from a borrower, and which were
issued by NORMIC
286
"MINIMUM RATE OF In respect of any series and class of notes, the rate of
INTEREST" interest specified as such in the applicable prospectus
supplement
"MINIMUM SELLER An amount included in the seller share which is
SHARE" calculated in accordance with the mortgages trust deed
as further described under "THE MORTGAGES TRUST"
"MONEY MARKET NOTES" Any series and/or class of notes issued by the issuer
that are designated as "MONEY MARKET NOTES"
"MONTHLY CPR" The meaning given to it on page 151
"MONTHLY PAYMENT" For any mortgage loan, the amount a borrower is required
to pay on a monthly payment date
"MONTHLY PAYMENT (a) In respect of any mortgage loan, the date in each
DATE" month on which the relevant borrower is required to
make a payment of interest and, if applicable,
principal, for that mortgage loan, as required by the
applicable mortgage conditions
(b) in respect of the issuer (and each series of class of
notes) and Funding 2 (and each loan tranche), the
date falling on the 20th day of each calendar month
subject to the appropriate business day convention
(if any) specified (in relation to a series and class
of notes) in the applicable prospectus supplement or
(in relation to a loan tranche) in the applicable
loan tranche supplement
"MOODY'S" Moody's Investors Services Limited, including any
successor to its rating business
"MOODY'S PORTFOLIO A certain percentage resulting from the application of
VARIATION TEST the Moody's portfolio variation test
VALUE"
"MOODY'S PORTFOLIO The calculation methodology provided by Moody's to the
VARIATION TEST" administrator from time to time for the purpose of
calculating the Moody's portfolio variation test value
"MORTGAGE" (1) For any mortgage loan in the mortgage portfolio
(other than regulated personal secured loans), the
first priority charge by way of legal mortgage (in
relation to English mortgage loans) or first priority
standard security (in relation to Scottish mortgage
loans), in each case which secures the repayment of
that mortgage loan including the mortgage conditions
applicable to it; and
(2) For any regulated personal secured loan in the
mortgage portfolio, the second or lower ranking
charge by way of legal mortgage (in relation to
English mortgage loans) or standard security (in
relation to Scottish mortgage loans) over the same
property that secures the relevant borrower's
existing mortgage loan, in each case which secures
the repayment of that regulated personal secured
loan, including the mortgage conditions applicable to
it
287
"MORTGAGE ACCOUNT" As the context requires, either (1) all mortgage loans
secured on the same mortgaged property and thereby
forming a single mortgage account or (2) an account
maintained by the administrator in respect of a
particular mortgage loan to record all amounts due in
respect of that mortgage loan (whether by way of
principal, interest or otherwise) and all amounts
received in respect thereof
"MORTGAGE For any mortgage loan, the terms and conditions
CONDITIONS" applicable to that mortgage loan and its related
security as set out in the seller's relevant "MORTGAGE
CONDITIONS" booklet and the seller's relevant general
conditions, and in relation to each as from time to time
varied by the relevant mortgage loan agreement and the
relevant mortgage deed; and
"MORTGAGE DEED" In respect of any mortgage, the deed creating that
mortgage including, unless the context otherwise
requires, the mortgage conditions applicable to that
mortgage
"MORTGAGE LOAN" Any mortgage loan (including, for the avoidance of
doubt, any personal secured loan) and any permitted
replacement mortgage loan which is assigned by the
seller to the mortgages trustee from time to time under
the terms of the mortgage sale agreement and referenced
by its mortgage loan identifier number and comprising
the aggregate of all principal sums, interest, costs,
charges, expenses and other monies (including all
further advances) due or owing with respect to that
mortgage loan (or permitted replacement mortgage loan,
as applicable) under the relevant mortgage conditions by
a borrower on the security of a mortgage from time to
time outstanding or, as the context may require, the
borrower's obligations in respect of the same
"MORTGAGE LOAN For each mortgage loan, the file or files (including
FILES" files kept in microfiche format or similar electronic
data retrieval system) containing correspondence between
the borrower and the seller and including the mortgage
documentation applicable to that mortgage loan, each
letter of offer for that mortgage loan and other
relevant documents
"MORTGAGE PORTFOLIO" The initial mortgage portfolio and, the further mortgage
portfolios as of any date of determination taking
account of, among other things, amortization of mortgage
loans in that portfolio and the addition and/or removal
of any mortgage loans to or from that portfolio as of
such date of the most recent assignment
"MORTGAGE RELATED As defined in the United States Secondary Mortgage
SECURITY" Markets Enhancement Act 1984, as amended
"MORTGAGE SALE The mortgage sale agreement entered into on March 26,
AGREEMENT" 2001, as amended from time to time, among the seller,
the mortgages trustee, Funding, Funding 2, the security
trustee and the Funding 2 security trustee regarding the
assignment of the mortgage portfolio to the mortgages
trustee including any documents ancillary thereto, and
as further described under "ASSIGNMENT OF THE MORTGAGE
LOANS AND THEIR RELATED SECURITY"
288
"MORTGAGED PROPERTY" For any mortgage loan, the freehold or leasehold
property in England and Wales or (as applicable) the
heritable or long leasehold property in Scotland and (in
each case) all rights and security attached or
appurtenant or related thereto and all buildings and
fixtures on the property which are subject to the
mortgage securing repayment of that mortgage loan
"MORTGAGEE" For any mortgage loan, the person for the time being who
is entitled to exercise the rights of the mortgagee or
(in Scotland) heritable creditor under the relevant
mortgage securing repayment of that mortgage loan
"MORTGAGES" The mortgages contained in the mortgage portfolio
"MORTGAGES TRUST" The bare trust of the trust property as to both capital
and income, held by the mortgages trustee on trust
absolutely for Funding, Funding 2 and the seller under
the mortgages trust deed so that each beneficiary has an
undivided beneficial interest in it
"MORTGAGES TRUST The order of priority for applying mortgages trustee
ALLOCATION OF available revenue receipts as set forth on page 128
REVENUE RECEIPTS"
"MORTGAGES TRUST The mortgages trust deed entered into on March 26, 2001,
DEED" as amended from time to time, among the mortgages
trustee, Funding, Funding 2, the seller and the
corporate services provider
"MORTGAGES TRUSTEE" Granite Finance Trustees Limited
"MORTGAGES TRUSTEE The meaning given to it on page 128
AVAILABLE REVENUE
RECEIPTS"
"MORTGAGES TRUSTEE The mortgages trustee GIC account and the mortgages
BANK ACCOUNTS" trustee transaction account
"MORTGAGES TRUSTEE The account in the name of the mortgages trustee held at
GIC ACCOUNT" Northern Rock and maintained subject to the terms of the
mortgages trustee guaranteed investment contract and the
bank account agreement or any additional or replacement
account as may for the time being be in place with the
prior consent of Funding, Funding 2, the seller, the
security trustee and the Funding 2 security trustee
"MORTGAGES TRUSTEE Northern Rock or any other person or persons as are for
GIC PROVIDER" the time being the mortgages trustee GIC provider under
the applicable mortgages trustee guaranteed investment
contract
"MORTGAGES TRUSTEE The guaranteed investment contract entered into on May
GUARANTEED 26, 2004, as amended, restated, supplemented or
INVESTMENT otherwise modified from time to time, among Funding,
CONTRACT" Funding 2, the Funding 2 GIC provider and others, in
each case under which the previous mortgages trustee GIC
provider or the mortgages trustee GIC provider, as
applicable, has agreed to pay the mortgages trustee a
guaranteed rate of interest on the balance of the
mortgages trustee GIC account
"MORTGAGES TRUSTEE The order in which the cash manager applies principal
PRINCIPAL PRIORITY receipts on the mortgage loans on each distribution
OF PAYMENTS" date, as set out in the mortgages trust deed
289
"MORTGAGES TRUSTEE On any distribution date, any mortgages trustee retained
PRINCIPAL RECEIPTS" principal receipt plus the principal receipts received
by the mortgages trustee in the immediately preceding
trust calculation period which may be distributed by the
mortgages trustee
"MORTGAGES TRUSTEE The meaning given to it on page 132
RETAINED PRINCIPAL
RECEIPTS"
"MORTGAGES TRUSTEE The order in which the cash manager applies the
REVENUE PRIORITY OF mortgages trustee available revenue receipts on each
PAYMENTS" distribution date, as set out in the mortgages trust
deed
"MORTGAGES TRUSTEE The account in the name of the mortgages trustee held at
TRANSACTION the account bank and maintained subject to the terms of
ACCOUNT" the bank account agreement or any additional or
replacement bank account of the mortgages trustee as may
for the time being be in place with the prior consent of
the security trustee
"N(M)" The meaning given to it on page 47
"NEW BASEL CAPITAL The meaning given to it on page 52
ACCORD"
"NEW MORTGAGE LOANS" Mortgage loans, other than the mortgage loans assigned
on or before the Funding 2 program date, which the
seller may assign, from time to time, to the mortgages
trustee under the terms of the mortgage sale agreement
"NEW MORTGAGE Any portfolio of new mortgage loans, the mortgages and
PORTFOLIO" new related security, any accrued interest and any other
amounts, proceeds, powers, rights, benefits and
interests derived from the new mortgage loans and/or the
new related security, in each case which are to be
assigned by the seller to the mortgages trustee after
the Funding 2 program date under the mortgage sale
agreement but excluding any mortgage loan and its
related security which has been redeemed in full on or
before the relevant assignment date
"NEW RELATED The security for the new mortgage loans (including the
SECURITY" mortgages) which the seller may assign to the mortgages
trustee under the mortgage sale agreement
"NEW TRUST PROPERTY" As at any assignment date after the Funding 2 program
date, any and all new mortgage portfolios assigned by
the seller to the mortgages trustee on an assignment
date, or as at any distribution date, any and all new
mortgage portfolios assigned by the seller to the
mortgages trustee during the immediately preceding trust
calculation period
"NEW UK GAAP" The meaning given to it on page 53
"NON-ASSET TRIGGER The meaning given to it on page 130
EVENT"
"NON-CASH RE-DRAW" An authorized underpayment or a payment holiday under a
flexible mortgage loan included in the mortgages trust,
which will result in the seller being required to pay to
the mortgages trustee an amount equal to the unpaid
interest associated with that authorized underpayment or
payment holiday
"NON-PERFORMING A mortgage loan that is in arrears and for which the
MORTGAGE related borrower has not made any payment within any of
LOAN" the three consecutive calendar months prior to the date
of determination
290
"NORMIC" Northern Rock Mortgage Indemnity Company Limited
"NORTHERN ROCK" Northern Rock plc
"NOTE CERTIFICATES" The global note certificates and the individual note
certificates
"NOTE EVENT OF An event of default under the provisions of the notes
DEFAULT"
"NOTE PAYMENT In respect of a series and class of notes, the monthly
DATE" payment date(s) specified in the prospectus supplement
for the payment of interest and/or principal subject to
the terms and conditions of the notes
"NOTE TRUSTEE" The Bank of New York, acting through its office at 48th
Floor, One Canada Square, London E14 5AL, or such other
person for the time being acting as note trustee under
the trust deed
"NOTEHOLDERS" The holders of the class A notes, the class B notes, the
class M notes, the class C notes and the class D notes
of any series
"NOTES" Includes all of the class A notes, the class B notes,
the class M notes, the class C notes and the class D
notes of the issuer
"NOTICE" In case of notice being given to the noteholders, a
notice duly given in accordance with the relevant
conditions set forth in the notes
"NRG" Northern Rock (Guernsey) Limited
"NR START-UP LOAN The agreement entered into on or about the Funding 2
AGREEMENT" program date, as amended from time to time, between the
issuer, Northern Rock plc and the issuer security trustee
relating to the provision of the start-up loan tranches
to the issuer
"OID" Original issue discount
"OID REGULATIONS" The US Treasury regulations relating to original issue
discount
"OFFER CONDITIONS" The terms and conditions applicable to a specific
mortgage loan as set out in the relevant offer letter to
the borrower
"OFFICIAL LIST" The official list maintained by the UK Listing Authority
"OFT" Office of Fair Trading
"OMBUDSMAN" The UK Financial Ombudsman Service
"ORIGINAL BULLET A loan tranche which has, at any time, been a bullet
LOAN TRANCHE" loan tranche, whether or not the step-up date in respect
of such loan tranche has occurred
"ORIGINAL BULLET A note which has, at any time, been a bullet redemption
REDEMPTION note, whether or not the step-up date in respect of such
NOTE" note has occurred
"ORIGINAL PASS- A loan tranche which, at the time it was advanced, was a
THROUGH pass-through loan tranche
LOAN TRANCHE"
"PASS-THROUGH LOAN A loan tranche which has no specified repayment dates
TRANCHE" other than the final repayment date. On the occurrence
of a date specified for a bullet loan tranche, a
scheduled repayment loan tranche or a controlled
repayment loan tranche in the applicable loan tranche
supplement or if a step-up date in relation to such loan
tranche occurs or if a pass-through trigger event
occurs, then such loan tranche will be deemed to be a
pass-through loan tranche
291
"PASS-THROUGH NOTES" Any series and class of notes which has no specified
redemption dates other than a final maturity date. On
the occurrence of a date specified for a series and
class of bullet redemption notes, scheduled redemption
notes or a controlled amortization notes in the
applicable prospectus supplement or if a step-up date in
relation to such series and class of notes occurs or if
a pass-through trigger event occurs then such notes will
be deemed to be pass-through notes
"PASS-THROUGH The meaning given to it on page 152
REQUIREMENT"
"PASS-THROUGH Any of the following events:
TRIGGER EVENT"
(a) a trigger event;
(b) the service of an issuer enforcement notice by the
note trustee on the issuer; or
(c) the service of an Funding 2 intercompany loan
enforcement notice by the Funding 2 security trustee
on the issuer
"PAYING AGENT AND The paying agent and agent bank agreement entered into
AGENT BANK on or about the Funding 2 program date, as amended from
AGREEMENT" time to time, among the issuer, the note trustee, the
issuer security trustee, the principal paying agent, the
paying agents, the transfer agent, the registrar and the
agent bank
"PAYING AGENTS" The principal paying agent and the US paying agent
"PAYMENT BUSINESS A day which is:
DAY"
(i) a day on which a day on which commercial banks and
foreign exchange markets settle payments and are open
for general business (including dealing in foreign
exchange and foreign currency deposits) in:
(a) the relevant place of presentation;
(b) London
(c) any additional financial centre specified in the
applicable Note Supplement; and
(ii) either (1) in relation to any sum payable in a
specified currency other than euro, a day on
which commercial banks and foreign exchange
markets settle payments and are open for general
business (including dealing in foreign exchange
and foreign currency deposits) in the principal
financial centre of the country of the relevant
specified currency (if other than London and any
additional business centre) and which if the
specified currency is Australian dollars or New
Zealand dollars shall be Sydney and Auckland,
respectively or (2) in relation to any Notes
denominated or payable in euro, a day on which
the Trans-European Automated RealTime Gross
Settlement Express Transfer (TARGET) System is
open; and
(iii) in the case of any payment in respect of a global
note denominated in a specified currency other
than US dollars and registered in the name of DTC
or its nominee and in respect of which an
accountholder of DTC (with an
292
interest in such global note) has elected to
receive any part of such payment in US dollars, a
day on which commercial banks are not authorised
or required by law or regulation to be closed in
New York
"PAYMENT HOLIDAY" The meaning given to it on page 78
"PERMITTED PRODUCT The exchange by a borrower of its then current mortgage
SWITCH" loan product for a different mortgage loan product
offered by the seller, which may be made only if the new
mortgage loan for which the prior mortgage loan is to be
exchanged is a permitted replacement mortgage loan
"PERMITTED As applicable, a bullet redemption date, a scheduled
REDEMPTION redemption date, a controlled redemption date or the
DATE" date on or after which principal repayments of pass-
through notes may be made
"PERMITTED The meaning given to it on page 112
REPLACEMENT
MORTGAGE LOAN"
"PENSION PLAN" A financial plan arranged by a borrower to provide for
that borrower's expenses during retirement
"PERSONAL SECURED The meaning given to it on page 71 and is either a
LOAN" regulated personal secured loan or an unregulated
personal secured loan
"PFIC" A passive foreign investment company as more fully
described under "MATERIAL UNITED STATES TAX
CONSEQUENCES"
"PLANS" The meaning given to it on page 246
"POST-ENFORCEMENT The agreement entered into on or about the Funding 2
CALL program date, as amended from time to time, under which
OPTION AGREEMENT" the note trustee agrees on behalf of the noteholders,
that in specified circumstances, GPCH Limited may call
for the notes to be transferred to it
"POST-ENFORCEMENT GPCH Limited
CALL OPTION HOLDER"
"PREVIOUS MORTGAGES Lloyds TSB Bank plc acting through its office at
TRUSTEE GIC Financial Markets Division, 25 Monument Street, London
PROVIDER" EC3R 8BQ as the mortgages trustee GIC provider under the
applicable mortgages trustee guaranteed investment
contract
"PRINCIPAL AMOUNT For each series and class of notes and as of any date of
OUTSTANDING" determination, the initial principal amount of such
series and class of notes less (in each case) the
aggregate amount of all principal payments in respect of
such series and notes that have been paid since the
closing date for such series and class notes and on or
prior to that determination date
"PRINCIPAL LEDGER" The ledger maintained by the cash manager on behalf of
the mortgages trustee under the cash management
agreement to record any mortgages trustee retained
principal receipts plus principal receipts on the
mortgage loans and payments of principal from the
mortgages trustee GIC account to Funding, Funding 2 and
the seller on each distribution date. Together the
principal ledger and the revenue ledger reflect the
aggregate of all amounts of cash standing to the credit
of the mortgages trustee in the mortgages trustee bank
accounts
293
"PRINCIPAL PAYING Citibank, N.A., acting through its London branch at 5
AGENT" Carmelite Street, London EC4Y 0PA, or such other person
for the time being acting as principal paying agent
under the paying agent and agent bank agreement
"PRINCIPAL RECEIPTS" Any payment in respect of principal received in respect
of any mortgage loan, whether as all or part of a
monthly payment, on redemption (including partial
redemption), on enforcement or on the disposal of that
mortgage loan or otherwise (including payments pursuant
to any insurance policy) and which may include the
amount of any overpayment in respect of any non-flexible
mortgage loan, but only to the extent permitted by the
mortgages trust deed, and which may also include the
amount of any further contribution made by Funding,
Funding 2 from time to time
"PRODUCT SWITCH" The meaning given to it on page 111
"PROGRAM" Means the asset-backed note program established by or
otherwise contemplated in the programme agreement and
the trust deed
"PROPERTIES IN The insurance policy issued by AXA General Insurance
POSSESSION Limited which provides the seller with rebuilding
POLICY" insurance when the seller takes possession of a property
from a default borrower
"PROGRAMME The agreement entered into on or around the Funding 2
AGREEMENT" program date, as amended from time to time, between,
amongst others, the issuer, Funding 2 and the dealers
named therein (or deemed named therein)
"PROGRAMME RESERVE As of any date of determination, an amount calculated in
REQUIRED AMOUNT" accordance with the formula set out on page 170
"PROGRAMME RESERVE Has the meaning given to it on page 170
REQUIRED PERCENTAGE"
"PROSPECTUS" This prospectus dated January 19, 2005 relating to the
issue of US notes as supplemented by the prospectus
supplement relating to each series and class of notes
"PROSPECTUS Each prospectus supplement relating to one or more
SUPPLEMENT" series and classes of notes issued on a single closing
date
"RATE OF INTEREST" In respect of any series and class of notes, the rate or
and"RATES OF rates (expressed as a percentage per annum) on interest
INTEREST" payable in respect of such notes specified in the
applicable prospectus supplement or calculated and
determined in accordance with the applicable prospectus
supplement
"RATING" Any rating assigned by the rating agencies to the notes
or new notes
"RATING AGENCIES" Moody's, Standard & Poor's and Fitch
"REAL PROPERTY" Freehold or leasehold property in England and Wales and
heritable or long leasehold property in Scotland, and
any estate or interest therein, and any reference to
"REAL PROPERTY" includes a reference to all rights and
security from time to time attached, appurtenant or
related thereto and all buildings and fixtures from time
to time thereon
294
"REASONABLE, PRUDENT A reasonably prudent prime residential mortgage 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 issuer security trustee
under the issuer deed of charge and/or the Funding 2
security trustee under the Funding 2 deed of charge
"RECOGNISED STOCK The meaning given to it on page 237
EXCHANGE"
"RECORD DATE" The fifteenth day before the due date for any payment on
the notes
"RE-DRAW" Either a cash re-draw or a non-cash re-draw
"RE-DRAWS LEDGER" The ledger maintained by the cash manager in the name of
the mortgages trustee under the cash management
agreement to record re-draws on flexible mortgage loans
from time to time and will be sub-divided into two sub-
ledgers to record cash redraws and non-cash re-draws
"REFERENCE PRICE" In respect of any series and class of Notes, the price
specified as such in the applicable prospectus
supplement
"REFERENCE RATE" In respect of any series of notes, the rate specified as
such in the applicable prospectus supplement
"RE-FIXED MORTGAGE As at any given date, a mortgage loan which on or before
LOAN" that date had been a fixed rate mortgage loan but the
fixed period had come to an end, but as at or before
that given date, the interest charged under that
mortgage loan was again fixed for another fixed period
by the seller or the administrator, as the case may be
(following an election by the borrower) in accordance
with the original terms of the fixed rate mortgage loan
"REG S NOTES" The notes admitted to the official list maintained by
the UK Listing Authority and admitted to trading on the
London Stock Exchange's market for listed securities
(but not including the US notes)
"REGISTER" The register of noteholders kept by the registrar and
which records the identity of each noteholder and the
number of notes which each noteholder owns
"REGISTERED LAND" Land in England and Wales, title to which is registered
at the Land Registry
"REGISTRAR" Citibank, N.A., acting through its London branch at 5
Carmelite Street, London EC4Y 0PA
"REGULATED MORTGAGE The meaning given to it on page 47
CONTRACT"
"REGULATED PERSONAL The meaning given to it on page 72
SECURED LOAN"
"REINSTATEMENT" For a mortgaged property that has been damaged,
repairing or rebuilding that mortgaged property to the
condition that it was in before the occurrence of the
damage
295
"RELATED SECURITY" The security for the repayment of a mortgage loan
including the relevant mortgage and all other matters
applicable to the mortgage loan, acquired as part of the
mortgage portfolio assigned to the mortgages trustee
"RELEVANT DEPOSIT The sum of the following:
AMOUNT"
(a) either:
(i) prior to the step-up date in respect of any notes
(pursuant to the terms and conditions thereof) or
if the step-up date has occurred in respect of
any notes (pursuant to the terms and conditions
thereof) and the option to redeem any notes has
been exercised by the issuer, an amount equal to
the aggregate of:
the Funding share of the trust property (as most
recently calculated)/the Funding share of the
trust property on the relevant closing date x the
outstanding balance in the Funding reserve fund
plus the outstanding balance in the Funding
(issuer) reserve fund (as most recently
calculated); and
the Funding 2 share of the trust property (as
most recently calculated)/the Funding 2 share of
the trust property on the relevant closing date x
the outstanding balance in the Funding 2 reserve
fund plus the outstanding balance in the issuer
reserve fund (as most recently calculated); or
(ii) if the issuer does not exercise its option to
redeem its notes on the relevant step-up date
pursuant to the terms and conditions thereof, an
amount equal to the aggregate of:
the Funding share of the trust property (as most
recently calculated)/the Funding share of the
trust property on the relevant closing date x the
outstanding balance in the Funding reserve fund
plus the outstanding balance in the Funding
(issuer) reserve fund (as most recently
calculated) x 2; and
the Funding 2 share of the trust property (as
most recently calculated)/the Funding 2 share of
the trust property on the relevant closing date x
the outstanding balance in the Funding 2 reserve
fund plus the outstanding balance in the issuer
reserve fund (as most recently calculated) x 2;
(b) any amounts standing to the credit of the FUNDING GIC
ACCOUNT AND THE Funding 2 GIC account which will be
applied on the next following date on which amounts
are due under any Funding intercompany loan or any
Funding 2 intercompany loan which in turn will result
in any notes having ratings of "AAA", "AA" or "A-1+"
from Standard & Poor's to be redeemed in whole or in
part;
(c) any amounts standing to the credit of the mortgages
trustee GIC account which will be distributed to
Funding and/or Funding 2 on the next following
distribution date and which will be applied by
Funding and/or Funding 2 on
296
the next following date on which amounts are due
under any Funding intercompany loan or any Funding 2
intercompany loan which in turn will result in any
notes having ratings of "AAA", "AA" or "A-1+" from
Standard & Poor's to be redeemed in whole or in part;
and
(d) any other amounts standing to the credit of accounts
maintained by the mortgages trustee, Funding, Funding
2 or the issuer with a bank and which would otherwise
be required by Standard & Poor's to be rated "A-1+";
less any amounts invested in authorized investments
or maintained in accounts at a bank rated at least
"A-1+" by Standard & Poor's
"RELEVANT Each distribution date or the date on which the mortgage
DISTRIBUTION DATE" trust terminates
"RELEVANT The meaning given to it on page 123
RECALCULATION DATE"
"RELEVANT SCREEN In respect of any series and class of notes, the screen
PAGE" page specified as such in the applicable prospectus
supplement
"REPAYMENT The meaning given to it on page 151
REQUIREMENT"
"REPAYMENT TESTS" The meaning given to it on page 15
"REQUIRED In respect of any series and class, the percentage
SUBORDINATED specified as such in the related prospectus supplement
PERCENTAGE"
"REPAYMENT MORTGAGE A mortgage loan for which the borrower is under an
LOAN" obligation to the mortgagee to make monthly payments of
principal so that the whole principal (in addition to
interest) is repaid by the stated maturity date for that
mortgage loan
"REVENUE LEDGER" The ledger created and maintained by the cash manager on
behalf of the mortgages trustee under the cash
management agreement to record revenue receipts on the
mortgage loans and interest from the mortgages trustee
bank accounts and payments of revenue receipts from the
mortgages trustee GIC account to Funding, Funding 2 and
the seller on each distribution date. Together the
revenue ledger and the principal ledger reflect the
aggregate of all amounts of cash standing to the credit
of the mortgages trustee bank accounts
"REVENUE RECEIPTS" Any payment received in respect of any mortgage loan,
whether as all or part of a monthly payment, on
redemption (including partial redemption), on
enforcement or on the disposal of that mortgage loan or
otherwise (including payments pursuant to any insurance
policy) which in any such case is not a principal
receipt
"REVENUE SHORTFALL" The deficiency of Funding 2 available revenue receipts
on a monthly payment date over the amounts due by
Funding 2 under the Funding 2 pre-enforcement revenue
priority of payments, and the deficiency of issuer
available revenue receipts on a monthly payment date
over the amounts due by the issuer under the issuer pre-
enforcement revenue priority of payments, as the context
requires
297
"SCHEDULED The scheduled redemption dates for any series and class
REDEMPTION of scheduled redemption notes will be the monthly
DATES" payment dates set out in the prospectus supplement
related to such series and class of notes.
"SCHEDULED Any series and class of notes scheduled to be repaid in
REDEMPTION full in two or more installments on scheduled redemption
NOTES" dates. Scheduled redemption notes will be deemed to be
pass-through notes if:
(a) a date specified in relation to the same in the
prospective supplement occurs;
(b) a pass-through trigger event occurs; or
(c) the step-up date (if any) in relation to such notes
occurs
"SCHEDULED On any scheduled redemption date before the occurrence
AMORTIZATION of a trigger event or the enforcement of the issuer
INSTALLMENT" security for any note or series and class of notes which
are scheduled redemption notes, the maximum aggregate
principal amount which may be repaid by the issuer to
the relevant noteholder or noteholders of such series
and class on that scheduled redemption date in
accordance with the terms and conditions of the relevant
notes
"SCHEDULED REPAYMENT The scheduled repayment dates for any scheduled
DATES" repayment loan tranche will be the monthly payment dates
specified as such for such loan tranche set out in the
applicable loan tranche supplement
"SCHEDULED REPAYMENT That part of a scheduled repayment loan tranche which is
LOAN INSTALLMENT" payable on a scheduled repayment date for that loan
tranche
"SCHEDULED REPAYMENT Any loan tranche scheduled to be repaid in full in two
LOAN TRANCHE" or more installments on scheduled repayment dates.
Scheduled repayment loan tranches will be deemed to be
pass-through loan tranches if:
(a) a date specified in relation to the same in the
applicable loan tranche supplement occurs
(b) a pass-through trigger event occurs; or
(c) the step-up date (if any) in relation to such loan
tranche occurs
"SCHEDULED REPAYMENT The meaning given to it on page 152
REQUIREMENT"
"SCOTTISH ASSETS" Any asset, property, right or benefit situated in or the
rights of which are governed by the laws of Scotland
"SCOTTISH MORTGAGE" A standard security over a residential property in
Scotland securing any mortgage loan in the mortgage
portfolio
"SCOTTISH MORTGAGE Each mortgage loan secured over a property located in
LOAN" Scotland
"S&P" and "STANDARD Standard & Poor's Ratings Services, a division of The
& POOR'S" McGraw-Hill Companies, Inc., including any successor to
its ratings business
"SEC" The United States Securities and Exchange Commission
"SECURITIES ACT" The United States Securities Act of 1933, as amended
298
"SECURITY TRUSTEE" The Bank of New York, acting through its office at 48th
floor, One Canada Square, London E14 5AL or such other
person for the time being acting as security trustee
under the Funding security
"SELLER" Northern Rock
"SELLER ARRANGED The meaning given to it on page 88
INSURER"
"SELLER SHARE" The current seller share of the trust property
calculated in accordance with the formula set out on
page 126
"SELLER SHARE EVENT" The meaning given to it on page 130
"SELLER SHARE EVENT A distribution date on which a seller share event occurs
DISTRIBUTION DATE"
"SELLER SHARE The current seller share percentage of the trust
PERCENTAGE" property calculated in accordance with the formula set
out on page 125
"SELLER'S POLICY" The originating, lending and underwriting,
administration, arrears and enforcement policies and
procedures which are applied from time to time by the
seller to mortgage loans and the security for their
repayment which are beneficially owned solely by the
seller and which may be amended by the seller from time
to time
"SELLER'S STANDARD The rate of interest set by the seller for variable rate
VARIABLE RATE" mortgage loans as more fully described on page 75
"SERIES" The meaning given to it on page 12
"SERIES AND CLASS" The meaning given to it on page 12
"SIGNIFICANT" When we discuss ERISA considerations, a benefit plan
investors' equity participation in the issuer would not
be significant if, immediately after the most recent
acquisition of any equity interest in the issuer, less
than 25% of the value of each class of equity interests
in the issuer -- excluding interests held by Funding 2
-- is held by benefit plan investors
"SPECIFIED CURRENCY" The meaning given to it in the relevant prospectus
supplement
"SPECIFIED CURRENCY In relation to a series and class of notes, the exchange
EXCHANGE RATE" rate specified in the issuer swap agreement relating to
such series and class of notes or, if the issuer swap
agreement has been terminated, the applicable spot rate
"SPECIAL A payment made by the mortgages trustee:
DISTRIBUTION"
(a) to the seller (excluding any payment of initial
purchase price) which is funded by a further
contribution made to the mortgages trustee by Funding
or by Funding 2; or
(b) to Funding which is funded by a further contribution
made to the mortgages trustee by Funding 2
"SPECIFIED In respect of any series and class of notes, the
DENOMINATION" denomination specified as such in the applicable
prospectus supplement
"STANDARD VARIABLE The Northern Rock standard variable rate and/or the
RATE" standard variable rate applicable to mortgage loans
within the mortgages trust, as applicable
"STAND-BY GIC In respect of the mortgages trustee GIC account, Lloyds
PROVIDER" TSB Bank plc acting through its office at Financial
Markets Division, 25 Monument Street, London EC2R 8BQ
299
"STANDARD VARIABLE A mortgage loan which is subject to the standard
RATE MORTGAGE LOAN" variable rate
"START-UP LOAN The NR start-up loan agreement or any agreement entered
AGREEMENT" into after the Funding 2 program date, as amended from
time to time, between the issuer, a start-up loan
provider and the issuer security trustee relating to the
provision of start-up loan tranches to the issuer
"START-UP LOAN Each loan made by a start-up loan provider to the issuer
TRANCHE" or under a start-up loan agreement, and collectively, the
"START-UP LOAN "START-UP LOANS"
TRANCHES"
"START-UP LOAN Northern Rock, in its capacity as provider of the start-
PROVIDER" up loans, or such other person who provides a start-up
loan tranche to the issuer pursuant to a start-up loan
agreement
"STEP-UP DATE" In respect of any loan tranche or any series and class
of notes, the monthly payment date on which the interest
rate on that loan tranche, or those notes, as
applicable, increases by a predetermined amount
following the payment made by Funding 2 or the issuer,
as applicable, on such monthly payment date, which date
for any loan tranche series and class of notes, will be
specified in the applicable loan tranche supplement and,
for any series and class of notes, will be specified in
the applicable prospectus supplement
"STERLING In relation to a note which is denominated in (a)
EQUIVALENT" currency other than sterling, the sterling equivalent of
such amount ascertained using the specified currency
exchange rates and (b) sterling, the applicable amount
in sterling
"SUB-CLASS" Any sub-class of a series and class of notes.
"SUBSCRIPTION An agreement supplemental to the programme agreement (by
AGREEMENT" whatever name called) in or substantially in the form
set out in the programme agreement or in such other form
as may be agreed between the issuer and the dealers
"SUBSIDIARY" A subsidiary within the meaning of Section 736 of the
United Kingdom Companies Act 1985, and unless the
context otherwise requires, a subsidiary undertaking
within the meaning of section 258 of the United Kingdom
Companies Act 1985
"SWAP AGREEMENTS" The Funding 2 basis rate swap agreement and each issuer
swap agreement
"SWAP COLLATERAL" At any time, any asset (including, without limitation,
cash and/or securities) which is paid or transferred by
a swap provider to, or held by, the issuer or to Funding
2, as applicable, as collateral to support the
performance by such swap provider of its obligations
under the relevant swap agreement together with any
income or distributions received in respect of such
asset (if the issuer or Funding 2, as applicable, is
entitled to retain the same)
"SWAP COLLATERAL An account opened in the name of the issuer and/or
ACCOUNT" Funding 2, as applicable for the purpose of holding swap
collateral and maintained in accordance with the issuer
cash management agreement or the cash management
agreement, as applicable
300
"SWAP COLLATERAL In relation to the issuer, any document (including,
ANCILLARY DOCUMENT" without limitation, any custodial agreement or bank
account agreement but excluding the swap agreements, the
issuer cash management agreement and the issuer deed of
charge) as may be entered into by the issuer from time
to time in connection with the swap collateral. In
relation to Funding 2, any document (including, without
limitation, any custodial agreement or bank account
agreement but excluding the swap agreements, the cash
management agreement and the Funding 2 deed of charge)
as may be entered into by Funding 2 from time to time in
connection with the swap collateral
"SWAP DOWNGRADE The meaning given to it on page 180
EVENT"
"SWAP EARLY A circumstance in which some or all swap transactions
TERMINATION (as the case may be) under a swap agreement can be
EVENT" terminated before their respective scheduled termination
dates
"SWAP PROVIDER (i) The occurrence of:
DEFAULT"
(a) an event of default (as defined in the relevant
swap agreement) where the relevant swap provider
is the defaulting party (as defined in the
relevant swap agreement); or
(b) an additional termination event (as defined in the
relevant swap agreement) as a result of the
failure by the relevant swap provider to remedy a
swap downgrade event in accordance with the
relevant swap agreement where the relevant swap
provider is the sole affected party (as defined in
the relevant swap agreement); or
(c) the additional tax representation (as defined in
the relevant swap agreement) proves to be
incorrect or misleading in any material respect as
a result of any action and/or any omission to take
action by the relevant swap provider which could
have prevented such breach of representation
"SWAP PROVIDERS" Each of the Funding 2 basis rate swap provider and the
issuer swap providers, or any one of them as the context
requires
"SWAP REPLACEMENT Any payment received from a replacement swap provider in
PREMIUM" order to enter into a replacement swap agreement with
such replacement swap provider replacing a swap
agreement
"SWAP TERMINATION The amount payable because of a swap early termination
PAYMENT" event
"SWAP TRANSACTIONS" The Funding 2 basis rate swaps and the issuer swaps, or
any of them, and individually each a "swap transaction"
"TARGET RESERVE The meaning given to such term on page 172
REQUIRED AMOUNT"
"THIRD PARTY The meaning given to it on page 128
AMOUNTS"
"TIER" All the loan tranches having the same designated credit
rating
"TITLE DEEDS" For each mortgage loan and its related security and the
mortgaged property relating to it, all conveyancing
deeds and documents which make up the title to the
mortgaged property
301
and the security for the mortgage loan and all searches
and inquiries undertaken in connection with the grant by
the borrower of the related mortgage
"TOGETHER The meaning given to it on page 69
CONNECTIONS
BENEFIT"
"TOGETHER The meaning given to it on page 70
CONNECTIONS
INTEREST"
"TOGETHER A type of flexible mortgage loan, the primary
CONNECTIONS characteristics of which are described on page 80
MORTGAGE LOAN"
"TOGETHER DISCOUNT A type of Together mortgage loan as more fully described
TRACKER on page 80
MORTGAGE LOAN"
"TOGETHER MORTGAGE A type of flexible mortgage loan which allows the
LOAN" borrower to obtain an additional unsecured loan and, in
some cases, a credit card, neither of which is secured
by the mortgage relating to the mortgage loan
"TOGETHER STEPPED A type of Together mortgage loan as more fully
TRACKER described on page 80
MORTGAGE LOAN"
"TOGETHER VARIABLE A type of Together mortgage loan as more fully described
MORTGAGE LOAN" on page 80
"TRACKER RATE A loan where interest is linked to a variable interest
MORTGAGE rate other than the standard variable rate; for example,
LOAN" the rate on a tracker rate mortgage loan may be set at a
margin above sterling LIBOR or above rates set by the
Bank of England
"TRANSACTION The documents listed in "LISTING AND GENERAL
DOCUMENTS" INFORMATION" and any swap collateral ancillary document
"TRANSFER AGENT" Citibank, N.A., acting through its London branch at 5
Carmelite Street, London EC4Y 0PA and/or any other
person for the time being acting as transfer agent under
the paying agent and agent bank agreement
"TRANSFER OF EQUITY" A transfer of the equitable or beneficial and legal
title by co-owners to one of the proprietors of a
mortgaged property where the transferee remains a party
to the original mortgage or enters into a new mortgage
over the relevant mortgaged property in favor of the
seller
"TRIGGER EVENT" An asset trigger event and/or a non-asset trigger event
"TRUST CALCULATION The period from (and including) the first day of each
PERIOD" calendar month to (and including) the last day of the
same calendar month
"TRUST DEED" The trust deed entered into on or about the Funding 2
program date, as amended from time to time, between the
issuer and the note trustee constituting the notes, as
further described under "DESCRIPTION OF THE TRUST DEED"
"TRUST DETERMINATION The first day (or, if not a London business day, the
DATE" next succeeding London business day) of each calendar
month
"TRUST PROPERTY" The meaning given to it on page 23
"TRUST PROPERTY The meaning given to it on page 122
CALCULATION
ADJUSTMENTS"
"UK LISTING The Financial Services Authority in its capacity as
AUTHORITY" competent authority under Part VI of the Financial
Services and Markets Act 2000
302
"UK TAX COUNSEL" Sidley Austin Brown & Wood
"UNAUTHORIZED In relation to any flexible mortgage loan has the
UNDERPAYMENT" meaning given to it on page 78
"UNDERPAYMENT" A situation where a borrower makes a monthly payment on
its mortgage loan which is less than the required
monthly payment for that month
"UNDERWRITERS" The institutions specified in the prospectus supplement
relating to any series and class of notes
"UNDERWRITING The underwriting agreement relating to the sale of a
AGREEMENT" series or class of US notes among the issuer and the
underwriters designated therein
"UNITED KINGDOM" The United Kingdom of Great Britain and Northern Ireland
"UNITED STATES The meaning given to it on page 240
PERSON"
"UNPAID INTEREST" For any non-cash re-draw of any flexible mortgage loan,
the interest which would, but for that non-cash re-draw,
have been payable in respect of that mortgage loan on
the relevant monthly payment date for that mortgage loan
"UNREGISTERED LAND" Land in England or Wales, title to which is not
registered at the Land Registry
"UNREGULATED The meaning given to it on page 72
PERSONAL
SECURED LOAN"
"US DOLLAR The meaning given to it on page 240
DENOMINATED
NOTES"
"US HOLDER" A beneficial owner of US dollar denominated notes who is
a "UNITED STATES PERSON" or that otherwise is subject to
US federal income taxation on a net income basis in
respect of such notes
"US GLOBAL NOTE The global note certificates relating to a series and
CERTIFICATES" class of US notes
"US NOTES" Any series of the class A, class B, class M and class C
notes which are registered in the United States under
the Securities Act
"US PAYING AGENT" Citibank, N.A., acting through its office at 14th Floor
388 Greenwich Street, New York, New York 10013
"US FEDERAL INCOME Sidley Austin Brown & Wood LLP
TAX COUNSEL"
"UTCCR" The Unfair Terms in Consumer Contracts Regulations 1999
"VARIABLE MORTGAGE The rate of interest which determines the amount of
RATE" interest payable each month on a variable rate mortgage
loan
"VARIABLE RATE A mortgage loan where the interest rate payable by the
MORTGAGE borrower varies in accordance with a specified variable
LOAN" rate which at any time may be varied in accordance with
the relevant mortgage conditions (and shall, for the
avoidance of doubt, exclude fixed rate mortgage loans
and flexible mortgage loans)
"VAT" Value added tax
"W-8BEN" An IRS Form W-8BEN
303
"WAFF" On any date, the weighted average foreclosure frequency
for the mortgage portfolio as calculated by the
administrator on that date in accordance with the
calculations for the initial mortgage portfolio or as
agreed by the administrator and Fitch and S&P from time
to time
"WALS" On any date, the weighted average loss severity for the
mortgage portfolio as calculated by the administrator on
that date in accordance with the calculations for the
initial mortgage portfolio or as agreed by the
administrator and Fitch and S&P from time to time
"WE" AND "US" The issuer
"WEIGHTED AVERAGE The meanings given to it under "THE MORTGAGES TRUST --
FUNDING 2 SHARE WEIGHTED AVERAGE FUNDING 2 SHARE PERCENTAGE AND WEIGHTED
PERCENTAGE" AVERAGE FUNDING SHARE PERCENTAGE"
"WEIGHTED AVERAGE The meanings given to it under "THE MORTGAGES TRUST --
SELLER WEIGHTED AVERAGE SELLER SHARE PERCENTAGE"
SHARE PERCENTAGE"
"WITHHOLDING TAX" A tax levied under English or Scots law, as further
described under "MATERIAL UNITED KINGDOM TAX
CONSEQUENCES"
"YOU" Potential investors in the notes
"ZERO COUPON NOTE" A note, the interest basis of which is specified in the
applicable prospectus supplement as being zero coupon
304
REGISTERED OFFICE OF THE ISSUER
GRANITE MASTER ISSUER PLC
Fifth Floor
100 Wood Street
London EC2V 7EX
ADMINISTRATOR
NORTHERN ROCK PLC
Northern Rock House
Gosforth
Newcastle upon Tyne
NE3 4PL
NOTE TRUSTEE AND PRINCIPAL PAYING AGENT, COMMON
SECURITY TRUSTEE DEPOSITARY AND REGISTRAR
THE BANK OF NEW YORK CITIBANK, N.A., LONDON BRANCH
48th Floor 5 Carmelite Street
One Canada Square London EC4Y 0PA
London E14 5AL
US PAYING AGENT AGENT BANK
CITIBANK, N.A., LONDON BRANCH CITIBANK, N.A., LONDON BRANCH
14th Floor 5 Carmelite Street
388 Greenwich Street London EC4Y 0PA
New York, New York 10013
LEGAL ADVISERS TO THE UNDERWRITERS, THE DEALERS, THE NOTE TRUSTEE,
THE ISSUER SECURITY TRUSTEE AND THE FUNDING 2 SECURITY TRUSTEE
as to English and US law as to Scots Law
ALLEN & OVERY LLP DUNDAS & WILSON
One New Change Saltire Court
London EC4M 9QQ 20 Castle Terrace
Edinburgh EH1 2EN
LEGAL ADVISERS TO THE ISSUER, FUNDING 2 AND THE ADMINISTRATOR
as to English and US law as to Scots Law
SIDLEY AUSTIN BROWN & WOOD TODS MURRAY LLP
Woolgate Exchange 66 Queen Street
25 Basinghall Street Edinburgh EH2 4NE
London EC2V 5HA
LEGAL ADVISERS TO THE MORTGAGES TRUSTEE
as to Jersey law
MOURANT DU FEU & JEUNE
4 Royal Mint Court
London EC3N 4HJ
ARRANGERS
BARCLAYS BANK PLC CITIGROUP GLOBAL MARKETS LIMITED MERRILL LYNCH INTERNATIONAL
5 The North Colonnade Citigroup Centre 2 King Edward Street
Canary Wharf Canary Wharf London EC1A 1HQ
London E14 4BB London E14 5LB
THROUGH AND INCLUDING AUGUST 22, 2005, ALL DEALERS EFFECTING TRANSACTIONS IN
THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION
TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
GRANITE MASTER ISSUER PLC
$975,000,000 SERIES 2005-2 CLASS A1 NOTES
$800,000,000 SERIES 2005-2 CLASS A4 NOTES
$1,250,000,000 SERIES 2005-2 CLASS A6 NOTES
$90,000,000 SERIES 2005-2 CLASS B1 NOTES
$95,000,000 SERIES 2005-2 CLASS M1 NOTES
$90,000,000 SERIES 2005-2 CLASS C1 NOTES
--------------
PROSPECTUS
SUPPLEMENT
--------------
LEAD UNDERWRITERS
LEHMAN BROTHERS MERRILL LYNCH & CO. UBS INVESTMENT BANK
UNDERWRITERS
BARCLAYS CAPITAL CITIGROUP JPMORGAN MORGAN STANLEY
MAY 23, 2005
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. 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).56), other than underwriting discounts
and commissions, to be incurred in connection with the issuance and
distribution of the securities being registered under this registration
statement:
Securities and Exchange Commission registration fee........... $1,520,400
Printing and engraving expenses............................... $580,000
Legal fees and expenses....................................... $5,400,000
Accounting fees and expenses.................................. $460,000
Trustee's fees and expenses................................... $30,000
Rating agency fees............................................ $2,060,000
Miscellaneous................................................. $400,000
Total......................................................... $10,450,400
* All amounts are estimates except for the SEC registration fee
Item 15. Indemnification of Directors and Officers
Granite Master Issuer plc (the "issuer")
Subject to the provisions of the Companies Act 1985, the laws which
govern the organization of the issuer provide for every director or other
officer or auditor of the issuer to be indemnified out of the assets of the
issuer against any liability incurred by him in defending any proceedings,
whether civil or criminal, in which judgment is given in his favor or in which
he is acquitted or in connection with any application in which relief is
granted to him by the court from liability for negligence, default, breach of
duty or breach of trust in relation to the affairs of the issuer.
Granite Finance Funding 2 Limited ("Funding 2")
Subject to the provisions of the Companies Act 1985, the laws which
govern the organization of Funding 2 provide for every director or other
officer or auditor of Funding 2 to be indemnified out of the assets of Funding
2 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 2.
Granite Finance Trustees Limited (the "mortgages trustee")
Subject to the provisions of the Companies (Jersey) Law 1991, the laws
which govern the organization of the mortgages trustee permit every director
or other officer or auditor of the mortgages trustee to be indemnified out of
the assets of the mortgages trust against any liability incurred by him in
defending any proceedings, whether civil or criminal, in which judgment is
given in his favor or in which he is acquitted or in connection with any
application in which relief is granted to him by the court from liability for
negligence, default, breach of trust in relation to the affairs of the
mortgages trustee.
Item 16. Exhibits
Exhibit No. Description of Exhibit Sequential
Page Number
1.1 Form of Underwriting Agreement*
II-1
3.1.1 Memorandum and Articles of Association of Granite Master
Issuer plc*
3.1.2 Memorandum and Articles of Association of Granite Finance
Funding 2 Limited*
3.1.3 Memorandum and Articles of Association of Granite Finance
Trustees Limited*
4.1 Form of Global Intercompany Loan Agreement*
4.2 Form of Mortgages Trust Deed*
4.3 Form of Mortgage Sale Agreement*
4.4 Form of Issuer Deed of Charge*
4.5.1 Form of Funding 2 Deed of Charge*
4.5.2 Form of Deed of Accession to Funding 2 Deed of Charge
(included as Schedule 2 in Exhibit 4.5.1)*
4.6.1 Form of Issuer Trust Deed*
4.6.2 Form of Terms and Conditions of the Notes*
4.7 Form of Issuer Paying Agent and Agent Bank Agreement*
4.8 Form of Cash Management Agreement*
4.9 Form of Issuer Cash Management Agreement*
4.10 Form of Administration Agreement*
4.11 Form of Issuer Post-Enforcement Call Option Agreement*
5.1 Opinion of Sidley Austin Brown & Wood as to legality**
8.1 Opinion of Sidley Austin Brown & Wood as to U.S. tax matters*
8.2 Opinion of Sidley Austin Brown & Wood as to U.K. tax matters**
8.3 Opinion of Mourant du Feu & Jeune as to Jersey tax matters*
10.1 Form of Issuer Basis Rate Swap Agreement**
10.2 Form of Issuer Dollar Currency Swap Agreement*
10.3 Form of Issuer Euro Currency Swap Agreement*
10.4 Form of Issuer Start-up Loan Agreement*
10.5.1 Form of Master Definitions Schedule*
10.5.2 Form of Issuer Master Definitions Schedule*
10.6.1 Form of Corporate Services Agreement (Issuer and Funding 2)*
10.6.2 Form of Corporate Services Agreement (Mortgages Trustee)*
10.7 Form of Remarketing Agreement
10.8 Form of Conditional Purchase Agreement
23.1 Consent of Sidley Austin Brown & Wood (included in Exhibits
5.1, 8.1 and 8.2)**
23.2 Consent of Mourant du Feu & Jeune (included in Exhibit 8.3)*
25.1 Statement of Eligibility of Trustee (Form T-1)*
* Previously filed on December 22, 2004 together with Amendment
No. 1 to this registration statement
** Previously filed on January 12, 2005 together with Amendment
No. 3 to this registration statement
Item 17. Undertakings
(a) As to Rule 415: Each of the undersigned registrants hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most
recent post-effective amendment hereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in this registration statement; and
II-2
(iii)to include any material information with respect to the plan of
distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement;
provided, however, that the undertakings set forth in clauses (i)
and (ii) above do not apply if the information required to be
included in a post-effective amendment by those clauses is contained
in periodic reports filed by the registrants pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934, as amended,
that are incorporated by reference in this amendment to the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To file a post-effective amendment to the registration statement to
include any financial statements required by Item 8.A. of Form 20-F at
the start of any delayed offering or continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Securities Act of 1933, as amended need not be furnished, provided, that
each of the registrants includes in the prospectus, by means of a
post-effective amendment, financial statements required pursuant to this
paragraph (4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements.
(b) As to indemnification: Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers
and controlling persons of each of the registrants pursuant to the
foregoing provisions, or otherwise, each registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
any of the registrants of expenses incurred or paid by a director,
officer or controlling person of such registrant in the successful
defense of any action, suit or proceeding) is asserted against any of the
registrants by such director, officer or controlling person in connection
with the securities being registered, the relevant registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(c) As to documents subsequently filed that are incorporated by reference:
Each of the undersigned registrants hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each
filing, if any, of each registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this registration statement shall be deemed
to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(d) As to information omitted in reliance on Rule 430A: 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
II-3
reliance upon Rule 430A and contained in a form of prospectus filed by
the registrants pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized on August 19, 2005.
GRANITE MASTER ISSUER PLC
By: L.D.C. Securitisation Director No. 1 Limited
By: /s/ Sharon Tyson
Sharon Tyson
Director
GRANITE FINANCE FUNDING 2 LIMITED
By: L.D.C. Securitisation Director No. 1 Limited
By: /s/ Sharon Tyson
Sharon Tyson
Director
GRANITE FINANCE TRUSTEES LIMITED
By: /s/ Daniel Le Blancq
Daniel Le Blancq
Director
II-5
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment thereto has been signed by the following
persons in the capacities and on the dates indicated.
Granite Master Issuer plc
Signature Title Date
L.D.C. SECURITISATION DIRECTOR NO. 1 LIMITED Director August 19, 2005
By: /s/ Sharon Tyson
Name: Sharon Tyson
L.D.C. SECURITISATION DIRECTOR NO. 2 LIMITED Director August 19, 2005
By: /s/ Ian Bowden
Name: Ian Bowden
Additional Signature Pages Follow
II-6
Granite Finance Funding 2 Limited
Signature Title Date
L.D.C. SECURITISATION DIRECTOR NO. 1 LIMITED Director August 19, 2005
By: /s/ Sharon Tyson
Name: Sharon Tyson
L.D.C. SECURITISATION DIRECTOR NO. 2 LIMITED Director August 19, 2005
By: /s/ Ian Bowden
Name: Ian Bowden
Additional Signature Pages Follow
II-7
Granite Finance Trustees Limited
Signature Title Date
By: /s/ Daniel Le Blancq Director August 19, 2005
Name: Daniel Le Blancq
By: /s/ Julia Chapman Director August 19, 2005
Name: Julia Chapman
By: /s/ Dean Godwin Director August 19, 2005
Name: Dean Godwin
II-8
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE MASTER ISSUER plc
Pursuant to the requirements of the Securities Act of 1933, the
undersigned, the duly authorized representative in the United States of
Granite Master Issuer plc, has signed this registration statement or amendment
thereto in New York, New York on August 19, 2005.
By: /s/ Donald J. Puglisi
Name: Donald J. Puglisi
Office: Managing Director
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE FINANCE FUNDING 2 LIMITED
Pursuant to the requirements of the Securities Act of 1933, the
undersigned, the duly authorized representative in the United States of
Granite Finance Funding 2 Limited, has signed this registration statement or
amendment thereto in New York, New York on August 19, 2005.
By: /s/ Donald J. Puglisi
Name: Donald J. Puglisi
Office: Managing Director
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE FINANCE TRUSTEES LIMITED
Pursuant to the requirements of the Securities Act of 1933, the
undersigned, the duly authorized representative in the United States of
Granite Finance Trustees Limited, has signed the registration statement or
amendment thereto in New York, New York on August 19, 2005.
By: /s/ Donald J. Puglisi
Name: Donald J. Puglisi
Office: Managing Director
II-9
EXHIBIT INDEX
Exhibit No. Description of Exhibit Sequential Page
Number
1.1 Form of Underwriting Agreement*
3.1.1 Memorandum and Articles of Association of Granite Master
Issuer plc*
3.1.2 Memorandum and Articles of Association of Granite Finance
Funding 2 Limited*
3.1.3 Memorandum and Articles of Association of Granite Finance
Trustees Limited*
4.1 Form of Global Intercompany Loan Agreement*
4.2 Form of Mortgages Trust Deed*
4.3 Form of Mortgage Sale Agreement*
4.4 Form of Issuer Deed of Charge*
4.5.1 Form of Funding 2 Deed of Charge*
4.5.2 Form of Deed of Accession to Funding 2 Deed of Charge
(included as Schedule 2 in Exhibit 4.5.1)*
4.6.1 Form of Issuer Trust Deed*
4.6.2 Form of Terms and Conditions of the Notes*
4.7 Form of Issuer Paying Agent and Agent Bank Agreement*
4.8 Form of Cash Management Agreement*
4.9 Form of Issuer Cash Management Agreement*
4.10 Form of Administration Agreement*
4.11 Form of Issuer Post-Enforcement Call Option Agreement*
5.1 Opinion of Sidley Austin Brown & Wood as to legality**
8.1 Opinion of Sidley Austin Brown & Wood as to U.S. tax matters*
8.2 Opinion of Sidley Austin Brown & Wood as to U.K. tax matters**
8.3 Opinion of Mourant du Feu & Jeune as to Jersey tax matters*
10.1 Form of Issuer Basis Rate Swap Agreement**
10.2 Form of Issuer Dollar Currency Swap Agreement*
10.3 Form of Issuer Euro Currency Swap Agreement*
10.4 Form of Issuer Start-up Loan Agreement*
10.5.1 Form of Master Definitions Schedule*
10.5.2 Form of Issuer Master Definitions Schedule*
10.6.1 Form of Corporate Services Agreement (Issuer and Funding 2)*
10.6.2 Form of Corporate Services Agreement (Mortgages Trustee)*
10.7 Form of Remarketing Agreement
10.8 Form of Conditional Purchase Agreement
23.1 Consent of Sidley Austin Brown & Wood (included in Exhibits
5.1, 8.1 and 8.2)**
23.2 Consent of Mourant du Feu & Jeune (included in Exhibit 8.3)*
25.1 Statement of Eligibility of Trustee (Form T-1)*
* Previously filed on December 22, 2004 together with Amendment
No. 1 to this registration statement
** Previously filed on January 12, 2005 together with Amendment
No. 3 to this registration statement
II-10