Creative Solution Allows for One-Off Payment to Instrument Holders Under a Newly Created Extraordinary Waterfall

The Mortgage Funding 2008-1 PLC securitisation (the “MF Securitisation”) is an English residential mortgage backed securitisation that was launched in March 2008. As issuer, Mortgage Funding 2008-1 PLC (the “Issuer”), issued €1,112,125,000 mortgage backed floating rate notes due March 2046 (the “Class A Notes”), £146,000,000 mortgage backed floating rate notes due March 2046 (the “Class B Notes”) and 10,000 Residual Certificates (the “Residual Certificates” and together with the Class A Notes and the Class B Notes, the “Instruments”). The Instruments were listed on the Irish Stock Exchange and only the Class A Notes had a credit rating.

Innovative Securitisation Restructuring
Following an innovative restructuring of the MF Securitisation whereby a hedging problem created by the demise of Lehman Brothers in September 2008 was permanently fixed, the holders of the Instruments received today, on the September 2013 Interest Payment Date, not only their regular payments, but also a meaningful one-off additional payment pursuant to an Extraordinary Waterfall that was created as part of the restructuring.

In addition, as a result of a redenomination of the Class A Notes from Euro to Sterling, effective as of 13 June, 2013, all payments received by the holders of the Instruments are now in Sterling only. At the same time as the redenomination of the Class A Notes, which resulted in a Principal Amount Outstanding of the A Notes of £554,750,942.50, a corresponding principal amount of the Class B Notes was reduced, resulting in a Principal Amount Outstanding of the B Notes of £100,056,720 and the margin on the Class B Notes was increased to a new Relevant Margin, each also deemed effective as of 13 June, 2013.

Pursuant to a Master Restructuring Agreement a set of amended and restated Transaction Documents (the “Restated Transaction Documents”) came into force on Friday 23 August, 2013. As part of the restructuring, the Post Enforcement Call Option (or “PECO”) Agreement was also terminated and replaced with limited recourse language. The Restated Transaction Documents further allow — subject to certain conditions — for a so-called Note Restructuring to take place prior to 14 November 2013. This Note Restructuring may include both a so-called A Note Restructuring and/or a so-called B Note Restructuring. An A Note Restructuring would result in newly issued A1 Notes and the existing A Notes being renamed the “A2 Notes” (after the Principal Amount Outstanding has been reduced by way of partial cancellation of principal) and a B Note Restructuring would result in newly issued B1 Notes and the existing B Notes being renamed the “B2 Notes” (after the Principal Amount Outstanding has been reduced by way of partial cancellation of principal). It is anticipated that the A1, A2 and B1 Notes will obtain a credit rating.

Original Conditions of the Instruments
Whilst the Class A Notes were denominated in Euros, all the income from the mortgage pool of the MF Securitisation was denominated in Sterling. The Transaction Documents for the MF Securitisation therefore included currency swap arrangements (the “Hedging Agreements”) in which certain Lehman Brothers entities acted as swap counterparties.

The insolvency filing by the various Lehman Brothers entities on or about 15 September 2008 constituted an event of default under the Hedging Agreements. As a result, the Issuer exercised its right to terminate the Hedging Agreements and designated 10 April 2009 as the early termination date under the Hedging Agreements.

The Issuer filed a claim of USD 257,063,719.29 against the Lehman hedge counterparties and hedge guarantors and on 17 July 2012 entered into a termination and settlement agreement pursuant to which an agreed claim amount of USD 205m was stipulated (the “Claims”).

The Issuer subsequently received a distribution out of the relevant Lehman bankruptcy estate in respect of the Claims in an aggregate amount of USD 68,118,466.00 (the “Termination Proceeds”). The remaining part of the Claims were monetised through a sale pursuant to an auction conducted by AgFe Limited (“AgFe”) which resulted in sale proceeds of USD 51,455,000 (together with the Termination Proceeds, the “Distributable Hedging Agreement Proceeds”). These Distributable Hedging Agreement Proceeds were converted from USD into Sterling resulting in an amount of £76,772,641.56 (the “Converted Distributable Hedging Agreement Proceeds”).

The original conditions of the Instruments required the Issuer to apply the Converted Distributable Hedging Agreement Proceeds towards payment to suitably rated replacement counterparties in consideration for such counterparties entering into suitable replacement hedging agreements with the Issuer. Rather than requiring the Issuer to do that, the Instrument holders exercised their rights to provide the necessary authority to the relevant Transaction Parties to fix the hedging problem by — in essence — a redenomination from Euro to Sterling of the Class A Notes. As a result, a significant part of the Converted Distributable Hedging Agreement Proceeds could now be distributed by way of a one-off payment pursuant to a newly created Extraordinary Waterfall to the Instrument holders.

Relevance
This Securitisation Restructuring may serve as a precedent for other securitisations that are still burdened by Lehman-related issues that require fixing. SRZ represented one of the main holders of the Instruments in the MF Securitisation.