As filed pursuant
to Rule 424(b)(5)
under the Securities Act of 1933
Registration No. 333-119671
PROSPECTUS SUPPLEMENT DATED SEPTEMBER 15, 2005
(TO PROSPECTUS DATED AUGUST 26, 2005)
GRANITE MASTER ISSUER PLC
ISSUER
$1,326,300,000 SERIES 2005-4 CLASS A1 NOTES
$996,600,000 SERIES 2005-4 CLASS A3 NOTES
$72,500,000 SERIES 2005-4 CLASS B1 NOTES
$38,500,000 SERIES 2005-4 CLASS B2 NOTES
$64,700,000 SERIES 2005-4 CLASS M1 NOTES
$36,300,000 SERIES 2005-4 CLASS M2 NOTES
$80,400,000 SERIES 2005-4 CLASS C1 NOTES
$44,600,000 SERIES 2005-4 CLASS C2 NOTES
The offering in respect of this series 2005-4 comprises the following
classes of notes:
INITIAL PRINCIPAL AMOUNT CLASS INTEREST RATE ISSUE PRICE FINAL MATURITY DATE
$1,326,300,000 Class A1 One-month USD LIBOR + 0.03% p.a. 100% June 2030
$996,600,000 Class A3 Three-month USD LIBOR + 0.07% p.a. 100% December 2054
$72,500,000 Class B1 Three-month USD LIBOR + 0.12% p.a. 100% December 2054
$38,500,000 Class B2 Three-month USD LIBOR + 0.18% p.a. 100% December 2054
$64,700,000 Class M1 Three-month USD LIBOR + 0.22% p.a. 100% December 2054
$36,300,000 Class M2 Three-month USD LIBOR + 0.28% p.a. 100% December 2054
$80,400,000 Class C1 Three-month USD LIBOR + 0.43% p.a. 100% December 2054
$44,600,000 Class C2 Three-month USD LIBOR + 0.55% p.a. 100% December 2054
The series 2005-4 class A1 notes, series 2005-4 class A3 notes, series 2005-
4 class B1 notes, series 2005-4 class B2 notes, series 2005-4 class M1 notes,
series 2005-4 class M2 notes, series 2005-4 class C1 notes and series 2005-4
class C2 notes (the "OFFERED NOTES") constitute the series 2005-4 issuance of
notes by Granite Master Issuer plc.
YOU SHOULD REVIEW AND CONSIDER THE DISCUSSION UNDER "RISK FACTORS" BEGINNING
ON PAGE 28 OF THE ACCOMPANYING PROSPECTUS BEFORE YOU PURCHASE THE OFFERED
NOTES.
Application will be 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 during the period of twelve months from the
date of this prospectus supplement to be admitted to the official list
maintained by the UK Listing Authority. Application will also be made to the
London Stock Exchange plc for such notes to be admitted to trading on the
London Stock Exchange's Gilt Edged and Fixed Interest Market.
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
CITIGROUP CREDIT SUISSE DEUTSCHE BANK LEHMAN
FIRST BOSTON SECURITIES BROTHERS
UNDERWRITERS
BARCLAYS CAPITAL JP MORGAN MERRILL LYNCH & CO.MORGAN STANLEY
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PAGE PROSPECTUS PAGE
Summary........................ S-4 Summary of prospectus.............. 6
US dollar presentation......... S-12 Risk factors....................... 28
Controlled redemption dates.... S-13 Defined terms...................... 58
Maturity and repayment The issuer......................... 59
considerations............... S-14 Use of proceeds.................... 60
The issuer swap provider....... S-16 The Northern Rock Group............ 61
Underwriting................... S-17 Funding 2.......................... 62
Legal Matters.................. S-23 The mortgages trustee.............. 63
Annex A........................ A-1 Holdings........................... 64
The cut-off date mortgage GPCH Limited....................... 65
portfolio.................... A-1 Issuance of notes.................. 67
Characteristics of the The mortgage loans................. 72
United Kingdom Certain characteristics of the
residential mortgage market.. A-10 United Kingdom residential
Annex B........................ B-1 mortgage market.................. 97
Annex C........................ C-1 The administrator and the
administration agreement......... 103
Assignment of the mortgage
loans and related security....... 115
The mortgages trust................ 127
The global intercompany loan
agreement........................ 148
Cashflows.......................... 153
Credit structure................... 182
The swap agreements................ 193
Cash management for the mortgages
trustee and Funding 2............ 198
Cash management for the issuer..... 202
Security for Funding 2's
obligations...................... 205
Security for the issuer's
obligations...................... 211
Description of the trust deed...... 215
The notes.......................... 217
Description of the US notes........ 223
Material legal aspects of the
mortgage loans and the
related security................. 251
Material United Kingdom tax
consequences..................... 257
Material United States tax
consequences..................... 260
Material Jersey (Channel
Islands) tax considerations...... 265
ERISA considerations............... 266
Enforcement of foreign
judgments in England
and Wales....................... 269
United States legal investment
considerations................... 270
Legal matters...................... 271
Underwriting....................... 272
Reports to noteholders............. 275
Listing and general information.... 276
Glossary........................... 279
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 certain 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 will need to review this entire prospectus
supplement and the accompanying prospectus before you purchase any offered
notes.
SECURITIES OFFERED $1,326,300,000 series 2005-4 class A1 notes,
$996,600,000 series 2005-4 class A3 notes, $72,500,000
series 2005-4 class B1 notes, $38,500,000 series 2005-
4 class B2 notes, $64,700,000 series 2005-4 class M1
notes, $36,300,000 series 2005-4 class M2 notes,
$80,400,000 series 2005-4 class C1 notes and
$44,600,000 series 2005-4 class C2 notes
(collectively, the "OFFERED NOTES").
The offered notes constitute part of the series 2005-4
issuance of notes. The offered notes are issued by us
and are solely our obligations. The series 2005-4
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 2005-4 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 in each case 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 2005-4 class A1 notes, the note payment
DATE date falling in October 2005.
For all other classes of offered notes, the note
payment date falling in February 2006.
CLOSING DATE September 21, 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 August 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 + 0.06% in respect of the series 2005-
4 class A1 notes, (ii) one-month USD LIBOR + 0.14% in
respect of the series 2005-4 class A3 notes, (iii)
one-month USD LIBOR + 0.24% in respect of the
S-4
series 2005-4 class B1 notes, (iv) one-month USD
LIBOR + 0.36% in respect of the series 2005-4 class B2
notes, (v) one-month USD LIBOR + 0.44% in respect of
the series 2005-4 class M1 notes, (vi) one-month USD
LIBOR + 0.56% in respect of the series 2005-4 class M2
notes, (vii) one-month USD LIBOR + 0.86% in respect of
the series 2005-4 class C1 notes and (viii) one-month
USD LIBOR + 1.10% in respect of the series 2005-4
class C2 notes.
Interest on the offered notes will accrue from the
closing date 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 2005-4 class A1 notes, the linear
interpolation of the arithmetic mean of the offered
quotations to leading banks for two-week US dollar
deposits and the arithmetic mean of the offered
quotations to leading banks for one-month US dollar
deposits in the London inter-bank market, and (ii)
for all other classes of offered notes, the offered
quotations to leading banks for five-month US
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 3750 no longer provides 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 installment. 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, noteholders
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 2005-4
notes are subordinated to payments of principal of and
interest on the more senior classes of the series
2005-4 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 2005-4 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 the consent of any 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 [GBP]201,156,989
REQUIRED AMOUNT
PROGRAM RESERVE 1.65%
REQUIRED PERCENTAGE
ARREARS OR STEP-UP If an arrears or step-up trigger event has occurred
TRIGGER EVENT under item (i) only of the arrears or step-up trigger
event definition, then the Funding 2 reserve fund
increased amount will be [GBP]11,000,000.
If an arrears or step-up trigger event has occurred
under item (ii) only of the arrears or step-up trigger
event definition, then the Funding 2 reserve fund
increased amount will be [GBP]11,000,000.
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, then the Funding 2
reserve fund increased amount will be [GBP]22,000,000.
LOSSES Losses on the mortgage loans may reduce the amount of
principal available to repay principal of the series
2005-4 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 2005-4 class A notes
until the aggregate amount of losses exceeds the
principal amount outstanding of each class of notes
junior to the series 2005-4 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 series
2005-4 notes is less than 10% of the initial
outstanding principal amount of the series
2005-4 notes; or
* on the note payment date falling in August 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.
S-7
THE SERIES 2005-4 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 2005-4 loan
tranches. The principal terms of such series 2005-4
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".
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
2005-4 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 2005-4 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.
In consideration of the purchase price of
[GBP]8,370,894,444.22 and subject to the terms and
conditions in the mortgages sale agreement, the seller
assigned a further mortgage portfolio and related
security to the mortgages trustee on August 30, 2005.
See ``ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED
SECURITY'' in the prospectus.
The aggregated outstanding current balance of mortgage
loans in the mortgages trust as at July 31, 2005 was
[GBP]35,438,816,369.90. See ANNEX A to this prospectus
supplement for detailed statistical and other
information on the mortgage loans.
S-8
ISSUER ACCOUNTS The issuer transaction account and the issuer GIC
account.
OTHER ISSUER NOTES The series 2005-4 notes are the fourth 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 $20,030,299,036
class B $707,424,698
class M $715,574,085
class C $777,597,261
USE OF PROCEEDS The gross proceeds from the issue of the series 2005-4
notes will equal approximately $6,838,213,537 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.
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
relating to such series and class of notes or, if the
issuer swap agreement has been terminated, the
applicable spot rate.
STOCK EXCHANGE LISTING Application will be 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 during the period of
twelve months from the date of this prospectus
supplement to be admitted to the official list
maintained by the UK Listing Authority. Application
will also be made to the London Stock Exchange plc for
such notes to be admitted to trading on the London
Stock Exchange's Gilt Edged and Fixed Interest Market.
RATINGS The series 2005-4 class A1 notes and series 2005-4
class A3 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 2005-4 class B1 notes and series
2005-4 class B2 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 2005-4 class M1 notes and series
2005-4 class M2 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 2005-4 class C1 notes and series
2005-4 class C2 notes are expected to be assigned a
"BBB" rating by Standard & Poor's, a "Baa2" rating by
Moody's and a
S-9
"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.
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 the matter is not free from
doubt, in the opinion of Sidley Austin Brown & Wood
LLP, US federal income tax advisers to Northern Rock,
the offered notes will be treated as debt for US
federal income tax purposes. Further, in the opinion
of US federal income tax advisers to Northern Rock,
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
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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.
CLEARING AND The offered notes have been accepted for clearance
SETTLEMENT through DTC, Clearstream Luxembourg and Euroclear
under the following CUSIPs, common codes and ISINs:
CLASS OF NOTES CUSIP ISIN COMMON CODE
series 2005-4 class A1 notes 38741Y AN 9 US38741YAN94 22999532
series 2005-4 class A3 notes 38741Y AP 4 US38741YAP43 22999583
series 2005-4 class B1 notes 38741Y AR 0 US38741YAR09 22999630
series 2005-4 class B2 notes 38741Y AS 8 US38741YAS81 22999656
series 2005-4 class M1 notes 38741Y AT 6 US38741YAT64 22999672
series 2005-4 class M2 notes 38741Y AU 3 US38741YAU38 22999737
series 2005-4 class C1 notes 38741Y AV 1 US38741YAV11 22999753
series 2005-4 class C2 notes 38741Y AW 9 US38741YAW93 22999761
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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]0.5684 = $1.00,
which reflects the noon buying rate in the City of New York for cable transfers
in sterling per US$1.00 as certified for customs purposes by the Federal
Reserve Bank on July 29, 2005. Use of this rate does not mean that pound
sterling amounts actually represent those US dollar amounts or could be
converted into US dollars at that rate at any particular time.
References throughout this prospectus supplement to "[GBP]", "POUNDS" or
"STERLING" are to the lawful currency for the time being of the United Kingdom
of Great Britain and Northern Ireland.
References in this prospectus supplement to "US$", "USD", "$", "US DOLLARS"
or "DOLLARS" are to the lawful currency of the United States of America.
STERLING/US DOLLAR EXCHANGE RATE HISTORY*
JANUARY 1, YEARS ENDED DECEMBER 31
2005 THROUGH --------------------------------------
AUGUST 30, 2005 2004 2003 2002 2001 2000
--------------- ------ ------ ------ ------ ------
Last(1) 1.7866 1.9181 1.7858 1.6100 1.4546 1.4930
Average(2) 1.8482 1.8334 1.6358 1.5038 1.4407 1.5160
High 1.9291 1.9467 1.7858 1.6100 1.5038 1.6537
Low 1.7376 1.7559 1.5541 1.4082 1.3727 1.3977
- ----------
Notes
(1) Last is the closing exchange rate on the last operating business day of
each of the periods indicated, years commencing from January 1 or the next
operating business day.
(2) Average is the average daily exchange rate during the period.
AUGUST 1, 2005
THROUGH
AUGUST 30, JULY JUNE MAY APRIL MARCH
2005 2005 2005 2005 2005 2005
-------------- ------ ------ ------ ------ ------
High 1.8147 1.7780 1.8352 1.9068 1.9193 1.9291
Low 1.7680 1.7376 1.7915 1.8171 1.8697 1.8667
- ----------
* Source: Bloomberg
S-12
CONTROLLED REDEMPTION DATES
The "CONTROLLED AMORTIZATION INSTALLMENT" for each class of offered notes
for any note payment date set forth below is an amount equal to the amount
which we would be required to repay in respect of such class of offered notes
so that on that note payment date the aggregate principal amount outstanding of
such class of offered notes has been reduced to (but is not less than) the
stated amount or "TARGET BALANCE" set out in the following table:
[GBP]($*) TARGET BALANCE [GBP]($*) TARGET BALANCE [GBP]($*) TARGET [GBP]($*) TARGET
FOR SERIES 2005-4 CLASS FOR SERIES 2005-4 CLASS BALANCE FOR SERIES BALANCE FOR SERIES
NOTE PAYMENT DATE OCCURRING IN: A1 NOTES A3 NOTES 2005-4 CLASS B1 NOTES 2005-4 CLASS B2 NOTES
- -----------------------------------------------------------------------------------------------------------------------------------
([GBP]) $ ([GBP]) $ ([GBP]) $ ([GBP]) $
February 2006 509,521,399 929,112,271 546,531,396 996,600,000 39,758,706 72,500,000 21,113,244 38,500,000
May 2006 387,375,320 706,378,896 546,531,396 996,600,000 39,758,706 72,500,000 21,113,244 38,500,000
August 2006 271,856,691 495,730,676 546,531,396 996,600,000 39,758,706 72,500,000 21,113,244 38,500,000
November 2006 162,605,917 296,511,890 546,531,396 996,600,000 39,758,706 72,500,000 21,113,244 38,500,000
February 2007 59,282,914 108,102,394 546,531,396 996,600,000 39,758,706 72,500,000 21,113,244 38,500,000
May 2007 0 0 546,531,396 996,600,000 20,309,207 37,033,839 21,113,244 38,500,000
August 2007 0 0 467,122,844 851,798,505 0 0 21,113,244 38,500,000
November 2007 0 0 331,992,251 605,387,870 0 0 21,113,244 38,500,000
February 2008 0 0 204,325,210 372,587,020 0 0 21,113,244 38,500,000
May 2008 0 0 83,709,490 152,644,256 0 0 21,113,244 38,500,000
August 2008 0 0 0 0 0 0 11,361,082 20,716,933
November 2008 0 0 0 0 0 0 0 0
February 2009 0 0 0 0 0 0 0 0
May 2009 0 0 0 0 0 0 0 0
August 2009 0 0 0 0 0 0 0 0
November 2009 0 0 0 0 0 0 0 0
February 2010 0 0 0 0 0 0 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
August 2012 0 0 0 0 0 0 0 0
November 2012 0 0 0 0 0 0 0 0
[GBP]($*) TARGET [GBP]($*) TARGET [GBP]($*) TARGET [GBP]($*) TARGET
BALANCE FOR SERIES BALANCE FOR SERIES BALANCE FOR SERIES BALANCE FOR SERIES
2005-4 2005-4 2005-4 2005-4
NOTE PAYMENT DATE OCCURRING IN: CLASS M1 NOTES CLASS M2 NOTES CLASS C1 NOTES CLASS C2 NOTES
- -----------------------------------------------------------------------------------------------------------------------------------
([GBP]) $ ([GBP]) $ ([GBP]) $ ([GBP]) $
February 2006 35,481,217 64,700,000 19,906,773 36,300,000 44,091,034 80,400,000 24,458,459 44,600,000
May 2006 35,481,217 64,700,000 19,906,773 36,300,000 44,091,034 80,400,000 24,458,459 44,600,000
August 2006 35,481,217 64,700,000 19,906,773 36,300,000 44,091,034 80,400,000 24,458,459 44,600,000
November 2006 35,481,217 64,700,000 19,906,773 36,300,000 44,091,034 80,400,000 24,458,459 44,600,000
February 2007 35,481,217 64,700,000 19,906,773 36,300,000 44,091,034 80,400,000 24,458,459 44,600,000
May 2007 18,124,216 33,049,508 19,906,773 36,300,000 22,522,210 41,069,250 24,458,459 44,600,000
August 2007 0 0 19,906,773 36,300,000 0 0 24,458,459 44,600,000
November 2007 0 0 19,906,773 36,300,000 0 0 24,458,459 44,600,000
February 2008 0 0 19,906,773 36,300,000 0 0 24,458,459 44,600,000
May 2008 0 0 19,906,773 36,300,000 0 0 24,458,459 44,600,000
August 2008 0 0 10,711,877 19,533,109 0 0 13,161,150 23,999,357
November 2008 0 0 0 0 0 0 0 0
February 2009 0 0 0 0 0 0 0 0
May 2009 0 0 0 0 0 0 0 0
August 2009 0 0 0 0 0 0 0 0
November 2009 0 0 0 0 0 0 0 0
February 2010 0 0 0 0 0 0 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
August 2012 0 0 0 0 0 0 0 0
November 2012 0 0 0 0 0 0 0 0
- ----------
Notes
* 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 =
$1.8235.
S-13
MATURITY AND REPAYMENT CONSIDERATIONS
The average lives of each class of 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 offered notes can be made,
however, based on certain assumptions. The assumptions used to calculate the
possible average lives of each class of offered notes in the following table
include that:
(1) each series and class of offered 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 the
offered notes to be deferred;
(6) the issuer exercises its option to redeem the offered notes on the
step-up date, if any, relating to such notes;
(7) the offered notes are issued on September 21, 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 each
class of offered notes, at various constant payment rates for the mortgage
loans, would be as follows:
POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE POSSIBLE
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
LIFE OF THE LIFE OF THE LIFE OF THE LIFE OF THE LIFE OF THE LIFE OF THE LIFE OF THE LIFE OF THE
SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES
2005-4 2005-4 2005-4 2005-4 2005-4 2005-4 2005-4 2005-4
CLASS A1 CLASS A3 CLASS B1 CLASS B2 CLASS M1 CLASS M2 CLASS C1 CLASS C2
CONSTANT PAYMENT RATE NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES
(% PER ANNUM) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS)
- --------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
5% 2.35 4.85 4.92 4.92 4.92 4.92 4.92 4.92
10% 1.32 3.15 4.92 4.92 4.92 4.92 4.92 4.92
15% 0.89 2.41 1.79 3.05 1.79 3.05 1.79 3.05
20% 0.89 2.41 1.79 3.05 1.79 3.05 1.79 3.05
25% 0.89 2.41 1.79 3.05 1.79 3.05 1.79 3.05
30% 0.89 2.41 1.79 3.05 1.79 3.05 1.79 3.05
S-14
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 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
Banque AIG is the issuer swap provider in respect of each class of offered
notes and American International Group, Inc. is the guarantor of the issuer
swap provider's payment obligations under the issuer swaps in respect of each
class of offered notes (the "SWAP GUARANTOR"). Banque AIG is a French bank,
acting through its London branch, and is a subsidiary of AIG Financial Products
Corp. ("AIGFP"). AIGFP is a wholly owned subsidiary of the swap guarantor.
Banque AIG conducts, primarily as principal, a financial derivative products
business. It also enters into investment contracts and other structured
transactions, and invests in a diversified portfolio of securities. In the
course of conducting its business, Banque AIG also engages in a variety of
other related transactions. Banque AIG's London branch is located at 5th Floor,
One Curzon Street, London W1J 5RT.
The swap guarantor, a Delaware corporation, is a holding company which
through its subsidiaries is primarily engaged in a broad range of insurance and
insurance-related activities and financial services in the United States and
abroad. Reports, proxy statements and other information filed by the swap
guarantor with the Securities and Exchange Commission (the "COMMISSION")
pursuant to the informational requirements of the Securities Exchange Act of
1934, as amended, can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: Pacific
Regional Office, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California
90036-3648; and Midwest Regional Office, Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a web site at http://www.sec.gov which contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The swap guarantor's common stock is listed
on the New York Stock Exchange and reports, proxy statements and other
information can also be inspected at the Information Center of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The information contained in the preceding two paragraphs has been provided
by Banque AIG for use in this prospectus supplement. Banque AIG, the swap
guarantor and their respective affiliates have not been involved in the
preparation of, and do not accept responsibility for, this prospectus
supplement or the accompanying prospectus as a whole.
S-16
UNDERWRITING
UNITED STATES
We have agreed to sell, and Citigroup Global Markets Limited, Credit Suisse
First Boston (Europe) Limited, Deutsche Bank Securities Inc. and Lehman
Brothers Inc. (the "LEAD UNDERWRITERS") and the other underwriters (together
with the lead underwriters, the "UNDERWRITERS", and each an "UNDERWRITER") for
the offered notes listed in the following tables have agreed to purchase, the
principal amount of those offered notes listed in those tables. 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 supplement and the
accompanying prospectus on the closing date.
PRINCIPAL AMOUNT OF THE SERIES
UNDERWRITERS OF THE SERIES 2005-4 CLASS A1 NOTES 2005-4 CLASS A1 NOTES
- ------------------------------------------------ ------------------------------
Citigroup Global Markets Limited USD291,575,000
Credit Suisse First Boston (Europe) Limited USD291,575,000
Deutsche Bank Securities Inc. USD291,575,000
Lehman Brothers Inc. USD291,575,000
Barclays Capital Inc. USD40,000,000
J.P. Morgan Securities Inc. USD40,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD40,000,000
Morgan Stanley & Co. Incorporated USD40,000,000
------------------------------
Total USD1,326,300,000
==============================
PRINCIPAL AMOUNT OF THE SERIES
UNDERWRITERS OF THE SERIES 2005-4 CLASS A3 NOTES 2005-4 CLASS A3 NOTES
- ------------------------------------------------ ------------------------------
Citigroup Global Markets Limited USD209,150,000
Credit Suisse First Boston (Europe) Limited USD209,150,000
Deutsche Bank Securities Inc. USD209,150,000
Lehman Brothers Inc. USD209,150,000
Barclays Capital Inc. USD40,000,000
J.P. Morgan Securities Inc. USD40,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD40,000,000
Morgan Stanley & Co. Incorporated USD40,000,000
------------------------------
Total USD996,600,000
==============================
PRINCIPAL AMOUNT OF THE SERIES
UNDERWRITERS OF THE SERIES 2005-4 CLASS B1 NOTES 2005-1 CLASS B1 NOTES
- ------------------------------------------------ ------------------------------
Citigroup Global Markets Limited USD18,125,000
Credit Suisse First Boston (Europe) Limited USD18,125,000
Deutsche Bank Securities Inc. USD18,125,000
Lehman Brothers Inc. USD18,125,000
------------------------------
Total USD72,500,000
==============================
S-17
PRINCIPAL AMOUNT OF THE SERIES
UNDERWRITERS OF THE SERIES 2005-4 CLASS B2 NOTES 2005-4 CLASS B2 NOTES
- ------------------------------------------------ ------------------------------
Citigroup Global Markets Limited USD9,625,000
Credit Suisse First Boston (Europe) Limited USD9,625,000
Deutsche Bank Securities Inc. USD9,625,000
Lehman Brothers Inc. USD9,625,000
------------------------------
Total USD38,500,000
==============================
PRINCIPAL AMOUNT OF THE SERIES
UNDERWRITERS OF THE SERIES 2005-4 CLASS M1 NOTES 2005-4 CLASS M1 NOTES
- ------------------------------------------------ ------------------------------
Citigroup Global Markets Limited USD16,175,000
Credit Suisse First Boston (Europe) Limited USD16,175,000
Deutsche Bank Securities Inc. USD16,175,000
Lehman Brothers Inc. USD16,175,000
------------------------------
Total USD64,700,000
==============================
PRINCIPAL AMOUNT OF THE SERIES
UNDERWRITERS OF THE SERIES 2005-4 CLASS M2 NOTES 2005-4 CLASS M2 NOTES
- ------------------------------------------------ ------------------------------
Citigroup Global Markets Limited USD9,075,000
Credit Suisse First Boston (Europe) Limited USD9,075,000
Deutsche Bank Securities Inc. USD9,075,000
Lehman Brothers Inc. USD9,075,000
------------------------------
Total USD36,300,000
==============================
PRINCIPAL AMOUNT OF THE SERIES
UNDERWRITERS OF THE SERIES 2005-4 CLASS C1 NOTES 2005-4 CLASS C1 NOTES
- ------------------------------------------------ ------------------------------
Citigroup Global Markets Limited USD20,100,000
Credit Suisse First Boston (Europe) Limited USD20,100,000
Deutsche Bank Securities Inc. USD20,100,000
Lehman Brothers Inc. USD20,100,000
------------------------------
Total USD80,400,000
==============================
PRINCIPAL AMOUNT OF THE SERIES
UNDERWRITERS OF THE SERIES 2005-4 CLASS C2 NOTES 2005-4 CLASS C2 NOTES
- ------------------------------------------------ ------------------------------
Citigroup Global Markets Limited USD11,150,000
Credit Suisse First Boston (Europe) Limited USD11,150,000
Deutsche Bank Securities Inc. USD11,150,000
Lehman Brothers Inc. USD11,150,000
------------------------------
Total USD44,600,000
==============================
The price to the public as a percentage of the principal balance of the
offered notes will be 100%.
S-18
We have agreed to pay to the underwriters of the series 2005-4 class A1
notes a selling commission of 0.03033% of the aggregate principal amount of the
series 2005-4 class A1 notes and a management and underwriting fee of 0.01517
of the aggregate principal amount of the series 2005-4 class A1 notes. We have
also agreed to pay to the underwriters of the series 2005-4 class A3 notes a
selling commission of 0.04783% of the aggregate principal amount of the series
2005-4 class A3 notes and a management and underwriting fee of 0.02392% of the
aggregate principal amount of the series 2005-4 class A3 notes. We have also
agreed to pay to the underwriters of the series 2005-4 class B1 notes a selling
commission of 0.10267% of the aggregate principal amount of the series 2005-4
class B1 notes and a management and underwriting fee of 0.05133% of the
aggregate principal amount of the series 2005-4 class B1 notes. We have also
agreed to pay to the underwriters of the series 2005-4 class B2 notes a selling
commission of 0.10267% of the aggregate principal amount of the series 2005-4
class B2 notes and a management and underwriting fee of 0.05133% of the
aggregate principal amount of the series 2005-4 class B2 notes. We have also
agreed to pay to the underwriters of the series 2005-4 class M1 notes a selling
commission of 0.14000% of the aggregate principal amount of the series 2005-4
class M1 notes and a management and underwriting fee of 0.07000% of the
aggregate principal amount of the series 2005-4 class M1 notes. We have also
agreed to pay to the underwriters of the series 2005-4 class M2 notes a selling
commission of 0.14000% of the aggregate principal amount of the series 2005-4
class M2 notes and a management and underwriting fee of 0.07000% of the
aggregate principal amount of the series 2005-4 class M2 notes. We have also
agreed to pay to the underwriters of the series 2005-4 class C1 notes a selling
commission of 0.18667% of the aggregate principal amount of the series 2005-4
class C1 notes and a management and underwriting fee of 0.09333% of the
aggregate principal amount of the series 2005-4 class C1 notes. We have also
agreed to pay to the underwriters of the series 2005-4 class C2 notes a selling
commission of 0.18667% of the aggregate principal amount of the series 2005-4
class C2 notes and a management and underwriting fee of 0.09333% of the
aggregate principal amount of the series 2005-4 class C2 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 0.03033% per
series 2005-4 class A1 note, 0.4783% per series 2005-4 class A3 note, 0.10267%
per series 2005-4 class B1 note, 0.10267% per series 2005-4 class B2 note,
0.14000% per series 2005-4 class M1 note, 0.14000% per series 2005-4 class M2
note, 0.18667% per series 2005-4 class C1 note and 0.18667% per series 2005-4
class C2 note. The underwriters may allow, and those dealers may re-allow, a
concession not in excess of 0.01517% per series 2005-4 class A1 note, 0.02392%
per series 2005-4 class A3 note, 0.05133% per series 2005-4 class B1 note,
0.05133% per series 2005-4 class B2 note, 0.07000% per series 2005-4 class M1
note, 0.07000% per series 2005-4 class M2 note, 0.09333% per series 2005-4
class C1 note and 0.09333% per series 2005-4 class C2 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 $2,283,000.
PEOPLE'S REPUBLIC OF CHINA
Each underwriter has represented and agreed that neither it nor any of its
affiliates has offered or sold or will offer or sell any of the offered notes
in the People's Republic of China (excluding Hong Kong, Macau and Taiwan) as
part of the initial distribution of the offered notes.
S-19
MALAYSIA
Each underwriter has represented and agreed that the offered notes may not
be offered or sold, directly or indirectly, nor may any document or other
material in connection therewith be distributed in Malaysia other than to:
(i) a corporation with total net assets exceeding ten million Ringgit
or its equivalent in non-Ringgit currencies, based on the last
audited accounts of such corporation;
(ii) a person licensed as a dealer under the Securities Industry Act
1983;
(iii) a person licensed as a fund manager under the Securities Industry
Act 1983 or a person declared to be an exempt fund manager under
the Securities Industry Act 1983;
(iv) a licensed offshore bank as defined under the Offshore Banking Act
1990; or
(v) an offshore insurer as defined under the Offshore Insurance Act
1990.
Each underwriter has acknowledged that:
(a) residents of Malaysia are not permitted to purchase the offered
notes without first having had and obtained all the necessary
approvals from all relevant regulatory authorities, including but
not limited to all the necessary approvals from Bank Negara
Malaysia; and
(b) the onus of obtaining such approvals is on the residents concerned
and none of the note trustee, the issuer security trustee, the
underwriters, the Government of Malaysia or the issuer accepts any
responsibility for the purchase of any offered note by the
residents as aforesaid without the necessary approvals being in
place.
JAPAN
The offered notes have not been and will not be registered under the
Securities and Exchange Law of Japan and each underwriter has agreed that it
will not, directly or indirectly, offer or sell any offered notes in Japan or
to any resident of Japan except pursuant to an exemption from the registration
requirements of, and otherwise in compliance with, the Securities and Exchange
Law of Japan, and furthermore it has undertaken that any securities dealer to
whom it initially sells any offered notes will represent and agree that it has
not, directly or indirectly, re-offered or resold and it will not, directly or
indirectly, re-offer or resell any offered notes in Japan or to any resident of
Japan except pursuant to an exemption from the registration requirements of,
and otherwise in compliance with, the Securities and Exchange Law of Japan. As
used in this paragraph, "resident of Japan" means any person having his place
of domicile or residence in Japan, any corporation or other legal entity
organised under the laws of Japan except for its branches or other offices
located outside Japan and, with respect to any corporation or other legal
entity organised under a law other than Japanese law, its branches and offices
located in 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:
S-20
(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
(ii) 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 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 Securities and
Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
TAIWAN
Each underwriter has represented and agreed that the offered notes have not
been and will not be offered in Taiwan and may only be offered and sold to
Taiwan resident investors from outside Taiwan in such manner as complies with
Taiwan securities laws and regulations applicable to such cross border
activities.
SINGAPORE
This prospectus supplement or the accompanying prospectus has not been
registered as a prospectus with the Monetary Authority of Singapore.
Accordingly, each underwriter has represented and agreed that it has not
offered or sold and will not offer or sell any offered notes or make the
offered notes the subject of an invitation for subscription or purchase and it
has not circulated or distributed and will not circulate or distribute this
prospectus supplement or the accompanying prospectus or any other document or
material in connection with the offer or sale, or invitation for subscription
or purchase of such offered notes, whether directly or indirectly, to the
public or any member of the public in Singapore other than (i) to an
institutional investor or other person specified in Section 274 of the
Securities and Futures Act, Chapter 289 of Singapore (the "Securities and
Futures Act"); (ii) to a sophisticated investor as defined in, and in
accordance with the conditions specified in, Section 275 of the Securities and
Futures Act or (iii) pursuant to, and in accordance with, the conditions of any
applicable exemption under the Securities and Futures Act.
ITALY
The offering of the offered notes has not been cleared by CONSOB (the
Italian Securities Exchange Commission) pursuant to Italian securities
legislation and, accordingly, each of the underwriters has represented and
agreed, and each further underwriter will be required to represent and agree,
that no offered notes may be offered, sold or delivered, nor may copies of this
prospectus supplement or the accompanying prospectus or of any other document
relating to the offered notes be distributed in the Republic of Italy, except:
(i) to professional investors ("operatori qualificati"), as defined in
Article 31, second paragraph, of CONSOB Regulation No. 11522 of 1
July, 1998, as amended; or
(ii) in circumstances which are exempted from the rules on solicitation
of investments pursuant to Article 100 of Legislative Decree No. 58
of 24 February, 1998 (the "FINANCIAL SERVICES ACT") and Article 33,
first paragraph, of CONSOB Regulation No. 11971 of 14 May, 1999, as
amended.
S-21
Each of the underwriters has represented and agreed, and each further
underwriter will be required to represent and agree, that any offer, sale or
delivery of the offered notes or distribution of copies of this prospectus
supplement or the accompanying prospectus or any other document relating to the
offered notes in the Republic of Italy under (i) or (ii) above must be:
(a) made by an investment firm, bank or financial intermediary
permitted to conduct such activities in the Republic of Italy in
accordance with the Financial Services Act and Legislative Decree
No. 385 of 1 September, 1993 (the "BANKING ACT"), as amended;
(b) in compliance with Article 129 of the Banking Act and the
implementing guidelines of the Bank of Italy pursuant to which the
issue or the offer of securities in the Republic of Italy may need
to be preceded and followed by an appropriate notice to be filed
with the Bank of Italy depending, inter alia, on the aggregate
value of the securities issued or offered in the Republic of Italy
and their characteristics; and
(c) in accordance with any other applicable laws and regulations.
S-22
LEGAL MATTERS
Certain matters of English law and United States law regarding the offered
notes, including matters relating to the validity of the issuance of the
offered notes, will be passed upon for Northern Rock 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 Northern Rock 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-23
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 US dollar figures set forth in the tables below
have been calculated based on the currency exchange rate of [GBP]1 = $1.7557
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. The
mortgage portfolio may change from time to time as new mortgage loans are
assigned to the mortgages trustee. The assignment of new mortgage loans can
only be made if such mortgage loans meet the criteria under the mortgage sale
agreement. 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.
260,402 of the mortgages securing the mortgage loans in the cut-off date
mortgage portfolio (or 75.41% 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 101,894 of the
mortgages securing the mortgage loans in the cut-off date mortgage portfolio
(or 24.59% 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.
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 July 31, 2005 (the
"CUT-OFF DATE") and comprised 362,296 mortgage loans having an aggregate
current balance of [GBP]35,438,816,369.90 as at that date. The seller
originated the mortgage loans in the cut-off date mortgage portfolio between
July 1, 1995 and May 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 May 31, 2005). None of the mortgage loans in the additional
mortgage portfolio had an aggregate monthly payment that was overdue by more
than one month during the twelve months immediately preceding the cut-off date.
There has been no revaluation of the mortgaged properties for the purposes of
the issue of the offered notes.
The borrowers in respect of 362,272 of the mortgage loans in the cut-off
date mortgage portfolio (or 89.87% 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.
170,400 mortgage loans in the cut-off date mortgage portfolio (or 54.44% of
the aggregate current balance of the mortgage loans as of the cut-off date)
were fixed rate mortgage loans. The remaining 191,896 of the mortgage loans in
the cut-off date mortgage portfolio (or 45.56% of the aggregate current balance
of the mortgage loans as of the cut-off date) were standard variable rate
mortgage loans, discounted variable rate
A-1
mortgage loans, "Together", "Together Connections", "Connections" and flexible
capped rate mortgage loans, as described below.
319,502 of the mortgage loans in the cut-off date mortgage portfolio (or
91.39% of the aggregate current balance of the mortgage loans as of the cut-off
date) were flexible mortgage loans, 104,507 mortgage loans (or 22.17% of the
aggregate current balance of the mortgage loans as of the cut-off-date) of
which were Together mortgage loans.
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
NUMBER OF
AGGREGATE CURRENT AGGREGATE CURRENT % OF TOTAL MORTGAGE
TYPE OF PROPERTY BALANCE ([GBP]) BALANCE (US$) LOANS LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
Detached Bungalow 1,090,633,932.77 1,914,825,995.76 3.08% 9,658 2.67%
Detached House 8,411,187,851.45 14,767,522,510.79 23.73% 60,145 16.60%
Flat 4,358,985,336.56 7,653,070,555.40 12.30% 48,018 13.25%
Maisonette 554,739,064.77 973,955,376.02 1.57% 5,116 1.41%
Not Known 499,950,643.49 877,763,344.78 1.41% 5,208 1.44%
New Property 13,978,401.33 24,541,879.22 0.04% 106 0.03%
Other 140,721,794.08 247,065,253.87 0.40% 1,010 0.28%
Semi Detached Bungalow 464,273,709.81 815,125,352.31 1.31% 5,605 1.55%
Purpose Built Flat 48,082,745.71 84,418,876.64 0.14% 866 0.24%
Semi Detached House 9,312,806,770.02 16,350,494,846.12 26.28% 99,995 27.60%
Terraced House 10,543,456,119.91 18,511,145,909.73 29.75% 126,569 34.94%
----------------- ----------------- ---------- --------- ----------
TOTAL 35,438,816,369.90 62,219,929,900.63 100.00% 362,296 100.00%
================= ================= ========== ========= ==========
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.
NUMBER OF
AGE OF MORTGAGE AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
LOANS (MONTHS) BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
0 to 6 2,488,477,044.94 4,369,019,147.80 7.02% 21,525 5.94%
6 to 12 7,286,325,981.72 12,792,602,526.11 20.56% 63,049 17.40%
12 to 18 7,334,243,445.95 12,876,731,218.05 20.70% 65,624 18.11%
18 to 24 4,548,378,362.46 7,985,587,890.97 12.83% 43,378 11.97%
24 to 30 4,492,127,279.08 7,886,827,863.88 12.68% 46,939 12.96%
30 to 36 2,717,031,179.12 4,770,291,641.18 7.67% 30,206 8.34%
36 to 42 1,942,518,896.00 3,410,480,425.71 5.48% 23,900 6.60%
42 to 48 1,143,877,989.31 2,008,306,585.83 3.23% 14,821 4.09%
48 to 54 857,439,627.65 1,505,406,754.27 2.42% 11,905 3.29%
54 to 60 530,444,906.63 931,302,122.57 1.50% 7,738 2.14%
60 to 66 387,522,908.50 680,373,970.45 1.09% 5,862 1.62%
66 to 72 299,980,735.67 526,676,177.62 0.85% 4,604 1.27%
72 to 78 317,708,844.74 557,801,418.71 0.90% 4,697 1.30%
78 to 84 186,685,756.73 327,764,183.09 0.53% 2,921 0.81%
84 to 90 300,214,935.64 527,087,362.50 0.85% 4,147 1.14%
90 to 96 175,524,100.33 308,167,662.95 0.50% 2,683 0.74%
96 to 102 124,096,804.62 217,876,759.87 0.35% 2,084 0.58%
102 to 108 89,070,684.17 156,381,400.20 0.25% 1,788 0.49%
108 to 114 110,296,731.02 193,647,970.65 0.31% 2,176 0.60%
114 to 120 67,448,173.33 118,418,757.92 0.19% 1,403 0.39%
120 to 126 39,401,982.29 69,178,060.31 0.11% 846 0.23%
----------------- ----------------- ---------- --------- ----------
TOTAL 35,438,816,369.90 62,219,929,900.63 100.00% 362,296 100.00%
================= ================= ========== ========= ==========
A-2
The weighted average seasoning of mortgage loans as of the closing date is
expected to be 24.49 months and the maximum seasoning of mortgage loans as of
the closing date is expected to be 122.73 months. The minimum seasoning of the
mortgage loans as of the closing date is expected to be 3.85 months.
YEARS TO MATURITY AT CLOSING
NUMBER OF
AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
YEARS TO MATURITY BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
Less than zero 1,680,451.64 2,950,368.94 0.00% 43 0.01%
0 to 5 207,158,218.71 363,707,684.59 0.58% 4,631 1.28%
5 to 10 1,778,653,548.19 3,122,782,034.56 5.02% 24,538 6.77%
10 to 15 3,334,751,499.49 5,854,823,207.65 9.41% 39,101 10.79%
15 to 20 6,447,979,213.72 11,320,717,105.53 18.19% 66,171 18.26%
20 to 25 20,373,570,981.99 35,769,878,573.08 57.49% 195,290 53.90%
25 to 30 2,939,338,480.13 5,160,596,569.56 8.29% 29,370 8.11%
35 to 40 119,234.73 209,340.42 0.00% 1 0.00%
----------------- ----------------- ---------- --------- ----------
TOTAL 35,438,816,369.90 62,219,929,900.63 100.00% 362,296 100.00%
================= ================= ========== ========= ==========
The weighted average remaining term of the mortgage loans as of the closing
date is expected to be 20.56 years and the maximum remaining term as of the
closing date is expected to be 34.68 years. The minimum remaining term as of
the closing date is expected to be less than one month.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
The following table shows the spread of mortgaged properties securing the
mortgage loans throughout England, 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.
NUMBER OF
AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
REGION BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
East Anglia 707,653,668.61 1,242,427,545.98 2.00% 7,142 1.97%
East Midlands 2,251,313,595.51 3,952,631,279.64 6.35% 25,385 7.01%
Greater London 6,885,160,842.12 12,088,276,890.51 19.43% 43,654 12.05%
North 2,385,108,362.03 4,187,534,751.22 6.73% 36,673 10.12%
North West 3,851,217,703.41 6,761,582,921.88 10.87% 48,340 13.34%
Scotland 3,404,558,561.59 5,977,383,466.58 9.61% 48,207 13.31%
South East
(excluding London) 7,158,077,699.05 12,567,437,016.22 20.20% 54,090 14.93%
South West 2,603,463,726.87 4,570,901,265.27 7.35% 23,555 6.50%
Wales 1,178,800,017.57 2,069,619,190.85 3.33% 14,779 4.08%
West Midlands 2,216,464,393.30 3,891,446,535.32 6.25% 23,896 6.60%
Yorkshire 2,796,997,799.84 4,910,689,037.18 7.89% 36,575 10.10%
----------------- ----------------- ---------- --------- ----------
TOTAL 35,438,816,369.90 62,219,929,900.63 100.00% 362,296 100.00%
================= ================= ========== ========= ==========
CURRENT LOAN-TO-VALUE RATIOS
The following table shows the range of current loan-to-value, or LTV,
ratios, which express the outstanding balance of a mortgage loan as at the cut-
off date divided by the value of the mortgaged property securing that mortgage
loan at the same date. The seller has not revalued any of the mortgaged
properties since the date of the origination of the related mortgage loan,
other than in respect of a mortgaged property of a related borrower
A-3
that has remortgaged its property or to which the seller has made a further
advance, as described in the prospectus under "THE MORTGAGE LOANS --
CHARACTERISTICS OF THE MORTGAGE LOANS -- MAXIMUM LTV RATIO".
NUMBER OF
AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
CURRENT LTV BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
0% to 25% 497,491,999.76 873,446,703.98 1.40% 12,677 3.50%
25% to 50% 3,269,514,644.83 5,740,286,861.93 9.23% 42,523 11.74%
50% to 55% 1,293,131,041.50 2,270,350,169.56 3.65% 13,753 3.80%
55% to 60% 1,487,551,038.08 2,611,693,357.56 4.20% 14,992 4.14%
60% to 65% 1,822,103,796.41 3,199,067,635.36 5.14% 17,432 4.81%
65% to 70% 2,205,610,032.35 3,872,389,533.80 6.22% 20,986 5.79%
70% to 75% 2,946,970,711.91 5,173,996,478.90 8.32% 26,993 7.45%
75% to 80% 3,263,013,580.21 5,728,872,942.77 9.21% 27,459 7.58%
80% to 85% 5,279,201,248.10 9,268,693,631.29 14.90% 45,798 12.64%
85% to 90% 4,703,817,010.54 8,258,491,525.41 13.27% 44,066 12.16%
90% to 95% 5,710,178,530.92 10,025,360,446.74 16.11% 63,903 17.64%
95% to 100% 2,914,281,754.92 5,116,604,477.11 8.22% 31,094 8.58%
> 100% 45,950,980.37 80,676,136.24 0.13% 620 0.17%
----------------- ----------------- ---------- --------- ----------
TOTAL 35,438,816,369.90 62,219,929,900.63 100.00% 362,296 100.00%
================= ================= ========== ========= ==========
The weighted average current loan-to-value ratio of the mortgage loans at
the cut-off date was 75.74%.
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).
NUMBER OF
AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
CURRENT INDEXED LTV BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
0% to 25% 1,107,143,880.62 1,943,812,511.20 3.12% 25,428 7.02%
25% to 50% 5,665,545,076.14 9,946,997,490.18 15.99% 76,113 21.01%
50% to 55% 1,729,775,572.87 3,036,966,973.29 4.88% 18,622 5.14%
55% to 60% 2,029,944,954.04 3,563,974,355.81 5.73% 21,277 5.87%
60% to 65% 2,356,342,908.17 4,137,031,243.87 6.65% 23,346 6.44%
65% to 70% 2,843,263,858.02 4,991,918,355.53 8.02% 27,858 7.69%
70% to 75% 3,488,846,954.15 6,125,368,597.40 9.84% 31,030 8.56%
75% to 80% 3,414,138,443.93 5,994,202,866.01 9.63% 28,823 7.96%
80% to 85% 4,428,320,433.45 7,774,802,185.01 12.50% 34,440 9.51%
85% to 90% 3,501,982,968.53 6,148,431,497.85 9.88% 30,932 8.54%
90% to 95% 3,340,801,658.75 5,865,445,472.27 9.43% 30,701 8.47%
95% to 100% 1,297,894,115.09 2,278,712,697.86 3.66% 11,140 3.07%
> 100% 234,815,546.14 412,265,654.36 0.66% 2,586 0.71%
----------------- ----------------- ---------- --------- ----------
TOTAL 35,438,816,369.90 62,219,929,900.63 100.00% 362,296 100.00%
================= ================= ========== ========= ==========
A-4
The weighted average current indexed loan-to-value ratio of the mortgage
loans as of the cut-off date was 68.99%.
OUTSTANDING CURRENT BALANCES
NUMBER OF
RANGE OF CURRENT AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
PRINCIPAL BALANCE BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
0 to 25,000 228,457,959.07 401,103,638.74 0.64% 12,830 3.54%
25,000 to 50,000 2,556,781,548.80 4,488,941,365.23 7.21% 65,855 18.18%
50,000 to 75,000 5,338,755,794.28 9,373,253,548.02 15.06% 85,574 23.62%
75,000 to 100,000 5,770,547,749.44 10,131,350,683.69 16.28% 66,653 18.40%
100,000 to 125,000 5,040,771,647.45 8,850,082,781.43 14.22% 45,097 12.45%
125,000 to 150,000 3,986,360,479.23 6,998,853,093.38 11.25% 29,181 8.05%
150,000 to 175,000 3,013,992,760.91 5,291,667,090.33 8.50% 18,688 5.16%
175,000 to 200,000 2,196,111,482.40 3,855,712,929.65 6.20% 11,776 3.25%
200,000 to 225,000 1,673,465,390.27 2,938,103,185.70 4.72% 7,931 2.19%
225,000 to 250,000 1,250,402,431.85 2,195,331,549.60 3.53% 5,288 1.46%
250,000 to 275,000 921,375,217.05 1,617,658,468.57 2.60% 3,525 0.97%
275,000 to 300,000 715,952,130.26 1,256,997,155.10 2.02% 2,494 0.69%
300,000 to 325,000 575,318,708.74 1,010,087,056.93 1.62% 1,851 0.51%
325,000 to 350,000 473,025,874.86 830,491,528.49 1.33% 1,403 0.39%
350,000 to 375,000 418,534,841.23 734,821,620.75 1.18% 1,159 0.32%
375,000 to 400,000 307,329,431.33 539,578,282.59 0.87% 795 0.22%
400,000 to 425,000 315,967,578.67 554,744,277.87 0.89% 771 0.21%
425,000 to 450,000 223,005,247.08 391,530,312.30 0.63% 510 0.14%
450,000 to 475,000 229,329,465.68 402,633,742.89 0.65% 498 0.14%
475,000 to 500,000 203,330,631.30 356,987,589.37 0.57% 417 0.12%
----------------- ----------------- ---------- --------- ----------
TOTAL 35,438,816,369.90 62,219,929,900.63 100.00% 362,296 100.00%
================= ================= ========== ========= ==========
The largest mortgage loan had a current balance as of the cut-off date of
[GBP]499,999.79 or $877,849.63. The average current balance as of the cut-off
date was approximately [GBP]97,817.30 or $171,737.83.
MORTGAGE LOAN PRODUCTS
NUMBER OF
MORTGAGE LOAN AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
PRODUCTS BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- ---------- --------- ----------
Tracker 1,616,064,982.27 2,837,325,289.37 4.56% 12,481 3.45%
Variable 3,876,643,410.35 6,806,222,835.55 10.94% 49,488 13.66%
Capped 159,093,737.19 279,320,874.38 0.45% 2,384 0.66%
Discount 2,636,730,988.99 4,629,308,597.37 7.44% 23,036 6.36%
Fixed 19,291,554,268.45 33,870,181,829.12 54.44% 170,400 47.03%
Together Connections 188,517,302.31 330,979,827.67 0.53% 3,171 0.88%
Together 7,670,211,680.34 13,466,590,647.17 21.64% 101,336 27.97%
----------------- ----------------- ---------- --------- ----------
TOTAL 35,438,816,369.90 62,219,929,900.63 100.00% 362,296 100.00%
================= ================= ========== ========= ==========
A-5
EMPLOYMENT STATUS
NUMBER OF
AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
EMPLOYMENT STATUS BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ----------------- ----------------- ----------------- ---------- --------- ----------
Full Time 28,981,335,552.59 50,882,530,829.68 81.78% 314,620 86.84%
Part Time 321,134,393.54 563,815,654.74 0.91% 4,673 1.29%
Retired 17,708,297.52 31,090,457.96 0.05% 493 0.14%
Self Employed 5,953,502,941.83 10,452,565,114.97 16.80% 39,222 10.83%
Other 165,135,184.42 289,927,843.29 0.47% 3,288 0.91%
----------------- ----------------- ---------- --------- ----------
TOTAL 35,438,816,369.90 62,219,929,900.63 100.00% 362,296 100.00%
================= ================= ========== ========= ==========
Approximately 42.64% of the aggregate current balance of the mortgage loans
as of the cut-off date were made to borrowers under the seller's non-verified
income program as described in the prospectus under "THE MORTGAGE LOANS --
CHARACTERISTICS OF THE MORTGAGE LOANS -- LENDING CRITERIA".
DISTRIBUTION OF FIXED RATE MORTGAGE LOANS
Fixed rate mortgage loans remain at the relevant fixed rate for a period of
time as specified in the offer of advance, after which they change to the
seller's standard variable rate or some other rate as specified in the offer of
advance.
NUMBER OF
AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
FIXED RATE % BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ------------ ----------------- ----------------- ---------- --------- ----------
0-2.99% 837,223,644.89 1,469,913,553.33 4.34% 7,101 4.17%
3.00-3.99% 967,217,761.74 1,698,144,224.29 5.01% 6,984 4.10%
4.00-4.99% 10,115,550,733.85 17,759,872,423.42 52.44% 81,708 47.95%
5.00-5.99% 7,106,085,527.26 12,476,154,360.21 36.84% 71,199 41.78%
6.00-6.99% 265,070,247.78 465,383,834.03 1.37% 3,369 1.99%
7.00-7.99% 406,352.93 713,433.84 0.00% 12 0.01%
----------------- ----------------- ---------- --------- ----------
TOTAL 19,291,554,268.45 33,870,181,829.12 100.00% 170,400 100.00%
================= ================= ========== ========= ==========
MONTH/YEAR IN WHICH FIXED RATE PERIOD ENDS
NUMBER OF
MONTH/YEAR IN WHICH AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
FIXED RATE PERIOD ENDS BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- -------------- --------- ----------
August 2005 8,444,726.61 14,826,406.51 0.04% 81 0.05%
September 2005 598,552,837.01 1,050,879,215.94 3.10% 4,789 2.81%
October 2005 898,188,860.18 1,576,950,181.82 4.66% 7,134 4.19%
November 2005 198,115,055.50 347,830,602.94 1.03% 1,796 1.05%
December 2005 41,220,103.09 72,370,135.00 0.21% 596 0.35%
January 2006 391,170,577.50 686,778,182.92 2.03% 3,436 2.02%
February 2006 448,338,984.98 787,148,755.93 2.32% 3,463 2.03%
March 2006 469,363,500.09 824,061,497.11 2.43% 3,834 2.25%
April 2006 433,755,395.54 761,544,347.95 2.25% 3,442 2.02%
May 2006 820,360,479.57 1,440,306,893.98 4.25% 7,037 4.13%
June 2006 1,977,112,211.56 3,471,215,909.84 10.25% 15,280 8.97%
July 2006 510,529,348.57 896,336,377.28 2.65% 3,441 2.02%
August 2006 1,827,934,361.82 3,209,304,359.05 9.48% 14,441 8.47%
September 2006 872,410,214.15 1,531,690,612.98 4.52% 7,728 4.54%
October 2006 373,014,622.19 654,901,772.18 1.93% 3,518 2.06%
November 2006 958,165,252.60 1,682,250,733.99 4.97% 7,892 4.63%
January 2007 1,373,610,369.98 2,411,647,726.57 7.12% 10,862 6.37%
February 2007 510,303,773.08 895,940,334.40 2.65% 3,879 2.28%
March 2007 11,939,580.97 20,962,322.31 0.06% 146 0.09%
A-6
NUMBER OF
MONTH/YEAR IN WHICH AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
FIXED RATE PERIOD ENDS BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- -------------- --------- ----------
April 2007 306,472,666.72 538,074,060.96 1.59% 2,912 1.71%
May 2007 158,195,830.59 277,744,419.77 0.82% 1,318 0.77%
June 2007 297,681,717.20 522,639,790.89 1.54% 2,761 1.62%
July 2007 58,889,549.79 103,392,382.57 0.31% 432 0.25%
August 2007 218,050,090.04 382,830,543.08 1.13% 2,364 1.39%
September 2007 145,159,918.93 254,857,269.67 0.75% 1,546 0.91%
October 2007 54,963,444.30 96,499,319.16 0.28% 730 0.43%
November 2007 98,963,604.56 173,750,400.53 0.51% 1,208 0.71%
December 2007 180,764,472.48 317,368,184.33 0.94% 1,812 1.06%
January 2008 160,287,875.21 281,417,422.51 0.83% 1,986 1.17%
February 2008 537,682,661.80 944,009,449.32 2.79% 4,907 2.88%
March 2008 107,877,479.12 189,400,490.09 0.56% 1,288 0.76%
April 2008 118,063,231.08 207,283,614.81 0.61% 1,039 0.61%
May 2008 270,184,331.27 474,362,630.41 1.40% 2,826 1.66%
June 2008 201,876,251.99 354,434,135.62 1.05% 1,984 1.16%
July 2008 57,062,753.61 100,185,076.51 0.30% 502 0.29%
August 2008 125,567,346.59 220,458,590.41 0.65% 1,383 0.81%
September 2008 103,536,776.99 181,779,519.36 0.54% 1,274 0.75%
October 2008 109,373,462.33 192,026,987.81 0.57% 1,164 0.68%
November 2008 35,546,156.25 62,408,386.53 0.18% 442 0.26%
January 2009 97,272,404.93 170,781,161.34 0.50% 1,103 0.65%
February 2009 28,155,868.40 49,433,258.15 0.15% 373 0.22%
March 2009 18,822,236.36 33,046,200.38 0.10% 193 0.11%
April 2009 102,907,879.43 180,675,363.92 0.53% 1,246 0.73%
May 2009 22,739,100.37 39,923,038.52 0.12% 252 0.15%
June 2009 115,415,227.47 202,634,514.87 0.60% 1,256 0.74%
August 2009 157,428,822.79 276,397,784.17 0.82% 1,677 0.98%
September 2009 158,615,205.77 278,480,716.77 0.82% 1,651 0.97%
October 2009 60,848,457.14 106,831,636.20 0.32% 722 0.42%
November 2009 51,337,454.18 90,133,168.30 0.27% 564 0.33%
December 2009 191,018,701.36 335,371,533.98 0.99% 2,159 1.27%
January 2010 177,808,156.72 312,177,780.75 0.92% 1,978 1.16%
February 2010 422,895,655.63 742,477,902.59 2.19% 3,834 2.25%
March 2010 22,153,024.44 38,894,065.01 0.11% 269 0.16%
April 2010 146,119,612.80 256,542,204.19 0.76% 1,312 0.77%
May 2010 254,888,446.44 447,507,645.41 1.32% 2,672 1.57%
June 2010 346,893,013.42 609,040,063.66 1.80% 3,248 1.91%
July 2010 36,630,958.77 64,312,974.31 0.19% 361 0.21%
August 2010 50,986,357.52 89,516,747.90 0.26% 537 0.32%
September 2010 46,696,373.59 81,984,823.11 0.24% 517 0.30%
October 2010 34,981,776.20 61,417,504.47 0.18% 398 0.23%
November 2010 8,865,646.31 15,565,415.23 0.05% 109 0.06%
December 2010 22,995,018.67 40,372,354.28 0.12% 279 0.16%
March 2011 6,729,254.79 11,814,552.63 0.03% 83 0.05%
April 2011 5,532,273.70 9,713,012.94 0.03% 72 0.04%
May 2011 2,939,792.22 5,161,393.20 0.02% 33 0.02%
June 2011 9,625,545.45 16,899,570.15 0.05% 117 0.07%
August 2011 8,070,988.07 14,170,233.75 0.04% 116 0.07%
September 2011 21,961,097.95 38,557,099.67 0.11% 250 0.15%
October 2011 12,317,311.77 21,625,504.27 0.06% 141 0.08%
November 2011 14,738,460.71 25,876,315.47 0.08% 169 0.10%
January 2012 12,614,121.59 22,146,613.28 0.07% 160 0.09%
February 2012 39,653,286.13 69,619,274.46 0.21% 394 0.23%
April 2012 9,070,656.53 15,925,351.67 0.05% 93 0.05%
May 2012 10,025,788.11 17,602,276.18 0.05% 102 0.06%
June 2012 12,631,613.58 22,177,323.96 0.07% 131 0.08%
July 2012 2,391,742.10 4,199,181.60 0.01% 25 0.01%
August 2012 2,268,006.58 3,981,939.15 0.01% 22 0.01%
September 2012 1,914,022.21 3,360,448.79 0.01% 17 0.01%
November 2012 123,747.40 217,263.31 0.00% 3 0.00%
December 2012 709,053.36 1,244,884.98 0.00% 11 0.01%
January 2013 2,242,082.39 3,936,424.05 0.01% 45 0.03%
February 2013 1,794.90 3,151.31 0.00% 1 0.00%
March 2013 2,274,514.76 3,993,365.56 0.01% 42 0.02%
May 2013 1,085,466.74 1,905,753.96 0.01% 22 0.01%
June 2013 658,059.15 1,155,354.45 0.00% 15 0.01%
A-7
NUMBER OF
MONTH/YEAR IN WHICH AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
FIXED RATE PERIOD ENDS BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ----------------- ----------------- -------------- --------- ----------
August 2013 463,507.33 813,779.82 0.00% 8 0.00%
September 2013 509,019.94 893,686.31 0.00% 11 0.01%
October 2013 1,029,349.76 1,807,229.37 0.01% 20 0.01%
April 2014 5,061,015.66 8,885,625.19 0.03% 58 0.03%
May 2014 2,174,307.35 3,817,431.41 0.01% 28 0.02%
June 2014 9,565,184.24 16,793,593.97 0.05% 123 0.07%
August 2014 6,463,536.82 11,348,031.59 0.03% 80 0.05%
September 2014 17,774,959.64 31,207,496.64 0.09% 196 0.12%
October 2014 8,050,070.04 14,133,507.97 0.04% 99 0.06%
November 2014 11,621,782.86 20,404,364.17 0.06% 142 0.08%
January 2015 13,599,484.13 23,876,614.29 0.07% 176 0.10%
February 2015 69,954,701.81 122,819,469.97 0.36% 679 0.40%
April 2015 21,234,838.74 37,282,006.38 0.11% 210 0.12%
May 2015 13,262,240.82 23,284,516.21 0.07% 143 0.08%
June 2015 22,573,934.87 39,633,057.45 0.12% 229 0.13%
July 2015 4,528,405.86 7,950,522.17 0.02% 49 0.03%
August 2015 3,230,148.40 5,671,171.55 0.02% 35 0.02%
September 2015 2,828,721.89 4,966,387.02 0.01% 31 0.02%
January 2017 168,491.37 295,820.30 0.00% 4 0.00%
November 2017 178,115.61 312,717.58 0.00% 2 0.00%
December 2017 280,386.21 492,274.07 0.00% 4 0.00%
January 2018 4,090,694.93 7,182,033.09 0.02% 69 0.04%
February 2018 125,445.11 220,243.98 0.00% 4 0.00%
March 2018 3,126,555.24 5,489,293.03 0.02% 50 0.03%
May 2018 4,103,289.24 7,204,144.92 0.02% 74 0.04%
June 2018 2,308,401.87 4,052,861.16 0.01% 33 0.02%
August 2018 168,791.31 296,346.90 0.00% 3 0.00%
September 2018 1,203,586.59 2,113,136.98 0.01% 14 0.01%
October 2018 1,000,399.60 1,756,401.58 0.01% 15 0.01%
April 2019 4,924,609.40 8,646,136.72 0.03% 51 0.03%
May 2019 4,530,470.51 7,954,147.07 0.02% 42 0.02%
June 2019 13,361,129.15 23,458,134.45 0.07% 127 0.07%
August 2019 11,990,836.00 21,052,310.77 0.06% 124 0.07%
September 2019 16,157,877.34 28,368,385.25 0.08% 175 0.10%
October 2019 8,753,190.18 15,367,976.00 0.05% 101 0.06%
November 2019 13,147,119.14 23,082,397.07 0.07% 154 0.09%
January 2020 17,708,782.76 31,091,309.89 0.09% 192 0.11%
February 2020 76,053,135.84 133,526,490.59 0.39% 713 0.42%
April 2020 19,102,362.85 33,538,018.46 0.10% 192 0.11%
May 2020 14,043,514.26 24,656,197.99 0.07% 142 0.08%
June 2020 24,457,356.37 42,939,780.58 0.13% 235 0.14%
July 2020 5,169,742.61 9,076,517.10 0.03% 50 0.03%
August 2020 2,680,431.33 4,706,033.29 0.01% 27 0.02%
September 2020 4,010,388.73 7,041,039.49 0.02% 39 0.02%
----------------- ----------------- -------------- --------- ----------
19,291,554,268.45 33,870,181,829.12 100.00% 170,400 100.00%
================= ================= ============== ========= ==========
A-8
REPAYMENT TERMS
NUMBER OF
TYPE OF REPAYMENT AGGREGATE CURRENT AGGREGATE CURRENT MORTGAGE
PLANS BALANCE ([GBP]) BALANCE (US$) % OF TOTAL LOANS % OF TOTAL
- -------------------------- ----------------- ----------------- ---------- --------- ----------
Endowment 1,701,381,926.22 2,987,116,247.86 4.80% 21,887 6.04%
Interest Only 10,458,599,194.97 18,362,162,606.61 29.51% 70,439 19.44%
Pension Policy 53,396,780.70 93,748,727.87 0.15% 528 0.15%
Personal Equity Plan 72,092,472.94 126,572,754.74 0.20% 961 0.27%
Repayment 23,153,345,995.07 40,650,329,563.54 65.33% 268,481 74.11%
----------------- ----------------- ---------- --------- ----------
TOTAL 35,438,816,369.90 62,219,929,900.63 100.00% 362,296 100.00%
================= ================= ========== ========= ==========
A-9
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 July 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.
ANNUALIZED ANNUALIZED
MONTH CPR MONTH 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%
April 2005 45.31%
May 2005 44.95%
June 2005 55.33%
July 2005 43.37%
- ----------
Source: Northern Rock Investor Report
A-10
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.
FOUR
CPR FOR QUARTER
THE ROLLING
QUARTER AVERAGE
DATE (%) (%)
- -------------------------------------------------------------- ------- -------
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-11
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 ARREARS
6-12 ARREARS 12 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.
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.
A-12
HOUSE PRICE HOUSE PRICE
TO EARNINGS TO EARNINGS
YEAR RATIO YEAR 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 9.9 527.0 9.7
2005 Q2 192.2 2.9 316.9 6.1 527.1 3.7
- ----------
1 The percentage annual change is calculated in accordance with the following
formula:
(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 PROCEDURES" and is important in helping to
understand Northern Rock's arrears and repossession experience as set forth in
the following table.
A-13
DECEMBER 31, 1996(1) DECEMBER 31, 1997(1) DECEMBER 31, 1998(1) 31, 1999(1) DECEMBER
--------------------------- -------------------------- -------------------------- --------------------------
US$ US$ US$ US$
[GBP] (MLS) (MLS) % [GBP] (MLS) (MLS) % [GBP] (MLS) (MLS) % [GBP] (MLS) (MLS) %
----------- -------- ---- ----------- ------- ---- ----------- ------- ---- ----------- ------- ----
Current balance 10,515 18.461 n/a 12,119 21,277 n/a 13,720 24,088 n/a 15,524 27,255 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 338,149 338,149 n/a
Current balance of
loans in arrears
1 to 2 months 231.3 406.09 2.20 283.4 497.57 2.34 244.4 429.09 1.78 247.5 434.54 1.59
2 to 3 months 82.0 143.97 0.78 71.2 125.01 0.59 101.8 178.73 0.74 62.5 109.73 0.40
3 to 6 months 93.5 164.16 0.89 78.1 137.12 0.64 93.7 164.51 0.68 71.7 125.88 0.46
6 to 12 months 83.5 146.60 0.79 56.3 98.85 0.46 51.2 89.89 0.37 36.0 63.21 0.23
Over 12 months 96.9 170.13 0.92 45.1 79.18 0.37 37.5 65.84 0.27 21.3 37.40 0.14
Total current
balance of
mortgage loans
in arrears 587.2 1,030.95 5.58 534.1 937.72 4.41 528.6 928.06 3.85 439.0 770.75 2.83
Number of mortgage
loans outstanding
in arrears
1 to 2 months 6,136 6,136 2.10 6,922 6,922 2.20 6,040 6,040 1.85 5,428 5,428 1.61
2 to 3 months 2,247 2,247 0.77 1,793 1,793 0.57 2,579 2,579 0.79 1,470 1,470 0.43
3 to 6 months 2,485 2,485 0.85 1,911 1,911 0.61 2,269 2,269 0.69 1,749 1,749 0.52
6 to 12 months 2,005 2,005 0.69 1,322 1,322 0.42 1,174 1,174 0.36 870 870 0.26
Over 12 months 2,104 2,104 0.72 940 940 0.30 756 756 0.23 447 447 0.13
Total number of
mortgage loans
outstanding in
arrears 14,977 14,977 5.13 12,888 12,888 4.09 12,818 12,818 3.92 9,964 9,964 2.95
Repossessions
during year 1,133 1,133 0.39 956 956 0.30 875 875 0.27 763 763 0.23
Amount of mortgage
loan losses 14.0 24.58 n/a 14 24.58 n/a 10.8 18.96 n/a 8.5 14.92 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 0.05% 0.05% n/a
DECEMBER 31, 2000(1) DECEMBER 31, 2001(1) DECEMBER 31, 2002(1) DECEMBER 31, 2003(1)
--------------------------- -------------------------- ------------------------ ---------------------------
US$ US$ US$ US$
[GBP] (MLS) (MLS) % [GBP] (MLS) (MLS) % [GBP] (MLS) (MLS) % [GBP] (MLS) (MLS) %
----------- ------- ---- ----------- ------- ---- ----------- ----------- ----------- -------- ----
Current balance 17,858 31,353 n/a 21,639 37,992 n/a 28,955 50,836 n/a 36,875 64,741 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 531,403 531,403 n/a
Current balance of
loans in arrears
1 to 2 months 218.2 383.09 1.22 231.98 407.28 1.07 271.07 475.920.94 349.77 614.09 0.95
2 to 3 months 77.1 135.36 0.43 78.08 137.08 0.36 104.94 184.240.36 123.18 216.27 0.33
3 to 6 months 69.3 121.67 0.39 74.11 130.11 0.34 96.55 169.510.33 101.42 178.06 0.28
6 to 12 months 34.8 61.10 0.19 36.17 63.50 0.17 32.60 57.240.11 36.86 64.72 0.10
Over 12 months 13.2 23.18 0.07 9.27 16.28 0.04 7.39 12.970.03 5.96 10.46 0.02
Total current
balance of
mortgage loans in
arrears 412.6 724.40 2.31 429.60 754.26 1.99 512.55 899.881.77 617.19 1,083.60 1.67
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 4,5570.93 5,260 5,260 0.99
2 to 3 months 1,896 1,896 0.52 1,694 1,694 0.41 2,150 2,1500.44 1,965 1,965 0.37
3 to 6 months 1,601 1,601 0.44 1,598 1,598 0.39 1,946 1,9460.40 1,674 1,674 0.32
6 to 12 months 800 800 0.22 736 736 0.18 658 6580.13 634 634 0.12
Over 12 months 290 290 0.08 191 191 0.05 133 1330.03 106 106 0.02
Total number of
mortgage loans
outstanding in
arrears 9,691 9,691 2.63 9,080 9,080 2.19 9,444 9,4441.93 9,639 9,639 1.81
Repossessions
during year 620 620 0.17 658 658 0.16 573 5730.06 509 509 0.09
Amount of mortgage
loan losses 7 12.29 n/a 5.27 9.25 n/a 3.72 6.53 n/a 1.00 1.76 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 0.00% 0.00% n/a
A-14
DECEMBER 31, 2004(1) JUNE 30, 2005(1)
----------------------------- ----------------------------
[GBP] (MLS) US$ (MLS) % [GBP] (MLS) US$ (MLS) %
----------- --------- ----- ----------- --------- ----
Current balance 48,030 84,326 n/a 53,591 94,090 n/a
Number of mortgage loans outstanding 584,457 584,457 n/a 614,570 614,570 n/a
Current balance of loans in arrears
1 to 2 months 492.89 865.37 1.03 671.07 1,178.20 1.25
2 to 3 months 161.86 284.18 0.34 225.36 395.66 0.42
3 to 6 months 128.61 225.80 0.27 151.28 265.60 0.28
6 to 12 months 30.54 53.62 0.06 41.13 72.21 0.08
Over 12 months 1.22 2.14 0.003 0.72 1.26 0.00
Total current balance of mortgage loans in arrears 815.12 1,431.11 1.70 1089.56 1,912.94 2.03
Number of mortgage loans outstanding in arrears
1 to 2 months 5,654 5,654 0.97 6,835 6,835 1.11
2 to 3 months 2,055 2,055 0.35 2,411 2,411 0.39
3 to 6 months 1,695 1,695 0.29 1,685 1,685 0.27
6 to 12 months 422 422 0.07 460 460 0.07
Over 12 months 18 18 0.003 10 10 0.00
Total number of mortgage loans outstanding in arrears 9,844 9,844 1.68 11,401 11,401 1.86
Repossessions during year 628 628 0.11 527 527 0.09
Amount of mortgage loan losses 0.64 1.13 n/a 1.04 1.83 n/a
Mortgage loan losses as % of total current balance 0.001% 0.001% n/a 0.00% 0.00% n/a
- ----------
Provided by Northern Rock plc
(1) Year ended December 31 or six months ended June 30, as applicable
In the tables above, 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-15
ANNEX B
SERIES 2005-4 AAA (CLASS A1) LOAN TRANCHE
The series 2005-4 class A1 notes will fund the series 2005-4 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 2005-4
Initial outstanding principal balance: [GBP]727,337,538
Closing date: September 21, 2005
Interest commencement date: September 21, 2005
Final repayment date: The loan payment date falling in June 2030
Loan payment dates: Each monthly payment date
Step-Up Date: The loan payment date falling in August 2010
SERIES 2005-4 AAA (CLASS A3) LOAN TRANCHE
The series 2005-4 class A3 notes will fund the series 2005-4 AAA (class A3)
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 A3)
Series number: Series 2005-4
Initial outstanding principal balance: [GBP]546,531,396
Closing date: September 21, 2005
Interest commencement date: September 21, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
Step-Up Date: The loan payment date falling in August 2010
SERIES 2005-4 AA (CLASS B1) LOAN TRANCHE
The series 2005-4 class B1 notes will fund the series 2005-4 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 2005-4
Initial outstanding principal balance: [GBP]39,758,706
Closing date: September 21, 2005
Interest commencement date: September 21, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
Step-Up Date: The loan payment date falling in August 2010
B-1
SERIES 2005-4 AA (CLASS B2) LOAN TRANCHE
The series 2005-4 class B2 notes will fund the series 2005-4 AA (class B2)
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 B2)
Series number: Series 2005-4
Initial outstanding principal balance: [GBP]21,113,244
Closing date: September 21, 2005
Interest commencement date: September 21, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
Step-Up Date: The loan payment date falling in August 2010
SERIES 2005-4 A (CLASS M1) LOAN TRANCHE
The series 2005-4 class M1 notes will fund the series 2005-4 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 2005-4
Initial outstanding principal balance: [GBP]35,481,217
Closing date: September 21, 2005
Interest commencement date: September 21, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
Step-Up Date: The loan payment date falling in August 2010
SERIES 2005-4 A (CLASS M2) LOAN TRANCHE
The series 2005-4 class M2 notes will fund the series 2005-4 A (class M2)
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 M2)
Series number: Series 2005-4
Initial outstanding principal balance: [GBP]19,906,773
Closing date: September 21, 2005
Interest commencement date: September 21, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
Step-Up Date: The loan payment date falling in August 2010
B-2
SERIES 2005-4 BBB (CLASS C1) LOAN TRANCHE
The series 2005-4 class C1 notes will fund the series 2005-4 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 2005-4
Initial outstanding principal balance: [GBP]44,091,034
Closing date: September 21, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
Step-Up Date: The loan payment date falling in August 2010
SERIES 2005-4 BBB (CLASS C2) LOAN TRANCHE
The series 2005-4 class C2 notes will fund the series 2005-4 BBB (class C2)
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 C2)
Series number: Series 2005-4
Initial outstanding principal balance: [GBP]24,458,459
Closing date: September 21, 2005
Final repayment date: The loan payment date falling in December 2054
Loan payment dates: Each monthly payment date
Step-Up Date: The loan payment date falling in August 2010
B-3
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]67,500,000
3. Interest rate Three-month sterling LIBOR + 0.90% per
annum
C-1
GRANITE MASTER ISSUER PLC
Issuer
o 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.
o 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.
o 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.
o 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.
o 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 will be 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 each series and class of notes issued under
the program during the period of twelve months from the date of this prospectus
(other than any which are to be unlisted or listed on any other exchange) to be
admitted to the official list maintained by the UK Listing Authority.
Application will also be made to the London Stock Exchange plc for such notes to
be admitted to trading on the London Stock Exchange's Gilt Edged and Fixed
Interest Market.
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 August 26, 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:
o the timing of interest and principal payments;
o financial and other information about our assets;
o information about enhancement for your series or class;
o the ratings for your class;
o the method for selling the notes; and
o 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 provides 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.
3
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.
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....................................................................28
DEFINED TERMS...................................................................58
THE ISSUER......................................................................59
USE OF PROCEEDS.................................................................60
THE NORTHERN ROCK GROUP.........................................................61
FUNDING 2.......................................................................62
THE MORTGAGES TRUSTEE...........................................................63
HOLDINGS........................................................................64
GPCH LIMITED....................................................................65
ISSUANCE OF NOTES...............................................................67
THE MORTGAGE LOANS..............................................................72
CERTAIN CHARACTERISTICS OF THE UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET.......97
THE ADMINISTRATOR AND THE ADMINISTRATION AGREEMENT.............................103
ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY..........................115
THE MORTGAGES TRUST............................................................127
THE GLOBAL INTERCOMPANY LOAN AGREEMENT.........................................148
CASHFLOWS......................................................................153
CREDIT STRUCTURE...............................................................182
THE SWAP AGREEMENTS............................................................193
CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING 2........................198
CASH MANAGEMENT FOR THE ISSUER.................................................202
SECURITY FOR FUNDING 2'S OBLIGATIONS...........................................205
SECURITY FOR THE ISSUER'S OBLIGATIONS..........................................211
DESCRIPTION OF THE TRUST DEED..................................................215
THE NOTES......................................................................217
DESCRIPTION OF THE US NOTES....................................................223
MATERIAL LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE RELATED SECURITY..........251
MATERIAL UNITED KINGDOM TAX CONSEQUENCES.......................................257
MATERIAL UNITED STATES TAX CONSEQUENCES........................................260
MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSIDERATIONS...........................265
ERISA CONSIDERATIONS...........................................................266
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES..........................269
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS..................................270
LEGAL MATTERS..................................................................271
UNDERWRITING...................................................................272
REPORTS TO NOTEHOLDERS.........................................................275
LISTING AND GENERAL INFORMATION................................................276
GLOSSARY.......................................................................279
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:
o 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:
6
(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
(c) to Funding as a special distribution (which will
have the effect of reducing the Funding share)
o to fund or replenish the Funding 2 reserve fund and/or to
make a deposit into the Funding 2 GIC account; or
o 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
7
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.
Funds produced from the mortgage loans will be applied, as described
above, to service payments under the notes. The assets backing the issue
(as set out above) will have characteristics that demonstrate capacity to
produce funds to service any payments due and payable on the notes.
8
STRUCTURAL DIAGRAM OF THE SECURITIZATION TRANSACTION
[GRAPHIC OMITTED]
9
DIAGRAM OF OWNERSHIP STRUCTURE
This diagram illustrates the ownership structure of the principal parties to the
transaction:
o Each of the mortgages trustee, Funding and Funding 2 is a
wholly-owned subsidiary of Granite Finance Holdings Limited.
o We are a wholly-owned subsidiary of Funding 2.
o 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.
o The post enforcement call option holder was a wholly owned
subsidiary of Granite Finance Holdings Limited (who holds two
shares in the post enforcement call option holder) until 6 July
2005 when 15,000 further ordinary shares of (pound)1.00 were
allotted
10
and issued to The Law Debenture Trust Corporation plc who holds
those shares under the terms of a discretionary trust for the
benefit of certain charities. The payments under your notes will
not be affected by this arrangement.
o Funding 2 may establish an additional issuer or issuers in the
future.
The purpose of this diagram is to draw your attention to TWO facts:
o 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
o 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.
11
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.
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.
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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.
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. Noteholders holding certain notes may have the benefit of
remarketing and conditional purchase arrangements. 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)
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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.
14
LISTING
Application will be 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 each series and class of notes issued under
the program during the period of twelve months from the date of this prospectus
(other than any which are to be unlisted or listed on any other exchange) to be
admitted to the official list maintained by the UK Listing Authority.
Application will also be 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
Gilt Edged and Fixed Interest Market (the "MARKET") for listed securities.
DENOMINATIONS
Notes will be issued in minimum denominations of euro 50,000 (or its
equivalent in any other currency as at the date of issue of such notes) but
subject thereto 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 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
15
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 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:
o 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;
o 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;
o 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;
16
o 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);
o 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;
o 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
o 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.
17
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
(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
18
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.
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.
19
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.
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
20
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:
o 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
o 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
o 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
o 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 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
21
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 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:
o 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;
o fund or replenish the Funding 2 reserve fund and/or to make a
deposit into the Funding 2 GIC account; and/or
o 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 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
22
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 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
23
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 mortgage over a residential property located
in England or Wales will be governed by English law. Each mortgage over a
residential property located in Scotland will be governed by Scots law. The
associated mortgage loans will be governed by English or Scots law (as the case
may be). 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 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
24
"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 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
25
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".
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, US
federal income tax counsel to Northern Rock plc, 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 US federal income tax counsel to
Northern Rock plc 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".
26
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.
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 FREQUENCY
- ------------------------------------- ------------------------- ------------------------------ ---------------------------
Administration fee 0.08% per year of the Ahead of all revenue Each distribution date
Funding 2 share of amounts payable to Funding
the trust property 2 by mortgages trustee
Funding 2 cash management fee (pound)100,000 each year Ahead of all revenue Each monthly payment date
amounts payable by Funding
2 and allocable to issuer
Issuer cash management fee (pound)100,000 each year Ahead of all interest Each monthly payment date
payments on the notes
Corporate expenses of mortgages Estimated (pound)13,000 Ahead of all revenue Each distribution date
trustee each year amounts payable to Funding
2 by mortgages trustee
Corporate expenses of Funding 2 Estimated (pound)10,500 Ahead of all revenue Each monthly payment date
each year amounts payable by Funding
2 and allocable to issuer
Corporate expenses of issuer Estimated (pound)12,000 Ahead of all interest Each monthly payment date
each year payments on the notes
Fee payable by Funding 2 to Funding 2 Estimated (pound)13,000 In respect of Funding 2 Each monthly payment date
security trustee, by issuer to note each year security trustee, ahead of
trustee and issuer security trustee all revenue amounts
and by issuer to principal paying payable by Funding 2 and
agent, paying agent, transfer agent, allocable to issuer, and
registrar and agent bank in respect of note
trustee, issuer security
trustee and agents, ahead
of all interest payments
on the notes
Each of the above fees is inclusive of value added tax ("VAT"), which
is currently assessed at 17.5%. The VAT-exclusive amount of the fees will be
subject to adjustment if the applicable rate of VAT changes so that the actual
amount of each fee (inclusive of VAT and regardless of the VAT rate assessed)
will be the amount as set out above.
27
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:
o 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;
o Funding 2 receiving funds from the Funding 2 basis rate swap
provider;
o Funding 2 receiving funds from the Funding 2 liquidity facility
provider (if any); and
o (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 - FUNDING 2 RESERVE
FUND") and subject to certain restrictions, the amount of funds
credited to
28
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:
o 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;
o (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;
29
o (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
o (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 be
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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.
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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
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there is a general decline in property values. We cannot guarantee that the
value of a mortgaged property will remain at the same level as on the date of
origination of the related mortgage loan. If the residential property market in
the United Kingdom experiences an overall decline in property values, the value
of the security created by the mortgage loans could be significantly reduced
and, ultimately, may result in losses to you if the security is required to be
enforced.
THE TIMING AND AMOUNT OF PAYMENTS ON THE MORTGAGE LOANS COULD BE AFFECTED BY
GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS
To the extent that specific geographic regions have experienced or may
experience in the future weaker regional economic conditions and housing markets
than other regions, a concentration of the mortgage loans in such a region may
be expected to exacerbate all of the risks relating to the mortgage loans
described in this section. We can predict neither when 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
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"overpay" or prepay principal on any day or make a re-draw in specified
circumstances. For a detailed summary of the characteristics of the flexible
mortgage loans, see "THE MORTGAGE LOANS - CHARACTERISTICS OF THE MORTGAGE LOANS
- - FLEXIBLE MORTGAGE LOANS". In addition, certain of the seller's flexible
mortgage loan products allow the borrower to make overpayments or repay the
entire current balance under the flexible mortgage loan at any time without
incurring an early repayment charge. See "THE MORTGAGE LOANS - CHARACTERISTICS
OF THE MORTGAGE LOANS - EARLY REPAYMENT CHARGES".
The inclusion of Together Connections mortgage loans and Connections
mortgage loans, which are another type of flexible mortgage loan, in the
mortgages trust may also affect the yield to maturity of and the timing of
payments on the notes. Application of the 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
34
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 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 occurrence 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:
o first, the AAA loan tranches in respect of each Funding 2
intercompany loan until each of those AAA loan tranches is fully
repaid;
o then, the AA loan tranches in respect of each Funding 2
intercompany loan until each of those AA loan tranches is fully
repaid;
o then, the A loan tranches in respect of each Funding 2
intercompany loan until each of those A loan tranches is fully
repaid;
o then, the BBB loan tranches in respect of each Funding 2
intercompany loan until each of those BBB loan tranches is fully
repaid;
o 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.
35
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 occurrence 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:
o firstly, the AAA loan tranches in order of final repayment date,
beginning with the earliest final repayment date;
o then, the AA loan tranches in respect of each Funding 2
intercompany loan until each of those AA loan tranches is fully
repaid;
o then, the A loan tranches in respect of each Funding 2
intercompany loan until each of those A loan tranches is fully
repaid;
o then, the BBB loan tranches in respect of each Funding 2
intercompany loan until each of those BBB loan tranches is fully
repaid;
o 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:
o each series and class of notes will be deemed pass-through notes
and each loan tranche will be deemed a pass-through loan tranche;
o 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;
o 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.
36
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 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
37
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.
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 occurred 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,
38
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 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
39
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.
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.
40
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 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
41
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 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 which could adversely affect our
payments on the notes.
42
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 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
43
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:
o Repayment basis, with principal and interest repaid on a monthly
basis through the mortgage term; or
o An interest-only basis with or without a capital repayment
vehicle; or
o 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
44
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 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:
o 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
45
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;
o 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
o 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 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
46
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:
o a borrower may seek to argue that certain re-draws are
unenforceable by virtue of non-compliance with the CCA;
o 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;
o 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
o 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.
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
47
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".
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.
48
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 on or after N(m) or originated prior to N(m) but
varied on or 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 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
49
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 practice, 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), however, under the Financial
Services and Markets Act 2000 (Transitional Provisions) (Complaints Relating to
General Insurance and Mortgages) Order 2004, borrowers may in certain
circumstances refer complaints relating to breaches of the CML Code that
occurred prior to N(m) to the Financial Ombudsman Service (see below).
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, there has been significant opposition from the European Parliament to
the original form of the proposed directive, and in October 2004, the European
Commission adopted a modified proposal. 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 (euro)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.
The European Commission is expected to publish a further amended
proposal shortly. If a finalised text is agreed, member states will have two
years in which to bring into force national implementing legislation,
regulations and administrative provisions. The UK Department of Trade and
Industry (the `"DTI") has consulted with consumer and industry organizations in
relation to the modified proposal and the DTI is considering the responses
received in respect of the consultation.
DISTANCE MARKETING OF FINANCIAL SERVICES
With effect from 31 October 2004, the Distance Marketing of Financial
Services Directive has been implemented in the United Kingdom by way of the
Financial Services (Distance Marketing) Regulations 2004 (the "DM REGULATIONS")
and amendments to MCoB. The DM Regulations apply to, inter alia, credit
agreements entered into on or after October 31, 2004 by
50
means of distance communication (i.e. without any substantive simultaneous
physical presence of the originator and the borrower).
The DM Regulations and MCoB require suppliers of financial services by
way of distance communication to provide certain prescribed information to
consumers before they become bound by a distance contract which includes, but is
not limited to, general information in respect of the supplier and the financial
service, contractual terms and conditions and whether or not there is a right of
cancellation.
A regulated mortgage contract under the FSMA, if originated by a UK
lender from an establishment in the UK, will not be cancellable under the DM
Regulations. Certain other credit agreements, such as agreements relating to
personal secured loans will be cancellable under the DM Regulations if the
borrower does not receive the prescribed information at the prescribed time.
Where the credit agreement is cancellable under the DM Regulations, the borrower
may send a notice of cancellation at any time before the end of the fourteenth
day after the day on which the cancellable agreement is made, where all the
prescribed information has been received, or, if later, the borrower receives
the last of the prescribed information.
If the borrower cancels the credit agreement under the DM Regulations,
then:
(a) the borrower is liable to repay the principal and any other sums paid
by the originator to the borrower under or in relation to the cancelled
agreement, within 30 days beginning with the day of the borrower sending notice
of cancellation or, if later, the originator receiving notice of cancellation;
(b) the borrower is liable to pay interest, or any early repayment charge
or other charge for credit under the cancelled agreement, only if the borrower
received certain prescribed information at the prescribed time and if other
conditions are met; and
(c) any security provided in relation to the contract is to be treated as
never having had effect.
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 (pound)25,000 for credit
agreements made on or after May 1, 1998, or lower amounts for credit agreements
made before that date, and (c) the credit agreement is not an exempt agreement
as specified in or under section 16 of the CCA (for example, certain types of
credit agreements 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";
(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.
51
In addition, if the requirements as to the licensing of lenders and
credit brokers are not met, the credit agreement relating to a personal secured
loan will be unenforceable against the borrower without an order of the OFT.
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 under the CCA 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 came into effect on May
31, 2005. For agreements that have been presented, sent or made available to the
borrower but have not been executed before May 31, 2005 the new regulations will
apply from August 31, 2005. Regulations on pre-contract disclosure took effect
on 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 came into force on May 31, 2005 for all
regulated consumer credit agreements 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 December 16,
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 (pound)25,000 for lending for business purposes to
individuals, unincorporated bodies and partnerships of up to 3 partners; (b)
strengthening the licensing regime; (c) changing the grounds for challenging a
52
credit agreement on the basis of it being an 'extortionate credit bargain' to an
'unfair credit relationship' between the lender and the borrower, with some
retrospective application to existing agreements; and (d) introducing
alternative dispute resolution procedures outside the courts for consumer credit
agreements. The Consumer Credit Bill lapsed with the dissolution of Parliament
on April 11, 2005 but was re-introduced in Parliament on May 18, 2005 in a
similar form. The bill was introduced into the House of Lords on July 19, 2005
and once enacted will come into force on such date as determined by the DTI.
So as to avoid dual regulation on and from N(m), it is intended that 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:
o 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
o 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.
If a term is unfair, then it is not binding on the borrower but the
contract continues to bind the parties if it is capable of continuing in
existence without the unfair term. 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.
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
53
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 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.
The FSA has agreed with the OFT to take responsibility for the
enforcement of the UTCCR insofar as they apply to regulated mortgage contracts.
In May 2005, the FSA issued a statement of good practice on fairness of terms in
consumer contracts, with specific reference to the fairness of variation
clauses. The statement is addressed to firms authorized and regulated by the FSA
in relation to products and services within the FSA's regulatory scope. Although
that statement is not, of itself, enforceable against the firm, the FSA will
have regard to it in exercising its powers under the UTCCR. The statement
provides, amongst other things, the FSA's views on the factors to be considered
when assessing the fairness of variation clauses, particularly where such
variation clauses are applied to contracts with locked-in borrowers. These
factors include whether there is some connection between interest rates which
apply to locked-in borrowers and those which apply to non-locked in borrowers
and whether the borrower must be given advance notice of the change.
Additionally, the FSA states that firms may consider drafting contracts so as to
permit variations to be made only when any lock-in clause has not been
exercised.
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) was published on February 24, 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 and their
respective businesses and operations.
On May 11, 2005 the European Council and European Parliament adopted a
directive on unfair commercial practices. This directive affects all consumer
contracts and thus may have an impact on the residential mortgage market. Under
this directive, a commercial practice is to be regarded as unfair if it is (a)
contrary to the requirements of professional diligence; and (b) materially
distorts or is likely to materially distort the economic behaviour of affected
consumers. In addition, there are provisions aimed at aggressive and misleading
practices and a list of practices which will in all cases be considered unfair.
Member States must implement the measures set out in this directive by
December 2007. Until the details of United Kingdom implementing legislation are
published, it is not certain what effect the adoption and implementation of the
directive would have on the seller, the mortgages trustee and/or the
administrator and their respective businesses and operations.
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
54
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 EU SAVINGS DIRECTIVE (2003/48/EC)
Under EC Council Directive 2003/48/EC on the taxation of savings income
(the "EU SAVINGS DIRECTIVE") EU Member States are required to provide to the tax
authorities of another Member State details of payments of interest (or similar
income) paid by a person within its jurisdiction to an individual resident in
that other Member State. However, for a transitional period, Belgium, Luxembourg
and Austria are instead required (unless during that period they elect
otherwise) to operate a withholding system in relation to such payments (the
ending of such transitional period being dependent upon the conclusion of
certain other agreements relating to information exchange with certain other
countries).
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.
55
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 practice 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 practice 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 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:
o result in payment delays on the notes because we will be sending
distributions on the notes to DTC instead of directly to you;
o 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
o 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
56
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 (pound)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 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, the Finance Act 2005 requires a
"securitisation company" to prepare tax computations for its periods of account
beginning on or after 1 January, 2005 and ending before 1 January, 2007 on the
basis of UK GAAP as applicable up to 31 December, 2004, notwithstanding the
requirement to prepare statutory accounts under IFRS or new UK GAAP. We and
Funding 2 have each been advised that we will be a "securitisation company" for
these purposes.
The stated policy of HM Revenue & Customs is that the tax neutrality of
securitisation companies in general should not be disrupted as a result of the
transition to IFRS or new UK GAAP, and it is working with participants in the
securitisation industry to establish a permanent regime that would prevent any
such disruption. The Finance Act 2005 enables regulations to be made to
establish such a regime. However, if (for whatever reason) measures are not
introduced to deal with the corporation tax position of such companies in
respect of their periods of account ending on or after 1 January, 2007, we and
Funding 2 (like other UK securitisation companies) may then be required to
recognise 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, Funding 2 and consequently
noteholders.
57
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.
58
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.
59
USE OF PROCEEDS
An indication of the application of the proceeds from each issue of
notes will be contained in the applicable prospectus supplement.
60
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 (pound)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 (pound)6.7 billion, (pound)8.5 billion and
(pound)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 (pound)12.6 billion,
(pound)17.3 billion and (pound)8.5 billion, respectively.
SUBSIDIARIES OF THE SELLER
The seller currently has the following two principal subsidiaries:
o 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.
o 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.
61
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.
62
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.
63
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 and
does not direct or actively control the activities of Funding 2 pursuant to the
transaction documents or otherwise.
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).
64
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 was wholly owned by Holdings
until July 6, 2005.
On July 6, 2005 15,000 ordinary shares were allotted and issued to The
Law Debenture Trust Corporation plc who holds such shares under the terms of a
trust for charitable purposes. As a result of the allotment, the
post-enforcement call option holder is no longer part of the same group as the
issuer, Funding, the Funding Issuers or Funding 2.
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 was 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 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
65
that these noteholders may have against us other than the rights to payment of
interest and repayment of principal under the notes.
66
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.
Noteholders holding certain notes may have the benefit of remarketing and
conditional purchase arrangements. 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:
o there may be no debit balance on the principal deficiency ledger
(in respect of any loan tranche);
o no note event of default shall have occurred which is continuing
or will occur as a consequence of such issuance;
o no issuer enforcement notice has been served on us by the note
trustee;
o no Funding 2 intercompany loan enforcement notice has been served
on Funding 2 by the Funding 2 security trustee;
o 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);
o each of the applicable transaction documents has been executed by
the relevant parties to those documents;
67
o we shall have delivered a solvency certificate to the note trustee
in form and substance satisfactory to the note trustee; and
o 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.
o 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).
o 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.
68
o 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).
o 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.
o 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).
o The "CLASS M AVAILABLE SUBORDINATED AMOUNT" is calculated, on any
date, as:
69
(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.
o 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
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).
o 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").
70
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:
o 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
o 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.
71
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:
o "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;
o "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;
o "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;
o "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
o "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
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the mortgage portfolio incorporated one or more of the features referred 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:
o "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.
o "STANDARD VARIABLE RATE MORTGAGE LOANS ": mortgage loans subject
to the seller's standard variable rate for the life of the
mortgage loan.
o "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.
o "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
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contractual monthly payment of principal (if any) and interest in
full. The "TOGETHER CONNECTIONS BENEFIT" is the difference between
(1) the contractual monthly payment due on the combined debit
balance and (2) the proportion of the payment made on the amount
by which the outstanding combined debit balance exceeds the
average cleared credit balance in that borrower's linked deposit
account or accounts in respect of each month or any part of a
month. Where the customer has elected to take Together Connections
Benefit, calculations will be made and applied with effect from
the first day of the month following the month during which the
combined debit balance exceeded such 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.
o "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
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in the borrower's linked Save Direct deposit account (a deposit
account operated by a dedicated savings division of the seller)
and/or current account with the seller. "CONNECTIONS BENEFIT" and
"CONNECTIONS INTEREST" are calculated in the same way as "Together
Connections Benefit" and "TOGETHER CONNECTIONS INTEREST" taking
into account the amended definitions of "CONNECTIONS DEBIT
BALANCE" and "CONNECTIONS COMBINED CREDIT BALANCE" as outlined
above. For the purposes of calculating Connections Interest, only
the average cleared balance in the deposit account will apply.
o "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.
o "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.
o "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.
o "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.
o "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.
o "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.
o "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.
o "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.
o "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
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interest that is linked to the Bank of England base rate plus an
additional fixed percentage.
o "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.
o "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 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:
o "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.
o "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:
o "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;
o "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;
o "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
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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;
o "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
o "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.
o "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.
o "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
(pound)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.
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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 (pound)200, that overpayment
initially will only reduce the current balance of the related mortgage loan and
not the capital balance. Any overpayment will be held by the cash manager in the
mortgages trustee GIC account and recorded on an overpayments ledger and will
not reduce the capital balance of the related mortgage loan until the annual
date at the end of each calendar year on which the capital balances of the
mortgage loans (other than flexible mortgage loans as described below) are
reconciled with the current balances of such mortgage loans. The capital
balances of such mortgage loans will only be reduced on such annual date in an
amount equal to the aggregate amount of the overpayments made in that calendar
year less any amounts that the borrower has underpaid (or has overpaid in error,
which amounts may be refunded to the borrower) during the same calendar year of
the overpayment. These credits and debits will be recorded on the overpayments
ledger during each calendar year. Any underpayments or refunds may be made only
up to the net amount of the overpayment standing to the credit of the
overpayments ledger during the same calendar year as the underpayment. As
interest on the mortgage loans accrues on the capital balance thereof from time
to time, an overpayment may only have an effect on the interest accruing on that
mortgage loan after the annual date that the current balance and the capital
balance of the mortgage loan is reconciled.
If a borrower under a mortgage loan (other than a flexible mortgage loan)
makes a monthly payment which is less than the required monthly payment (an
"UNDERPAYMENT"), the current balance of that mortgage loan will remain higher
than the expected scheduled current balance, although the capital balance of
that mortgage loan will remain unchanged 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.
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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 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
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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 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:
o the seller's standard variable rate; or
o 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).
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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:
o where there has been, or the lender reasonably expects there to be
in the near future, a general trend to increase rates on
mortgages;
o where the lender for good commercial reasons needs to fund an
increase in the interest rate or rates payable to depositors;
o where the lender wishes to adjust its interest rate structure to
maintain a prudent level of profitability;
o 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
o where the lender's administrative costs have increased or are
likely to increase in the near future.
The term "LENDER" in the above five bullet points means the seller and
its successors.
The rate that the borrower is required to pay under the variable rate
mortgage loans must not be greater than either the seller's standard variable
rate or a set margin above or below the seller's standard variable rate. 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.
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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:
o 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 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.
o 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.
o 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
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a payment holiday (an "UNAUTHORIZED UNDERPAYMENT"), if any, will
be treated by the seller as arrears.
o 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.
o 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 (pound)500, and
that the amount of such cash re-draw is equal to or greater than
(pound)500. If the aggregate amount of all overpayments for such
period is less than (pound)500, any borrower wishing to make a
cash re-draw in these amounts may instead make an authorized
underpayment of the scheduled monthly payment, but is not entitled
to a cash re-draw. Notwithstanding the foregoing, a borrower under
a Together Connections Benefit mortgage loan or Connections
mortgage loan is not permitted to make a cash re-draw of the
principal amounts that have been repaid as a result of the
application of the Together Connections Benefit or Connections
Benefit. Any cash re-draw on a flexible mortgage loan will result
in the immediate increase in the related current 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).
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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
(pound)30,000 for Together and Together Connections mortgage loans and
(pound)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):
(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.
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(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 (pound)250,000. In the case of a remortgage,
the seller calculates the maximum amount of the loan available by using the then
current valuation of the mortgaged property. A borrower may repay amounts owed
under a currently offered flexible mortgage loan under any of the repayment
terms described above under "- REPAYMENT TERMS". The 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.
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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 (pound)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
(pound)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, 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
86
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".
ORIGINATION OF THE MORTGAGE LOANS
The seller currently derives its mortgage lending business from the
following sources:
o intermediaries that range from mortgage clubs to small independent
mortgage advisors;
o its branch network throughout the United Kingdom;
87
o its website; and
o 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 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
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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 (pound)500,000 may be established by:
o last three monthly bank statements and/or three monthly payslips
from the six month period prior to the date of the loan
application; and
o a form P60 or accountant's certificate certifying the borrower's
income.
Proof of income for self-employed prospective borrowers may be
established by:
o a letter from the prospective borrower's accountant in acceptable
form; or
o 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 (pound)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 (pound)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 (pound)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 (pound)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 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
89
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 (pound)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 (pound)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 (pound)500,000.
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(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.
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(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 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 (pound)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 (pound)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 (pound)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:
o the valuation made by an independent valuer from the panel of
valuers appointed by the seller or an employee valuer of the
seller; or
o 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
92
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".
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
(pound)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
93
claim under the contingency insurance policy provided the seller has no prior
knowledge of the deficiency. The contingency insurance policy is an insurance
policy currently provided to the seller by AXA that insures the seller against
loss relating to mortgaged properties where borrowers have failed to make their
own property insurance arrangements. The contingency insurance policy provides
cover for the mortgages trustee. The administrator will make claims in
accordance with the contingency insurance policy and hold the proceeds of claims
on trust for the mortgages trustee or as the mortgages trustee may direct.
In the case of leasehold properties where the lease requires the
landlord to insure the property, provision is made to deal with the insurance in
the mortgage conditions or the "GENERAL INSTRUCTIONS TO SOLICITORS" or other
comparable or successor instructions or guidelines. Again, if it transpires that
the property is not insured and is damaged, the seller can claim under the
contingency insurance policy.
If a borrower who originally had seller arranged insurance fails to pay
a premium, but does not notify the seller that it wishes to make alternative
arrangements, it is assumed that the borrower requires seller arranged insurance
to continue and no alternative insurance requirements form is sent to that
borrower. The unpaid premium is 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 (pound)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
94
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 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
95
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".
96
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
97
FOUR FOUR
CPR FOR QUARTER CPR FOR QUARTER
THE ROLLING THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
DATE (%) (%) DATE (%) (%)
- ------------------------------------ ------- -------- ------------------------------- -------- ---------
March 1975 9.96 9.58 June 1975 12.23 10.65
September 1975 12.76 11.44 December 1975 12.21 11.79
March 1976 10.10 11.82 June 1976 11.48 11.64
September 1976 11.86 11.41 December 1976 11.70 11.28
March 1977 8.00 10.76 June 1977 9.84 10.35
September 1977 12.13 10.42 December 1977 12.66 10.66
March 1978 11.30 11.48 June 1978 12.19 12.07
September 1978 11.71 11.97 December 1978 11.19 11.60
March 1979 9.33 11.11 June 1979 10.12 10.59
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
FOUR FOUR
CPR FOR QUARTER CPR FOR QUARTER
THE ROLLING THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
DATE (%) (%) DATE (%) (%)
- ------------------------------------ ------- -------- ------------------------------- -------- ---------
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
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.
UK RETAIL NATIONWIDE HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------------------- ------------------------------ ------------------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------------------- ------------ ------------- ----------- ------------- -------- -----------
1973 Q4 N/A N/A 19.5 N/A N/A N/A
1974 Q1 N/A N/A 19.8 N/A N/A N/A
1974 Q2 N/A N/A 20.0 N/A N/A N/A
1974 Q3 N/A N/A 20.2 N/A N/A N/A
1974 Q4 N/A N/A 20.4 4.4 N/A N/A
1975 Q1 31.5 N/A 20.7 4.5 N/A N/A
1975 Q2 34.8 N/A 21.4 6.8 N/A N/A
1975 Q3 35.6 N/A 21.9 7.9 N/A N/A
1975 Q4 37.0 N/A 22.5 10.1 N/A N/A
1976 Q1 38.2 19.3 23.0 10.3 N/A N/A
1976 Q2 39.5 12.7 23.4 9.0 N/A N/A
1976 Q3 40.7 13.4 23.9 8.9 N/A N/A
1976 Q4 42.6 14.1 24.4 7.8 N/A N/A
99
UK RETAIL NATIONWIDE HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------------------- ------------------------------ ------------------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------------------- ------------ ------------- ----------- ------------- -------- -----------
1977 Q1 44.6 15.5 24.8 7.4 N/A N/A
1977 Q2 46.5 16.3 25.3 7.8 N/A N/A
1977 Q3 47.1 14.6 25.9 7.8 N/A N/A
1977 Q4 47.8 11.5 26.2 7.4 N/A N/A
1978 Q1 48.6 8.6 27.6 10.8 N/A N/A
1978 Q2 50.0 7.3 28.9 13.3 N/A N/A
1978 Q3 50.8 7.6 31.7 20.4 N/A N/A
1978 Q4 51.8 8.0 33.6 24.6 N/A N/A
1979 Q1 53.4 9.4 35.5 25.3 N/A N/A
1979 Q2 55.7 10.8 38.1 27.5 N/A N/A
1979 Q3 59.1 15.1 40.9 25.3 N/A N/A
1979 Q4 60.7 15.9 43.8 26.7 N/A N/A
1980 Q1 63.9 18.0 45.2 24.3 N/A N/A
1980 Q2 67.4 19.1 46.6 20.2 N/A N/A
1980 Q3 68.5 14.8 47.1 14.3 N/A N/A
1980 Q4 69.9 14.1 46.9 6.7 N/A N/A
1981 Q1 72.0 11.9 47.3 4.5 N/A N/A
1981 Q2 75.0 10.7 48.1 3.2 N/A N/A
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
100
UK RETAIL NATIONWIDE HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------------------- ------------------------------ ------------------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------------------- ------------ ------------- ----------- ------------- -------- -----------
1988 Q3 108.4 5.7 108.4 20.1 197.4 26.5
1988 Q4 110.3 6.6 114.2 25.5 211.8 29.3
1989 Q1 112.3 7.6 118.8 27.8 220.7 27.9
1989 Q2 115.4 7.9 124.2 24.1 226.1 23.1
1989 Q3 116.6 7.3 125.2 14.4 225.5 13.3
1989 Q4 118.8 7.4 122.7 7.2 222.5 4.9
1990 Q1 121.4 7.8 118.9 0.1 223.7 1.4
1990 Q2 126.7 9.3 117.7 -5.4 223.3 -1.2
1990 Q3 129.3 10.3 114.2 -9.2 222.7 -1.2
1990 Q4 129.9 8.9 109.6 -11.3 223.0 0.2
1991 Q1 131.4 7.9 108.8 -8.8 223.1 -0.3
1991 Q2 134.1 5.7 110.6 -6.2 221.9 -0.6
1991 Q3 134.6 4.0 109.5 -4.2 219.5 -1.4
1991 Q4 135.7 4.4 107.0 -2.4 217.7 -2.4
1992 Q1 136.7 4.0 104.1 -4.4 213.2 -4.5
1992 Q2 139.3 3.8 105.1 -5.1 208.8 -6.1
1992 Q3 139.4 3.5 104.2 -5.0 206.9 -5.9
1992 Q4 139.2 2.5 100.1 -6.7 199.5 -8.7
1993 Q1 139.3 1.9 100.0 -4.0 199.6 -6.6
1993 Q2 141.0 1.2 103.6 -1.4 201.7 -3.5
1993 Q3 141.9 1.8 103.2 -1.0 202.6 -2.1
1993 Q4 141.9 1.9 101.8 1.7 203.5 2.0
1994 Q1 142.5 2.3 102.4 2.4 204.6 2.5
1994 Q2 144.7 2.6 102.5 -1.1 202.9 0.6
1994 Q3 145.0 2.2 103.2 0.0 202.7 0.0
1994 Q4 146.0 2.8 104.0 2.1 201.9 -0.8
1995 Q1 147.5 3.4 101.9 -0.5 201.8 -1.4
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
101
UK RETAIL NATIONWIDE HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------------------- ------------------------------ ------------------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- ---------------------------- ------------ ------------- ----------- ------------- -------- -----------
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
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.
102
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:
o 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
103
authorized underpayments made by such borrower up to such date
of determination); and
o 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 equaling 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.
104
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.
In seeking to control and manage arrears, the administrator from time
to time enters into arrangements with borrowers regarding the arrears,
including:
o arrangements to make each monthly payment as it falls due plus
an additional amount to pay the arrears over a period of time;
o arrangements to pay only a portion of each monthly payment as
it falls due; and/or
o 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:
o securing, maintaining or protecting the property and putting
it into a suitable condition for sale;
o creating (other than in Scotland) any estate or interest on
the property, including a leasehold;
o 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
o letting the property for any period of time.
105
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. 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 practices, legislative
or regulatory changes or business codes of practice.
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.
106
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 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
107
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.
The administrator has agreed to administer and service the mortgage
loans and their related security in accordance with:
o the terms and conditions of the mortgage loans and the
mortgages;
o 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
o 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:
108
(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.
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;
109
(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;
(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
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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:
o 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;
o 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;
o 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
o in the case of any payment by check where a reference to the
relevant borrower is not provided, by close of business on the
next London business day after notification from the relevant
collection bank of the identity of the borrower,
provided, however, that in any event the administrator has agreed to
credit monthly payments made by a borrower to the relevant collection account
within three London business days of receiving that monthly payment.
Payments from borrowers under mortgage loans originated by the seller
which are not intended to be assigned to the mortgages trustee are also paid
into and flow through the collection accounts.
Amounts paid into the collection accounts are held on trust by the
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
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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 (pound)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 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:
o 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;
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o 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;
o 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
o 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:
o if possible, to have experience in administering mortgage
loans secured on residential properties in England, Wales and
Scotland; and
o 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.
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
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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:
o 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;
o the assignment of other mortgage loans and their related
security to the mortgages trust;
o (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);
o the making of re-draws in respect of flexible mortgage loans
contained in the trust property; and
o 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
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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 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:
o 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;
o 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;
o 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;
o each relevant mortgaged property is located in England, Wales
or Scotland;
o 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;
o the seller's lending criteria are consistent with the criteria
that would be used by a reasonable and prudent mortgage
lender;
o in relation to each mortgage loan, the borrower has a good and
marketable title to the relevant mortgaged property;
o 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;
o 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;
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o 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;
o so far as the seller is aware, no borrower is in material
breach of its mortgage loan;
o the first payment due has been paid by the relevant borrower
in respect of each mortgage loan and each mortgage loan is
fully performing;
o 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;
o 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;
o 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;
o each borrower is a natural person, and no borrower is, as of
the assignment date, an employee or an officer of the seller;
o 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;
o 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;
o no mortgage loan has a current balance of more than
(pound)500,000;
o 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
o 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.
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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.
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:
o a variation in the financial terms and conditions of the
mortgage loan involving a permitted product switch (as
described below);
o a change between interest-only and repayment mortgage loans;
o a transfer of equity;
o a release of a party to a mortgage loan or a release of part
of the land subject to the mortgage;
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o any variation agreed with borrowers to control or manage
arrears on a mortgage loan;
o 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;
o any variation imposed by statute; and
o 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 loan is to be exchanged is a
permitted replacement mortgage loan. A "PERMITTED REPLACEMENT MORTGAGE LOAN" is
a mortgage loan:
o that is subject to a variable rate of interest; and
o 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
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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 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.
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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);
(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);
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(g) the aggregate current balance of new mortgage loans
transferred in any one interest period does not exceed 10% of
the aggregate current balance of the mortgage loans in the
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%;
(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
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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:
o 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
o 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 (pound)1,000,000,000; or
o 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 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:
o 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
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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);
o 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
o 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 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
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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:
o 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;
o 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;
o 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;
o 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;
o the occurrence of an insolvency event in relation to the
seller; or
o 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
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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 (pound)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:
o the sum of (pound)100 settled by Law Debenture Corporate
Services Limited on trust on the date of the mortgages trust
deed;
o the mortgage portfolio, including the mortgage loans and their
related security, the rights under any MIG policies and the
other seller arranged insurance policies;
o 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;
o 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;
o any interest and principal paid by borrowers on their mortgage
loans on or after the relevant assignment date;
o any other amounts received under the mortgage loans and
related security on or after the relevant assignment date
excluding third party amounts;
o any re-draws under flexible mortgage loans included in the
trust property;
o any further draws under personal secured loans included in the
mortgage portfolio;
o any further advances made by the seller to existing borrowers
which are assigned to the mortgages trustee in accordance with
the mortgage sale agreement;
o 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;
o amounts on deposit (and interest earned on such amounts) in
the mortgages trustee transaction account and the mortgages
trustee GIC account; and
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o the proceeds of sale of any mortgage loan and its related
security pursuant to the mortgage sale agreement or other
proceeds of sale of any trust property;
less
o 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
o 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:
o the allocation of principal receipts from the mortgage loans
to Funding, Funding 2 and/or the seller on each distribution
date;
o losses arising on the mortgage loans;
o the assignment of new mortgage loans and their related
security to the mortgages trustee;
o 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;
o a borrower making a re-draw under a flexible mortgage loan;
o a borrower making a further draw under a personal secured
loan;
o the capitalization of arrears in respect of any mortgage loan;
o 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
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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
o the mortgages trustee making a special distribution to any
beneficiary on a distribution date.
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 (pound)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:
o 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
o 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:
o on each distribution date;
o 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
o 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.
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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".
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:
o The current Funding 2 share of the trust property will be an
amount equal to:
A - B - C + D
o 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;
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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),
(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:
o The current Funding 2 share of the trust property will be an amount equal to:
A + E + F
o The current Funding 2 share percentage of the trust property
will be an amount equal to:
A + E + F
--------- X 100
H
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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
(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):
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(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 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
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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 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:
o 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.
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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:
o 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:
o 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:
o 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 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;
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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):
o 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);
o interest payable to the mortgages trustee on the mortgages
trustee transaction account and the mortgages trustee GIC
account; and
o 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
o 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
o 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;
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(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;
(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
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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
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:
o an insolvency event occurs in relation to the seller;
o the seller's role as administrator is terminated and a new
administrator is not appointed within 60 days; or
o 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
139
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.
MORTGAGESTRUST 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 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
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(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 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
141
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.
MORTGAGESTRUST 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:
(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
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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 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".
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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 "- 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".
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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 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:
o that no Funding 2 intercompany loan enforcement notice has
been served under the global intercompany loan agreement;
o that as at the most recent monthly payment date no deficiency
was recorded on the principal deficiency ledger;
o that no event of default in relation to Funding 2 under the
transaction documents shall have occurred which is continuing;
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o 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
o 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 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:
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(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):
o 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
o 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:
o 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;
o fund the Funding 2 reserve fund or to make a deposit into the
Funding 2 GIC account; and/or
o 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:
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(a) the related series and class of notes has been issued and the
proceeds have been received by us or on our behalf;
(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:
o 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;
o 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;
o 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;
o 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;
o 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;
o 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
o 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
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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 applicable to the
relevant loan tranche will be determined by reference to LIBOR for one-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
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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 occurring 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 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:
o 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
o 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 noncompliance 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
o 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
o an insolvency event occurs in relation to Funding 2; or
o 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
o 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.
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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".
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:
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(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 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
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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 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
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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;
(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:
o the issuer in respect of its obligations (if any) to pay any
issuer swap excluded termination amount;
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o the Funding 2 liquidity facility provider, if any, any Funding
2 liquidity facility subordinated amounts due under the
Funding 2 liquidity facility agreement;
o 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:
o 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;
o 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
o 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").
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.
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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 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
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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
monthly 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
monthly 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
monthly 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);
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(ii) to pay interest due and payable (if any) on the
related series and class of class C notes on such
monthly 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):
(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
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(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:
o 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 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
o 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:
o 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
o 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.
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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
(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:
o each other bullet repayment loan amount that was not fully
repaid on its bullet repayment date and is still outstanding;
and
o 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;
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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:
o the principal amount outstanding in relation to each bullet
repayment loan amount that is within a cash accumulation period;
o 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;
o 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:
o the cash accumulation requirement;
o the controlled repayment requirement;
o the scheduled repayment requirement; and
o 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:
o 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
o 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);
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(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:
o 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
o 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 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
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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:
o 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;
o 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;
o 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;
o 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;
o 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;
o 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
o 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.
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.
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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":
o 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;
o 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;
o 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
o 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
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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) 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
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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
(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),
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(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 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.
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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;
(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;
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(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;
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(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
(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.
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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 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:
o all principal amounts to be repaid by Funding 2 to the issuer
under the global intercompany loan agreement on that monthly
payment date; and
o 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"):
o 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;
o 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):
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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 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;
o 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):
(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;
o 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;
o 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;
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o 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.
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
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"- 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;
(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);
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(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 management
agreement, to the corporate services provider under the
corporate services agreement and to the issuer account bank
under the issuer bank account agreement;
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(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
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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;
(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;
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(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 startup loan provider(s) under
the start-up loan agreements;
(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:
o 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;
o a revenue shortfall in Funding 2 available revenue receipts may
be met from Funding 2 available principal receipts;
o 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;
o 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;
o payments on the class M notes will be subordinated to payments on
the class A notes and the class B notes;
o payments on the class B notes will be subordinated to payments on
the class A notes;
o the mortgages trustee GIC account, the Funding 2 GIC account and
the issuer GIC account each earn interest at a specified rate;
o 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;
o 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;
o 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);
o start-up loans will be provided to the issuer from time to time to
fund the issuer reserve fund; and
o 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
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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:
o the weighted average interest rate on the mortgage loans included
in the mortgage portfolio; and
o 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:
o 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
o 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:
o to help meet any deficit in issuer available revenue receipts
available for interest and fees due under the notes;
o to help meet expenses in connection with the issuance of notes by
the issuer; and
o to help meet any deficit in issuer 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 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.
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:
o 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;
o 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;
o 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
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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 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:
o 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
o 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
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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:
o 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;
o 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
o 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.
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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:
o 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;
o (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
o 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 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
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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:
o any principal losses on the mortgage loans allocated to Funding 2;
o 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
o 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:
o first, on the BB principal deficiency sub-ledger until the balance
of that subledger is equal to the aggregate outstanding balance of
all BB loan tranches;
o second, on the BBB principal deficiency sub-ledger, until the
balance of that subledger is equal to the aggregate outstanding
balance of all BBB loan tranches;
o third, on the A principal deficiency sub-ledger, until the balance
of that subledger is equal to the aggregate outstanding balance of
all A loan tranches;
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o fourth, on the AA principal deficiency sub-ledger, until the
balance of that subledger is equal to the aggregate outstanding
balance of all AA loan tranches; and
o 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:
o first, on the AAA principal deficiency sub-ledger;
o second, on the AA principal deficiency sub-ledger;
o third, on the A principal deficiency sub-ledger;
o fourth, on the BBB principal deficiency sub-ledger; and
o 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.
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
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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 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
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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 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.
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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 startup 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 installments. 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 occurring 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.
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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 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;
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(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;
(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:
o 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";
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o 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;
o if withholding taxes are imposed on a swap provider's payments due
to a change in law;
o 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 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
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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.
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:
o 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;
o the losses ledger, which will record losses on the
mortgage loans;
o 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;
o 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;
o 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 (pound)199.99), and which will be
sub-divided into sub-ledgers to record overpayments
made on non- flexible mortgage loans and flexible
mortgage loans;
o the non-flexible underpayments ledger, which will
record underpayments on non-flexible mortgage loans;
o 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;
o the contributions ledger, which will record the
making by Funding, Funding 2 and the seller of
contributions to the mortgages trust and the
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application of such contributions in accordance with
the terms of the mortgages trust deed; and
o 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;
(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:
o 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
o 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:
o the Funding 2 cash accumulation ledger which will
record the principal receipts accumulated by Funding
2 to repay each bullet loan tranche;
o the Funding 2 principal ledger, which will record the
all other principal receipts received by Funding 2 on
each distribution date;
o the Funding 2 revenue ledger, which will record all
other amounts received by Funding 2 on each
distribution date;
o 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
o 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
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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".
COMPENSATION OF CASH MANAGER
The cash manager is paid an annual fee of (pound)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:
o 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
o 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:
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o 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;
o 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
o 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 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:
o 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;
o 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
o such other amounts as are expressed to be calculations and
determinations made by the issuer cash manager under the
conditions of the notes;
(B) applying issuer available revenue receipts and issuer
available principal receipts in accordance with the relevant
order of priority of payments for the issuer set out in the
issuer cash management agreement;
(C) providing the issuer, Funding 2, the note trustee, the issuer
security trustee and the rating agencies with quarterly
reports in relation to the issuer;
(D) making all returns and filings required of the issuer and
procuring the provision of company secretarial and
administration services to the issuer;
(E) arranging payment of all fees to the London Stock Exchange plc
or, as applicable, the Financial Services Authority;
(F) performing, if necessary, all currency and interest rate
conversions free of charge, cost or expense at the relevant
exchange rate; and
(G) 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.
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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
(pound)100,000 which will be paid in equal installments monthly in arrear on a
monthly payment date. The fee is inclusive of VAT. The fees will be subject to
adjustment if the applicable rate of VAT changes.
In addition, the issuer cash manager will be entitled to reimbursement
for any expenses or other amounts properly incurred by it in carrying out its
duties. The issuer cash manager will be paid by the issuer prior to amounts due
on the notes.
RESIGNATION OF ISSUER CASH MANAGER
The issuer cash manager may resign only on giving 12 months' 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:
o 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
o 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:
o 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;
o 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
o 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.
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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:
o an assignment by way of first fixed security of the Funding 2
share of the trust property;
o 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;
o 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);
o 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
o 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
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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 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 (pound)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
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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 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:
o 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
o 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
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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.
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:
o 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
o 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
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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.
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:
o 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;
o is not responsible for the legality, admissibility in evidence,
adequacy or enforceability of the Funding 2 deed of charge or any
other transaction document;
o may rely on documents believed by it to be genuine provided by
any of the mortgages trustee, Funding 2 or the cash manager;
o 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;
o is not required to monitor or supervise the functions of the
account bank or of any other person under any transaction
document;
o 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;
o 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;
o 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;
o 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
o 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
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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):
o 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;
o 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;
o 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);
o 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
o 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:
o 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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o 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:
o 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;
o 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;
o 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;
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o 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;
o 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;
o 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;
o 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;
o 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
o 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 Market 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 documents (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;
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(d) duty of the note trustee (following a note event of default) to
use the same degree of care in exercising its responsibilities
as would be exercised by a prudent person conducting their own
affairs;
(e) duty of the note trustee to notify all noteholders of any note
event of default of which it has actual knowledge; and
(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
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a global note certificate is credited and only in respect of that portion of the
aggregate principal amount of notes as to which that participant or those
participants has or have given that direction.
Beneficial owners will be entitled to the benefit of, will be bound by
and will be deemed to have notice of, all the provisions of the trust deed and
the paying agent and agent bank agreement. Beneficial owners can see copies of
these agreements at the principal office for the time being of the note trustee,
which is, as of the date of this document, The Bank of New York, London Branch
and at the specified office for the time being of each of the paying agents.
Pursuant to its obligations under the Listing Rules made pursuant to the FSMA,
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:
o limited-purpose trust company organized under New York Banking
Law;
o "banking organization" within the meaning of New York Banking
Law;
o member of the Federal Reserve System;
o "clearing corporation" within the meaning of the New York
Uniform Commercial Code; and
o "clearing agency" registered under the provisions of Section 17A
of the Exchange Act.
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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 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
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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, 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.
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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".
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.
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INDIVIDUAL NOTE CERTIFICATES
Beneficial owners of US notes will only be entitled to receive
individual note certificates under the following limited circumstances:
o 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
o 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:
o 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;
o 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;
o 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
o 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:
o Granite Master Issuer plc, as issuer;
o Citibank, N.A., as principal paying agent, US paying agent, agent
bank, transfer agent and registrar; and
o 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.
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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.
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.
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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 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:
o 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;
o 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;
o 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
o 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
o 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
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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 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:
o 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;
o 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;
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o 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;
o have an interest in any bank account other than our bank accounts
maintained pursuant to the transaction documents;
o 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;
o 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;
o consolidate with or merge with any person or transfer
substantially all of its properties or assets to any person;
o waive or consent to the modification or waiver of any of the
obligations relating to the issuer security;
o have any employees, premises or subsidiaries;
o 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;
o purchase or otherwise acquire any notes; or
o 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.
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"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:
(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:
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(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.
(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 subparagraph (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
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(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.
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
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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/or trading 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/or trading 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
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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 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
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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.
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
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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:
o the amount of each principal payment payable on each US note of
each series and class, called the "NOTE PRINCIPAL PAYMENT ";
o 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
o 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:
o 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
o 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
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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,
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
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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.
(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 in
respect of each note, the principal amount outstanding of such note.
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
237
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.
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:
o 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
o 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":
o 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
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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
o 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
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
o 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
o 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
o 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
o 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.
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(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:
o 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
o 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":
o 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
o 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:
o 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
o 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":
o 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
o 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.
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(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:
o 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
o directed to do so by an extraordinary resolution passed at a
meeting of the holders of the class C notes.
If any of the following events occurs and is continuing it is called a
"CLASS C NOTE EVENT OF DEFAULT":
o 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
o 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:
o 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
o 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":
o 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
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o 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:
o (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
o 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:
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o 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
o 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 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:
o 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;
o 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;
o 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:
o 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;
o 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;
o 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
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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:
o 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;
o 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;
o 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:
o 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;
o 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;
o 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,
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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:
o 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;
o 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;
o 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:
o 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;
o 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
o 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
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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):
o 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.
o 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).
o 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 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).
o 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
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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.
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
247
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 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
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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 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.
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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:
o 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.
o 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.
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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.
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:
o Overriding interests; and
o 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.
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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 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:
o 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.
o The mortgagee may lease the mortgaged property to third parties.
o 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.
o 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.
o 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
253
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.
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.
254
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 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;
255
(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 (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 HM Revenue & Customs practice as at the date of this prospectus relating
to certain aspects of the UK taxation of the notes. Sidley Austin Brown & Wood,
UK tax advisers to Northern Rock plc ("UK TAX COUNSEL"), has prepared and
reviewed this summary and the opinions of UK tax counsel are contained in this
summary (with our consent and at our request). 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 HM Revenue & Customs published practice, securities will be
treated as listed on the London Stock Exchange while 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 HM Revenue & Customs 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 HM Revenue & Customs in
257
respect of such relief as may be available pursuant to the provisions of an
applicable double taxation treaty.
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 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 HM Revenue & Customs 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
HM Revenue & Customs 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 HM Revenue & Customs considers to be
just and reasonable will be treated as accrued income. However, the transferee
of a variable rate security will not be
258
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 HM Revenue &
Customs 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 indicates that the Inland Revenue
will not exercise its power to require this information where. Information so
obtained may, in certain circumstances, be exchanged by HM Revenue & Customs
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.
THE EU SAVINGS DIRECTIVE (2003/48/EC)
Under EC Council Directive 2003/48/EC on the taxation of savings income
(the "EU SAVINGS DIRECTIVE") EU Member States are required to provide to the tax
authorities of another Member State details of payments of interest (or similar
income) paid by a person within its jurisdiction to an individual resident in
that other Member State. However, for a transitional period, Belgium, Luxembourg
and Austria are instead required (unless during that period they elect
otherwise) to operate a withholding system in relation to such payments (the
ending of such transitional period being 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
Northern Rock plc ("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
260
the discussion herein. ACCORDINGLY, THE ISSUER SUGGESTS THAT PERSONS
CONSIDERING THE PURCHASE OF US DOLLAR DENOMINATED NOTES CONSULT THEIR OWN TAX
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
261
to LIBOR plus a margin (or other qualified floating rate within the meaning of
Treas. Reg. ss. 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
262
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 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.
263
BACKUP WITHHOLDING
Backup withholding of US Federal income tax may apply to payments made
in respect of the notes to registered owners who are not "EXEMPT RECIPIENTS" and
who fail to provide certain identifying information (such as the registered
owner's taxpayer identification number) in the required manner. Generally,
individuals are not exempt recipients, whereas corporations and certain other
entities generally are exempt recipients. Payments made in respect of the US
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:
o is signed under penalties of perjury by the beneficial owner of
the note,
o certifies that such owner is not a United States person, and
o 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.
264
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.
265
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
266
local law of the United States that is substantially similar to the provisions
of section 406 of ERISA or section 4975 of the Code or (B) its purchase,
holding and disposition of such note will not result in a prohibited
transaction under section 406 of ERISA or section 4975 of the Code (or, in the
case of a governmental plan, any substantially similar federal, state or local
law of the United States) for which an exemption is not available.
In addition, the US Department of Labor has promulgated a regulation,
29 C.F.R. Section 2510.3-101 (the "PLAN ASSET REGULATION"), describing what
constitutes the assets of a Plan with respect to the Plan's investment in an
entity for purposes of certain provisions of ERISA, including the fiduciary
responsibility provisions of Title 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
267
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 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.
268
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:
o 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;
o enforcement of the judgment is contrary to the public policy of
England or Wales;
o the judgment was obtained by fraud or duress or was based on a
clear mistake of fact;
o the judgment is of a public nature (for example, a penal or
revenue judgment);
o 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;
o the enforcement would contravene section 5 of the Protection of
Trading Interests Act 1980; or
o 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, English
counsel to Northern Rock plc, 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.
269
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.
270
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 Northern Rock plc and 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 Northern Rock plc and 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.
271
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.
o 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.
o Stabilizing transactions permit bids to purchase the US notes so
long as the stabilizing bids do not exceed a specified maximum.
o 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.
o 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
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prior consent to receive copies of this prospectus and related prospectus
supplement in that format.
UNITED KINGDOM
Each underwriter will represent and agree that:
o in relation to any US notes which have a maturity of less than one
year, (i) it is a person whose ordinary activities involve it in
acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of its business and (ii) it
has not offered or sold and will not offer or sell any US notes
other than to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as
principal or as agent) for the purposes of their businesses or who
it is reasonable to expect will acquire, hold, manage or dispose
of investments (as principal or agent) for the purposes of their
businesses where the issue of the US notes would otherwise
constitute a contravention of Section 19 of the FSMA by the
issuer;
o it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an 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
o 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, and each further underwriter
appointed under the program will be required to represent and agree that neither
the US notes nor this prospectus has been approved or registered in the
administrative registries of the Spanish Securities Markets Commission (Comision
Nacional del Mercado de Valores). Accordingly, the US notes may not be offered
in Spain except in circumstances which do not constitute a public offer of
securities in Spain within the meaning of article 30bis of the Spanish
Securities Market Law of 28 July 1988 (Ley 24/1988, de 28 de julio, del Mercado
de Valores), as amended and restated, and supplemental rules enacted thereunder.
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.
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,
273
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.
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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.
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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 will be 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 each series and class of notes issued under
the program during the period of twelve months from the date of this prospectus
(other than any which are to be unlisted or listed on any other exchange) to be
admitted to the official list maintained by the UK Listing Authority.
Application will also be made to the London Stock Exchange for each class of the
notes to be admitted to trading on the Gilt Edged and Fixed Interest Market of
the London Stock Exchange.
It is expected that each series and class of notes which is to be
admitted to the official list and to trading on the Gilt Edged and Fixed
Interest Market of 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 and
to making the final terms relating to the notes available to the public in
accordance with Prospectus Directive and associated UK and EU implementing
legislation.
This prospectus has been prepared in compliance with the Prospectus
Rules Instrument, 2005, made pursuant to the FSMA.
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 governmental, legal or arbitration
proceedings, (including any such proceedings which are pending or threatened of
which the issuer, the Funding 2 Group, Holdings, the post-enforcement call
option holder or the mortgages trustee (respectively) is aware) which may have,
or have had since its incorporation, a significant effect upon the financial
position or profitability of the issuer, the Funding 2 Group, Holdings, the
post-enforcement call option holder or the mortgages trustee.
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
276
as the notes are listed on the official list of the UK Listing Authority and
are traded on the Gilt Edged and Fixed Interest Market of the London Stock
Exchange, the most recently published audited annual accounts of the issuer
from time to time shall be available at the specified office of the 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.
SIGNIFICANT OR MATERIAL CHANGE
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.
DOCUMENTS AVAILABLE
From the date of this prospectus and 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
office 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) a copy of the prospectus
(C) any future offering circulars, prospectuses, supplementary
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.
(D) all other reports, letters, statements prepared by an expert
and included in the prospectus; and
(E) each of the following documents:
o the programme agreement;
o each subscription agreement;
o each underwriting agreement;
o the global intercompany loan agreement;
o the mortgages trust deed;
o the controlling beneficiary deed;
277
o the mortgage sale agreement;
o the issuer deed of charge;
o each deed of accession to the issuer deed of charge;
o the Funding 2 deed of charge;
o each deed of accession to the Funding 2 deed of charge;
o the Funding 2 basis rate swap agreement;
o each issuer swap agreement;
o the trust deed;
o the paying agent and agent bank agreement;
o the administration agreement;
o the cash management agreement;
o the issuer cash management agreement;
o the issuer guaranteed investment contract;
o the Funding 2 guaranteed investment contract;
o the mortgages trustee guaranteed investment contract;
o the post-enforcement call option agreement;
o the bank account agreement;
o the Funding 2 bank account agreement;
o the issuer bank account agreement;
o the collection bank agreement;
o the master definitions schedule;
o each start-up loan agreement;
o the corporate services agreement;
o any other deeds of accession or supplemental deeds
relating to any such documents.
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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", The lawful currency for the time being
"US DOLLARS" or "DOLLARS" of the United States of America
"(EURO)" 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
"(POUND)", "STERLING" or "POUNDS The lawful currency for the time being
STERLING" of the United Kingdom of Great Britain
and Northern Ireland
"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 INTEREST" The meaning given to it on page 252
"AAA PRINCIPAL DEFICIENCY One of five sub-ledgers on the
SUB-LEDGER" principal deficiency ledger which
records any principal deficiency in
respect of any AAA loan tranches
"AA PRINCIPAL DEFICIENCY One of five sub-ledgers on the principal
SUB-LEDGER" deficiency ledger which records any
principal deficiency in respect of any
AA loan tranches
"A PRINCIPAL DEFICIENCY One of five sub-ledgers on the principal
SUB-LEDGER" deficiency ledger which records any
principal deficiency in respect 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 LOAN" Any mortgage loan (being an English
mortgage loan or a 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
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"ADDITIONAL MORTGAGE PORTFOLIO" The portfolio of additional mortgage
loans, their related security, accrued
interest and other amounts derived
from such additional mortgage loans
that the seller, as of each cut-off
date, anticipates assigning to the
mortgages trustee from time to time
"ADJUSTED FUNDING 2 RESERVE FUND The sum of:
level"
(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 PROCEDURES" The administration, arrears and
enforcement policies and procedures
forming part of the seller's policy from
time to time or, at any time when the
administrator is not also the seller,
the policies and procedures from time to
time which would be adopted by a
reasonable, prudent mortgage lender
Northern Rock or such other person as
may from time to time be appointed as
administrator of the mortgage portfolio
under the administration agreement
"ADMINISTRATOR TERMINATION EVENT" The meaning given to it on page 120
"AGENT BANK" Citibank, N.A, acting through its London
branch at 5 Carmelite Street, London
EC4Y 0PA, or such other person for the
time being acting as agent bank under
the paying agent and agent bank
agreement
"ALTERNATIVE INSURANCE REQUIREMENTS" Requirements which vary the insurance
provisions of the mortgage conditions
"ANTICIPATED CASH ACCUMULATION PERIOD" The meaning given to it on page 175
"ARREARS OF INTEREST" As at any date and for any mortgage
loan, interest (other than capitalized
interest or accrued interest) on that
mortgage loan which is currently due and
payable on that date
"ARREARS OR STEP-UP TRIGGER EVENT" An arrears or step-up trigger event
occurs when (i) the outstanding
principal balance of the mortgage loans
in arrears
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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 EVENT" The meaning given to it on page 150
"ASSIGNMENT DATE" The date of assignment of any new
mortgage portfolio to the mortgages
trustee
"AUTHORIZED HOLDINGS" In respect of the US notes, $100,000 and
integral 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 INVESTMENTS" (a) sterling gilt-edged securities;
and
(b) sterling demand or time deposits,
certificates of deposit and
short-term debt obligations
(including commercial paper)
(which may include deposits into
any account which earns a rate of
interest related to LIBOR)
provided that in all cases these
investments have a maturity date
of 90 days or less and mature on
or before the next following note
payment date or loan payment date
(as applicable) or, in relation
ot 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 88
UNDERPAYMENT"
"AXA" The AXA Group of Companies
"BANK ACCOUNT AGREEMENT" The agreement dated March 26, 2001, as
amended from time to time, among the
account bank, the 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 BASE RATE" The Bank of England's official dealing
rate (the repo rate) as set by the UK
Monetary Policy Committee, and in the
event that this rate ceases to exist or
becomes inappropriate as an index for
the base rate pledge, such alternative
rate or index, which is not controlled
by the seller, that the seller considers
to be the most appropriate in the
circumstances
"BARCLAYS" Barclays Bank PLC, acting through its
office at City Group Office, Percy
Street, Newcastle upon Tyne NE99 1JP
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"BARCLAYS COLLECTION ACCOUNT" The account of the administrator held
at Barclays as may be utilized from
time to time for the purpose of
collecting amounts which are paid to
the seller on the mortgage loans and/or
the related security
"BASE RATE PLEDGE" The meaning given to it on page 86
"BASEL COMMITTEE" The meaning given to it on page 59
"BASIC TERMS MODIFICATIONS" The meaning given to it on page 266
"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 DEFICIENCY One of five sub-ledgers or the principal
SUB-LEDGER" deficiency ledger which records any
principal deficiency in respect of any
BBB loan tranches
"BB PRINCIPAL DEFICIENCY One of five sub-ledgers or the principal
SUB-LEDGER" deficiency ledger which records any
principal deficiency in respect of any
BB loan tranches
"BENEFICIARIES" Funding, Funding 2 and the seller,
collectively as beneficiaries of the
mortgages trust
"BENEFIT PLAN INVESTORS" An investor in a pension, profit-sharing
or other employee benefit plan, as well
as individual retirement accounts and
certain types of Keogh Plans, as
described further in "ERISA
CONSIDERATIONS"
"BORROWER" For each mortgage loan, the person or
persons who is or are named and defined
as such in the relevant mortgage deed,
or the other person or persons (other
than a guarantor) who shall become
legally obligated to comply with the
borrower's obligations under the related
mortgage
"BROKEN AMOUNT" In respect of any series and class of
notes, an amount specified as such (if
any) in the applicable prospectus
supplement
"BULLET LOAN TRANCHE" Any loan tranche which is scheduled to
be repaid in full 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
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(c) the step-up date (if any) in
relation to such loan tranche
occurs.
"BULLET REDEMPTION DATE" The bullet redemption date for any
series and class of bullet redemption
notes will be the monthly payment date
specified as such for such series and
class of notes in the applicable
prospectus supplement
"BULLET REDEMPTION NOTES" Any series and class of notes which
is scheduled to be 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) pass-through trigger event occurs;
or
(c) the step-up date (if any) in
relation to such notes occurs.
"BULLET REPAYMENT DATE" The bullet repayment date for any bullet
loan tranche will be the monthly payment
date specified as such for such loan
tranche in the applicable loan tranche
supplement.
"BULLET REPAYMENT LOAN AMOUNT" The amount required to be repaid on the
bullet repayment 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 83
"CAPITALIZED" In respect of a fee, an interest amount
or any other amount, means that amount
which is added to the capital balance of
a mortgage loan
"CAPITALIZED ARREARS" For any mortgage loan at any date,
interest or other amounts which are
overdue in respect of that mortgage loan
and which as at that date have been
added to the capital balance of that
mortgage loan either in accordance with
the mortgage conditions or otherwise by
arrangement with the relevant borrower
"CAPITALIZED INTEREST" For any mortgage loan at any date,
interest which is overdue in respect of
that mortgage loan and which as at that
date has been added to the capital
balance of that mortgage loan in
accordance with the mortgage conditions
or otherwise by arrangement with the
relevant borrower (excluding for the
avoidance of doubt any arrears of
interest which have not been so
capitalized on that date)
"CAPITAL REQUIREMENTS DIRECTIVE" The meaning given to it on page 54
"CAPPED RATE MORTGAGE LOANS" Mortgage loans that are subject to a
maximum rate of interest and charge
interest at the lesser of the seller's
standard variable
283
rate or the specified capped rate
"CASH ACCUMULATION LIABILITY" The meaning given to it on page 182
"CASH ACCUMULATION SHORTFALL" means at any time that the Funding 2
cash accumulation ledger amount is less
than the cash accumulation liability;
"CASH ACCUMULATION PERIOD" The meaning given to it on page 174
"CASH ACCUMULATION REQUIREMENT" The meaning given to it on page 175
"CASHBACK MORTGAGE LOAN" A type of mortgage loan, the primary
characteristics of which are described
on page 81
"CAT STANDARD MORTGAGE LOAN" A type of flexible mortgage loan, the
primary characteristics of which are
described on page 80
"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 SUBORDINATED The meaning given to it on page 72
AMOUNT"
"CLASS A ISSUER ENFORCEMENT The meaning given to it on page 258
NOTICE"
"CLASS A NOTE EVENT OF DEFAULT" The meaning given to it on page 258
"CLASS A NOTEHOLDERS" The holders of the class A notes
"CLASS A NOTES" The notes of any series designated as
such in the applicable prospectus
supplement
"CLASS A REQUIRED SUBORDINATED The meaning given to it on page 72
AMOUNT"
"CLASS A REQUIRED SUBORDINATED On any date, the percentage specified as
PERCENTAGE" such in the most recent prospectus
supplement.
"CLASS B AVAILABLE SUBORDINATED The meaning given to it on page 73
AMOUNT"
"CLASS B ISSUER ENFORCEMENT NOTICE" The meaning given to it on page 260
"CLASS B NOTE EVENT OF DEFAULT" The meaning given to it on page 260
"CLASS B NOTEHOLDERS" The holders of the class B notes
"CLASS B NOTES" The notes of any series designated as
such in the applicable prospectus
supplement
"CLASS B REQUIRED SUBORDINATED The meaning given to it on page 73
AMOUNT"
284
"CLASS B REQUIRED SUBORDINATED On any date, the percentage specified as
PERCENTAGE" such in supplement.
"CLASS C AVAILABLE SUBORDINATED The meaning given to it on page 74
AMOUNT"
"CLASS C ISSUER ENFORCEMENT NOTICE" The meaning given to it on page 261
"CLASS C NOTE EVENT OF DEFAULT" The meaning given to it on page 261
"CLASS C NOTEHOLDERS" The holders of the class C notes
"CLASS C NOTES" The notes of any series designated as
such in the applicable prospectus
supplement
"CLASS C REQUIRED SUBORDINATED The meaning given to it on page 74
AMOUNT"
"CLASS C REQUIRED SUBORDINATED On any date, the percentage specified as
PERCENTAGE" such in the most recent prospectus
supplement.
"CLASS D ISSUER ENFORCEMENT NOTICE" The meaning given to it on page 261
"CLASS D NOTE EVENT OF DEFAULT" The meaning given to it on page 262
"CLASS D NOTEHOLDERS" The holders of the class D notes
"CLASS D NOTES" The notes of any series designated as
such in the applicable prospectus
supplement
"CLASS M AVAILABLE SUBORDINATED The meaning given to it on page 74
AMOUNT"
"CLASS M ISSUER ENFORCEMENT NOTICE" The meaning given to it on page 260
"CLASS M NOTE EVENT OF DEFAULT" The meaning given to it on page 260
"CLASS M NOTEHOLDERS" The holders of the class M notes
"CLASS M NOTES" The notes of any series designated as
such in the applicable prospectus
supplement
"CLASS M REQUIRED SUBORDINATED The meaning given to it on page 73
AMOUNT"
"CLASS M REQUIRED SUBORDINATED On any date, the percentage specified as
PERCENTAGE" such in the most recent prospectus
supplement.
"CLEARING AGENCY" An agency registered under the
provisions of section 17A of the
Exchange Act
"CLEARING CORPORATION" A corporation within the meaning of the
New York Uniform Commercial Code
"CLEARSTREAM, Clearstream Banking, societe anonyme
LUXEMBOURG"
"CLOSING DATE" The closing date for the issuance of any
series and class of
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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 54
"CODE" United States Internal Revenue Code of
1986, as amended
"COLLECTION ACCOUNT" The Barclays collection account, the
Lloyds TSB collection account and each
other account in the name of the
administrator which is from time to time
used for the purpose of collecting,
directly or indirectly, monies due in
respect of mortgage loans and/or the
related security
"COLLECTION BANKS" Barclays Bank PLC acting through its
branch at Percy Street, Newcastle upon
Tyne NE99 1JP and Lloyds TSB Bank plc
acting through its branch at City
Office, Bailey Drive, Gillingham
Business Park, Kent ME8 0LS and each
other bank as may be appointed as such
under and in accordance with the
transaction documents
"COLLECTION BANK AGREEMENT" The agreement dated March 26, 2001, as
amended from time to time, among the
mortgages trustee, Funding, Funding 2,
the seller, the administrator, the
security trustee and the collection
banks
"COMBINATION MORTGAGE LOAN" A mortgage loan that combines the
features of a repayment mortgage loan
and an interest-only loan in that only
part of the principal of the mortgage
loan will be repaid by way of monthly
payments
"COMBINED CREDIT BALANCE" The meaning given to it on page 79
"COMBINED DEBIT BALANCE" The meaning given to it on page 79
"CONNECTIONS BENEFIT" The meaning given to it on page 80
"CONNECTIONS COMBINED CREDIT The meaning given to it on page 80
BALANCE"
"CONNECTIONS DEBIT BALANCE" The meaning given to it on page 80
"CONNECTIONS INTEREST" The meaning given to it on page 80
"CONNECTIONS MORTGAGE LOAN" A type of flexible mortgage loan, the
primary characteristics of which are
described on page 69
"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
286
contribution
"CONTRIBUTIONS LEDGER" The ledger on which contributions to the
mortgages trust made by Funding, Funding
2 and the seller to the mortgages
trustee and the application of such
ontributions in accordance with the
terms of the mortgages trust deed shall
be recorded
"CONTROLLED AMORTIZATION On any controlled redemption date before
INSTALLMENT" the occurrence of a trigger event or the
enforcement of the issuer 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 or noteholders of
such series and class on that controlled
redemption date in accordance with the
terms and conditions of the relevant
notes
"CONTROLLED AMORTIZATION NOTE" Any series and class of notes the
conditions of which impose a limit on
the amount of principal which may be
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 REDEMPTION DATES" The controlled redemption dates for any
series and class of controlled
amortization notes will be the monthly
payment dates specified as such for such
series and class of notes in the
applicable prospectus supplement
"CONTROLLED REPAYMENT DATES" The controlled repayment dates for any
controlled repayment loan tranche will
be the monthly payment dates specified
as such for such loan tranche in the
applicable loan tranche supplement
"CONTROLLED REPAYMENT AMOUNT" On any controlled repayment date before
the occurrence of a trigger event or
LOAN the enforcement of the Funding 2
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 REPAYMENT LOAN Any loan tranche which by its terms
TRANCHE" imposes a limit on the amount of
principal which may be repaid on such
loan 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) 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
287
"CONTROLLED REPAYMENT REQUIREMENT" The meaning given to it on page 176
"CONTROLLING BENEFICIARY DEED" The beneficiary deed entered into on the
Funding 2 program date, as amended from
time to time, among Funding, Funding 2,
the security trustee, the Funding 2
security trustee, the note trustee to
the Funding issuers and the seller
"CONTROLLING DIRECTIONS" The meaning given on page 157
"CORE TERMS" The main subject matter of the contract
"CORPORATE SERVICES AGREEMENT" With respect to the issuer and Funding
2, the corporate 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 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 PROVIDER" With respect to the issuer and Funding
2, Law Debenture 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 PAYMENT RATE" Unless otherwise defined in this
prospectus, represents a constant rate
of scheduled and unscheduled repayments
on the mortgage loans in the mortgage
portfolio each month relative to the
aggregate principal amount outstanding
of those mortgage loans
"CREDIT SUPPORT ANNEX" The 1995 Credit Support Annex (Bilateral
Form - 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
288
(3) any interest, disbursement, legal
expense, fee, charge, rent,
service charge, premium or payment
which has been properly
capitalized in accordance with the
relevant mortgage conditions or
with the relevant borrower's
consent and added to the amounts
secured or intended to be secured
by that mortgage loan (including
interest capitalized on any
re-draw under a flexible mortgage
loan); and
(4) any other amount (other than
unpaid interest) which is due or
accrued (whether or not due) and
which has not been paid by the
relevant borrower and has not been
capitalized in accordance with the
relevant mortgage conditions or
with the relevant borrower's
consent but which is secured or
intended to be secured by that
mortgage loan
as at the end of the London
business day immediately preceding
that given date less any repayment
or payment of any of the foregoing
made on or before the end of the
London business day immediately
preceding that given date and
excluding any retentions made but
not released and any further
advances committed to be made but
not made by the end of the London
business day immediately preceding
that given date
"CURRENT FUNDING 2 SHARE" The amount of trust property
beneficially owned by Funding 2 from
time to time, as described further in
"THE MORTGAGES TRUST"
"CURRENT FUNDING 2 SHARE The percentage share of Funding 2's
PERCENTAGE" interest in the trust property from time
to time, as described further in "THE
MORTGAGES TRUST"
"CURRENT SELLER SHARE" The amount of trust property
beneficially owned by the seller from
time to time, as described further in
"THE MORTGAGES TRUST"
"CURRENT SELLER SHARE The percentage share of the seller's
PERCENTAGE" interest in the trust property from time
to time, as described further 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 MORTGAGE As of any cut-off date, the initial
PORTFOLIO" mortgage portfolio and the further
mortgage portfolios (taking account of,
among other things, amortization of
mortgage loans in that portfolio and the
addition and/or removal of any mortgage
loans to or from that portfolio since
March 26, 2001) combined with the
additional mortgage portfolio
"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 CONTRIBUTION" The consideration in the form of cash
payable by Funding 2
289
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 252
"DEFERRED PURCHASE PRICE" That portion of the purchase price for
the initial mortgage portfolio and of
the purchase price (if any) of any other
mortgage portfolio assigned to the
mortgages trustee which was not paid to
the seller on the initial closing date
or (in the case of any other mortgage
portfolio) the relevant assignment date
and which is to be paid by the mortgages
trustee from time to time to the seller
from deferred contributions received by
the mortgages trustee from Funding 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 PERIOD" Each period from (and including) a
determination date to (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)
"DIRECT DEBIT" A payment made directly by a borrower
from its bank account to a collection
account
"DISCOUNT RATE MORTGAGE A type of mortgage loan, the primary
LOAN" characteristics of which are described
on page 81
"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 INTEREST A note, the interest basis of which is
NOTES" specified in the applicable prospectus
supplement as being dual currency
interest
"ENGLISH MORTGAGE LOAN" Each mortgage loan secured over a
property located in 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
290
"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 75
"EXCHANGE ACT" The United States Securities Exchange
Act of 1934, as amended
"EXISTING BORROWERS' RE-FIX At any date, the fixed rate then being
RATE" offered to those of the seller'sexisting
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 DATE" In respect of any series and class of
notes, the date specified as such for
such series and class of notes in the
related prospectus supplement
"FINAL REPAYMENT DATE" In relation to any loan tranche the date
specified as such for such loan tranche
in the related loan tranche supplement
"FINANCIAL SERVICES ACT" The Legislative Decree No.58 of February
24, 1998 of the Republic of Italy
"FITCH" Fitch Ratings Ltd., including any
successor to its ratings business
"FIXED COUPON AMOUNT" In respect of any series and class of
notes, the amount specified as such (if
any) in the applicable prospectus
supplement
291
"FIXED RATE MORTGAGE LOAN" A mortgage loan which is subject to a
fixed rate of interest set by reference
to a predetermined rate or series of
rates for a fixed period or periods 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 RATE Flexible mortgage loans with the same
MORTGAGE LOANS" basic features as a Together mortgage
loan (other than allowing the borrower
to obtain an unsecured loan) which are
subject to a maximum rate of interest
for a specified period of time, and at
the expiration of that period are
generally subject to the seller's
standard variable rate
"FLEXIBLE CASH RE-DRAW The meaning given to it on page 146
CAPACITY"
"FLEXIBLE FIXED RATE Flexible mortgage loans with the same
MORTGAGE LOAN" basic features as a Together mortgage
loan (other than allowing the borrower
to obtain an unsecured loan) which are
subject to a fixed rate of interest for
a specified period of time, and at the
expiration of that period are generally
subject to the seller's standard
variable rate
"FLEXIBLE MORTGAGE LOAN" A type of mortgage loan product that
typically incorporates features that
give the borrower options (which may be
subject to certain conditions) to, among
other things, make further drawings on
the mortgage loan account, and/or to
overpay or underpay interest and
principal in a given month and/or to
take a payment holiday (and shall, for
the avoidance of doubt, exclude: (i)
flexible mortgage loans which are, at
the relevant time, subject to fixed
rates of interest set by reference to a
predetermined 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)
292
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 RATE A type of flexible mortgage loan, the
MORTGAGE LOANS" primary characteristics of which are
described on page 81
"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
hte 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 BENEFICIARIES" Funding and Funding 2 in their capacity
as beneficiaries of the mortgages trust
"FUNDING GIC ACCOUNT" An account in the name of Funding held
at Northern Rock and maintained pursuant
to the terms of a guaranteed investment
contract
"FUNDING INTERCOMPANY The intercompany loans between Funding
LOANS" and each of the Funding issuers
"FUNDING (ISSUER) RESERVE A reserve fund established in the name
FUND" of Funding for the benefit of a Funding
issuer
"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 FUND" A reserve fund established in the name
of Funding
"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 TRUSTEES" The security trustee and the Funding 2
security trustee
"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"
"FUNDING SHARE/FUNDING 2 The ledger maintained by the cash
SHARE/SELLER manager, on behalf of the mortgages
SHARE LEDGER" trustee and the
beneficiaries, to record the current
Funding 2 share, the current Funding 2
share percentage, the
293
current seller share and the current
seller share percentage of the trust
property
"FUNDING SHARE PERCENTAGE" The current Funding share percentage of
the trust 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 PRINCIPAL The meaning given to it on page 177
RECEIPTS"
"FUNDING 2 AVAILABLE REVENUE RECEIPTS" The meaning given to it on page 165
"FUNDING 2 BANK ACCOUNT AGREEMENT" The agreement entered into on or about
the Funding 2 program date, as amended
from time to time, among the 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 ACCOUNTS" The Funding 2 GIC account, and the
Funding 2 transaction 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 RATE SWAPS" The swap transactions as described
further under "THE SWAP AGREEMENTS - THE
FUNDING 2 BASIS RATE SWAPS" and
documented under the Funding 2 basis
rate swap agreement
"FUNDING 2 BASIS RATE The ISDA master agreement, the schedule
SWAP AGREEMENT" thereto and the confirmations thereunder
to be entered into on or before 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 RATE Northern Rock and/or, as applicable, any
SWAP PROVIDER" other basis rate swap provider appointed
from time to time in accordance with the
transaction documents
"FUNDING 2 BASIS RATE means, in relation to the Funding 2
SWAP EXCLUDED TERMINATION AMOUNT" basis rate swap agreement, an amount
equal to:
(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 ACCUMULATION LEDGER" The meaning given to it on page 176
294
"FUNDING 2 CASH ACCUMULATION LEDGER The meaning given to it on page 182
AMOUNT"
"FUNDING 2 CHARGED PROPERTY" The property, assets and undertaking of
Funding 2 which 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 CHARGE" The deed of charge entered into on the
Funding 2 program 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 SUB-LEDGER" The ledger on which receipts and
payments of Funding 2 revenue receipts
allocable to the payment of expenses
will be recorded by the cash manager
"FUNDING 2 GIC ACCOUNT" The account in the name of Funding 2
held at Northern 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 PROVIDER" Northern Rock or any other person or
persons as are for the time being the
Funding 2 GIC provider under the
applicable Funding 2 guaranteed
investment contract
"FUNDING 2 GUARANTEED INVESTMENT The guaranteed investment contract
entered into on the Funding 2 program
CONTRACT" date, as amended, restated,
supplemented or otherwise modified from
time to time, 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 INTERCOMPANY LOAN" A loan (or the aggregate of a number of
separate loans) of the net proceeds of
any issue (or all issues) of 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 INTERCOMPANY LOAN means a loan agreement entered into
AGREEMENT" between Funding 2 and a Funding 2 issuer
in relation to a Funding 2 intercompany
loan;
"FUNDING 2 INTERCOMPANY LOAN An enforcement notice served by the
Funding 2 security trustee on Funding 2
ENFORCEMENT NOTICE" for the enforcement
of the Funding 2 security following the
occurrence of Funding 2 intercompany
loan event of default
295
"FUNDING 2 INTERCOMPANY LOAN EVENT OF An event of default under the global
DEFAULT" intercompany loan agreement and/or under
any other Funding 2 intercompany loan
agreement
"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
"FUNDING 2 LIQUIDITY means a liquidity facility entered into
FACILITY" at any time after the Funding 2
program date
"FUNDING 2 LIQUIDITY means the provider of the Funding 2
FACILITY PROVIDER" liquidity facility
"FUNDING 2 LIQUIDITY The amounts specified as such in the
FACILITY SUBORDINATED AMOUNTS" Funding 2 liquidity facility agreement
(if any)
"FUNDING 2 LIQUIDITY The payments specified as such in the
FACILITY PRINCIPAL Funding 2 liquidity facility agreement
PAYMENT" (if any)
"FUNDING 2 LIQUIDITY The liquidity reserve fund in Funding
RESERVE FUND" 2's name which 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
RESERVE LEDGER" to record the 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 202
RESERVE PRINCIPAL
PAYMENT"
"FUNDING 2 LIQUIDITY The meaning given to it on page 201
RESERVE RATING EVENT"
"FUNDING 2 LIQUIDITY The meaning given to it on page 202
RESERVE REQUIRED AMOUNT"
"FUNDING 2 POST- The provisions and the order of priority
ENFORCEMENT PRIORITY OF PAYMENTS" set out in a schedule to the Funding 2
deed of charge in which 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"
296
"FUNDING 2 PRE- The provisions and the order of priority
ENFORCEMENT PRINCIPAL PRIORITY OF of payments set out in a schedule to the
PAYMENTS" Funding 2 deed of charge in which
Funding 2 available principal receipts
will be applied until enforcement of
the Funding 2 security, which is as
described under "CASHFLOWS -
DISTRIBUTION OF FUNDING 2 AVAILABLE
PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT
OF THE FUNDING 2 SECURITY"
"FUNDING 2 PRE- The provisions and the order of priority
ENFORCEMENT REVENUE PRIORITY OF of payments set out in a schedule to the
PAYMENTS" Funding 2 deed of charge in which
Funding 2 available revenue receipts
will be applied until enforcement of
the Funding 2 security, which is as
described under "CASHFLOWS -
DISTRIBUTION OF FUNDING 2 AVAILABLE
REVENUE RECEIPTS"
"FUNDING 2 PRINCIPAL DEFICIENCY The ledger maintained by the Funding 2
cash manager which will be ledger"
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 LEDGER" The ledger on which receipts and
payments of Funding 2 principal receipts
(other than amounts recorded on the
Funding 2 cash accumulation ledger) will
be recorded by the cash manager
"FUNDING 2 PRINCIPAL RECEIPTS" The mortgage trustee principal receipts
paid by the mortgages trustee to Funding
2 on each distribution date
"FUNDING 2 PRIORITY OF PAYMENTS" As the context requires, any of the
Funding 2 pre-enforcement revenue
priority of payments, the Funding 2
pre-enforcement principal priority of
payments and/or the Funding 2
post-enforcement priority of payments
"FUNDING 2 PROGRAM DATE" January 19, 2005
"FUNDING 2 RESERVE FUND" The reserve fund established in the name
of Funding 2 up to an amount not
exceeding the Funding 2 reserve maximum
amount as further described under
"CREDIT STRUCTURE - FUNDING 2 RESERVE
FUND"
"FUNDING 2 RESERVE FUND THRESHOLD" On any date, the lesser of:
(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
LEDGER" manager in the name of Funding 2 to
record the amount credited to the
Funding 2 reserve fund and withdrawals
from and deposits into the
297
Funding 2 reserve fund
"FUNDING 2 RESERVE REQUIRED AMOUNT" As of any date of determination, the
amount calculated in accordance with the
formula set out on page 172
"FUNDING 2 REVENUE The ledger on which the cash manager
LEDGER" records all monies 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
"FUNDING 2 SECURED CREDITORS" The Funding 2 security trustee (and any
receiver of 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 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 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 139 and 149
"FUNDING 2 SHARE PERCENTAGE" The current Funding 2 share percentage
of the trust property calculated in
accordance with the formula set out on
pages 139 and 140
"FUNDING 2 SWAP COLLATERAL ACCOUNTS" The
accounts, if any, opened in the name of
Funding 2 for the purpose of holding
swap collateral delivered to Funding 2
and maintained in accordance with the
terms of the cash management agreement
"FUNDING 2 TRANSACTION ACCOUNT" The account in
the name of Funding 2 held with the
account bank and maintained subject to
the terms of 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
Funding 2 security trustee
"FUNDING 2 TRANSACTION DOCUMENTS" Each of the following 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;
298
(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;
(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 CONTRIBUTION" The consideration in the form of cash
payable by any 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 81
"FURTHER DRAW CAPACITY" The meaning given to it on page 146
"FURTHER DRAW LEDGER" The ledger on which further draws under
personal secured loans will be recorded
by the cash manager
"FURTHER MORTGAGE LOAN" Any mortgage loan which was assigned by
the seller to 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
299
"FURTHER MORTGAGE PORTFOLIOS" The portfolios of further mortgage
loans, their related security, accrued
interest and other amounts derived from
such further mortgage loans that the
seller assigned to the mortgages trustee
after March 26, 2001
"GLOBAL NOTE CERTIFICATES" The note certificates representing the
notes in global form
"HERITABLE CREDITOR" The meaning given to it on page 102
"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 60
"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
"INDEX LINKED INTEREST NOTE" A note, the interest basis of which is
specified in the applicable
prospectus supplement as being index
linked interest
"INDIVIDUAL NOTE CERTIFICATES" The note certificates representing the
notes in definitive form
"INITIAL CLOSING DATE" March 26, 2001
"INITIAL CONTRIBUTION" The consideration in the form of cash
paid by Funding 2 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 PORTFOLIO" The portfolio of mortgage loans, their
related security, accrued interest and
other amounts, proceeds, powers, rights,
benefits and interests derived from such
mortgage loans that the seller assigned
to the mortgages trustee on
March 26, 2001
"INITIAL PURCHASE PRICE" That portion of the purchase price paid
by the mortgages trustee to the seller
on the initial closing date in
consideration for the assignment to the
mortgages trustee of the initial
mortgage portfolio or that portion of
the purchase price (if any) payable by
the mortgages trustee to the seller
on the relevant assignment date in
consideration for the assignment to the
mortgages trustee of the further
mortgage portfolios or any new mortgage
portfolio, in each case in accordance
with the provisions of the mortgage
sale agreement
"INITIAL TRUST PROPERTY" The sum of (pound)100 that the corporate
services provider settled on trust and
held on trust absolutely as to both
capital and income by the mortgages
trustee for the benefit of the
beneficiaries
300
"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;
(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
301
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
(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
302
(iv) 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 COMMENCEMENT DATE" In respect of any series and class of
notes, the closing date of such notes
or such other date as may be 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 DETERMINATION DATE" In respect of any series and class of
notes, the date(s) specified as such
(if any) in the applicable prospectus
supplement
"INTEREST PERIOD" or "FIXED INTEREST In respect of any series and class of
PERIOD" notes, (i) with respect to the first
note payment date for such notes, 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
"INTERIM CALCULATION PERIOD" The meaning given to it on page 139
"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
303
"ISSUANCE TESTS" The tests set out in "ISSUANCE OF THE
NOTES - ISSUANCE"
"ISSUER" Granite Master Issuer plc
"ISSUER ACCOUNT BANK" Citibank, N.A., acting through its
London branch at 5 Carmelite
Street, London EC4Y 0PA or any other
authorized entity as the issuer may
choose with the prior written approval
of the issuer security trustee
"ISSUER ARREARS TEST" The meaning given to it on page 183
"ISSUER AVAILABLE PRINCIPAL RECEIPTS" The meaning given to it on page 187
"ISSUER BANK ACCOUNT AGREEMENT" The bank account
agreement entered into on or about the
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 MANAGEMENT AGREEMENT" The issuer cash management agreement
entered into on or about the Funding 2
program date, as amended from time 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 MANAGER" Northern Rock or such other person or
persons for the time being acting,
under the issuer cash management
agreement, as agent for the issuer and
(following enforcement of the issuer
security) the 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 CHARGE" The deed of charge entered into on the
Funding 2 program 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 issuer security in favor of the
issuer secured creditors, as described
further under "SECURITY FOR THE
ISSUER'S OBLIGATIONS"
"ISSUER ENFORCEMENT NOTICE" A notice served by the note trustee for
the acceleration 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" ledger relating to 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 PROVIDER" Northern Rock or any other person or
persons as are for the time being the
issuer GIC provider under the applicable
issuer
304
guaranteed investment contract
"ISSUER GUARANTEED INVESTMENT The guaranteed investment contract
CONTRACT" entered into on the Funding 2 program
date, as amended, restated 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 LEDGER" The ledger on which the issuer cash
manager records issuer available
principal receipts received and paid out
by the issuer
"ISSUER POST-ENFORCEMENT PRIORITY OF The provisions and the order of priority
PAYMENTS" set out in a schedule to the issuer deed
of charge in which all issuer available
revenue receipts, issuer available
principal receipts and all other monies,
income, receipts and recoveries of the
issuer or the 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-ENFORCEMENT PRINCIPAL The provisions and the order of priority
PRIORITY OF PAYMENTS" of payments set out in a schedule to the
issuer cash management agreement in
which the issuer available principal
receipts will be applied until
enforcement of the issuer security,
which on the 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-ENFORCEMENT REVENUE The provisions and the order of priority
PRIORITY OF PAYMENTS" of payments set out in a schedule
to the issuer cash management agreement
in which the issuer available
revenue receipts will be applied until
enforcement of the issuer security,
which on the Funding 2 program date will
be as described under "CASHFLOWS -
DISTRIBUTION OF ISSUER AVAILABLE REVENUE
RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY"
"ISSUER PRIORITY OF PAYMENTS" An issuer pre-enforcement revenue
priority of payments, the issuer
pre-enforcement principal priority of
payments and the issuer post-enforcement
priority of payments
"ISSUER RESERVE FUND" The reserve fund established in the name
of the issuer up to an amount not
exceeding the issuer reserve required
amount as further described under
"CREDIT STRUCTURE - ISSUER RESERVE
FUND".
"ISSUER RESERVE LEDGER" The ledger maintained by the issuer cash
manager to record the amount credited to
the issuer reserve fund and withdrawals
from and deposits into the issuer
reserve fund.
"ISSUER RESERVE MINIMUM AMOUNT" As of any date of determination, an
amount calculated in accordance with the
formula set out on page 199
305
"ISSUER RESERVE PRINCIPAL PAYMENT" The meaning given to it on page 198
"ISSUER RESERVE REQUIRED AMOUNT" As of any date of determination, an
amount calculated in accordance with the
formula set out on page 198
"ISSUER RESERVE REQUIREMENT" The meaning given to it on page 184
"ISSUER REVENUE LEDGER" The ledger on which the issuer cash
manager records issuer available
revenue receipts received and paid out
by the issuer
"ISSUER SECURED CREDITORS" The issuer security trustee (and any
receiver appointed 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 AGREEMENTS" The ISDA master agreements, schedules
thereto and 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 COLLATERAL ACCOUNTS" The accounts, if any, opened in the name
of the issuer for the purpose of holding
swap collateral delivered to the issuer
and maintained in accordance with the
terms of the issuer cash management
agreement
"ISSUER SWAP EXCLUDED TERMINATION In relation to an issuer swap agreement
AMOUNT" an amount equal to:
(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
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 PROVIDERS" The institutions identified in respect
of each issuer swap in the prospectus
supplement related to the relevant
series and class of notes
306
"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
a pplicable 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 ACCOUNT" The day to day bank accounts of the
issuer, held with 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 COLLECTION ACCOUNT" The account of the administrator held at
Lloyds TSB as may be utilized from time
to time for the purpose of collecting
amounts which are paid to the seller on
the mortgage loans and/or the related
security
"LOAN PAYMENT DATE" In respect of a loan tranche, the
monthly payment 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 RATING" The designated rating assigned to a loan
tranche which 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 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
307
"LOAN TRANCHE SUPPLEMENT" In relation to any loan tranche, means
the document between, amongst others,
Funding 2 and the issuer recording the
principal terms of such loan tranche;
"LONDON BUSINESS DAY" A day (other than a Saturday, Sunday or
public holiday) on which banks are
generally open for business in London
"LONDON STOCK EXCHANGE" London Stock Exchange plc
"LOSSES" The realized losses experienced on the
mortgage loans in the mortgage portfolio
"LOSSES LEDGER" The ledger created and maintained by the
cash manager under the cash management
agreement to record the losses on the
mortgage portfolio
"LTV RATIO" or "LOAN TO VALUE RATIO" In respect of any mortgage loan assigned
to the mortgages trust, the ratio of the
outstanding balance of such mortgage
loan to the value of the mortgaged
property securing such mortgage loan;
and in respect of the seller's decision
as to whether to make a mortgage loan
to a prospective borrower and for
purposes of determining whether a MIG
policy is necessary in connection with
a mortgage loan, the ratio of the
outstanding balance of such mortgage
loan to the lower of the purchase price
or valuation of the mortgaged property
securing such mortgage loan as
determined by the relevant valuation by
the seller
"LTV TESTS" Two tests which assign a credit
enhancement value (i) to each mortgage
loan in the mortgage portfolio based on
its current LTV ratio and the amount of
mortgage indemnity cover on that
mortgage loan, and (ii) calculated to
include any related unsecured portion
of a mortgage loan in respect of the
Together product based on its current
LTV ratio and the amount of mortgage
indemnity cover on that mortgage loan.
The weighted average credit enhancement
value for the mortgage portfolio is
then determined
"MANDATE HOLDERS" The meaning given to it on page 94
"MARGIN" In respect of any series and class of
notes, the amount specified as such in
the applicable prospectus supplement
"MARKET" The London Stock Exchange's Gilt Edged
and Fixed Interest Market
"MASTER DEFINITIONS SCHEDULE" Together, the master definitions
schedule dated January 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 INTEREST" In respect of any series and class of
notes, the rate of interest specified
as such in the applicable prospectus
supplement
"MCOB" The meaning given to it on page 54
"MIG POLICIES" The mortgage indemnity guarantee
policies on certain of the mortgage
loans which are intended to cover
losses which may
308
be incurred following repossession and
sale of a mortgaged property from a
borrower, and which were issued by
NORMIC
"MINIMUM RATE OF INTEREST" In respect of any series and class of
notes, the rate of interest specified
as such in the applicable prospectus
supplement
"MINIMUM SELLER SHARE" An amount included in the seller share
which is 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 175
"MONTHLY PAYMENT" For any mortgage loan, the amount a
borrower is required to pay on a monthly
payment date
"MONTHLY PAYMENT DATE" (a) In respect of any mortgage loan,
the date in each month on which the
relevant borrower is required to
make a payment of interest and, if
applicable, principal, for that
mortgage loan, as required by the
applicable mortgage conditions
(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 VARIATION TEST A certain percentage resulting from the
VALUE" application of the Moody's portfolio
variation test
"MOODY'S PORTFOLIO VARIATION TEST" The calculation methodology provided by
Moody's to the 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
309
"MORTGAGE ACCOUNT" As the context requires, either (1) all
mortgage loans secured on the same
mortgaged property and thereby forming
a single mortgage account or (2) an
account maintained by the administrator
in respect of a particular mortgage loan
to record all amounts due in respect of
that mortgage loan (whether by way of
principal, interest or otherwise) and
all amounts received in respect
thereof
"MORTGAGE CONDITIONS" For any mortgage loan, the terms and
conditions applicable to that mortgage
loan and its related security as set out
in the seller's relevant "MORTGAGE
CONDITIONS" booklet and the seller's
relevant general conditions, and in
relation to each as from time to time
varied by the relevant mortgage loan
agreement and the relevant mortgage
deed; 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 FILES" For each mortgage loan, the file or
files (including files kept in
microfiche format or similar electronic
data retrieval system) containing
correspondence between the borrower and
the seller and including the mortgage
documentation applicable to that
mortgage loan, each letter of offer for
that mortgage loan and other relevant
documents
"MORTGAGE PORTFOLIO" The initial mortgage
portfolio 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
SECURITY" Secondary Mortgage Markets Enhancement
Act 1984, as amended
"MORTGAGE SALE AGREEMENT" The mortgage sale agreement entered into
on March 26, 2001, as amended from time
to time, among the seller, the
mortgages trustee, Funding, Funding 2,
the security trustee and the Funding 2
security trustee regarding the
assignment of the mortgage portfolio to
the mortgages trustee including any
310
documents ancillary thereto, and as
further described under "ASSIGNMENT OF
THE MORTGAGE LOANS AND THEIR RELATED
SECURITY"
"MORTGAGED PROPERTY" For any mortgage loan, the freehold or
leasehold property in England and Wales
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
ALLOCATION OF REVENUE RECEIPTS" mortgages trustee available revenue
receipts as set forth on page 147
"MORTGAGES TRUST DEED" The mortgages trust deed entered into
on March 26, 2001, 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 AVAILABLE REVENUE The meaning given to it on page 147
RECEIPTS"
"MORTGAGES TRUSTEE BANK ACCOUNTS" The mortgages trustee GIC account and
the mortgages trustee transaction
account
"MORTGAGES TRUSTEE GIC ACCOUNT" The account in the name of the mortgages
trustee held at 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 GIC PROVIDER" Northern Rock or any other person or
persons as are for the time being the
mortgages trustee GIC provider under the
applicable mortgages trustee guaranteed
investment contract
311
"MORTGAGES TRUSTEE GUARANTEED The guaranteed investment contract
INVESTMENT CONTRACT" entered into on May 26, 2004, as
amended, restated, supplemented or
otherwise modified from time to time,
among Funding, 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 PRINCIPAL PRIORITY The order in which the cash manager
OF PAYMENTS" applies principal receipts on the
mortgage loans on each distribution
date, as set out in the mortgages trust
deed
"MORTGAGES TRUSTEE PRINCIPAL On any distribution date, any mortgages
RECEIPTS" trustee retained principal receipt
plus the principal receipts received
by the mortgages trustee in the
immediately preceding trust calculation
period which may be distributed by the
mortgages trustee
"MORTGAGES TRUSTEE RETAINED PRINCIPAL The meaning given to it on page 152
RECEIPTS"
"MORTGAGES TRUSTEE REVENUE PRIORITY The order in which the cash manager
OF PAYMENTS" applies the mortgages trustee available
revenue receipts on each distribution
date, as set out in the mortgages trust
deed
"MORTGAGES TRUSTEE TRANSACTION The account in the name of the mortgages
ACCOUNT" trustee held at the account bank and
maintained subject to the terms of the
bank account agreement or any additional
or replacement bank account of the
mortgages trustee as may for the time
being be in place with the prior
consent of the security trustee
"N(M)" The meaning given to it on page 53
"NEW BASEL CAPITAL The meaning given to it on page 59
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 PORTFOLIO" Any portfolio of new mortgage loans, the
mortgages and new related security, any
accrued interest and any other amounts,
proceeds, powers, rights, benefits and
interests derived from the new mortgage
loans and/or the new related security,
in each case which are to be assigned
by the seller to
312
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 SECURITY" The security for the
new mortgage loans (including the
mortgages) which the seller may assign
to the mortgages trustee under the
mortgage sale agreement
"NEW TRUST PROPERTY" As at any assignment
date after the 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 60
"NON-ASSET TRIGGER EVENT" The meaning given to it on page 150
"NON-CASH RE-DRAW" An authorized underpayment or a
payment holiday under a flexible
mortgage loan included in the mortgages
trust, which will result in the seller
being required to pay to the mortgages
trustee an amount equal to the unpaid
interest associated with that authorized
underpayment or payment holiday
"NON-PERFORMING MORTGAGE LOAN" A mortgage loan that is
in arrears and for which the related
borrower has not made any payment within
any of the three consecutive calendar
months prior to the date of
determination
"NORMIC" Northern Rock Mortgage Indemnity Company
Limited
"NORTHERN ROCK" Northern Rock plc
"NOTE CERTIFICATES" The global note certificates and the
individual note certificates
"NOTE EVENT OF DEFAULT" An event of default under the provisions
of the notes
"NOTE PAYMENT DATE" In respect of a series and class of
notes, the monthly 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 AGREEMENT" The agreement
entered into on or about the Funding 2
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
313
"OMBUDSMAN" The UK Financial Ombudsman Service
"ORIGINAL BULLET LOAN TRANCHE" A loan tranche which has, at any time,
been a bullet loan tranche, whether or
not the step-up date in respect of such
loan tranche has occurred
"ORIGINAL BULLET REDEMPTION NOTE" A note which has, at any time, been a
bullet redemption note, whether or not
the step-up date in respect of such
note has occurred
"ORIGINAL PASS-THROUGH A loan tranche which, at the time it
LOAN TRANCHE" was advanced, was a pass-through loan
tranche
"PASS-THROUGH LOAN TRANCHE" A loan tranche which has no specified
repayment dates 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
"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 REQUIREMENT" The meaning given to it on page 176
"PASS-THROUGH TRIGGER EVENT" Any of the following events:
(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 AGENT BANK The paying agent and agent bank
AGREEMENT" agreement entered into on or about the
Funding 2 program date, as amended from
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 DAY" A day which is:
(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:
314
(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 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 88
"PERMITTED PRODUCT SWITCH" The exchange by a borrower of its then
current mortgage loan product for a
different mortgage loan product offered
by the seller, which may be made only
if the new mortgage loan for which
the prior mortgage loan is to be
exchanged is a permitted replacement
mortgage loan
"PERMITTED REDEMPTION DATE" As applicable, a bullet redemption date,
a scheduled redemption date, a
controlled redemption date or the date
on or after which principal repayments
of pass-through notes may be made
"PERMITTED REPLACEMENT MORTGAGE LOAN" The meaning given to it on page 127
"PENSION PLAN" A financial plan arranged by a borrower
to provide for that borrower's
expenses during retirement
"PERSONAL SECURED LOAN" The meaning given to it on page 81 and
is either a 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 289
"POST-ENFORCEMENT CALL OPTION The agreement entered into on or about
AGREEMENT" the Funding 2 program date, as amended
from time to time, under which the note
trustee agrees on behalf of the note
holders, that in specified
315
circumstances, GPCH Limited may call
for the notes to be transferred to it
"POST-ENFORCEMENT CALL OPTION HOLDER" GPCH Limited
"PREVIOUS MORTGAGES TRUSTEE GIC Lloyds TSB Bank plc acting through its
PROVIDER" office at Financial Markets Division,
25 Monument Street, London EC3R 8BQ as
the mortgages trustee GIC provider
under the applicable mortgages trustee
guaranteed investment contract
"PRINCIPAL AMOUNT OUTSTANDING" For each series and class of notes and
as of any date of 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
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
"PRINCIPAL PAYING AGENT" Citibank, N.A., acting through its
London branch at 5 Carmelite Street,
London EC4Y 0PA, or such other
person for the time being acting as
principal paying agent under the paying
agent and agent bank agreement
"PRINCIPAL RECEIPTS" Any payment in respect of principal
received in respect of any mortgage
loan, whether as all or part of a
monthly on redemption (including partial
payment, 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 127
"PROGRAM" Means the asset-backed note program
established by or otherwise contemplated
in the programme agreement and the trust
deed
"PROPERTIES IN POSSESSION POLICY" The insurance policy issued by AXA
General Insurance Limited which provides
the seller with rebuilding insurance
when the seller takes possession of a
property from a default borrower
316
"PROGRAMME AGREEMENT" The agreement entered into on or around
the Funding 2 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 REQUIRED AMOUNT" As of any date of determination, an
amount calculated in accordance with
the formula set out on page 199
"PROGRAMME RESERVE REQUIRED Has the meaning given to it on page 199
percentage"
"PROSPECTUS" This prospectus dated August 26, 2005
relating to the issue of US notes as
supplemented by the prospectus
supplement relating to each series and
class of notes
"PROSPECTUS RULES" The rules contained in the
Prospectus Rules Instrument 2005, made
pursuant to the Financial Services and
Market Act 2000
"PROSPECTUS SUPPLEMENT" Each prospectus supplement relating to
one or more series and classes of
notes issued on a single closing date
"RATE OF INTEREST" and In respect of any series and class of
notes, the rate or rates (expressed as
"RATES OF INTEREST" a percentage per annum) on 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
"REASONABLE,PRUDENT MORTGAGE LENDER" A reasonably prudent prime residential
mortgage lender lending to borrowers
in England, Wales and Scotland who
generally satisfy the lending criteria
of traditional sources of residential
mortgage capital
"RECEIVER" A receiver appointed by the 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 EXCHANGE" The meaning given to it on page 279
"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
317
redraws and non-cash re-draw
"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 LOAN" As at any given date, a mortgage loan
which on or before that date had been
a fixed rate mortgage loan but the fixed
period had come to an end, but as
at or before that given date, the
interest charged under that mortgage
loan was again fixed for 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
Gilt Edged and Fixed Interest Market
(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 CONTRACT" The meaning given to it on page 53
"REGULATED PERSONAL SECURED LOAN" The meaning given to it on page 81
"REINSTATEMENT" For a mortgaged property that has been
damaged, repairing or rebuilding that
mortgaged property to the condition that
it was in before the occurrence of the
damage
"RELATED SECURITY" The security for the repayment
of a mortgage loan including the
relevant mortgage and all other matters
applicable to the mortgage loan,
acquired as part of the mortgage
portfolio assigned to the mortgages
trustee
"RELEVANT DEPOSIT AMOUNT" The sum of the following:
(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
318
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 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+";
319
less any amounts invested in
authorized investments or
maintained in accounts at a bank
rated at least "A-1+" by Standard
& Poor's
"RELEVANT DISTRIBUTION DATE" Each distribution date or the date
on which the mortgage trust
terminates
"RELEVANT RECALCULATION DATE" The meaning given to it on page
141
"RELEVANT SCREEN PAGE" In respect of any series and class
of notes, the screen page
specified as such in the
applicable prospectus supplement
"REPAYMENT REQUIREMENT" The meaning given to it on page
176
"REPAYMENT TESTS" The meaning given to it on page 17
"REQUIRED SUBORDINATED PERCENTAGE" In respect of any series and
class, the percentage specified as
such in the related prospectus
supplement
"REPAYMENT MORTGAGE LOAN" A mortgage loan for which the
borrower is under an obligation to
the mortgagee to make monthly
payments of principal so that the
whole principal (in addition to
interest) is repaid by the stated
maturity date for that mortgage
loan
"REVENUE LEDGER" The ledger created and maintained
by the cash manager on behalf of
the mortgages trustee under the
cash management agreement to
record revenue receipts on the
mortgage loans and interest from
the mortgages trustee bank
accounts and payments of revenue
receipts from the mortgages
trustee GIC account to Funding,
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
"SCHEDULED REDEMPTION DATES" The scheduled redemption dates for
any series and class of scheduled
redemption notes will be the
monthly payment dates set out in
the prospectus supplement related
to such series and class of notes.
320
"SCHEDULED REDEMPTION NOTES" Any series and class of notes
scheduled to be repaid in full in two
or more installments on scheduled
redemption 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
supplementoccurs;
(b) a pass-through trigger event
occurs; or (c) the step-up date
(if any) in relation to such notes
occurs
"SCHEDULED AMORTIZATION INSTALLMENT" On any scheduled redemption date before
the occurrence of a trigger event or the
enforcement of the issuer 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 DATES" The scheduled repayment dates for any
scheduled 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
LOAN INSTALLMENT" tranche which is payable on a scheduled
repayment date for that loan tranche
"SCHEDULED REPAYMENT Any loan tranche scheduled to be repaid
LOAN TRANCHE" in full in two 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 REQUIREMENT" The meaning given to it on page 177
"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 LOAN" Each mortgage loan secured over a
property located in
Scotland "S&P" and "STANDARD & Standard & Poor's Ratings Services, a
POOR'S" division of The 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
321
"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 INSURER" The meaning given to it on page 99
"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 150
"SELLER SHARE EVENT DISTRIBUTION DATE" A distribution date on which a seller
share event occurs
"SELLER SHARE PERCENTAGE" The current seller share percentage of
the trust property calculated in
accordance with the formula set out on
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 VARIABLE RATE" The rate of interest set by the seller
for variable rate mortgage loans as more
fully described on page 85
"SERIES" The meaning given to it on page 14
"SERIES AND CLASS" The meaning given to it on page 14
"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 EXCHANGE RATE" In relation to a series and class of
notes, the exchange 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 DISTRIBUTION" A payment made by the mortgages trustee:
(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 DENOMINATION" In respect of any series and class of
notes, the denomination specified as
such in the applicable prospectus
supplement and in respect of listed
notes, shall be no less than euro
50,000 (or its equivalent in any other
currency as at the date of issue of
322
such notes).
"STANDARD VARIABLE RATE" The Northern Rock standard variable rate
and/or the standard variable rate
applicable to mortgage loans within the
mortgages trust, as applicable
"STAND-BY GIC PROVIDER" In respect of the mortgages trustee GIC
account, Lloyds TSB Bank plc acting
through its office at Financial Markets
Division, 25 Monument Street, London
EC2R 8BQ
"STANDARD VARIABLE RATE MORTGAGE LOAN" A mortgage loan which is subject to the
standard variable rate
"START-UP LOAN AGREEMENT" The NR start-up loan agreement or any
agreement entered 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 TRANCHE" or "START-UP Each loan made by a start-up loan
LOAN TRANCHES" provider to the issuer under a start-up
loan agreement, and collectively, the
"START-UP LOANS"
"START-UP LOAN PROVIDER" Northern Rock, in its capacity as
provider of the start-up loans, or such
other person who provides a start-up
loan 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 EQUIVALENT" In relation to a note which is
denominated in (a) 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 AGREEMENT" An agreement supplemental to the
programme agreement (by 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
323
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 ACCOUNT" An account opened in the name of the
issuer and/or 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
"SWAP COLLATERAL ANCILLARY DOCUMENT" In relation to the issuer, any document
(including, without limitation, any
custodial agreement or bank account
agreement but excluding the swap
agreements, the issuer cash management
agreement and the issuer deed of charge)
as may be entered into by the issuer
from time to time in connection with the
swap collateral. 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 EVENT" The meaning given to it on page 211
"SWAP EARLY TERMINATION EVENT" A circumstance in which some or all swap
transactions (as the case may be) under
a swap agreement can be terminated
before their respective scheduled
termination dates
"SWAP PROVIDER DEFAULT" (i) The occurrence of:
(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 PREMIUM" Any payment received from a replacement
swap provider in order to enter into a
replacement swap agreement with such
replacement swap provider replacing a
swap agreement
324
"SWAP TERMINATION PAYMENT" The amount payable because of a swap
early termination 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 REQUIRED AMOUNT" The meaning given to such term on page
201
"THIRD PARTY AMOUNTS" The meaning given to it on page 147
"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 and the security
for the mortgage loan and all searches
and inquiries undertaken in connection
with the grant by the borrower of the
related mortgage
"TOGETHER CONNECTIONS BENEFIT" The meaning given to it on page 79
"TOGETHER CONNECTIONS INTEREST" The meaning given to it on page 79
"TOGETHER CONNECTIONS MORTGAGE LOAN" A type of
flexible mortgage loan, the primary
characteristics of which are described
on page 91
"TOGETHER DISCOUNT TRACKER MORTGAGE A type of Together mortgage loan as more
LOAN" fully described on page 90
"TOGETHER MORTGAGE LOAN" A type of flexible mortgage loan which
allows the borrower to obtain an
additional unsecured loan and, in some
cases, a credit card, neither of which
is secured by the mortgage relating to
the mortgage loan
"TOGETHER STEPPED TRACKER MORTGAGE A type of Together mortgage loan as more
LOAN" fully described on page 91
"TOGETHER VARIABLE MORTGAGE LOAN" A type of Together mortgage loan as more
fully described on page 90
"TRACKER RATE MORTGAGE LOAN" A loan where interest is linked to a
variable interest rate other than the
standard variable rate; for example, the
rate on a tracker rate mortgage loan may
be set at a margin above sterling LIBOR
or above rates set by the Bank of
England
"TRANSACTION DOCUMENTS" The documents listed in "LISTING AND
GENERAL INFORMATION" and any swap
collateral ancillary document
"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
325
favor of the seller
"TRIGGER EVENT" An asset trigger event and/or a
non-asset trigger event
"TRUST CALCULATION PERIOD" The period from (and including) the
first day of each calendar month to (and
including) the last day of the same
calendar month
"TRUST DEED" The trust deed entered into on or about
the 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 DATE" The first day (or, if not a London
business day, the next succeeding London
business day) of each calendar month
"TRUST PROPERTY" The meaning given to it on page 26
"TRUST PROPERTY CALCULATION The meaning given to it on page 140
ADJUSTMENTS"
"UK LISTING AUTHORITY" The Financial Services Authority in its
capacity as competent authority under
Part VI of the Financial Services and
Markets Act 2000
"UK TAX COUNSEL" Sidley Austin Brown & Wood, UK tax
counsel to Northern Rock plc
"UNAUTHORIZED UNDERPAYMENT" In relation to any flexible mortgage
loan has the meaning given to it on
page 88
"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 AGREEMENT" The underwriting agreement relating to
the sale of a 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 PERSON" The meaning given to it on page 283
"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 PERSONAL SECURED LOAN" The meaning given to it on page 81
"US DOLLAR DENOMINATED NOTES" The meaning given to it on page 282
"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
326
notes
"US GLOBAL NOTE CERTIFICATES" The global note certificates relating
to a series and 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 TAX COUNSEL" Sidley Austin Brown & Wood LLP, US
federal income tax counsel to Northern
Rock plc
"UTCCR" The Unfair Terms in Consumer Contracts
Regulations 1999
"VARIABLE MORTGAGE RATE" The rate of interest which determines
the amount of interest payable each
month on a variable rate mortgage loan
"VARIABLE RATE MORTGAGE LOAN" A mortgage loan where the interest rate
payable by the borrower varies in
accordance with a specified variable
rate 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
"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 FUNDING 2 SHARE The meanings given to it under "THE
PERCENTAGE" MORTGAGES TRUST - WEIGHTED AVERAGE
PERCENTAGE" FUNDING 2 SHARE PERCENTAGE
AND WEIGHTED AVERAGE FUNDING SHARE
PERCENTAGE"
"WEIGHTED AVERAGE SELLER SHARE The meanings given to it under "THE
PERCENTAGE" MORTGAGES TRUST - WEIGHTED AVERAGE
SELLER 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
327
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 NORTHERN ROCK PLC IN ITS VARIOUS CAPACITIES
as to English and US law as to Scots Law
SIDLEY AUSTIN BROWN & WOOD TODS MURRAY LLP
Woolgate Exchange Edinburgh Quay
25 Basinghall Street 133 Fountain Bridge
London EC2V 5HA Edinburgh EH3 9AG
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 MERRILL LYNCH
5 The North Colonnade LIMITED INTERNATIONAL
Canary Wharf Citigroup Centre 2 King Edward Street
London E14 4BB Canary Wharf London EC1A 1HQ
London E14 5LB
THROUGH AND INCLUDING DECEMBER 13, 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 UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
GRANITE MASTER ISSUER PLC
$1,326,300,000 SERIES 2005-4 CLASS A1 NOTES
$996,600,000 SERIES 2005-4 CLASS A3 NOTES
$72,500,000 SERIES 2005-4 CLASS B1 NOTES
$38,500,000 SERIES 2005-4 CLASS B2 NOTES
$64,700,000 SERIES 2005-4 CLASS M1 NOTES
$36,300,000 SERIES 2005-4 CLASS M2 NOTES
$80,400,000 SERIES 2005-4 CLASS C1 NOTES
$44,600,000 SERIES 2005-4 CLASS C2 NOTES
----------
PROSPECTUS
SUPPLEMENT
----------
LEAD UNDERWRITERS
CITIGROUP CREDIT SUISSE FIRST BOSTON DEUTSCHE BANK SECURITIES LEHMAN BROTHERS
UNDERWRITERS
BARCLAYS CAPITAL JP MORGAN MERRILL LYNCH & CO. MORGAN STANLEY
SEPTEMBER 15, 2005