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Offering circular Bauhaus Securities Limited - DG Hyp

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OFFERING CIRCULAR<br />

BAUHAUS SECURITIES LIMITED<br />

(Incorporated with limited liability in Jersey)<br />

€ 194,500,000 Class A1 Floating Rate Notes<br />

€ 707,500,000 Class A2 Floating Rate Notes<br />

€ 63,250,000 Class B Floating Rate Notes<br />

€ 18,750,000 Class C Floating Rate Notes<br />

€ 22,250,000 Class D Floating Rate Notes<br />

Issue Price: for each Class of Notes 100 per cent.<br />

<strong>Bauhaus</strong> <strong>Securities</strong> <strong>Limited</strong>, a public company incorporated with limited liability in Jersey (the "Issuer"), will<br />

issue Class A1 Floating Rate Notes (the "Class A1 Notes") with an initial principal balance ("Initial Principal<br />

Balance") of € 194,500,000, Class A2 Floating Rate Notes (the "Class A2 Notes" and, together with the Class<br />

A1 Notes, the "Class A Notes") with an Initial Principal Balance of € 707,500,000, Class B Floating Rate Notes<br />

(the "Class B Notes") with an Initial Principal Balance of € 63,250,000, Class C Floating Rate Notes (the "Class<br />

C Notes") with an Initial Principal Balance of € 18,750,000 and Class D Floating Rate Notes (the "Class D<br />

Notes") with an Initial Principal Balance of € 22,250,000 (the Class A Notes, the Class B Notes, the Class C<br />

Notes and the Class D Notes collectively, the "Notes"). Each of the Class A Notes, the Class B Notes, the Class<br />

C Notes and the Class D Notes is referred to herein as a "Class". Application will be made for the Notes to be<br />

traded and officially quoted on the Frankfurt Stock Exchange and on the Luxembourg Stock Exchange.<br />

Particular attention is drawn to the section of this <strong>Offering</strong> Circular entitled "Investment Considerations".<br />

Interest will accrue on the principal balance in effect from time to time (the "Note Principal Amount") of each<br />

of the Notes of each Class of Notes at an annual rate equal to EURIBOR (as defined herein) for three month<br />

euro deposits plus the Relevant Margin (as defined herein) applicable to the relevant Class of Notes. Interest<br />

on the Notes will be payable by the Issuer in euro, quarterly in arrears, on each Interest Payment Date (as defined<br />

herein), subject as provided in the terms and conditions of the Notes (the "Conditions").<br />

Concurrently with the issuance of the Notes, the Issuer will enter into a credit default swap agreement (the<br />

"Credit Default Swap Agreement") with Deutsche Genossenschafts-<strong>Hyp</strong>othekenbank AG ("<strong>DG</strong> HYP", and in<br />

such capacity, the "Swap Counterparty") pursuant to which the Swap Counterparty will designate a reference<br />

portfolio (the "Reference Portfolio") consisting of the reference obligations (the "Reference Obligations") of<br />

the obligors (the "Reference Entities") in respect of residential Mortgage Loans (as defined herein) or certain<br />

portions of Mortgage Loans granted by the Swap Counterparty. On each Interest Payment Date, the Issuer will<br />

repay principal in respect of a Class or Classes of Notes in an amount corresponding to the aggregate of (i)<br />

any actual repayment of principal by the Reference Entities in relation to the Reference Obligations; (ii) the<br />

aggregate Work Out Proceeds (as defined herein); and (iii) the aggregate principal amount of any Reference<br />

Obligations removed from the Reference Portfolio due to non-compliance with the applicable Eligibility Criteria<br />

(as defined herein) or substitution criteria, in each case as determined in the quarterly Determination Period (as<br />

defined herein) immediately preceding such Interest Payment Date. On each such Interest Payment Date, the<br />

Issuer will repay principal in respect of such Class or Classes of Notes until the Principal Balance (as defined<br />

herein) of each such Class or Classes of Notes is reduced to zero, in an order of priority commencing with the<br />

most senior Class, with the Principal Balance of the Class A1 Notes being reduced to zero before the reduction of<br />

the Principal Balance of the Class A2 Notes, and progressing to the next most junior Class.<br />

________________________________________<br />

<strong>DG</strong> BANK<br />

Deutsche Genossenschaftsbank AG<br />

as Manager<br />

________________________________________<br />

The date of this <strong>Offering</strong> Circular is 30th October, 2000<br />

This <strong>Offering</strong> Circular includes an update as of 8th November, 2000


Pursuant to the Credit Default Swap Agreement, the Issuer will make certain payments (each a "Credit Protection<br />

Payment") to the Swap Counterparty in the event of the occurrence of a Credit Event (as defined herein) in respect<br />

of one or more Reference Obligations. A Credit Protection Payment made by the Issuer at any time in respect of a<br />

Reference Obligation will not exceed the amount of such Reference Obligation at such time. Each Credit Protection<br />

Payment made by the Issuer to the Swap Counterparty will result in the writing down of the Principal Balance of a<br />

Class or Classes of Notes, in an order of priority commencing with the most junior Class and progressing to each next<br />

senior Class, with the Principal Balance of the Class A1 Notes and the Class A2 Notes being written down pro rata,<br />

until the Principal Balance of the affected Class or Classes is reduced to zero.<br />

Also concurrently with the issuance of the Notes, the Issuer will enter into a repurchase agreement (the "Repurchase<br />

Agreement") with <strong>DG</strong> BANK Deutsche Genossenschaftsbank AG ("<strong>DG</strong> BANK", and in such capacity, the "Repo<br />

Counterparty"). The Issuer will apply the net proceeds of the issuance of the Notes to purchase collateral (the<br />

"Collateral") from the Repo Counterparty under the terms of the Repurchase Agreement. The Collateral will consist<br />

initially of floating rate public sector Pfandbriefe issued by <strong>DG</strong> HYP and may subsequently include French or German<br />

government securities, with the Collateral in each case being rated AAA by the Rating Agencies (as defined herein).<br />

The Issuer will fund the making of Credit Protection Payments as well as the repayment of principal in respect of the<br />

Notes through the proceeds of sales to the Repo Counterparty of Collateral under the Repurchase Agreement or, subject<br />

to certain conditions, the sale of Collateral under a substitute repurchase agreement or the disposition of Eligible<br />

Investments (as defined herein). The Issuer will fund the payment of interest in respect of the Notes through the Swap<br />

Premium (as defined herein) payable by the Swap Counterparty to the Issuer under the Credit Default Swap<br />

Agreement and the payment of Repo Interest (as defined herein) at the Repo Rate (as defined herein) payable by the<br />

Repo Counterparty to the Issuer under the Repurchase Agreement or by any substitute repo counterparty under any<br />

substitute repurchase agreement or the income on Eligible Investments, as the case may be.<br />

The rights to receive payments in respect of the Class D Notes are subordinate to the rights to receive payments in<br />

respect of the Class A Notes, the Class B Notes and the Class C Notes; the rights to receive payments in respect of<br />

the Class C Notes are subordinate to the rights to receive payments in respect of the Class A Notes and the Class B<br />

Notes and the rights to receive payments in respect of the Class B Notes are subordinate to the rights to receive payments<br />

in respect of the Class A Notes.<br />

The Notes will be obligations solely of the Issuer and will not be guaranteed by, or be the responsibility of, any<br />

other entity. In particular, the Notes will not be obligations or responsibilities of, or guaranteed by, the Manager,<br />

the Security Trustee, the Paying Agents, the Cash Administrator, the Note Calculation Agent, the Swap Calculation<br />

Agent, the Repo Calculation Agent, the Custodian, the Account Bank, the Transaction Account Bank, the Data<br />

Trustee, the Independent Auditor or the Independent Valuation Expert (each as defined herein), the Swap<br />

Counterparty or the Repo Counterparty.<br />

All payments relating to the Notes will be made subject to any withholding tax applicable to the Notes and the Issuer<br />

will not be obliged to pay any additional amounts as a consequence of any such withholding.<br />

The Notes may be redeemed in whole, but not in part, as more particularly set out herein. (See "Summary of Terms –<br />

Early Redemption following an Early Redemption Event").<br />

Repayments of principal and payments of interest on the Notes will be limited to the amount of funds available from<br />

time to time for that purpose in the Principal Collection Account and the Transaction Accounts (each as defined herein)<br />

and will be subject to the application of Available Distribution Funds (as defined herein) in accordance with the priorities<br />

of payments set forth in "Summary of Terms – Priorities of Payments".<br />

The Notes are being offered by <strong>DG</strong> BANK (in such capacity, the "Manager"), subject to receipt and acceptance by<br />

the Manager of the Notes and subject to the right of the Manager to reject any order in whole or in part. Delivery of the<br />

Notes has been made to Clearstream Banking AG, Frankfurt am Main ("Clearstream Germany") on 27th October,<br />

2000. The Notes will be kept in custody by Clearstream Germany for financial institutions that are account holders of<br />

Clearstream Germany, including Notes which are held through Clearstream Banking, société anonyme ("Clearstream<br />

Luxembourg") and Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear<br />

System ("Euroclear").


The Issuer will grant to The Chase Manhattan Bank as security trustee (the "Security Trustee") for the benefit of,<br />

amongst others, the holders of the Notes the Transaction Security Interests (as defined herein) over various Security<br />

Assets (as defined herein), including the Collateral. The Transaction Security Interests will be junior and subordinate to<br />

the security interests granted by the Issuer in favour of the Swap Counterparty and the Repo Counterparty in such<br />

Security Assets, including the Collateral and will be enforceable as more particularly described below (see "Security<br />

and Account Structure").<br />

It will be a condition precedent to the issuance of the Notes that the Class A1 Notes and the Class A2 Notes be rated<br />

"AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's")<br />

and "AAA" by Fitch Ratings Ltd ("Fitch" and, together with Standard & Poor's, the "Rating Agencies" and each a<br />

"Rating Agency"), that the Class B Notes be rated "A" by Standard & Poor's and "A" by Fitch and that the Class C<br />

Notes be rated "BBB" by Standard & Poor's and "BBB" by Fitch. The Class D Notes will not be rated. A security<br />

rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal<br />

at any time by the relevant Rating Agency.<br />

The Notes (each in a denomination of € 250,000) of each Class will initially be represented by a temporary global note<br />

(each a "Temporary Global Note"), which will be in bearer form without coupons or talons. Each Temporary Global<br />

Note will be exchangeable not earlier than 40 days after the Closing Date (as defined herein), and upon certification<br />

of non-U.S. beneficial ownership, for interests in a permanent global note representing the Notes of the relevant Class<br />

(each a "Permanent Global Note" and together with the Temporary Global Notes, the "Global Notes"). Clearstream<br />

Germany will hold the Global Notes in bearer form representing the Notes for Clearstream Germany accountholders<br />

and/or for the account of Euroclear and/or Clearstream Luxembourg. Notes in definitive form will not be issued in<br />

exchange for any Permanent Global Note.<br />

The Issuer, having made all reasonable enquiries, confirms that to the best of its knowledge and belief this <strong>Offering</strong><br />

Circular contains or incorporates all information which is material in the context of the issuance and offering of the<br />

Notes, that the information contained or incorporated in this <strong>Offering</strong> Circular is true and accurate in all material<br />

respects and is not misleading, that the opinions and intentions expressed in this <strong>Offering</strong> Circular are honestly held<br />

and that there are no other facts the omission of which would make this <strong>Offering</strong> Circular or any of such information<br />

or the expression of any such opinions or intentions misleading. The Issuer accepts responsibility accordingly.<br />

<strong>DG</strong> HYP accepts responsibility regarding information provided with respect to itself and VR Kreditwerk AG and with<br />

respect to the Mortgage Loans and the Reference Obligations and the servicing of the Mortgage Loans, but <strong>DG</strong> HYP<br />

does not accept responsibility for this document as a whole.<br />

Neither the delivery of this document nor any sale or allotment made in connection with any offering of any of the<br />

Notes will, under any circumstances, constitute a representation or create any implication that there has been no<br />

change in the information contained herein since the date of this document.<br />

The Manager has not separately verified the information contained in this document. The Manager does not make any<br />

representation, warranty or undertaking, express or implied, or accept any responsibility with respect to the accuracy<br />

or completeness of any of the information in this document or part thereof. Each potential purchaser of Notes should<br />

determine the relevance of the information contained in this document or part thereof and the purchase of Notes<br />

should be based upon such investigation as each such purchaser deems necessary. The Manager neither undertakes<br />

nor will undertake to review the financial condition or affairs of the Issuer, the Swap Counterparty or the Repo<br />

Counterparty, or to advise any investor or potential investor in the Notes of any information coming to the attention<br />

of the Manager.<br />

No person has been authorised to give any information or to make any representation other than as contained in this<br />

document and, if given or made, such information or representation must not be relied upon as having been authorised<br />

by or on behalf of the Issuer, the Manager, the Security Trustee, the Paying Agents, the Swap Counterparty or<br />

the Repo Counterparty.<br />

The Notes have not been and will not be registered under the United States <strong>Securities</strong> Act of 1933, as amended (the<br />

"<strong>Securities</strong> Act") and are subject to U.S. tax law requirements. Subject to certain exceptions, the Notes may not be<br />

offered, sold or delivered within the United States or to or for the account of U.S. persons (as defined in Regulation S<br />

A1


under the <strong>Securities</strong> Act ("Regulation S")). See "Subscription and Sale" below. The Issuer is not and will not be<br />

registered under the United States Investment Company Act of 1940, as amended.<br />

The distribution of this document or any part thereof and any offering of the Notes in certain jurisdictions may be<br />

restricted by law. No action has been taken by the Issuer or the Manager, other than as set out in the first paragraph<br />

of the cover page of this document, which would permit a public offer of the Notes or distribution of this document<br />

in any country or jurisdiction where action for that purpose is required. Accordingly, the Notes may not be offered or<br />

sold, directly or indirectly, and neither this document nor any part thereof nor any other offering <strong>circular</strong>, prospectus,<br />

form of application, advertisement or other offering material may be issued, distributed or published in any country<br />

or jurisdiction (including Germany and the United Kingdom), except in circumstances that will result in compliance<br />

with applicable laws, orders, rules and regulations. Persons into whose possession this document (or any part thereof)<br />

or any Notes come are required by the Issuer and the Manager to inform themselves about and to observe any<br />

such restrictions. For a further description of certain restrictions on offers and sales of the Notes and distribution of<br />

this document (or any part thereof), see "Subscription and Sale" below. For a description of the certification requirements<br />

as to non-U.S. beneficial ownership, see "Terms and Conditions of the Notes" below.<br />

Neither this document nor any part hereof constitutes an offer of, or an invitation by, or on behalf of, the Issuer or the<br />

Manager to subscribe for or to purchase, any of the Notes and neither this document nor any part hereof may be used<br />

for or in connection with an offer or solicitation by any person in any jurisdiction in which such offer or solicitation is<br />

not authorised or to any person to whom it is unlawful to make such offer or solicitation.<br />

In connection with the issue of the Notes, the Manager may over-allot or effect transactions which stabilise or maintain<br />

the market prices of the Notes at levels which might not otherwise prevail. Such stabilising, if commenced, may<br />

be discontinued at any time.<br />

A copy of this <strong>Offering</strong> Circular has been delivered to the Registrar of Companies in Jersey in accordance with Article<br />

6 of the Companies (General Provisions) (Jersey) Order 1992 as amended, and he has given, and has not withdrawn,<br />

his consent to its circulation. The Jersey Financial Services Commission has given, and has not withdrawn, its consent<br />

under Article 4B of the Control of Borrowing (Jersey) Order 1958 as amended to the issue of the Notes by the<br />

Issuer. It must be distinctly understood that, in giving these consents, neither the Registrar of Companies nor the<br />

Jersey Financial Services Commission takes any responsibility for the financial soundness of the Issuer or for the<br />

correctness of any statements made, or opinions expressed, with regard to it.<br />

An investment in the Notes is only suitable for financially sophisticated investors who are capable of evaluating the<br />

merits and risks of such investment and who have sufficient means to be able to bear any losses which may result<br />

from such an investment. If you are in any doubt about the contents of this document you should consult your stockbroker,<br />

bank manager, solicitor, accountant and/or other financial adviser.<br />

It should be remembered that the price of securities and the income from them can go down as well as up.<br />

References in this document to "€" or "euro" are to the currency introduced at the third stage of European economic and<br />

monetary union pursuant to the Treaty establishing the European Community, as amended by the Treaty on European<br />

Union.<br />

A2


TABLE OF CONTENTS<br />

TRANSACTION STRUCTURE DIAGRAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2<br />

SUMMARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3<br />

USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35<br />

INVESTMENT CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36<br />

THE ISSUER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43<br />

THE ACCOUNT BANK, CUSTODIAN AND SWAP COUNTERPARTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45<br />

RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59<br />

THE REPO COUNTERPARTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61<br />

WEIGHTED AVERAGE LIVES OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79<br />

THE CREDIT DEFAULT SWAP AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88<br />

THE DATA PROTECTION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98<br />

THE CASH ADMINISTRATION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99<br />

THE REFERENCE PORTFOLIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101<br />

THE SWAP COUNTERPARTY'S ORIGINATION OF THE MORTGAGE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .114<br />

SERVICING AND ADMINISTRATION BY VR KREDITWERK AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119<br />

THE REPURCHASE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .124<br />

SECURITY AND ACCOUNT STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129<br />

THE COLLATERAL AND ELIGIBLE INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .136<br />

TERMS AND CONDITIONS OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139<br />

GERMAN TRUST AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .168<br />

ENGLISH DEED OF ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .182<br />

CURRENCY INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .184<br />

TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .185<br />

SUBSCRIPTION AND SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .191<br />

GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .194<br />

GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .199<br />

UPDATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .201<br />

1


TRANSACTION STRUCTURE DIAGRAM<br />

This structure diagram is for illustration purposes only, and should be interpreted in conjunction with, and is qualified<br />

in its entirety by reference to, the more detailed information which appears elsewhere in this <strong>Offering</strong> Circular.<br />

<strong>DG</strong> HYP<br />

(Swap<br />

Counterparty)<br />

Reference<br />

Portfolio<br />

Repurchase<br />

Price (including<br />

Repo Interest)<br />

at Repo Rate<br />

Swap Premium<br />

Credit Default<br />

Swap<br />

Credit Protection<br />

Payments<br />

<strong>DG</strong> BANK<br />

(Repo Counterparty)<br />

Repurchase<br />

Agreement<br />

BAUHAUS<br />

SECURITIES<br />

LIMITED<br />

(Issuer)<br />

2<br />

Proceeds from Notes/<br />

Purchase Price<br />

Notes<br />

Proceeds<br />

from Notes<br />

AAA-rated<br />

Class A1 Notes<br />

and Class A2 Notes<br />

A-rated<br />

Class B Notes<br />

BBB-rated<br />

Class C Notes<br />

Unrated<br />

Class D Notes


SUMMARY OF TERMS<br />

The following is only a summary of, and should be read in conjunction with, and is qualified in its entirety by reference<br />

to, the more detailed information which appears elsewhere in this <strong>Offering</strong> Circular. Certain terms used in<br />

this <strong>Offering</strong> Circular, including this Summary of Terms, are defined elsewhere in this <strong>Offering</strong> Circular. A list of<br />

the pages on which these terms are defined is found in the "Glossary" at the end of this <strong>Offering</strong> Circular.<br />

The Parties and Certain Defined Terms<br />

Issuer <strong>Bauhaus</strong> <strong>Securities</strong> <strong>Limited</strong>, a public company incorporated with limited liability under the<br />

laws of Jersey, company number 78047, having its registered offices at Whiteley<br />

Chambers, Don Street, St. Helier, Jersey. The issued shares of the Issuer are held by, or<br />

on behalf of, Ogier Trustee <strong>Limited</strong> as trustee of the <strong>Bauhaus</strong> <strong>Securities</strong> Charitable Trust,<br />

a Jersey charitable trust.<br />

Security Trustee The Chase Manhattan Bank, acting through its office at Trinity Towers, 9 Thomas More Street,<br />

London E1W 9YT will act as Security Trustee for the Transaction Secured Creditors, including<br />

the Noteholders, in respect of the Transaction Security Interests granted by the Issuer.<br />

Swap Counterparty,<br />

Data Provider<br />

Deutsche Genossenschafts-<strong>Hyp</strong>othekenbank AG, acting through its office at Rosenstraße 2,<br />

20095 Hamburg will act as Swap Counterparty pursuant to the Credit Default Swap<br />

Agreement and Data Provider pursuant to the Data Protection Agreement.<br />

Repo Counterparty <strong>DG</strong> BANK Deutsche Genossenschaftsbank AG, acting through its office at Am Platz der<br />

Republik, D-60265 Frankfurt am Main will act as Repo Counterparty pursuant to the<br />

Repurchase Agreement.<br />

Cash Administrator,<br />

Note Calculation Agent<br />

Swap Calculation Agent<br />

Repo Calculation Agent<br />

Account Bank and<br />

Custodian<br />

The Chase Manhattan Bank, acting through its office at 9 Trinity Towers, Thomas More Street,<br />

London E1W 9YT will act as Cash Administrator, Note Calculation Agent, Swap Calculation<br />

Agent and Repo Calculation Agent pursuant to the Cash Administration Agreement.<br />

The Issuer has appointed Deutsche Genossenschafts-<strong>Hyp</strong>othekenbank AG as Account<br />

Bank pursuant to the Account Bank Agreement and as Custodian pursuant to the Custody<br />

Agreement.<br />

Transaction Account Bank The Issuer has appointed The Chase Manhattan Bank as Transaction Account Bank pursuant<br />

to the Transaction Account Bank Agreement.<br />

Principal Paying Agent, The Issuer has appointed Chase Manhattan Bank AG, of Grüneburgweg 2, 60322 Frankfurt<br />

Luxembourg Paying Agent<br />

am Main, to act as Principal Paying Agent and Chase Manhattan Bank Luxembourg S.A.,<br />

of 5 rue Plaetis 2238 Luxembourg Grund, to act as Luxembourg Paying Agent, pursuant<br />

to the Agency Agreement.<br />

Data Trustee Arthur Andersen Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft mbH,<br />

acting through its office at Mergenthaler Allee 55, 65760 Frankfurt am Main will act as Data<br />

Trustee pursuant to the Data Protection Agreement.<br />

3


Independent Auditor PwC Deutsche Revision Wirtschaftsprüfungsgesellschaft Aktiengesellschaft, acting through<br />

its office at New-York-Ring 13, 22297 Hamburg, Hamburg will act as Independent Auditor.<br />

Closing Date 30th October, 2000<br />

Cut-off Date 28th July, 2000<br />

Business Day "Business Day" means any day, other than a Saturday or Sunday, on which commercial<br />

banks are generally open for business in Frankfurt, Jersey, Luxembourg and London, and<br />

which is a TARGET Business Day.<br />

TARGET Business Day "TARGET Business Day" means any day on which the Trans-European Automated Real-<br />

Time Gross Settlement Express Transfer (TARGET) System (or any successor thereto (the<br />

"TARGET System")) is open.<br />

Initial Principal<br />

Balance of the Notes<br />

The Notes<br />

On the Closing Date, the Issuer will issue notes (the "Notes" and each a "Note") with an<br />

aggregate initial principal balance of € 1,006,250,000 consisting of the following classes<br />

(each, a "Class"), each having the initial principal balance (each, an "Initial Principal<br />

Balance") as follows:<br />

Class of Notes Initial Principal Balance<br />

Class A1 Notes € 194,500,000<br />

Class A2 Notes € 707,500,000<br />

Class B Notes € 63,250,000<br />

Class C Notes € 18,750,000<br />

Class D Notes € 22,250,000<br />

As of the Closing Date and any date after the Closing Date:<br />

(i) the "Note Principal Amount" of any Note will be equal to the principal amount of such<br />

Note on the Closing Date minus the sum of (i) the aggregate amount of repayments<br />

of principal in respect of such Note attributable to Pay-Down Events or made in<br />

respect of any Aggregate Evaluated Work Out Proceeds, (ii) the aggregate amount of<br />

reductions of principal in respect of such Note, if any, attributable to Credit Protection<br />

Payments, and (iii) the aggregate amount of repayments of principal in respect of<br />

such Note, if any, resulting from the occurrence of an Early Redemption Event. See<br />

"Reduction of Principal Amount Outstanding";<br />

(ii) the "Principal Balance" of any Class of Notes will be equal to the Initial Principal<br />

Balance of such Class minus the sum of (i) the aggregate amount of repayments of<br />

principal in respect of such Class attributable to Pay-Down Events or made in respect of<br />

any Aggregate Evaluated Work Out Proceeds, (ii) the aggregate amount of reductions<br />

of principal in respect of such Class, if any, attributable to Credit Protection<br />

Payments, and (iii) the aggregate amount of repayments of principal in respect of<br />

4


Form and<br />

Denomination<br />

such Class, if any, resulting from the occurrence of an Early Redemption Event. See<br />

"Reduction of Principal Amount Outstanding"; and<br />

(iii) the "Principal Amount Outstanding" of the Notes will be the aggregate Principal<br />

Balance of all of the Classes of the Notes outstanding.<br />

The Class D Notes will initially be purchased by Deutsche Genossenschafts-<br />

<strong>Hyp</strong>othekenbank AG from the Manager on the Closing Date.<br />

The Notes of each Class (which will be in the denomination of € 250,000 each) will initially<br />

be represented by a temporary global note (each a "Temporary Global Note"), which will be<br />

in bearer form without coupons or talons. Each Temporary Global Note will be exchangeable<br />

not earlier than the date that is 40 days after the Closing Date (and upon certification of<br />

non-U.S. beneficial ownership) for interests in a permanent global note representing the<br />

Notes of the relevant Class (each a "Permanent Global Note" and together with the<br />

Temporary Global Notes, the "Global Notes"). Interest payments on Notes represented by<br />

a Temporary Global Note shall be made only after delivery of such certification. A separate<br />

certification will be required in respect of each such interest payment. Any such certification<br />

received on or after the day which is 40 days after the Closing Date will be treated as a<br />

request to exchange such Temporary Global Note. Clearstream Banking AG, formerly<br />

known as Deutsche Börse Clearing AG, Frankfurt am Main ("Clearstream Germany") will<br />

hold the Global Notes in bearer form representing the Notes, for Clearstream Germany<br />

accountholders and/or for the account of Clearstream Banking, société anonyme, a company<br />

with limited liability under Luxembourg law and formerly known first as "Cedel S.A." and<br />

more recently as "Cedelbank" ("Clearstream Luxembourg") or Morgan Guaranty Trust<br />

Company of New York, Brussels office, as operator of the Euroclear System ("Euroclear").<br />

Notes in definitive form will not be issued in exchange for any Permanent Global Note.<br />

Ratings It is a condition precedent to the issuance of the Notes will be assigned the following<br />

ratings by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,<br />

Inc. ("Standard & Poor's") and Fitch Ratings Ltd ("Fitch" and, together with Standard &<br />

Poor's, the "Rating Agencies" and each a "Rating Agency"):<br />

Standard & Poor's Fitch<br />

Class A1 Notes: AAA AAA<br />

Class A2 Notes: AAA AAA<br />

Class B Notes: A A<br />

Class C Notes: BBB BBB<br />

The Class D Notes will not be rated.<br />

The ratings of the Notes address the likelihood that the principal amount of such Notes<br />

will be fully repaid by the Final Maturity Date and that accrued interest thereon will be<br />

timely paid as well as the extent of any possible payment shortfall thereof. However, a Rating<br />

Agency does not evaluate, and the ratings of the Notes will not address, the likelihood or<br />

amount of repayment of principal of any of the Notes at any time prior to the Final Maturity Date.<br />

5


Use of Proceeds<br />

of the Notes<br />

A security rating is not a recommendation to buy, sell or hold securities and may be subject<br />

to revision, suspension or withdrawal at any time by the relevant Rating Agency.<br />

On the Closing Date, the Issuer will apply the net proceeds of the Notes to purchase<br />

Collateral pursuant to the terms of a master repurchase agreement (the "Repurchase<br />

Agreement") substantially in the form of a 1995 PSA-ISMA Global Master Repurchase<br />

Agreement to be entered into on or prior to the Closing Date between the Repo<br />

Counterparty and the Issuer.<br />

Collateral The collateral (the "Collateral") will consist of any one or any combination of the following:<br />

(i) floating rate <strong>DG</strong> HYP Pfandbriefe with a maximum maturity of ten years, or (ii) French<br />

or German government securities rated AAA by Fitch and Standard & Poor's with a maximum<br />

maturity of ten years. "<strong>DG</strong> HYP Pfandbriefe" means Pfandbrief debt securities<br />

issued by <strong>DG</strong> HYP with ratings of AAA by each of Standard & Poor’s and Fitch.<br />

Under the terms of the Repurchase Agreement, the Collateral to be purchased by the<br />

Issuer on the Closing Date will be floating rate public sector <strong>DG</strong> HYP Pfandbriefe.<br />

<strong>Limited</strong> Recourse The Notes are direct, secured and (subject to the application of Available Distribution<br />

Funds in accordance with the priorities of payments set forth in "Priorities of Payments"<br />

below) unconditional limited recourse obligations of the Issuer payable solely out of the<br />

assets assigned or pledged by the Issuer to the Security Trustee to secure the Notes, and<br />

the Issuer will have no other assets or sources of revenue. If these assets and/or sources<br />

of revenue are insufficient to make payments on the Notes, no other assets or sources of<br />

revenue will be available for payment of the deficiency, and following liquidation of the<br />

available assets, the obligations of the Issuer to pay such deficiency will be extinguished.<br />

See "Security and Account Structure".<br />

Payment of Interest on the Notes<br />

Interest Rate Each Note of each Class will bear interest on its Note Principal Amount at a per annum<br />

floating rate (the "Interest Rate") equal to the sum of (i) EURIBOR for three month euro<br />

deposits plus (ii) the relevant margin (the "Relevant Margin") as specified below:<br />

Interest Payment<br />

Dates<br />

Class of Notes Relevant Margin<br />

Class A1 Notes 0.19 % per annum<br />

Class A2 Notes 0.32 % per annum<br />

Class B Notes 0.69 % per annum<br />

Class C Notes 1.40 % per annum<br />

Class D Notes 3.50 % per annum<br />

Interest will be paid quarterly in arrears on 30th January, 30th April, 30th July and 30th<br />

October of each year (or if such a day is not a Business Day, the next succeeding Business<br />

Day unless such succeeding Business Day falls in the next succeeding calendar month in<br />

which event interest will be paid on the immediately preceding Business Day) commencing<br />

on 30th January, 2001 and, in case of the occurrence of an Early Redemption Event, on<br />

6


the Distribution Date and on the Final Distribution Date, if applicable (each such date, an<br />

"Interest Payment Date").<br />

Interest Period The "Interest Period" for the first Interest Payment Date is the period from and including<br />

the Closing Date to but excluding the first Interest Payment Date and, subject as provided<br />

below, for each Interest Payment Date thereafter, the period from and including the previous<br />

Interest Payment Date to but excluding such subsequent Interest Payment Date.<br />

In the event of the occurrence of an Early Redemption Event, the Interest Period for the<br />

Distribution Date will be amended and will be from and including the previous Interest<br />

Payment Date to but excluding the Distribution Date (with no payments being made on the<br />

Final Determination Date), and the Interest Period for the Final Distribution Date, if any, will<br />

be from and including the Distribution Date to but excluding the Final Distribution Date.<br />

Interest Calculation The amount of interest due on any Interest Payment Date in respect of each individual<br />

Note of the respective Class of Notes will be equal to the product of (i) the actual number<br />

of days in the Interest Period ending on the Business Day prior to such Interest Payment<br />

Date divided by 360, (ii) the Interest Rate applicable to such Class and (iii) the Note<br />

Principal Amount of such Note on the immediately preceding Interest Payment Date (after<br />

giving effect to any reduction to such Note Principal Amount effected on such preceding<br />

Interest Payment Date) or, in the case of the first Interest Payment Date, the Note Principal<br />

Amount of such Note on the Closing Date. Interest will not be calculated on Notes to the<br />

extent they have been written down or redeemed.<br />

Sources of Interest<br />

on the Notes<br />

Reduction of Principal<br />

Balance of a Class<br />

or Classes of Notes<br />

On any Interest Payment Date, the funds available to pay interest on the Notes will be<br />

equal to the sum of (i) Repo Interest received by the Issuer on the Repurchase Date immediately<br />

preceding such Interest Payment Date or interest on Eligible Investments received<br />

by the Issuer during the Collection Period preceding such Interest Payment Date, as the<br />

case may be, and (ii) the Swap Premium received by the Issuer from the Swap<br />

Counterparty on the Swap Payment Date falling on the preceding Interest Payment Date.<br />

See "Available Distribution Funds". In the event of acceleration of the Notes due to the<br />

occurrence of an Event of Default the Repo Counterparty will cease to pay Repo Interest<br />

on the Final Determination Date and the Swap Counterparty will cease to pay Swap<br />

Premium on the Swap Payment Date preceding the Final Determination Date and, accordingly,<br />

no Repo Interest or Swap Premium will be available to the Issuer for the payment of<br />

interest on the Notes other than amounts received by the Issuer prior to such dates.<br />

The Repo Interest will be fully collateralised under the Repurchase Agreement and the<br />

Swap Premium will be payable on the first day of each respective Interest Period.<br />

Redemption and Write-down of the Notes<br />

The Principal Balance of a Class or Classes of Notes will be reduced as a result of any:<br />

(i) Pay-Down Event;<br />

7


Certain Periods<br />

and Dates<br />

(ii) Credit Protection Payment; or<br />

(iii) Early Redemption Event,<br />

in the manner set forth below. Pay-Down Events will result in repayments of principal to<br />

the Noteholders of a Class or Classes. Write-off Events will result in the writing down of<br />

the Principal Balance of the Notes of a Class or Classes, without any commensurate<br />

repayments of principal being made to Noteholders of the affected Class or Classes of<br />

Notes. The occurrence of an Early Redemption Event will result in the Principal Amount<br />

Outstanding being redeemed and/or written down.<br />

In this <strong>Offering</strong> Circular, the following periods and dates, amongst others, will be applicable:<br />

"Class A1 Notes Final Maturity Date" means 30th October, 2010 if any Class A1 Notes are<br />

outstanding on such date.<br />

"Collection Period" means, in respect of any Interest Payment Date, the period from and<br />

including one (1) Business Day prior to the preceding Interest Payment Date, to but<br />

excluding the day one Business Day prior to such Interest Payment Date, provided that<br />

following the occurrence of an Early Redemption Event, the penultimate Collection Period<br />

will be the period from and including the Final Determination Date to, but excluding the<br />

day one Business Day prior to the Distribution Date, and the final Collection Period will be<br />

the period from, and including the Business Day prior to the Distribution Date to, but<br />

excluding the day one Business Day prior to the Final Distribution Date.<br />

"Determination Date" means, with respect to an Interest Payment Date, the day 10<br />

Business Days prior to the relevant Interest Payment Date, but excluding the Final<br />

Determination Date, the Distribution Date and the Final Distribution Date, as the case may<br />

be.<br />

"Determination Period" means (i) for any Interest Payment Date (excluding the<br />

Distribution Date and the Final Distribution Date) the period from but excluding the<br />

Determination Date preceding the previous Interest Payment Date (or, in the case of the<br />

first Determination Period, from and including the Cut-off Date) to and including the<br />

Determination Date preceding the relevant Interest Payment Date, and (ii) for the<br />

Distribution Date the period from but excluding the Determination Date preceding the previous<br />

Interest Payment Date to and including the Final Determination Date. There will be<br />

no Determination Period for the Final Distribution Date.<br />

"Distribution Date" means the day ten (10) Business Days after the Final Determination<br />

Date.<br />

"Final Determination Date" means:<br />

(i) in the case of the exercise of the Clean-Up Call, the occurrence of a Tax Redemption<br />

Event or the occurrence of the Final Maturity Date, the day that would otherwise be<br />

the next Interest Payment Date; or<br />

8


(ii) in the case of an Event of Default, the day on which the Notes are accelerated.<br />

"Final Distribution Date" means the day ten (10) Business Days after the Valuation Date.<br />

"Final Maturity Date" means 30th October, 2052 if any Notes are outstanding on that date.<br />

"Swap Payment Date" means, with respect to an Interest Period, the date on which such<br />

Interest Period commences; provided that following an Additional Termination Event, the<br />

Swap Payment Dates will include the Final Determination Date and the Distribution Date<br />

but not the Final Distribution Date and, provided further that following the acceleration of<br />

the Notes due to an Event of Default or a Termination Event, there will be no further Swap<br />

Payment Date.<br />

"Valuation Date" means the date on which the Independent Valuation Expert determines<br />

the Aggregate Evaluated Write-off Amount and the Aggregate Evaluated Work Out<br />

Proceeds, which will be sixty (60) Business Days after the Distribution Date.<br />

Pay-Down Events As of any Interest Payment Date other than the Final Distribution Date, "Pay-Down Event"<br />

means any reduction in the Reference Obligations resulting from:<br />

(i) each repayment of principal by a Reference Entity made during the preceding<br />

Determination Period in relation to a Reference Obligation including any principal<br />

payment made by any Reference Entity on a Mortgage Loan in respect of which a<br />

Credit Event has occurred but for which the Write-Off Amount has not been determined<br />

(the aggregate of such payments, the "Reference Obligation Reduction Amount");<br />

(ii) the determination and verification of any Work Out Proceeds following the Work Out<br />

of each Mortgage Loan with a corresponding Reference Obligation in Credit Event<br />

which is completed within the preceding Determination Period; and<br />

(iii) removal of a Reference Obligation from the Reference Portfolio during the preceding<br />

Determination Period due to (aa) such Reference Obligation not meeting the applicable<br />

Eligibility Criteria as of the Cut-off Date or (bb) the Reference Entity in respect of such<br />

Reference Obligation not having been substituted in compliance with the conditions<br />

to substitution set forth in the Credit Default Swap Agreement.<br />

On each Interest Payment Date other than the Final Distribution Date, if a Pay-Down Event<br />

has occurred during the preceding Determination Period, the Issuer will apply proceeds<br />

from the sale of the Collateral under the Repo-Transaction terminating on the Repurchase<br />

Date preceding such Interest Payment Date or from the liquidation of Eligible Investments<br />

during the Collection Period preceding such Interest Payment Date, as the case may be,<br />

in an amount (the "Pay-Down Amount") equal to the sum of:<br />

(i) the Reference Obligation Reduction Amount; and<br />

(ii) the aggregate Work Out Proceeds, if any, determined and verified during the preceding<br />

Determination Period; and<br />

9


(iii) the aggregate outstanding principal balance of any Reference Obligations which have<br />

been removed from the Reference Register during the preceding Determination<br />

Period due to (aa) such Reference Obligations not meeting the applicable Eligibility<br />

Criteria as of the Cut-off Date or (bb) the Reference Entity in respect of such<br />

Reference Obligation not having been substituted in compliance with the conditions<br />

to substitution set forth in the Credit Default Swap Agreement,<br />

in the following order of priority (the "Order of Seniority") which corresponds to the Pre-<br />

Enforcement Priority of Principal Payments:<br />

(a) in or towards repayment of principal due on the Class A1 Notes, until the Principal<br />

Balance of the Class A1 Notes has been reduced to zero;<br />

(b) in or towards repayment of principal due on the Class A2 Notes, until the Principal<br />

Balance of the Class A2 Notes has been reduced to zero;<br />

(c) in or towards repayment of principal due on the Class B Notes, until the Principal<br />

Balance of the Class B Notes has been reduced to zero;<br />

(d) in or towards repayment of principal due on the Class C Notes, until the Principal<br />

Balance of the Class C Notes has been reduced to zero; and<br />

(e) in or towards repayment of principal due on the Class D Notes, until the Principal<br />

Balance of the Class D Notes has been reduced to zero.<br />

Write-off Events As of any Interest Payment Date, "Write-off Event" means the determination and verification<br />

within the preceding Determination Period of the Write-off Amount following a Work<br />

Out of a Mortgage Loan with a corresponding Reference Obligation in respect of which a<br />

Credit Event has occurred.<br />

On each Interest Payment Date, if a Write-off Event has occurred during the preceding<br />

Determination Period, the Issuer will apply proceeds from the sale of the Collateral under<br />

the Repo-Transaction terminating on the Repurchase Date preceding such Interest<br />

Payment Date or from the liquidation of Eligible Investments during the Collection Period<br />

preceding such Interest Payment Date, as the case may be, to make Credit Protection<br />

Payments to the Swap Counterparty under the Credit Default Swap Agreement in an<br />

amount equal to the aggregate Write-off Amounts determined and verified during the preceding<br />

Determination Period (the "Quarterly Write-off Amount"). The Principal Amount<br />

Outstanding will be written down, without any commensurate repayment of principal to<br />

the Noteholders of the affected Class or Classes of Notes, by an amount equal to such<br />

Quarterly Write-off Amount in the following order of priority (the "Reverse Order of<br />

Seniority"):<br />

(i) to write down the Principal Balance of the Class D Notes until the Principal Balance<br />

of the Class D Notes has been reduced to zero;<br />

(ii) to write down the Principal Balance of the Class C Notes until the Principal Balance<br />

of the Class C Notes has been reduced to zero;<br />

10


Early Redemption<br />

Events<br />

(iii) to write down the Principal Balance of the Class B Notes until the Principal Balance<br />

of the Class B Notes has been reduced to zero; and<br />

(iv) to write down the Principal Balance of the Class A Notes, on a pro rata basis, until<br />

the Principal Balance of the Class A Notes has been reduced to zero.<br />

The Issuer will be required to redeem the Notes (an "Early Redemption") following any<br />

one of the following events (each an "Early Redemption Event"):<br />

(i) the exercise of the Clean-Up Call;<br />

(ii) the occurrence of the Final Maturity Date;<br />

(iii) the occurrence of a Tax Redemption Event; or<br />

(iv) the acceleration of the Notes due to the occurrence of an Event of Default.<br />

Redemption of the Notes following an Early Redemption Event will occur as set out below.<br />

Clean-Up Call The Issuer will redeem the Notes (the "Clean-Up Call") without premium in whole, but not<br />

in part, together with accrued interest (if any) in accordance with the Pre-Enforcement<br />

Priority of Interest Payments and the Pre-Enforcement Priority of Principal Payments on<br />

the Distribution Date, subject to the prior deduction of any Delayed Payment Amount, if:<br />

(i) on any Business Day on which the Notional Swap Amount is less than 10% of the<br />

Notional Swap Amount on the Closing Date, the Swap Counterparty gives notice to the<br />

Issuer under the Credit Default Swap Agreement pursuant to which the Issuer will give<br />

notice of the Clean-Up Call; or (ii) on any Business Day on which the Principal Amount<br />

Outstanding is less than 10% of the Principal Amount Outstanding of the Notes on the<br />

Closing Date the Issuer decides in its discretion to provide notice of its decision to exercise<br />

the Clean-up Call and does, in fact, provide such notice.<br />

The Issuer shall give notice of a Clean-Up Call (which notice shall be irrevocable) to the<br />

Noteholders, the Security Trustee, the Paying Agents, the Cash Administrator, the Swap<br />

Counterparty and the Independent Valuation Expert not less than thirty (30) but not more<br />

than sixty (60) days prior to an Interest Payment Date. For the avoidance of doubt, if the<br />

Swap Counterparty provides the notice described in paragraph (i) on a date which is less<br />

than thirty (30) days prior to the next succeeding Interest Payment Date, the Issuer shall<br />

be required to provide notice of a Clean-Up Call, as aforesaid, not less than thirty (30) nor<br />

more than sixty (60) days prior to the Interest Payment Date following such next succeeding<br />

Interest Payment Date.<br />

Final Maturity Date If the Final Maturity Date occurs, the Issuer will redeem the Notes without premium in<br />

whole, but not in part, together with accrued interest (if any) in accordance with the Pre-<br />

Enforcement Priority of Interest Payments and the Pre-Enforcement Priority of Principal<br />

Payments on the Distribution Date, subject to the prior deduction of any Delayed Payment<br />

Amount.<br />

Tax Redemption Events A tax redemption event (a "Tax Redemption Event") will occur on any day on which the<br />

Issuer provides notice that:<br />

11


Events of Default<br />

under the Notes<br />

(i) the Issuer has determined (on the basis of a written opinion of independent counsel)<br />

that its income, the Eligible Investments or any amounts payable to it by the Repo<br />

Counterparty under the Repurchase Agreement or any substitute repo counterparty<br />

under any substitute repo agreement or by the Swap Counterparty under the Credit<br />

Default Swap Agreement are or will be subject to any tax or deduction or withholding<br />

for or on account of any tax, duty, assessment or other governmental charge unless,<br />

prior to giving notice of a Tax Redemption Event, the Issuer receives the relevant Tax<br />

Gross-Up Amounts from the Swap Counterparty on the Swap Payment Date or Swap<br />

Payment Dates on which such deduction or withholding is or will be required to be<br />

made. See "Swap Premium"; or<br />

(ii) the Swap Counterparty has determined (on the basis of a written opinion of independent<br />

counsel) that payments received by it under the Credit Default Swap Agreement<br />

are or will be subject to any tax or deduction or withholding for or on account of any<br />

tax, duty, assessment or other governmental charge and has notified the Issuer that<br />

as a result it elects to terminate the Credit Default Swap Agreement; or<br />

(iii) the Issuer has ceased or will cease to be entitled to the benefit of its tax exempt<br />

finance company status, or ceases or will cease to be in possession of any relevant<br />

licence needed under Jersey law to maintain its tax exempt status in respect of its<br />

activities, or otherwise becomes or will become subject to corporation tax.<br />

"Tax Gross-Up Amounts" means an amount equal to any tax or any deduction or withholding<br />

for or on account of any present or future tax, duty, assessment or other governmental<br />

charge imposed on the Issuer's income, the Eligible Investments or any amounts<br />

payable to it by the Repo Counterparty under the Repurchase Agreement or any substitute<br />

repo counterparty under any substitute repurchare agreement or by the Swap<br />

Counterparty under the Credit Default Swap Agreement.<br />

Tax Gross-Up Amounts will not include any amounts to be deducted or withheld for or<br />

on account of any present or future tax, duty, assessment or governmental charge<br />

imposed upon or as a result of payments by the Issuer under the Notes.<br />

If any event as described in paragraphs (i), (ii) or (iii) above occurs, the Issuer shall give<br />

notice of a Tax Redemption Event (which notice shall be irrevocable) to the Noteholders,<br />

the Security Trustee, the Paying Agents, the Cash Administrator, the Swap Counterparty<br />

and the Independent Valuation Expert not less than thirty (30) but not more than sixty (60)<br />

days prior to the next succeeding Interest Payment Date, and the Issuer will be obliged to<br />

redeem the Notes without premium in whole, but not in part, together with accrued interest<br />

(if any) in accordance with the Pre-Enforcement Priority of Interest Payments and the Pre-<br />

Enforcement Priority of Principal Payments on the Distribution Date, subject to the prior<br />

deduction of the Delayed Payment Amount, if any. If the Issuer is unable to comply with<br />

the requisite notice period, the Issuer shall give such notice prior to the next following<br />

Interest Payment Date in the same manner as set forth above. See "Early Redemption<br />

following an Early Redemption Event".<br />

An event of default under the Notes (an "Event of Default") will occur when:<br />

12


(i) the Issuer defaults in the payment of any interest or repayment of principal due and<br />

payable in respect of any Note and such default continues for a period of five (5)<br />

Business Days; or<br />

(ii) the Issuer fails to perform or observe any of its other material obligations under the<br />

Conditions or any other Transaction Document and such failure continues unremedied<br />

for a period of thirty days following the delivery by the Security Trustee to the Issuer<br />

of notice requiring the same to be remedied; or<br />

(iii) the Swap Counterparty, the Repo Counterparty or any of the Transaction Secured<br />

Creditors ceases to have a valid and enforceable security interest in, or such security<br />

interest proves not to have been valid or enforceable when granted or purported to<br />

have been granted in, the relevant Security Assets under any of the Security<br />

Documents; or<br />

(iv) the Credit Default Swap Agreement is terminated other than due to an Additional<br />

Termination Event; or<br />

(v) the Issuer is subject to a declaration that its property has been rendered en désastre,<br />

is wound up or otherwise subject to liquidation proceedings; or<br />

(vi) an Acceleration Event occurs under the Repurchase Agreement or any substitute<br />

repurchase agreement, unless (a) such Acceleration Event was caused by a payment<br />

or delivery default by, or an insolvency event in relation to, the Repo Counterparty or<br />

the substitute repo counterparty and (b) the Issuer enters into a substitute repurchase<br />

agreement the terms of which are substantially identical to the terms of the<br />

Repurchase Agreement or the Cash Administrator on behalf of the Issuer invests the<br />

proceeds from the sale of the Collateral in Eligible Investments; or<br />

(vii) it is or will become unlawful for the Issuer to perform or comply with any of its obligations<br />

under or in respect of the Notes or any Transaction Document.<br />

In case of any event described in:<br />

(aa) paragraph (i) or (v) above the Notes will be accelerated immediately upon the occurrence<br />

of such event; and<br />

(bb) paragraphs (ii), (iii), (iv) (vi) or (vii) above, the Notes will be accelerated on the first<br />

Business Day on which the Security Trustee receives notice or has actual knowledge<br />

of the occurrence of such event.<br />

A Noteholder will exercise his right to declare his Notes due for redemption by giving notice<br />

in accordance with the Conditions to the Security Trustee enclosing evidence of ownership<br />

of Notes reasonably satisfactory to the Security Trustee.<br />

In the event of acceleration of the Notes due to the occurrence of an Event of Default, the<br />

Security Trustee will give notice (an "Enforcement Notice") to the Noteholders, the Issuer,<br />

the Paying Agents, the Cash Administrator, the Swap Counterparty, the Repo<br />

Counterparty and the Independent Valuation Expert and the Notes will be redeemed<br />

13


Calculation of the<br />

Redemption Amount<br />

Class A1 Notes<br />

Redemption<br />

Available<br />

Distribution Funds<br />

without premium in whole, but not in part, together with accrued interest (if any) on the<br />

Distribution Date, subject to the prior deduction of the Delayed Payment Amount, if any.<br />

Following the service of an Enforcement Notice, and subject to the prior rights of the<br />

Swap Counterparty and the Repo Counterparty, the Security Trustee will be entitled to<br />

enforce the Transaction Security Interests. (See "Security Structure".) If the Security<br />

Trustee has not enforced the Transaction Security Interests, the Notes will be redeemed<br />

in accordance with the Pre-Enforcement Priority of Interest Payments and the Pre-<br />

Enforcement Priority of Principal Payments. If the Security Trustee has enforced the<br />

Transaction Security Interests, the Notes will be redeemed in accordance with the Post-<br />

Enforcement Priority of Payments.<br />

Pursuant to the Credit Default Swap Agreement, the Swap Counterparty will notify the<br />

Issuer on the Final Determination Date of (i) the Quarterly Write-off Amounts and (ii) the<br />

aggregate balance (the "Delayed Payment Amount") of any outstanding principal balance<br />

of any Reference Obligations in respect of which a Credit Event has occurred but for<br />

which no Write-off Amount has been determined and verified as of the Final Determination<br />

Date. The aggregate amount of principal to be repaid on the Notes on the Distribution<br />

Date will be an amount up to, but not in excess of, the Principal Amount Outstanding on<br />

such date, minus (i) the Quarterly Write-off Amount; and (ii) the Delayed Payment Amount,<br />

if any.<br />

On the Class A1 Notes Final Maturity Date, provided there is no Event of Default under the<br />

Notes which is continuing, the Issuer will redeem the Class A1 Notes without premium in<br />

whole, but not in part, together with accrued interest, if any.<br />

Priorities of Payments<br />

On each Interest Payment Date, the Issuer will apply the sum of the following amounts<br />

("Available Distribution Funds") in accordance with the Priorities of Payments set forth below:<br />

(i) any Swap Premium received by the Issuer from the Swap Counterparty under the<br />

Credit Default Swap Agreement on the Swap Payment Date preceding such Interest<br />

Payment Date;<br />

(ii) any Repo Interest received by the Issuer from the Repo Counterparty or any substitute<br />

repo counterparty on the Repurchase Date immediately preceding such Interest<br />

Payment Date or any income received by the Issuer on Eligible Investments during<br />

the preceding Collection Period; and<br />

(iii) an amount equal to the difference between any Repurchase Price (net of any Repo<br />

Interest) received by the Issuer from the Repo Counterparty or from any substitute<br />

repo counterparty on the Repurchase Date preceding such Interest Payment Date or<br />

any proceeds received by the Issuer from the realisation of Collateral (net of income<br />

thereon) or Eligible Investments (net of income thereon) during the preceding<br />

Collection Period, as the case may be, and the sum of:<br />

(a) any Credit Protection Payment payable by the Issuer to the Swap Counterparty<br />

on such Interest Payment Date; and<br />

14


Issuer’s<br />

Priorities of Payments<br />

(b) any (x) Purchase Price paid by the Issuer to the Repo Counterparty or any substitute<br />

repo counterparty on the Purchase Date under the Repo-Transaction<br />

entered into on the Purchase Date immediately preceding such Interest Payment<br />

Date, or (y) funds to be invested in Eligible Investments by the Cash Administrator<br />

acting on behalf of the Issuer in respect of the current Collection Period, as the<br />

case may be; and<br />

(iv) any other amount standing to the credit of the Transaction Accounts.<br />

Amounts set out in paragraph (i) above will be paid directly into the Interest Transaction<br />

Account. Amounts set out in paragraph (ii) above will be transferred from the Principal<br />

Collection Account to the Interest Transaction Account. Amounts set out in (iii) above<br />

except for amounts referred to in (a) and (b) will be paid from the Principal Collection<br />

Account to the Principal Transaction Account.<br />

The Issuer will apply Available Distribution Funds as follows:<br />

Pre-Enforcement Priority Prior to the enforcement of the Transaction Security Interests, monies standing to the credit<br />

of Interest Payments<br />

of the Interest Transaction Account will be applied on each Interest Payment Date in the<br />

following order of priority (the "Pre-Enforcement Priority of Interest Payments"):<br />

(i) first, in or towards payment of all amounts payable to the Security Trustee under the<br />

Security Documents;<br />

(ii) secondly, in or towards payment (pro rata) of (a) any and all amounts payable to the<br />

Paying Agents in respect of amounts properly paid by them to the Noteholders and<br />

not reimbursed by the Issuer, (b) any and all amounts payable under Jersey law with<br />

respect to taxes, exempt company and statutory fees, and (c) the fees and expenses<br />

(when due) to the Paying Agents, the Note Calculation Agent, the Swap Calculation<br />

Agent, the Repo Calculation Agent, the Cash Administrator, the Transaction Account<br />

Bank, the directors of the Issuer, the auditors of the Issuer, the Corporate Administrator<br />

and the Data Trustee (together referred to as "Service Providers") pursuant<br />

to the relevant Transaction Documents (together referred to as the "Expense Payments");<br />

(iii) thirdly, in or towards payment (pro rata) of interest due on the Class A1 Notes and the<br />

Class A2 Notes;<br />

(iv) fourthly, in or towards payment (pro rata) of interest accrued and not paid when due<br />

(if any) on the Class A1 Notes and the Class A2 Notes;<br />

(v) fifthly, in or towards payment of interest due on the Class B Notes;<br />

(vi) sixthly, in or towards payment of interest accrued and not paid when due (if any) on<br />

the Class B Notes;<br />

(vii) seventhly, in or towards payment of interest due on the Class C Notes;<br />

(viii) eighthly, in or towards payment of interest accrued and not paid when due (if any) on<br />

the Class C Notes;<br />

15


(ix) ninthly, in or towards payment of interest due on the Class D Notes;<br />

(x) tenthly, in or towards payment of interest accrued and not paid when due (if any) on<br />

the Class D Notes;<br />

(xi) eleventhly, in or towards payment of amounts (when due) in excess of the fees and<br />

expenses or other amounts specified in paragraph (ii) above to the Service Providers<br />

under the relevant Transaction Documents;<br />

(xii) twelfthly, in or towards payment of any and all amounts due in respect of taxes that<br />

the Issuer is required to pay in any jurisdiction other than the amounts identified in<br />

paragraph (ii) (b) above to the relevant tax authority;<br />

(xiii) thirteenthly, to pay a dividend to its shareholder; and<br />

(xiv) fourteenthly, to pay any surplus to the Principal Transaction Account.<br />

Pre-Enforcement Priority Prior to the enforcement of the Transaction Security Interests, monies standing to the credit<br />

of Principal Payments of the Principal Transaction Account will be applied on each Interest Payment Date in the<br />

following order of priority (the "Pre-Enforcement Priority of Principal Payments"):<br />

Post-Enforcement<br />

Priority of Payments<br />

(i) first, in or towards repayment of principal due on the Class A1 Notes until the<br />

Principal Balance of the Class A1 Notes has been reduced to zero;<br />

(ii) secondly, in or towards repayment of principal due on the Class A2 Notes until the<br />

Principal Balance of the Class A2 Notes has been reduced to zero;<br />

(iii) thirdly, in or towards repayment of principal due on the Class B Notes until the<br />

Principal Balance of the Class B Notes has been reduced to zero;<br />

(iv) fourthly, in or towards repayment of principal due on the Class C Notes until the<br />

Principal Balance of the Class C Notes has been reduced to zero;<br />

(v) fifthly, in or towards repayment of principal due on the Class D Notes until the<br />

Principal Balance of the Class D Notes has been reduced to zero; and<br />

(vi) sixthly, in or towards payment to the Swap Counterparty when due of the Termination<br />

Fee pursuant to the Credit Default Swap Agreement.<br />

Upon the enforcement of the Transaction Security Interests, any proceeds resulting therefrom<br />

will be applied on the Distribution Date and, if applicable, the Final Distribution Date<br />

in the following order of priority (the "Post Enforcement Priority of Payments"):<br />

(i) first, in or towards payment (pro rata) of all amounts payable to the Security Trustee<br />

under the Security Documents and to any receiver appointed in respect of the Issuer;<br />

(ii) secondly, in or towards payment (pro rata) of (a) any and all amounts payable to the<br />

Paying Agents in respect of amounts properly paid by them to the Noteholders and<br />

not reimbursed by the Issuer, (b) any and all amounts payable under Jersey law with<br />

16


espect to taxes, tax exempt company and statutory fees and (c) the Expense<br />

Payments (when due) to the Service Providers pursuant to the relevant Transaction<br />

Documents;<br />

(iii) thirdly, in or towards payment (pro rata) of interest due on the Class A1 Notes and the<br />

Class A2 Notes;<br />

(iv) fourthly, in or towards payment (pro rata) of interest accrued and not paid when due<br />

(if any) on the Class A1 Notes and the Class A2 Notes;<br />

(v) fifthly, in or towards repayment (pro rata) of principal due on the Class A1 Notes and<br />

the Class A2 Notes until the Principal Balance of the Class A1 Notes and the Class<br />

A2 Notes has been reduced to zero;<br />

(vi) sixthly, in or towards payment of interest due on the Class B Notes;<br />

(vii) seventhly, in or towards payment of interest accrued and not paid when due (if any)<br />

on the Class B Notes;<br />

(viii) eighthly, in or towards repayment of principal due on the Class B Notes until the<br />

Principal Balance of the Class B Notes has been reduced to zero;<br />

(ix) ninthly, in or towards payment of interest due on the Class C Notes;<br />

(x) tenthly, in or towards payment of interest accrued and not paid when due (if any) on<br />

the Class C Notes;<br />

(xi) eleventhly, in or towards repayment of principal due on the Class C Notes until the<br />

Principal Balance of the Class C Notes has been reduced to zero;<br />

(xii) twelfthly, in or towards payment of interest due on the Class D Notes;<br />

(xiii) thirteenthly, in or towards payment of interest accrued and not paid when due (if any)<br />

on the Class D Notes;<br />

(xiv) fourteenthly, in or towards repayment of principal due on the Class D Notes until the<br />

Principal Balance of the Class D Notes has been reduced to zero;<br />

(xv) fifteenthly, in or towards payment of amounts (when due) in excess of the fees and<br />

expenses or other amounts specified in paragraph (ii) above to the Service Providers<br />

under the relevant Transaction Documents;<br />

(xvi) sixteenthly, in or towards payment of any and all amounts due in respect of taxes that<br />

the Issuer is required to pay in any jurisdiction other than the amounts identified in<br />

paragraph (ii) (b) above (such amount to be paid to the relevant tax authority);<br />

(xvii) seventeenthly, in or towards payment of the Termination Fee to the Swap<br />

Counterparty when due; and<br />

17


Credit Default<br />

Swap Agreement<br />

Credit Protection Payments<br />

in respect of a<br />

Reference Obligation<br />

(xviii) eighteenthly, to pay any surplus to the Issuer.<br />

The Credit Default Swap Agreement<br />

On or prior to the Closing Date, the Issuer will enter into a Credit Default Swap Agreement<br />

with the Swap Counterparty in the form of a 1992 ISDA Master Agreement, including a<br />

Schedule and a Confirmation. Pursuant to the Credit Default Swap Agreement, the Issuer<br />

will be obliged to make Credit Protection Payments to the Swap Counterparty on each<br />

Interest Payment Date, provided certain conditions are met, and the Swap Counterparty<br />

will be obliged to pay a Swap Premium to the Issuer on each Swap Payment Date.<br />

The aggregate liability of the Issuer under the Credit Default Swap Agreement will be equal<br />

to the Notional Swap Amount which will, in turn, be equal to the Principal Amount<br />

Outstanding. On the Closing Date, the notional amount under the Credit Default Swap<br />

Agreement (the "Notional Swap Amount") will equal € 1,006,250,000. The Notional Swap<br />

Amount will be reduced on each Interest Payment Date by an amount equal to the sum of<br />

(i) the Pay-Down Amount (ii) the Credit Protection Payments, for the preceding<br />

Determination Period and (iii) any other amounts attributable to a redemption, in whole or<br />

in part, of the Notes. Following the occurrence of an Additional Termination Event (other<br />

than an Additional Termination Event attributable to an Event of Default), the Credit Default<br />

Swap Agreement will be terminated and the Notional Swap Amount will be reduced to<br />

zero on the Distribution Date or the Final Distribution Date, as the case may be. Upon the<br />

occurrence of an Event of Default or a Termination Event, the Credit Default Swap<br />

Agreement will be terminated and the Notional Swap Amount will be reduced to zero on<br />

the Final Determination Date.<br />

If a Credit Event in respect of a Reference Entity occurs on or before the Final Determination<br />

Date, the Issuer will be obliged, subject to certain conditions to payment, to make<br />

a payment to the Swap Counterparty under the Credit Default Swap Agreement (a "Credit<br />

Protection Payment") in respect of the related Reference Obligation of such Reference<br />

Entity. Prior to the occurrence of an Early Redemption Event, the Issuer will be required to<br />

make a Credit Protection Payment to the Swap Counterparty on the first Interest Payment<br />

Date falling after each Determination Period in which each of the following conditions to<br />

payment are satisfied: (i) the Swap Counterparty has given written notice of the relevant<br />

Credit Event to the Cash Administrator on behalf of the Issuer, (ii) the Swap Counterparty<br />

has determined the appropriate Write-off Amount and (iii) the Independent Auditor has<br />

delivered the Independent Auditor Confirmation in relation to such Reference Obligation.<br />

After the occurrence of an Early Redemption Event, the Issuer will be required to make a<br />

Credit Protection Payment to the Swap Counterparty on the Distribution Date and on the<br />

Final Distribution Date, if any, provided that, before any such date, the following conditions to<br />

payment have been met: (a) the Swap Counterparty has given written notice of such Credit<br />

Event to the Cash Administrator on behalf of the Issuer, (b) the Independent Valuation<br />

Expert has determined the appropriate Evaluated Write-off Amount and verified any<br />

Write-off Amount and (c) the Independent Valuation Expert has delivered the Valuation<br />

Report in relation to such Reference Obligation and the respective Evaluated Write-off<br />

Amount or any Write-off Amount (if applicable).<br />

18


Aggregate Credit<br />

Protection Payments<br />

The aggregate Credit Protection Payments in respect of any Interest Payment Date due<br />

and payable on such date shall equal the Quarterly Write-off Amount. The aggregate<br />

Credit Protection Payments due and payable on the Final Distribution Date shall equal the<br />

Aggregate Evaluated Write-off Amount.<br />

Credit Events With respect to a Reference Obligation and the related Reference Entity, each of the following<br />

events will constitute a credit event under the Credit Default Swap Agreement (each a "Credit<br />

Event"):<br />

(i) the Reference Entity becomes delinquent with respect to one or more payments due<br />

under a Mortgage Loan amounting in total to at least one quarter of the amount owed<br />

to the Swap Counterparty under such Mortgage Loan during the current calendar<br />

year (including any payments which were due in a previous calendar year, but remain<br />

unpaid);<br />

(ii) insolvency proceedings in respect of the Reference Entity are commenced; or<br />

(iii) a Mortgage Loan is terminated due to the occurrence of an "important reason" (wichtiger<br />

Grund), as that term is known under German law, in relation to the Reference<br />

Entity. In relation to the occurrence of an "important reason" see "The Credit Default<br />

Swap Agreement – Credit Events".<br />

Upon the occurrence of a Credit Event and the notification thereof to the Cash Administrator<br />

acting on behalf of the Issuer the principal balance outstanding of the affected Reference<br />

Obligation will be recorded in a separate ledger maintained by the Swap Counterparty.<br />

A Credit Event in respect of a Reference Obligation will cease to exist if the Reference<br />

Entity has paid to the Swap Counterparty all amounts due and overdue on such Reference<br />

Obligation before the related Work Out Amount in respect of such Credit Event has been<br />

transferred to the Swap Counterparty and no other Credit Event has occurred and is in<br />

existence with respect to such Reference Obligation.<br />

Work Out If, following the occurrence of a Credit Event, the Swap Counterparty determines that it<br />

would be appropriate to attempt to collect amounts due under the Reference Obligation<br />

corresponding to the affected Mortgage Loan, it will do so by means of one of the following<br />

methods (each a "Work Out"):<br />

(i) termination of the Mortgage Loan and foreclosure (Zwangsversteigerung) on the residential<br />

property securing such Mortgage Loan; or<br />

(ii) if the Reference Entity so elects and with the consent of the Swap Counterparty, termination<br />

of the Mortgage Loan and repayment or prepayment of such Mortgage<br />

Loan; or<br />

(iii) upon receipt by the Swap Counterparty of an offer to buy the Mortgage Loan, the sale<br />

and transfer of such Mortgage Loan or claims thereunder to a third party.<br />

The Swap Counterparty will establish Work Out methods and terms on a case-by-case basis.<br />

To the extent the Swap Counterparty has a choice between the Work Out methods, it will use<br />

19


its discretion to select in good faith the Work Out method which it deems will provide for the<br />

greatest recovery of proceeds. Neither the Issuer nor the Security Trustee nor the Noteholders<br />

will have any right to compel the Swap Counterparty to select a particular Work Out method.<br />

The "Work Out Amount" in respect of a Mortgage Loan with a corresponding Reference<br />

Obligation in relation to which a Credit Event has occurred, is the amount of any proceeds<br />

transferred to the Swap Counterparty as a result of the Work Out of the related Mortgage<br />

Loan, net of, to the extent applicable, any amounts equal to prior ranking rights to the related<br />

residential property granted in favour of third parties, plus accrued but unpaid interest<br />

thereon and any amounts equal to other claims which according to the Law on<br />

Compulsory Sale and Administration (Gesetz über die Zwangsversteigerung und<br />

Zwangsverwaltung) rank prior to the real rights (Realrechte) securing such Mortgage<br />

Loan. These amounts deducted will not be at the disposal of the Swap Counterparty and<br />

details of the calculation will not be available to the Swap Counterparty.<br />

The "Work Out Proceeds" for a Reference Obligation means the amount, as verified by<br />

the Independent Auditor, equal to:<br />

(i) if the result of the following calculation is a positive number, the Work Out Amount of<br />

the related Mortgage Loan minus:<br />

(a) first, an amount equal to all fees, disbursements, costs and expenses (excluding<br />

internal costs such as prepayment fees and expenses of the Swap Counterparty)<br />

which the Swap Counterparty has paid or incurred in connection with the Work<br />

Out (the "Work Out Expenses");<br />

(b) second, an amount which equals the aggregate outstanding principal amount of<br />

the portions, if any, of any mortgage loans (including the relevant Mortgage Loan)<br />

which are secured by the residential property securing the Mortgage Loan and<br />

which are registered in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register; or<br />

(ii) if the result of the calculation in (i) above is zero or a negative number, zero.<br />

The "Write-off Amount" for a Reference Obligation is an amount equal to the outstanding<br />

principal balance of such Reference Obligation as of the Cut-off Date minus the sum of:<br />

(i) the aggregate amount of repayments of principal by the Reference Entity made up to,<br />

and including, the day on which the Work Out Amount is transferred to the Swap<br />

Counterparty which are applied toward payment of the Reference Obligation; and<br />

(ii) the Work Out Proceeds.<br />

On each Reporting Date and on the Final Reporting Date, the Swap Counterparty will provide<br />

to, inter alios, the Issuer, the Cash Administrator and the Security Trustee a report (the<br />

"Swap Counterparty Report") in relation to the Reference Obligation Reduction Amount,<br />

the occurrence of any Credit Events, any Work Out Proceeds, any Write-off Amounts and<br />

any Credit Events cured during the relevant Determination Period.<br />

20


On the Reporting Date following the Final Determination Date, the Swap Counterparty will<br />

also inform the Independent Valuation Expert of all Reference Obligations in Credit Event<br />

as of the Final Determination Date.<br />

"Reporting Date" means the day two (2) Business Days after each Determination Date<br />

and "Final Reporting Date" means the day two (2) Business Days after the Valuation Date.<br />

The period from the occurrence of a Credit Event to the actual determination of the Write-off<br />

Amount and the Work Out Proceeds relating to the Reference Obligation giving rise to such<br />

Credit Event is mainly dependent on the time required for the Work Out. If the Work Out of a<br />

Mortgage Loan is carried out by foreclosure, the Write-off Amount will be calculated only after (i)<br />

foreclosure proceedings have been completed and (ii) the Work Out Amount has been transferred<br />

to the Swap Counterparty. In the experience of the Swap Counterparty the period<br />

between the occurrence of an event analogous to a Credit Event and the determination of<br />

amounts analogous to the Write-off Amount and the Work Out Proceeds in respect of its<br />

overall mortgage loan portfolio usually approximates two years but in some cases the process<br />

may last longer. See "The Credit Default Swap Agreement, Write-off Amount".<br />

Independent Auditor On each Determination Date on which the Swap Counterparty discloses any Write-off<br />

Amount occurred during the preceding Determination Period, the Issuer or, following the<br />

enforcement of the Transaction Security Interests, the Security Trustee will provide a confirmation<br />

of the Independent Auditor (the "Independent Auditor Confirmation") to the<br />

Swap Counterparty and the Cash Administrator and, if the notification is provided by the<br />

Issuer, to the Security Trustee confirming (i) that the affected Reference Obligation was listed<br />

in the Reference Register and met the applicable Eligibility Criteria on the Cut-off Date<br />

and, if applicable, that the substitution of the Reference Entity in respect of such<br />

Reference Obligation was effected in compliance with the conditions to substitution set<br />

forth in the Credit Default Swap Agreement, and (ii) the calculations (including the procedures<br />

relating to the calculations) of the Write-off Amount or Write-off Amounts and the<br />

Work Out Proceeds, if any, are correct.<br />

Independent<br />

Valuation Expert<br />

If a Delayed Payment Amount subsists as of the Final Determination Date, the Issuer or,<br />

in certain circumstances, the Security Trustee will request an independent valuation<br />

expert (the "Independent Valuation Expert") to deliver a report (the "Valuation Report")<br />

on the Valuation Date, which will include: (i) (a) the Write-off Amount or Evaluated Writeoff<br />

Amount, as the case may be, of each Reference Obligation giving rise to such Delayed<br />

Payment Amount, (b) the Work Out Proceeds or the amount of Evaluated Work Out<br />

Proceeds in respect of such Reference Obligation and (c) the Aggregate Evaluated Writeoff<br />

Amount and the Aggregate Evaluated Work Out Proceeds and (ii) confirmation that such<br />

Reference Obligation was listed in the Reference Register and the Reference List and met<br />

the applicable Eligibility Criteria as at the Cut-off Date and, if applicable, that the substitution<br />

of the Reference Entity in respect of such Reference Obligation was effected in<br />

compliance with the conditions to substitution set forth in the Credit Default Swap<br />

Agreement. The Independent Valuation Expert will determine such amounts based on<br />

certain valuation criteria and other factors to be considered as set out in the Credit Default<br />

Swap Agreement. See "The Credit Default Swap Agreement" below. The Independent<br />

Valuation Expert will make such evaluations and will deliver the Valuation Report on the<br />

Valuation Date.<br />

21


"Evaluated Write-off Amount" means, with respect to a Reference Obligation, the outstanding<br />

principal amount of such Reference Obligation as of the Cut-off Date minus the<br />

sum of (i) the aggregate amount of repayments of principal since the Cut-off Date by the<br />

Reference Entity made prior to the Final Determination Date which are applied towards<br />

payment of the Reference Obligation and (ii) the Evaluated Work Out Proceeds in respect<br />

of the Mortgage Loan relating to such Reference Obligation. The Evaluated Write-off<br />

Amount for a Reference Obligation cannot be greater than the outstanding principal<br />

balance of such Reference Obligation as of the Final Determination Date.<br />

"Evaluated Work Out Proceeds" means:<br />

(i) if the result of the following calculation is a positive number, any and all monies which<br />

the Independent Valuation Expert anticipates will be transferred to the Swap<br />

Counterparty from the enforcement of the residential property securing the Mortgage<br />

Loan after taking into account, to the extent applicable, any anticipated prior ranking<br />

rights to the related residential property in favour of third parties plus accrued but<br />

unpaid interest thereon and any anticipated amount equal to all other claims, if any,<br />

which according to the Law on Compulsory Sale and Administration (Gesetz über die<br />

Zwangsversteigerung und Zwangsverwaltung) rank prior to the real rights (Realrechte)<br />

securing such Mortgage Loan, plus any Additional Work Out Amount, in each case minus:<br />

(a) first, all fees, disbursements, costs and expenses (excluding internal costs such<br />

as prepayment fees and expenses of the Swap Counterparty) which the<br />

Independent Valuation Expert anticipates will be paid or incurred by the Swap<br />

Counterparty in connection with the recovery of monies in relation to such<br />

Mortgage Loan; and<br />

(b) second, an amount which equals the aggregate outstanding principal amount of<br />

the portions, if any, of any mortgage loans (including such Mortgage Loan), which<br />

are secured by the residential property securing the Mortgage Loan and which are<br />

registered in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register; or<br />

(ii) if the result of the calculation in (i) above is zero or a negative number, zero.<br />

"Additional Work Out Amount" means, with respect to a Mortgage Loan, any monies received<br />

by the Swap Counterparty from the Reference Entity under the Mortgage Loan,<br />

after the Final Determination Date but on or prior to the Valuation Date in respect of a<br />

Reference Obligation in respect of which a Delayed Payment Amount subsists on the Final<br />

Determination Date.<br />

"Aggregate Evaluated Write-off Amount" means an amount equal to the sum of all<br />

Evaluated Write-off Amounts determined by the Independent Valuation Expert on or prior<br />

to the Valuation Date and all Write-off Amounts resulting from any Work Out completed<br />

after the Final Determination Date as determined by the Swap Counterparty and verified<br />

by the Independent Valuation Expert on or prior to the Valuation Date.<br />

"Aggregate Evaluated Work Out Proceeds" means an amount equal to the sum of all<br />

Evaluated Work Out Proceeds determined by the Independent Valuation Expert on or prior<br />

to the Valuation Date plus any Work Out Proceeds determined by the Swap Counterparty<br />

22


and verified by the Independent Valuation Expert after the Final Determination Date but on<br />

or prior to the Valuation Date.<br />

Reference Register On the Closing Date, <strong>DG</strong> HYP, acting in its function as "Data Provider", will deliver (i) pursuant<br />

to the Credit Default Swap Agreement to the Issuer and the Security Trustee a register<br />

containing certain information in encoded form relating to the Reference Obligations (the<br />

"Reference Register") and (ii) pursuant to a data protection agreement dated as of the<br />

Closing Date (the "Data Protection Agreement") between the Data Provider and the Data<br />

Trustee to the Data Trustee, a list in sealed form containing the information necessary to<br />

decode the Reference Register (the "Reference List"). Only Reference Obligations denoted<br />

on the Reference List and the Reference Register constitute the Reference Portfolio.<br />

When a Work Out of a Mortgage Loan has been completed, the Data Provider will ensure<br />

that the Reference Register is reviewed by the Independent Auditor and that the Data<br />

Trustee provides a confirmation that the Reference Obligation was listed in the Reference<br />

List, in order to ascertain that the Reference Obligation in respect of which a Credit<br />

Protection Payment must be made is in the Reference Portfolio. The Data Provider will<br />

amend the Reference Register and the Reference List to remove a Reference Obligation<br />

in the event that it is ascertained that such Reference Obligation did not meet the applicable<br />

Eligibility Criteria on the Cut-off Date or the relevant Reference Entity was not substituted<br />

in compliance with the conditions to substitution of Reference Entities, as well as<br />

to reflect the substitution of a Reference Entity, or the removal of any Reference Obligation<br />

once payment obligations in relation to such are fulfilled or a Credit Protection Payment<br />

in respect of such Reference Obligation has been made. The Data Provider will carry out<br />

any such amendment as soon as reasonably practicable after such substitution or removal<br />

and deliver an updated Reference Register to the Issuer and the Security Trustee and an<br />

updated Reference List to the Data Trustee on the next following Interest Payment Date.<br />

Swap Premium On each Swap Payment Date, the Swap Counterparty will make a payment to the Issuer<br />

under the Credit Default Swap Agreement (the "Swap Premium") equal to the sum of (i) the<br />

aggregate amount of interest payable in respect of the Notes on the following Interest Payment<br />

Date less the amount of any Repo Interest payable to the Issuer by the Repo Counterparty<br />

or any substitute repo counterparty under the relevant Repo-Transaction on the next<br />

Repurchase Date or any income payable to the Issuer on Eligible Investments prior to the<br />

next Interest Payment Date, and (ii) an amount equal to the fees and expenses of the<br />

Security Trustee, any amounts payable under Jersey law with respect to taxes, exempt company<br />

and statutory fees and any Expense Payments due during the immediately following<br />

Interest Period.<br />

In the event of an Early Redemption due to the exercise of the Clean-Up Call, the occurrence<br />

of a Tax Redemption Event or the occurrence of the Final Maturity Date, the Swap<br />

Counterparty will make the following payments as Swap Premium, in each case less any income<br />

payable to the Issuer on Eligible Investments: (i) on the Final Determination Date, the<br />

Swap Counterparty will make a payment to the Issuer equal to the sum of (a) the aggregate<br />

amount of interest accruing on the Notes during the period from and including the Final<br />

Determination Date to but excluding the Distribution Date and (b) the fees and expenses of<br />

the Security Trustee, any amounts payable under Jersey law with respect to taxes, exempt<br />

company and statutory fees and any Expense Payments due on or prior to the Distribution<br />

Date, and (ii) on the Distribution Date, the Swap Counterparty will make a payment to the<br />

Issuer equal to the sum of (a) the aggregate amount of interest accruing on the Notes during<br />

23


the Interest Period from and including the Distribution Date to but excluding the Final<br />

Distribution Date and (b) the fees and expenses of the Security Trustee, any amounts<br />

payable under Jersey law with respect to taxes, exempt company and statutory fees and<br />

any Expense Payments due on, prior to or after the Final Distribution Date. In the event of<br />

an Early Redemption due to the occurrence of an Event of Default, the Swap Counterparty<br />

shall not be required to make any further payments in respect of the Swap Premium after<br />

the Swap Payment Date preceding the Final Determination Date. On the first anniversary of<br />

the Closing Date and, thereafter, annually on each anniversary of the Closing Date the Swap<br />

Counterparty will pay to the Issuer an additional amount of € 1,500 as Swap Premium.<br />

If income or amounts under the Eligible Investments, the Repurchase Agreement, any<br />

substitute repurchase agreement or the Credit Default Swap Agreement payable to the<br />

Issuer become subject to any tax, withholding or deduction, the Swap Counterparty will<br />

have the option (i) to pay the Tax Gross-Up Amounts as part of the Swap Premium or (ii)<br />

to terminate the Credit Default Swap Agreement which will oblige the Issuer to give notice<br />

of a Tax Redemption Event.<br />

On the Closing Date the Swap Counterparty will also pay to the Issuer an additional sum<br />

representing the initial expenses related to the issuance of the Notes.<br />

Termination of the Credit The Credit Default Swap Agreement provides for limited termination events (each a<br />

Default Swap Agreement "Termination Event") which consist of: (i) the Issuer or the Swap Counterparty being sub-<br />

and Termination Fee<br />

ject to certain insolvency or bankruptcy related events (ii) the Issuer or the Swap<br />

Counterparty failing to make any payment thereunder, which failure is not remedied on or<br />

before the third Business Day after notice of such failure is given, and (iii) it becoming<br />

unlawful for the Issuer or the Swap Counterparty to comply with its obligations thereunder.<br />

A Termination Event will constitute an Event of Default under the Notes and will entitle the<br />

Swap Counterparty to terminate the Credit Default Swap on the Final Determination Date<br />

(without prejudice to any Credit Protection Payment due following such date) and to<br />

enforce the Security Interests granted to it by the Issuer. The Credit Default Swap<br />

Agreement also provides for additional termination events (each an "Additional<br />

Termination Event") which consist of (i) the issuance by the Issuer of notice of the Clean-<br />

Up Call, either at the option of the Issuer or following a notice by the Swap Counterparty<br />

of a clean up call under the Credit Default Swap Agreement, (ii) the issuance by the Issuer<br />

of notice of a Tax Redemption Event. This includes circumstances in which the Swap<br />

Counterparty has exercised its option not to pay Tax Gross-Up Amounts, which in turn will<br />

oblige the Issuer to give notice of a Tax Redemption Event, (iii) the occurence of the Final<br />

Maturity Date; and (iv) the occurrence of an Event of Default under the Notes.<br />

Upon termination of the Credit Default Swap Agreement, the Issuer will pay to the Swap<br />

Counterparty the funds standing to the credit of the Principal Transaction Account (if any),<br />

after payment of all amounts due to all other creditors of the Issuer has been made (the<br />

"Termination Fee").<br />

The Reference Portfolio<br />

Reference Portfolio Pursuant to the Credit Default Swap Agreement, the Swap Counterparty has designated,<br />

and Reference Obligations as of the Cut-off Date, a portfolio (the "Reference Portfolio") of Reference Obligations<br />

related to mortgage loans (the "Mortgage Loans") which are secured on residential pro-<br />

24


perties located throughout the Federal Republic of Germany and which are granted to<br />

individual obligors (the "Reference Entities") to which the Swap Counterparty has incurred<br />

credit exposure in relation to its mortgage lending activities. The term "residential<br />

property" includes real property as well as hereditary building rights (Erbbaurechte)<br />

(which are real property rights permitting the holder to use land for building purposes). A<br />

portion of many of the Mortgage Loans serves as cover for <strong>DG</strong> HYP Mortgage<br />

Pfandbriefe. The "Reference Obligations" consist of entire Mortgage Loans or, in the case<br />

of Mortgage Loans a portion of which serve as cover for <strong>DG</strong> HYP Mortgage Pfandbriefe,<br />

those portions of such Mortgage Loans that do not serve as cover for <strong>DG</strong> HYP Mortgage<br />

Pfandbriefe. See "<strong>DG</strong> HYP Mortgage Pfandbrief Cover Register". Only Reference<br />

Obligations denoted in the Reference Register and the Reference List constitute the<br />

Reference Portfolio and, aside from allowances for substitution of the Reference Entity or<br />

removal of Reference Obligations, the constitution of the Reference Portfolio is fixed.<br />

If the Mortgage Loans serve as "cover" for <strong>DG</strong> HYP Mortgage Pfandbrief at a percentage<br />

below 60% of the lending value of the underlying residential property or if the Mortgage<br />

Loans are not in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register, third party rights (including,<br />

in the case of hereditary building rights (Erbbaurechte) any ground rent (Erbbauzins))<br />

("Third Party Rights") to the residential property may rank prior to <strong>DG</strong> HYP's mortgages.<br />

As of the Cut-off Date, the aggregate value of prior ranking Third Party Rights to the<br />

residential property, in respect of the entire Reference Portfolio, does not exceed DEM 400<br />

million/€ 204,516,752.48 plus any amounts payable as interest with respect thereto.<br />

A detailed description of the Mortgage Loans is set out in "The Swap Counterparty's<br />

Origination of the Mortgage Loans" and "Servicing and Administration by VR Kreditwerk<br />

AG" below.<br />

<strong>DG</strong> HYP Mortgage The Mortgage Loans and the percentage of the lending value of the residential properties<br />

Pfandbrief Cover Register<br />

securing the Mortgage Loans which serve as cover for <strong>DG</strong> HYP Mortgage Pfandbriefe are<br />

registered in the "<strong>DG</strong> HYP Mortgage Pfandbrief Cover Register". Pfandbriefe are debt<br />

securities issued under German law that must be secured ("covered") by mortgage loans<br />

or obligations of public sector debtors (or certain other qualifying assets) and whose<br />

terms must otherwise comply with the requirements and limitations imposed by the<br />

Mortgage Banking Act. Pfandbriefe are general obligations of the issuing bank, and no<br />

separate corporation or other vehicle is created for their issuance in general or for the<br />

issuance of any specific series of Pfandbriefe.<br />

Only mortgage loans (or a portion thereof) with a loan-to-value ("LTV") ratio (i.e. the principal<br />

amount of a loan expressed as a percentage rate of the "lending value" of the mortgaged<br />

residential property as determined in accordance with the Mortgage Banking Act)<br />

not exceeding 60% qualify for inclusion in the asset pool backing the Pfandbriefe. The<br />

Mortgage Banking Act requires banks issuing Pfandbriefe to keep a register recording the<br />

mortgage loan and the percentage of the lending value of the residential property securing<br />

the mortgage loan which serves as "cover" for the Pfandbriefe. See also "The Collateral –<br />

German Pfandbriefe".<br />

Servicing of Portfolio As of 1st July, 2000 the Swap Counterparty has outsourced to VR Kreditwerk Hamburg-<br />

Schwäbisch Hall AG, a subsidiary of the Swap Counterparty and Bausparkasse<br />

Schwäbisch Hall AG, the administration and servicing of its loans. See "The Servicing and<br />

Administration by VR Kreditwerk AG".<br />

25


Eligibility Criteria On the Cut-off Date, each Mortgage Loan and corresponding Reference Obligation satisfied<br />

the following eligibility criteria (the "Eligibility Criteria" and each as "Eligibility Criterion"):<br />

(i) The Swap Counterparty is the legal and beneficial owner of the outstanding principal<br />

amount of each Reference Obligation.<br />

(ii) Each Mortgage Loan, together with any other security in addition to the security on<br />

residential property (including, without limitation, any other credit support therefor<br />

such as assignment of life insurance or similar financial or savings products), constitutes<br />

a valid, binding and legally enforceable obligation of the Reference Entity and,<br />

as the case may be, any guarantor or other credit support provider.<br />

(iii) No Mortgage Loan has become overdue since 1994 within the meaning of that term<br />

in the internal operational guidelines of the Swap Counterparty.<br />

(iv) Each Mortgage Loan was originated, or transferred to, and booked by or on behalf of<br />

the Swap Counterparty in accordance with its usual origination and booking procedures<br />

for the mortgage loans of that type in effect at the date the Mortgage Loan<br />

was originated or transferred.<br />

(v) Each Reference Obligation is denominated in DEM or euro.<br />

(vi) The aggregate of the principal amounts outstanding under the Reference Obligations<br />

does not exceed DEM 1,968,420,491.34 /€ 1,006,437,416.00.<br />

(vii) No Mortgage Loan exceeds the amount permitted by the German Mortgage Banking<br />

Act (<strong>Hyp</strong>othekenbankgesetz) (the "Mortgage Banking Act").<br />

(viii) No Reference Entity is an employee or executive (Organmitglied) of the Swap<br />

Counterparty.<br />

(ix) No amounts have been written off and no loss provisions have been made by the<br />

Swap Counterparty in respect of any Reference Obligation or Mortgage Loan.<br />

(x) Each Mortgage Loan satisfies the standard requirements of the Swap Counterparty<br />

concerning mortgage loans which include:<br />

(a) A legally binding contract exists between the Swap Counterparty and the<br />

Reference Entity.<br />

(b) The terms of interest as well as the terms of repayment of principal are determined<br />

in the loan contract or the reset confirmation respectively and are in compliance<br />

with the legal form requirements.<br />

(c) The security object is clearly defined through the land register data.<br />

(d) The loan contract includes a security agreement (Sicherungszweckerklärung).<br />

26


(e) The loan contract includes an obligation of the Reference Entity to provide for a mortgage<br />

security to be registered with the land register (grundbuchrechtliche Sicherheit).<br />

(f) The Reference Entity has no right to terminate the loan during the fixed interest period<br />

except for the legally given termination right.<br />

(g) The Swap Counterparty has the contractual right to terminate the loan in case of<br />

non-payment by the Reference Entity.<br />

(xi) All residential property securing the Mortgage Loans is located in the Federal<br />

Republic of Germany.<br />

(xii) Security interests (if any) in favour of parties other than the Swap Counterparty are<br />

fully reflected in the loan to value calculation regarding such Mortgage Loan.<br />

(xiii) No Mortgage Loan has a variable interest rate.<br />

(xiv) The approval dates or oldest reset dates of the Mortgage Loans were between 1st<br />

January, 1991 and 31st March, 2000 (approval) and between 1st January, 1991 and<br />

the Cut-off Date (reset), respectively.<br />

(xv) All Mortgage Loans have been extended for residential purposes (Wohnungsbau) as<br />

defined by the Swap Counterparty.<br />

(xvi) No Mortgage Loan had an original nominal amount in excess of DEM 1.5 million.<br />

(xvii) No Reference Entity is a financial institution or a legal entity (Juristische Person).<br />

Application of Repayments Prior to enforcement of a Mortgage Loan, any principal amounts repaid by the Reference<br />

under the Mortgage Loans<br />

Entity under such Mortgage Loan will be applied first to the portion of such Mortgage<br />

Loan represented by the corresponding Reference Obligation before any amounts are<br />

applied to the portion of the Mortgage Loan, if any, representing "cover" for <strong>DG</strong> HYP<br />

Mortgage Pfandbriefe.<br />

If the payments made by the Reference Entity are insufficient to cover principal, interest,<br />

default interest if any and any administrative costs and expenses incurred by the Swap<br />

Counterparty in connection with the Mortgage Loan, the monies received by the Swap<br />

Counterparty will be applied first to such costs and expenses (including default interest),<br />

then to outstanding interest, and finally to principal of such Mortgage Loan.<br />

After enforcement of the affected Mortgage Loan with a corresponding Reference<br />

Obligation, the Work Out Amount will be applied first to Work Out Expenses, secondly, to<br />

the portions, if any, of any mortgage loans (including the relevant Mortgage Loan) representing<br />

"cover" for <strong>DG</strong> HYP Mortgage Pfandbriefe, if any, and lastly, to the portion of the<br />

Mortgage Loan represented by the corresponding Reference Obligation. Such an application<br />

will result in a loss for the Noteholders of the affected Class or Classes of Notes if<br />

the Work Out Amount is insufficient to cover the sum of (i) the Work Out Expenses, (ii) the<br />

principal balance outstanding of the Mortgage Loan representing cover in the <strong>DG</strong> HYP<br />

Mortgage Pfandbrief Cover Register, if any, and (iii) the principal amount outstanding of<br />

the Reference Obligation.<br />

27


The Repurchase Agreement<br />

Repurchase Agreement On or prior to the Closing Date, the Issuer will enter into a sale and repurchase agreement<br />

with the Repo Counterparty substantially in the form of a 1995 PSA/ISMA Global Master<br />

Repurchase Agreement (the "Repurchase Agreement") pursuant to which the Issuer will,<br />

on the Closing Date, purchase Collateral from the Repo Counterparty with an Initial<br />

Notional Repo Amount equal to the aggregate Initial Principal Balance of all of the Classes<br />

of the Notes.<br />

The Repurchase Agreement provides that the parties thereto intend to enter into individual<br />

repurchase transactions with terms of approximately three months (each, including any<br />

repurchase transaction with a substitute repo counterparty, a "Repo-Transaction"), with<br />

the first such Repo-Transaction commencing on the Closing Date and terminating on the<br />

initial Repurchase Date, and each new Repo-Transaction commencing on the Purchase<br />

Date preceding an Interest Payment Date and terminating on the Repurchase Date following<br />

such Interest Payment Date (each, a "Repo-Transaction Period"). The Repo Counterparty<br />

may elect not to enter into a new Repo-Transaction, in which case the Issuer will<br />

have the right, subject to certain conditions, to enter into a substitute repurchase agreement<br />

with a substitute repo counterparty. If no substitute repurchase agreement with a<br />

substitute repo counterparty is entered into by the Issuer, the Cash Administrator, acting<br />

on behalf of the Issuer, will invest the amounts which would otherwise have been invested<br />

in a new Repo-Transaction in Eligible Investments (as more particularly described below).<br />

Following the first Repo-Transaction on the Closing Date, Repo-Transactions will be effected<br />

only with respect to any amounts required to be balanced on the relevant Repurchase<br />

Date or Purchase Date, respectively. The Repo-Transactions will be executed using a<br />

delivery versus payment mechanism and a real time settlement system. See "The<br />

Repurchase Agreement – Balancing of Excess Amounts and Settlement of Repo<br />

Transactions" below.<br />

"Repurchase Date" means, with respect to an Interest Payment Date, one (1) Business<br />

Day before such Interest Payment Date except that: (i) following the acceleration of the<br />

Notes due to the exercise of the Clean-Up Call, the occurrence of a Tax Redemption Event<br />

or the occurrence of the Final Maturity Date, the Repurchase Date shall be one (1)<br />

Business Day prior to the Final Determination Date and (ii) following the acceleration of the<br />

Notes due to an Event of Default, the Repurchase Date shall be the Final Determination<br />

Date, and "Purchase Date" means, in the case of the first Repo-Transaction, the Closing<br />

Date, and for each subsequent Repo-Transaction the Repurchase Date of the previous<br />

Repo-Transaction except that in respect of the Repurchase Date prior to the Final Determination<br />

Date there will be no Purchase Date.<br />

Notional Repo Amount The notional purchase amount outstanding (the "Notional Repo Amount") will equal<br />

€ 1,006,250,000 for the first Repo-Transaction. For each new Repo-Transaction entered<br />

into thereafter, the Notional Repo Amount will be reduced on the Purchase Date of such<br />

Repo-Transaction by an amount equal to the sum of (i) the Pay-Down Amount and (ii) the<br />

Credit Protection Payment, payable by the Issuer on the Interest Payment Date following<br />

such Purchase Date and (iii) by any amount payable in respect of a redemption in whole or<br />

in part of the Notes. Upon the occurrency an Acceleration Event, the Repurchase<br />

Agreement will be terminated and the Notional Repo Amount will be reduced to zero on the<br />

Final Determination Date.<br />

28


Repurchases Under each Repo-Transaction, the Repo Counterparty will repurchase the Collateral on<br />

the Repurchase Date for the Repurchase Price. From the proceeds of such Repurchase<br />

Price, the Issuer will make all required Credit Protection Payments and payments of principal<br />

in respect of the Notes and will transfer to the Interest Transaction Account an<br />

amount equal to any Repo Interest payable to the Noteholders as part of the interest on<br />

the Notes (See "Sources of Interest") on the next immediately succeeding Interest<br />

Payment Date. The Issuer will then reinvest an amount equal to the Notional Repo Amount<br />

in (i) the purchase of Collateral pursuant to a new Repo-Transaction or (ii) Eligible Investments,<br />

as the case may be.<br />

Purchase Price The "Purchase Price" is the price to be paid by the Issuer to the Repo Counterparty or<br />

any substitute repo counterparty for the purchase of Collateral on any Purchase Date. The<br />

Purchase Price on any Purchase Date will equal the Notional Repo Amount for such<br />

Purchase Date.<br />

Repurchase Price The "Repurchase Price" is the price to be paid by the Repo Counterparty or any substitute<br />

repo counterparty to the Issuer for the repurchase of Collateral on any Repurchase<br />

Date. The Repurchase Price on any Repurchase Date will be equal to the Purchase Price<br />

paid on the previous Purchase Date plus Repo Interest.<br />

Repo Interest On each Repurchase Date the Repo Counterparty or any substitute repo counterparty will<br />

pay the Issuer interest in arrears at the Repo Rate on the Notional Repo Amount outstanding<br />

at the previous Purchase Date on the basis of the actual number of days elapsed<br />

in the relevant Repo-Transaction Period divided by 360 (Actual / 360).<br />

Repo Rate For the first Repo-Transaction the rate of interest to be paid on the Notional Repo Amount<br />

(the "Repo Rate") was fixed two TARGET Business Days before the Closing Date. For<br />

each new Repo-Transaction, the new Repo Rate will be agreed by the Issuer and the Repo<br />

Counterparty, or any substitute repo counterparty, one TARGET Business Day before the<br />

Purchase Date under such Repo-Transaction.<br />

Mark-to-Market On each Business Day on which a Repo-Transaction is in effect, the Repo Calculation<br />

Agent will monitor the aggregate market value of the Collateral in accordance with the<br />

market value calculation procedure set forth in the Repurchase Agreement (the<br />

"Collateral Value") and determine, by reference to certain overcollateralisation tables provided<br />

by the Rating Agencies to the Repo Calculation Agent, the required value of the<br />

Collateral for such Repo-Transaction (the "Required Collateral Value"). The Required<br />

Collateral Value in respect of a Repo-Transaction will in no event be less than 102.8 per<br />

cent. of the aggregate Principal Balance of all the Classes of Notes or of the Principal<br />

Amount Outstanding, plus the Repo Interest due on the Repurchase Date under such<br />

Repo-Transaction.<br />

If, on any Business Day on which a Repo-Transaction is in effect, the Repo Calculation<br />

Agent determines that the Collateral Value is less than the Required Collateral Value for<br />

such Repo-Transaction, it will notify the Issuer and the Repo Counterparty or the substitute<br />

repo counterparty and the Repo Counterparty or the substitute repo counterparty will<br />

deliver to the Issuer Collateral with a market value equal to the amount of such deficiency (the<br />

"Margin Deficit").<br />

29


If, on any Business Day on which a Repo-Transaction is in effect, the Repo Calculation<br />

Agent determines that the Collateral Value exceeds the Required Collateral Value for such<br />

Repo-Transaction, it will notify the Issuer and the Repo Counterparty or the substitute<br />

repo counterparty and the Issuer will deliver to the Repo Counterparty or the substitute<br />

repo counterparty Collateral with a market value equal to the amount of such surplus (the<br />

"Margin Surplus").<br />

If due to regulatory changes the Required Collateral Value must be increased, the Repo<br />

Calculation Agent will adjust the Required Collateral Value accordingly, and will determine the<br />

occurrence of any Margin Deficit or Margin Surplus on the basis of the amended Required<br />

Collateral Value.<br />

Income on Collateral The Issuer will pay to the Repo Counterparty, no later than the first Business Day following<br />

receipt, all income received by the Issuer in respect of the Collateral, provided the Issuer<br />

will not make any such payment to the extent a Margin Deficit would arise or be increased as<br />

a result of such payment.<br />

Acceleration Events<br />

and Termination of<br />

Repurchase Agreement<br />

Substitution of Repo<br />

Counterparty<br />

The Repurchase Agreement provides for limited acceleration events (each an<br />

"Acceleration Event"), which consist of (i) the occurrence of an Event of Default under the<br />

Notes, (ii) any payment or delivery default by the Issuer or the Repo Counterparty if such<br />

failure is not remedied within two Business Days, or (iii) the occurrence of certain insolvency<br />

or bankruptcy related events occurring in relation to either of them. An Acceleration<br />

Event will constitute an Event of Default under the Notes (see "Events of Default under the<br />

Notes") unless (i) such Acceleration Event was caused by a payment or delivery default<br />

by, or an insolvency or bankruptcy related event in relation to, the Repo Counterparty and<br />

(ii) the Issuer enters into a substitute repurchase agreement with a substitute repo counterparty,<br />

the terms of which are substantially identical to the terms of the Repurchase<br />

Agreement or the Cash Administrator, acting on behalf of the Issuer, invests the proceeds<br />

from the sale of the Collateral in Eligible Investments.<br />

If a Repo-Transaction is in effect on the Repurchase Date on or prior to the Final Determination<br />

Date, the Repo Counterparty will repurchase the Collateral from the Issuer on the<br />

Repurchase Date or, in case of an Event of Default, on the Final Determination Date and<br />

the Issuer will use proceeds of such sale to redeem the Notes and to pay Credit Protection<br />

Payments to the Swap Counterparty on the Distribution Date and, if applicable, the Final<br />

Distribution Date, and the Issuer will not enter into any further Repo-Transactions.<br />

The Repo Counterparty may, upon prior notice to the Issuer and the Security Trustee and<br />

subject to the satisfaction of certain conditions, substitute a subsidiary or affiliate as the<br />

Repo Counterparty under the Repurchase Agreement. Such conditions include (i) the delivery<br />

by the Repo Counterparty to the Issuer and Security Trustee of an opinion of counsel<br />

acceptable to the Issuer and the Security Trustee stating that (a) payments made under<br />

the Repurchase Agreement would not be subject to any withholding tax and (b) no entity<br />

level tax will be imposed on the Issuer in the jurisdiction in which the substitute subsidiary or<br />

affiliate is located and (ii) the receipt by the Repo Counterparty, the Issuer and the Security<br />

Trustee of written confirmation from each of the Rating Agencies that the ratings then<br />

assigned to the Notes will not be adversely affected thereby.<br />

30


If, on any Repurchase Date, the Repo Counterparty elects not to enter into a new Repo-<br />

Transaction, the Issuer may, upon prior written approval by the Swap Counterparty, the<br />

Security Trustee, the Cash Administrator and prior written confirmation from each of the<br />

Rating Agencies that the ratings then assigned to the Notes are not adversely affected<br />

thereby, enter into a substitute repurchase agreement with a substitute repo counterparty on<br />

terms substantially identical to the Repurchase Agreement.<br />

Eligible Investments in lieu If the Repo Counterparty elects not to enter into a new Repo-Transaction or the<br />

of new Repo-Transaction<br />

Repurchase Agreement is terminated due to an Acceleration Event thereunder, and no<br />

substitute repurchase agreement on terms substantially identical to the Repurchase<br />

Agreement is entered into by the Issuer, the Cash Administrator, acting on behalf of the<br />

Issuer, will invest in Eligible Investments the amounts which would otherwise have been<br />

invested in a new Repo-Transaction. "Eligible Investments" means any investment in<br />

eligible instruments (as described below) including, but not limited to, Collateral, provided<br />

that the eligible instruments mature during the Collection Period in which such instruments<br />

are purchased. The following order of priority will apply:<br />

Cash Administrator,<br />

Swap Calculation Agent,<br />

Note Calculation Agent<br />

and Repo Calculation<br />

Agent<br />

(i) floating rate <strong>DG</strong> HYP Pfandbriefe provided that <strong>DG</strong> HYP is acting as Custodian and<br />

provided <strong>DG</strong> HYP is rated A1+ by Standard & Poor's and F1+ by Fitch or provides an<br />

equivalent account guarantee following prior written confirmation by the Rating<br />

Agencies that the then current ratings of the Notes are not affected thereby;<br />

(ii) securities rated at least A1+ or AAA by Standard & Poor's and at least F1+ or AAA<br />

by Fitch with a risk weighting of 0% under the German capital adequacy regime<br />

(Grundsatz I);<br />

(iii) a cash deposit with <strong>DG</strong> HYP, provided <strong>DG</strong> HYP is acting as Account Bank and provided<br />

<strong>DG</strong> HYP is rated at least A1+ by Standard & Poor's and F1+ by Fitch or provides an<br />

equivalent account guarantee following prior written confirmation by the Rating<br />

Agencies that the then current ratings of the Notes are not affected thereby; or<br />

(iv) a guaranteed investment contract entered into with <strong>DG</strong> HYP provided that <strong>DG</strong> HYP is<br />

rated at least A1+ by Standard & Poor's and F1+ by Fitch following prior written confirmation<br />

by the Rating Agencies that the then current ratings of the Notes are not<br />

affected thereby.<br />

The Cash Administration Agreement<br />

On or prior to the Closing Date the Issuer, the Cash Administrator, the Swap Calculation<br />

Agent, the Note Calculation Agent, the Repo Calculation Agent, the Security Trustee and<br />

the Swap Counterparty will enter into a cash administration agreement (the "Cash<br />

Administration Agreement"), pursuant to which the Issuer will appoint the Cash<br />

Administrator to be its agent to provide certain services including but not limited to the<br />

making of payments on behalf of the Issuer and the deposit of funds in the accounts of<br />

the Issuer. The Cash Administrator will also direct the Custodian to transfer and accept<br />

Collateral for deposit on behalf of the Issuer and to transfer interest on Collateral to the<br />

Collateral Interest Account on behalf of the Issuer.<br />

31


The Issuer will also appoint:<br />

(i) the Note Calculation Agent to determine the Principal Amount Outstanding and all<br />

other calculations in respect of the Notes, including but not limited to the amounts to<br />

be paid to the Noteholders;<br />

(ii) the Swap Calculation Agent to calculate the Notional Swap Amount and all payments<br />

to be made between the Swap Counterparty and the Issuer including but not limited<br />

to the Swap Premium and each Credit Protection Payment under the Credit Default<br />

Swap Agreement; and<br />

(iii) the Repo Calculation Agent to calculate the Notional Repo Amount and all payments<br />

to be made between the Repo Counterparty and the Issuer, including, but not limited<br />

to the Purchase Price, the Repurchase Price and Repo Interest under the Repurchase<br />

Agreement. The Repo Calculation Agent will also be responsible for monitoring the<br />

Collateral Value and calculating any Margin Deficit or Margin Surplus on a daily basis<br />

in accordance with the terms of the Repurchase Agreement.<br />

The Account and Security Structure<br />

Custody Agreement On or prior to the Closing Date, the Issuer, the Custodian, the Security Trustee and the<br />

Cash Administrator will enter into a custody agreement (the "Custody Agreement").<br />

Pursuant to the Custody Agreement, the Issuer will open and maintain in its name a collateral<br />

deposit account (the "Collateral Deposit Account"), to which will be credited the<br />

Collateral purchased by the Issuer under the Repurchase Agreement or Eligible<br />

Investments (in the form of securities), as the case may be.<br />

Account Bank Agreement On or prior to the Closing Date, the Issuer, the Account Bank, the Cash Administrator and<br />

the Security Trustee will enter into an account bank agreement (the "Account Bank<br />

Agreement"), pursuant to which the Issuer will open and maintain in its name:<br />

Transaction Account<br />

Bank Agreement<br />

(i) a principal collection account to which will be credited the net proceeds of the Notes,<br />

the Repurchase Price under each Repo-Transaction on each Repurchase Date and<br />

any Eligible Investments (in the form of cash) (the "Principal Collection Account"); and<br />

(ii) a collateral interest account to which will be credited the income accruing on the<br />

Collateral (other than Repo Interest) (the "Collateral Interest Account").<br />

The Collateral purchased by the Issuer under the Repurchase Agreement or any substitute<br />

repurchase agreement from time to time will be transferred by the Repo Counterparty or<br />

the substitute repo counterparty to the sub-account of the Custodian held with<br />

Clearstream Germany and credited to the Collateral Deposit Account. On each<br />

Repurchase Date, the Issuer will transfer the Collateral to the Repo Counterparty or the<br />

substitute repo counterparty against payment of the Repurchase Price, which will be<br />

credited to the Principal Collection Account.<br />

On or prior to the Closing Date, the Issuer, the Transaction Account Bank, the Security<br />

Trustee and the Cash Administrator will enter into a transaction account bank agreement<br />

32


(the "Transaction Account Bank Agreement"). Pursuant to the Transaction Account Bank<br />

Agreement, the Issuer will open and maintain in its name a principal transaction account<br />

(the "Principal Transaction Account"), to which the Cash Administrator will transfer from<br />

the Principal Collection Account an amount equal to the principal payable on the Notes<br />

on each Interest Payment Date and an interest transaction account (the "Interest<br />

Transaction Account" and together with the Principal Transaction Account, the<br />

"Transaction Accounts"), to which the Cash Administrator will transfer from the Principal<br />

Collection Account and from the other sources available to pay interest, including income<br />

on Eligible Investments, an amount equal to the interest payable on the Notes and any<br />

Expense Payments.<br />

Security Structure Pursuant to the German Swap Counterparty Pledge Agreement, the German Repo<br />

Counterparty Pledge Agreement, the German Subordinated Pledge and Security<br />

Agreement, the German Trust Agreement and the English Deed of Assignment (together,<br />

the "Security Documents"), the Issuer has created various security interests (the<br />

"Security Interests") over certain security assets (the "Security Assets") in favour of the<br />

Swap Counterparty, the Repo Counterparty and the Transaction Secured Creditors, a<br />

detailed description of which is set out in the section "Security and Account Structure"<br />

below. The obligations of the Issuer under the Notes, in favour of the Service Providers<br />

under the Transaction Documents and in favour of the Security Trustee will be secured by<br />

security interests (the "Transaction Security Interests") granted by the Issuer in favour of<br />

the Security Trustee (for the benefit of the Noteholders, the Service Providers and the<br />

Security Trustee itself (together the "Transaction Secured Creditors")). The Transaction<br />

Security Interests will consist of: (i) an assignment by way of security, under English law,<br />

over the Issuer's right, title, interest and benefit, present and future, in, to and under the<br />

Credit Default Swap Agreement, the Repurchase Agreement, the Transaction Account<br />

Bank Agreement (including certain other ancillary rights and claims) and the Corporate<br />

Administration Agreement, pursuant to the English Deed of Assignment; (ii) a subordinated<br />

pledge, under German law, over the Collateral (excluding the right to demand payment<br />

of any present and future income accruing on the Collateral) or Eligible Investments (in the<br />

form of securities) (excluding the right to demand payment of any present and future income<br />

accruing on Eligible Investments) credited to the Collateral Deposit Account and of the<br />

Issuer's right to demand payment of any present and future balance standing to the credit<br />

of each of the Principal Collection Account and the Collateral Interest Account, pursuant<br />

to the German Subordinated Pledge and Security Agreement; (iii) an assignment by<br />

way of security, under German law, of the Issuer's present or future, actual or contingent<br />

rights and claims under the Cash Administration Agreement, the Agency Agreement and<br />

the Custody Agreement (including, but not limited to, the right to demand payment of any<br />

present and future income accruing on any Eligible Investments and excluding the right to<br />

demand payment of any present and future income accruing on the Collateral and the<br />

rights to any Eligible Investments (in the form of securities) or the Collateral itself), pursuant<br />

to the German Subordinated Pledge and Security Agreement. The Transaction<br />

Security Interests referred to under (ii) above will be junior and subordinate to (i) a first<br />

priority pledge in favour of the Swap Counterparty over the Collateral or Eligible<br />

Investments (in the form of securities) (excluding any present and future income accruing<br />

on either Collateral or Eligible Investments) and over the Issuer's right to demand payment<br />

of any present and future credit balance on the Principal Collection Account in each case<br />

created pursuant to the German Swap Counterparty Pledge Agreement, and (ii) a first<br />

priority pledge in favour of the Repo Counterparty over the Issuer's right to demand pay-<br />

33


ment of any present and future credit balance on the Collateral Interest Account created<br />

pursuant to the German Repo Counterparty Pledge Agreement.<br />

Upon the occurrence of a Termination Event under the Credit Default Swap Agreement, the<br />

Swap Counterparty may enforce the <strong>DG</strong> HYP Secured Obligations by realising the pledge<br />

over the Collateral or the Eligible Investments (in the form of securities), as the case may<br />

be, and the Principal Collection Account. Upon the occurrence of an Acceleration Event<br />

under the Repurchase Agreement, the Repo Counterparty may enforce its right to demand<br />

payment of any income accruing on the Collateral by realising the pledge over the<br />

Collateral Interest Account and demanding from the Custodian payment of any income<br />

accrued on the Collateral standing to the credit of the Collateral Deposit Account.<br />

In the event of an acceleration of the Notes following the occurrence of an Event of<br />

Default, the Security Trustee is required to give notice (the "Enforcement Notice") to the<br />

Issuer and to the Noteholders in accordance with the Conditions. Upon receipt of the<br />

Enforcement Notice by the Issuer, the Security Trustee may, and upon request by one or<br />

more of the Noteholders shall, enforce the Transaction Security Interests. However, the right<br />

of the Security Trustee to enforce the Transaction Security Interests will be subordinated<br />

to (i) the right of the Swap Counterparty to enforce the Security Interests created in favour<br />

of the Swap Counterparty under the German Swap Counterparty Pledge Agreement, and<br />

(ii) the right of the Repo Counterparty to enforce the first priority pledge over the Issuer’s<br />

right to demand payment of any present and future credit balance on the Collateral<br />

Interest Account created in favour of the Repo Counterparty under the German Repo<br />

Counterparty Pledge Agreement.<br />

In the event that the Transaction Security Interests are enforced and the proceeds of<br />

such enforcement are insufficient, after payment of all other claims ranking in priority,<br />

to pay in full any amounts whatsoever due to any Transaction Secured Creditor or<br />

Transaction Secured Creditors then such Transaction Secured Creditor or Transaction<br />

Secured Creditors shall have no further claim against the Security Trustee or the Issuer<br />

in respect of any such unpaid amounts.<br />

Listing, Governing Law and Jurisdiction<br />

Listing Application will be made for the Notes to be traded and officially quoted on the Frankfurt<br />

Stock Exchange and the Luxembourg Stock Exchange.<br />

German Law The Notes, the Agency Agreement, the Account Bank Agreement, the Custody<br />

Agreement, the Cash Administration Agreement, the Data Protection Agreement, the<br />

German Swap Counterparty Pledge Agreement, the German Repo Counterparty Pledge<br />

Agreement, the German Subordinated Pledge and Security Agreement and the German<br />

Trust Agreement will be governed by, and will be construed in accordance with, German<br />

law. The Issuer will submit to the exclusive jurisdiction of the courts in Frankfurt am Main,<br />

Germany in connection with the Notes and each of such agreements.<br />

English Law The Credit Default Swap Agreement, the Repurchase Agreement, the Transaction Account<br />

Bank Agreement, the Corporate Administration Agreement and the English Deed of<br />

Assignment will be governed by, and will be construed in accordance with, English law.<br />

The Issuer will submit to the non-exclusive jurisdiction of the English courts in connection<br />

with such deed and each of such agreements.<br />

34


USE OF PROCEEDS<br />

The aggregate net proceeds of the issue of the Notes will be € 1,003,250,000 and this sum will be applied by the<br />

Issuer to purchase Collateral in the form of floating rate public sector <strong>DG</strong> HYP Pfandbriefe from the Repo<br />

Counterparty.<br />

35


INVESTMENT CONSIDERATIONS<br />

The following is a summary of certain aspects of the Notes and the security therefor about which prospective<br />

Noteholders should be aware. This summary is not intended to be exhaustive, and prospective Noteholders should<br />

also read the detailed information set out elsewhere in this <strong>Offering</strong> Circular.<br />

Liability under the Notes<br />

The Notes will be obligations solely of the Issuer and will not be guaranteed by, or be the responsibility of, any<br />

other entity. In particular, the Notes will not be obligations or responsibilities of, or guaranteed by, the Manager,<br />

the Security Trustee, the Paying Agents, the Cash Administrator, the Note Calculation Agent, the Swap<br />

Calculation Agent, the Repo Calculation Agent, the Custodian, the Account Bank, the Transaction Account Bank,<br />

the Data Trustee, the Independent Auditor or the Independent Valuation Expert, the Swap Counterparty or the<br />

Repo Counterparty.<br />

Credit Exposure to Reference Obligations<br />

As described in "The Credit Default Swap Agreement", the obligation of the Issuer to make payments to the Swap<br />

Counterparty under the Credit Default Swap Agreement creates an exposure to the credit default risk of a pre-defined<br />

pool of Reference Obligations, and exposes the Noteholders to the creditworthiness of the Reference Entities to the<br />

full extent of their investment in the Notes. The amount payable in respect of principal on the Notes depends upon<br />

whether, and to what extent, the Issuer is obliged to make Credit Protection Payments to the Swap Counterparty<br />

under the Credit Default Swap Agreement. On each Interest Payment Date on which a Credit Protection Payment is<br />

to be made, the Principal Amount Outstanding will be written down as a result of such Credit Protection Payment.<br />

Any such reduction will lead to a loss for the holders of the affected Class or Classes of Notes, commencing with the<br />

most junior Class of Notes and progressing to the next senior Class of Notes, with the Class A1 Notes and the Class<br />

A2 Notes being reduced on a pro rata basis, without any commensurate repayment of principal being made to the<br />

Noteholders of the affected Class or Classes.<br />

Priority of Payments<br />

Interest payments in respect of a Class of Notes will not be made until payments of all interest due in respect of all<br />

more senior Classes of Notes are made. Thus the rights to receive interest payments, (i) of the holders of the Class<br />

D Notes are subordinate to the rights of the holders of the Class A Notes, the Class B Notes and the Class C Notes<br />

to receive interest payments, (ii) of the holders of the Class C Notes are subordinate to the rights of the holders of the<br />

Class B Notes and the Class A Notes to receive interest payments, (iii) of the holders of the Class B Notes are subordinate<br />

to the rights of the holders of the Class A Notes to receive interest payments and (iv) of the holders of the<br />

Class A Notes are senior to the rights of the holders of all other Classes of Notes to receive interest payments.<br />

Repayments of principal in respect of a Class of Notes will not be made until repayments of all principal due in respect<br />

of all more senior Classes of Notes are made. Thus, prior to the enforcement of the Transaction Security Interests,<br />

the rights to receive repayments of principal, (i) of the holders of the Class D Notes are subordinate to the rights of<br />

the holders of the Class A Notes, the Class B Notes and the Class C Notes to receive repayments of principal, (ii) of<br />

the holders of the Class C Notes are subordinate to the rights of the holders of the Class B Notes and the Class A<br />

Notes to receive repayments of principal, (iii) of the holders of the Class B Notes are subordinate to the rights of the<br />

holders of the Class A Notes to receive repayments of principal, (iv) of the holders of the Class A2 Notes are subordinate<br />

to the rights of the holders of the Class A1 Notes to receive repayments of principal and (v) of the holders of<br />

the Class A1 Notes are senior to the rights of the holders of all other Classes of Notes to receive repayments of principal.<br />

Following the enforcement of the Transaction Security Interests, repayments of principal shall continue to be<br />

36


made in the order of priority set forth above except that repayments of principal in respect of the Class A1 Notes and<br />

the Class A2 Notes shall be made on a pro rata basis.<br />

Upon the occurrence of an Early Redemption Event each Note of each Class of Notes will bear interest on its Note<br />

Principal Amount until the Notes are redeemed on the Distribution Date or on the Final Distribution Date, as the case<br />

may be. In case of an Early Redemption Event due to the exercise of the Clean-Up Call, the occurrence of a Tax<br />

Redemption Event or the occurrence of the Final Maturity Date, the interest payments on each Note on such dates<br />

will be funded by payments of Swap Premium to be made by the Swap Counterparty pursuant to the terms of the<br />

Credit Default Swap Agreement. In the case of an Early Redemption Event due to an Event of Default under the Notes,<br />

the Swap Counterparty will not be required to make any further payments in respect of the Swap Premium.<br />

In case of an Early Redemption Event due to the occurrence of an Event of Default under the Notes, the Transaction<br />

Security Interests shall immediately become enforceable. In the event that the Transaction Security Interests are<br />

enforced, the payments of interest and repayments of principal on each Note will be funded by Available Distribution<br />

Funds in accordance with the Post-Enforcement Priority of Payments as set out in Clause 15.3 of the German Trust<br />

Agreement. If the Available Distribution Funds are insufficient to cover all payments of interest and repayments of<br />

principal to be made on the Distribution Date and on the Final Distribution Date, this will result in a shortfall of payments<br />

of interest or repayments of principal in respect of the subordinated Classes of Notes, beginning with the most<br />

junior Class of Notes and progressing to the next senior Class of Notes, and in a corresponding loss for the<br />

Noteholders of the affected Class or Classes of Notes.<br />

<strong>Limited</strong> Recourse and Subordinated Security Interests<br />

The Notes are limited recourse obligations of the Issuer. The Noteholders must rely solely on (i) payments under the<br />

Repurchase Agreement (including any substitute repurchase agreement, as the case may be) or proceeds from<br />

Eligible Investments, subject to the payment of Credit Protection Payments from such sources, for the repayment of<br />

principal on the Notes, (ii) payment of the Swap Premium by the Swap Counterparty and Repo Interest by the Repo<br />

Counterparty or income on Eligible Investments for interest payments on the Notes and (iii) the enforcement of the<br />

Security Interests in the Security Assets for the repayment of the principal and payment of interest on the Notes.<br />

Moreover, the Transaction Security Interests are subordinate to the Security Interests of the Swap Counterparty in<br />

connection with Credit Protection Payments and the Repo Counterparty in connection with the Issuer's obligation to<br />

transfer income accrued on the Collateral to the Repo Counterparty, and accordingly, the right of the Security Trustee<br />

to enforce the Transaction Security Interests will be subordinated to the Security Interests of the Swap Counterparty<br />

and the Security Interests of the Repo-Counterparty. Consequently, the Security Trustee will not be entitled to enforce the<br />

Security Interests created under the German Subordinated Pledge and Security Agreement (i) in respect of the<br />

Collateral (excluding the right to demand payment of income thereon) or Eligible Investments (in the form of securities)<br />

(excluding the right to demand payment of income thereon), as the case may be, and the Principal Collection Account<br />

until the <strong>DG</strong> HYP Secured Obligations have been fully and finally satisfied and (ii) in respect of the Collateral Interest<br />

Account, until the obligation of the Issuer to pay to the Repo Counterparty any income accruing on the Collateral<br />

credited to the Collateral Deposit Account has been fully and finally satisfied.<br />

No assurance can be made that the proceeds available for and allocated to the repayment of any particular Class of<br />

Notes at any particular time will be sufficient to cover all amounts that would otherwise be due and payable in respect<br />

of such Class of Notes. If proceeds received by the Issuer or the Security Trustee for the benefit of the Noteholders<br />

are insufficient to make payments on the Notes, no other assets will be available for payment of the deficiency, and<br />

following liquidation of the available assets, the obligation of the Issuer to pay such deficiency will be extinguished.<br />

37


No Legal or Security Interest in Reference Obligations<br />

The Credit Default Swap Agreement does not constitute a purchase or other acquisition or assignment of any interest in<br />

any Mortgage Loan or any other obligation of any Reference Entity. Consequently, the Issuer and the Security Trustee<br />

will have a contractual relationship with, and rights solely against, the Swap Counterparty and will have no contractual<br />

relationship with, or recourse against, any Reference Entity. None of the Issuer, the Security Trustee or the<br />

Noteholders will have any rights to acquire from the Swap Counterparty (or to require the Swap Counterparty to transfer,<br />

assign or otherwise dispose of) any interest in any Mortgage Loan or any other obligation of any Reference Entity,<br />

notwithstanding the payment by the Issuer of a Credit Protection Payment to the Swap Counterparty with respect to<br />

such Reference Entity. Moreover, the Swap Counterparty will not be required to grant to the Issuer or the Security<br />

Trustee any security interest in any such Mortgage Loan or other obligation.<br />

Yield Considerations<br />

The yield to maturity of the Notes will be mainly affected by the Issuer's obligation to make repayments of principal<br />

on the Notes whenever (i) Reference Entities make repayments (or prepayments) of principal on the Mortgage Loans,<br />

(ii) Work Out Proceeds are recovered, (iii) one or more Reference Obligations are removed from the Reference<br />

Portfolio due to non-compliance of such Reference Obligation with respect to the applicable Eligibility Criteria as of<br />

the Cut-off Date, and for not having been substituted in compliance with the conditions to substitution or (iv) the<br />

Notes are redeemed, and will depend on other factors, such as the level of EURIBOR and the purchase price of the<br />

Notes.<br />

With regard to (i) and (ii) above, the rate of distributions of principal and the yield to maturity on the Notes therefore<br />

will be related directly to the rate of repayments of principal on the Mortgage Loans and the amount and timing of<br />

the occurrence of Credit Events in relation to Reference Obligations resulting in Write-off Amounts. Generally,<br />

Reference Entities may not prepay the Mortgage Loans without indemnifying the Swap Counterparty for costs incurred<br />

in relation to such prepayment. On certain pre-determined reset dates, however, Reference Entities are permitted to<br />

prepay the Mortgage Loans without any additional costs. As a result, prepayments are more likely to occur at the<br />

applicable reset date than on any other date. Prepayments on the Mortgage Loans may result in an actual yield that<br />

is lower than the expected yield.<br />

In general, the rate of repayments of principal (including prepayments) on mortgage loans is influenced by a variety<br />

of economic, geographic, social, demographic, tax, legal and other factors including, inter alios, changes in borrowers'<br />

housing needs, borrowers' job transfers, unemployment trends, mortgage market interest rates, changes in the value<br />

of the relevant properties and servicing decisions. Moreover, if prevailing interest rates for similar mortgage loans fall<br />

below the rate of interest on the Mortgage Loans, the rate of prepayment will generally be expected to increase.<br />

Conversely, if interest rates on similar mortgage loans rise above the rate of interest on the Mortgage Loans, the rate<br />

of prepayment will generally be expected to decrease.<br />

Subordinated Nature of the Reference Obligations<br />

If a Credit Event occurs in relation to a Mortgage Loan with a corresponding Reference Obligation, and if such Credit<br />

Event is not cured before the related Work Out Amount has been transferred to the Swap Counterparty, the Swap<br />

Counterparty may enforce the security over the underlying residential property by way of foreclosure<br />

(Zwangsversteigerung). Alternatively, the affected Mortgage Loan may be terminated and, if the Reference Entity so<br />

elects, the amounts outstanding of the relevant Mortgage Loan may be repaid or prepaid, or upon receipt by the<br />

Swap Counterparty of an offer to buy the affected Mortgage Loan, the Swap Counterparty may sell and transfer such<br />

Mortgage Loan including the corresponding Reference Obligation, or any claim thereunder, to the offeror.<br />

38


Work Out methods and terms will be established by the Swap Counterparty on a case-by-case basis. To the extent the<br />

Swap Counterparty has a choice between the Work Out methods, it will use its discretion to select in good faith the<br />

Work Out method which it deems will provide for the greatest recovery of proceeds. However, none of the Issuer, the<br />

Security Trustee or the Noteholders will have any right to demand that the Issuer chooses a certain Work Out method.<br />

The Work Out Amount transferred to the Swap Counterparty as a result of a Work Out will be net of prior ranking rights<br />

to the related residential property in favour of third parties, plus accrued but unpaid interest thereon, and of any<br />

amounts equal to other claims which according to the Law on Compulsory Sale and Administration (Gesetz über die<br />

Zwangsversteigerung und Zwangsverwaltung) rank prior to the real rights (Realrechte) securing such Mortgage Loan.<br />

The Work Out Amount will be applied, first, in or towards payment of the Work Out Expenses, secondly, in or towards the<br />

portion of the Mortgage Loan representing "cover" in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register, and thirdly,<br />

in or towards the portion of the Mortgage Loan represented by the corresponding Reference Obligation. Such an<br />

application will result in a loss for the Noteholders of the affected Class or Classes of Notes if the Work Out Amount<br />

is insufficient to cover the sum of (i) the Work Out Expenses (ii) the principal amount outstanding of the Mortgage<br />

Loan representing cover in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register, and (iii) the principal amount outstanding<br />

of the Reference Obligation.<br />

Also, Third Party Rights to the residential property may rank prior to <strong>DG</strong> HYP’s mortgages. The aggregate value of<br />

prior ranking Third Party Rights to the residential property, in respect of the entire Reference Portfolio, amounts to<br />

not more than DEM 400 million/€ 204,516,752.48 as at the Cut-off Date plus any amounts payable as interest with<br />

respect thereto.<br />

Investors should also note that more than one mortgage loan granted by <strong>DG</strong> HYP may be secured by the same<br />

residential property.<br />

Geographical Concentration of the Mortgage Loans<br />

If the Reference Entities are concentrated in certain locations, such as densely populated areas, and if the overall<br />

economic conditions in such areas deteriorate, the number and amount of losses in respect of the Reference<br />

Obligations might increase. The real properties underlying the Mortgage Loans are of residential nature located<br />

throughout the Federal Republic of Germany (see "The Swap Counterparty's Origination of the Mortgage Loans –<br />

the Properties Charged"). There can be no assurance, however, that the economic conditions in areas in which a certain<br />

concentration might take place will not deteriorate and, as a consequence, lead to an increase in the number and<br />

amount of losses in respect of the Reference Obligations. A concentration of the residential properties in such areas<br />

may therefore result in a greater risk of loss than if such concentration had not been present. Any increase in the number<br />

and amount of losses in respect of the Reference Obligations will likely result in an increase in the number of Credit<br />

Protection Payments to be made to the Swap Counterparty. An increase in the number of Credit Protection Payments<br />

will reduce the amounts available for principal payments in respect of the Notes, which will result in the writing down<br />

of the Principal Balance of the most junior Class of Notes outstanding at that time, and will progress to the next senior<br />

Class of Notes, with the Class A1 Notes and the Class A2 Notes being reduced on a pro rata basis.<br />

Reliance on Loan Servicing and Foreclosure<br />

The Swap Counterparty has outsourced the administration and servicing of the Mortgage Loans to VR Kreditwerk AG.<br />

See "Servicing and Administration by VR Kreditwerk AG". VR Kreditwerk AG has undertaken to extend, monitor, service<br />

and otherwise administer the Mortgage Loans in the Reference Portfolio in accordance with its loan servicing procedures<br />

from time to time in effect, which are applied to loans generally and to Mortgage Loans in the Reference<br />

Portfolio in particular. Noteholders must rely on the adequacy of such servicing and enforcement procedures. If a<br />

Credit Event occurs, the Swap Counterparty will conduct any Work Out of the affected Mortgage Loan. To the extent<br />

39


it has a choice between the Work Out methods, the Swap Counterparty will use its discretion in selecting the Work Out<br />

method it deems most likely to result in the greatest recovery of proceeds. Although the Swap Counterparty has<br />

undertaken to make such selection in good faith, Noteholders nonetheless must rely on the Swap Counterparty's<br />

judgment that the selected Work Out method is the most effective. Neither the Issuer, the Security Trustee nor the<br />

Noteholders have any right to compel the Swap Counterparty to select a particular Work Out method. See "Servicing<br />

and Administration by VR Kreditwerk AG".<br />

In undertaking a Work-Out to determine the amount of a Credit Protection Payment, the Swap Counterparty will<br />

employ its standard work-out procedures as set forth in "Servicing and Administration by VR Kreditwerk AG –<br />

Arrears, Defaults and Enforcement Procedures". The Swap Counterparty is under no obligation to account to the<br />

Issuer or Noteholders for any amount it may subsequently recover with respect to a Reference Obligation for which<br />

it already has received a Credit Protection Payment.<br />

No Investigations<br />

No investigations, searches or other enquiries have been made by or on behalf of the Issuer or the Security Trustee<br />

in respect of any Reference Entity, Reference Obligation, Mortgage Loan or the Collateral and no representations or<br />

warranties have been given by the Issuer or the Security Trustee in respect thereof. Prospective Noteholders should<br />

obtain their own legal, financial, accounting, tax and other relevant advice as to the structure and viability of their<br />

prospective investment in the Notes.<br />

<strong>Limited</strong> Provision of Information about Reference Entities<br />

Due to certain German bank secrecy standards and data protection laws, none of the Issuer, the Security Trustee or<br />

the Noteholders will have the right to know the identities of the Reference Entities, or to inspect the records of the<br />

Swap Counterparty. The Swap Counterparty will be under no obligation to disclose any further information or evidence<br />

regarding the existence or terms of any obligation of any Reference Entity or any matters arising in relation thereto or<br />

otherwise regarding any Reference Entity, any guarantor or any other person. Noteholders must therefore rely on the<br />

Independent Auditor appointed by the Issuer to (i) ascertain that any Reference Obligations in respect of which the<br />

Swap Counterparty has declared a Credit Event and in respect of which a Work Out has been completed constitutes<br />

part of the Reference Portfolio, (ii) ensure that such Reference Obligations complied with the applicable Eligibility<br />

Criteria as of the Cut-Off Date, (iii) ensure that each substituted Reference Entity was substituted in compliance with<br />

the conditions to substitution set out in the Credit Default Swap Agreement and (iv) verify that Work Out Proceeds<br />

and Write-off Amounts have been calculated correctly. See "The Credit Default Swap Agreement" and "The Data<br />

Protection Agreement".<br />

Reliance on Creditworthiness of Swap Counterparty and Repo Counterparty<br />

The ability of the Issuer to meet its interest obligations under the Notes will depend on the timely receipt by the Issuer of<br />

payments from the Swap Counterparty under the Credit Default Swap Agreement. Consequently, in respect of interest<br />

payable to the Noteholders on an Interest Payment Date other than a Swap Payment Date the Issuer is relying on the<br />

creditworthiness of the Swap Counterparty in respect of its obligation to pay the Swap Premium under the Credit<br />

Default Swap Agreement. In respect of the obligation of the Repo Counterparty to pay Repo Interest under the<br />

Repurchase Agreement the Issuer is equally relying on payments made by the Repo Counterparty although it should be<br />

noted that the Required Collateral Value under each Repo-Transaction must always be equal to or greater than the Principal<br />

Amount Outstanding of the Notes and the Repo Interest due on the Repurchase Date under such Repo Transaction.<br />

Neither the Swap Counterparty nor, subject to the above, the Repo Counterparty has any obligation to transfer any<br />

rights to the Issuer or to grant any security for the performance of its payment obligations or other obligations in<br />

40


favour of the Issuer, the Security Trustee or the Noteholders in the event of a downgrading, suspension or withdrawal of<br />

its current credit ratings or a deterioration of its creditworthiness.<br />

<strong>Limited</strong> Liquidity of the Notes<br />

There is currently no secondary market for the Notes. There can be no assurance that a secondary market for the<br />

Notes will develop or that a market will develop for all Classes of Notes or, if any such market does develop, that it<br />

will continue. Moreover, the limited scope of information available to the Issuer, the Security Trustee and the<br />

Noteholders regarding the Reference Obligations, and the nature of any Credit Event, including uncertainty as to the<br />

extent of any reduction of the Principal Amount Outstanding if a Credit Event has occurred but the relevant Credit<br />

Protection Payment has not been determined, may affect the liquidity of the Notes, especially the more junior Classes<br />

of the Notes. Consequently, any purchaser of Notes must be prepared to hold such Notes for an indefinite period of<br />

time or until final redemption or maturity of the Notes.<br />

<strong>Limited</strong> Liquidity of the Collateral and Certain Types of Eligible Investments; Maturity<br />

The ability of the Issuer to repay principal of, and to pay interest on, the Notes depends upon, inter alia, the performance<br />

of the Repo Counterparty under the Repurchase Agreement and whether the Repo Counterparty and the<br />

Issuer enter into a new Repo-Transaction on each Purchase Date under the Repurchase Agreement. If the Repo<br />

Counterparty defaults on its obligations, repayment of principal will depend on the market value of the Collateral. In<br />

the event that a new Repo-Transaction is not entered into on any Purchase Date and no substitute repurchase agreement<br />

is entered into by the Issuer, the Cash Administrator will invest the amounts that would otherwise have been<br />

invested in a new Repo-Transaction in Eligible Investments. To the extent that Eligible Investments include investments<br />

in the form of securities, the repayment of principal will also depend on the market value of the Eligible<br />

Investments. Therefore, no assurance can be given that the principal of the Notes will be repaid in full on or prior to<br />

their anticipated maturity.<br />

Furthermore, if there is no secondary market in the Collateral or the Eligible Investments, as the case may be, or to<br />

the extent that such a secondary market is limited, upon enforcement the Security Trustee may not be able to sell the<br />

Collateral or Eligible Investments, as the case may be, to a third party and distribute the net proceeds to the<br />

Noteholders. In such circumstances, Noteholders would not receive repayments of principal and the payment of interest<br />

until the Collateral or the Eligible Investments, as applicable, matures or is redeemed in accordance with its terms.<br />

Taxation<br />

The following explanation of tax issues should be read in conjunction with the section "Taxation" herein.<br />

Taxation in Germany:<br />

Attention is drawn to the section "Taxation" – Taxation in Germany. There can also be no assurance that German tax<br />

law and/or practice will remain unchanged during the lives of the Notes.<br />

European Union Withholding Tax<br />

As described below under the heading "Taxation-European Union Withholding Tax", it appears from a report by the<br />

ECOFIN Council to the European Council dated 20th June, 2000 that the proposal by the European Commission<br />

which, if adopted, would have required EU Member States to adopt legislation, potentially including a withholding tax<br />

system applicable to paying agents located in such EU Member States, will not be adopted in its current form.<br />

41


However, there can be no assurance that a withholding tax system that would be applicable to one or both of the<br />

Principal Paying Agent and the Luxembourg Paying Agent will not be adopted as a result of future EU Directives or<br />

other EU initiatives. Moreover, although ECOFIN Council has agreed (and the European Council has endorsed) that<br />

the ultimate objective of any EU Directive will be the exchange of information between EU Member States rather than<br />

the establishment of a withholding tax system, if an EU Member State so wishes it will be permitted temporarily to<br />

operate a withholding tax system. Accordingly, there can be no assurance that interest or other amounts paid by the<br />

Issuer to the Noteholders will remain free from withholding over the life of the Notes.<br />

Taxation in Jersey<br />

There can be no assurance that the internal law of Jersey will remain unchanged and that interest paid by the Issuer<br />

to the Noteholders will remain free of withholding tax in Jersey over the life of the Notes.<br />

42


THE ISSUER<br />

The Issuer, <strong>Bauhaus</strong> <strong>Securities</strong> <strong>Limited</strong>, was incorporated in Jersey, Channel Islands under the Companies (Jersey)<br />

Law 1991 with company number 78047 as a public company with limited liability on 25th August, 2000. The Issuer's<br />

registered office and principal place of business is Whiteley Chambers, Don Street, St. Helier, Jersey, Channel Islands,<br />

the location at which the Issuer's register of shareholders is kept. The Issuer is a wholly-owned subsidiary of Ogier<br />

Trustee <strong>Limited</strong> as trustee of the <strong>Bauhaus</strong> <strong>Securities</strong> Charitable Trust, a trust company incorporated in Jersey and<br />

having its registered office at Whiteley Chambers, Don Street, St. Helier, Jersey, Channel Islands.<br />

The principal purpose of the Issuer is as set out in its Memorandum of Association and is, inter alios, to issue the<br />

Notes and enter into all financial arrangements in that connection. The Memorandum of Association of the Issuer may<br />

be inspected at the registered office of the Issuer.<br />

Directors and Secretary<br />

The Directors of the Issuer and their respective business addresses and other principal activities are:<br />

Name Nationality Business Address Occupation<br />

Simon Willing British Whiteley Chambers, Don Street, St. Helier,<br />

Jersey, Channel Islands<br />

Lawyer<br />

Michael Lombardi British Whiteley Chambers, Don Street, St. Helier,<br />

Jersey, Channel Islands<br />

Lawyer<br />

Simon Willing and Michael Lombardi are partners of Ogier & Le Masurier which will receive legal fees in connection<br />

with the transaction. Ogier & Le Masurier is the owner of Ogier Trustee <strong>Limited</strong>, which, as trustee of the <strong>Bauhaus</strong><br />

<strong>Securities</strong> Charitable Trust, is the owner of the Issuer, and which may receive trustee fees for acting in that capacity.<br />

Each of the directors of the Issuer is entitled to be reimbursed for costs and expenses properly and reasonably incurred<br />

in connection with his duties.<br />

Ogier Secretaries <strong>Limited</strong>, a company incorporated in Jersey, Channel Islands under the Companies (Jersey) Law<br />

1991 and having its registered office at Whiteley Chambers, Don Street, St. Helier, Jersey, Channel Islands, has entered<br />

into an agreement with the Issuer to provide corporate services to the Issuer (the "Corporate Administration<br />

Agreement"). The directors of the Issuer specified above have been nominated by Ogier Secretaries <strong>Limited</strong> which<br />

will receive a fee from the Issuer.<br />

The Secretary of the Issuer:<br />

The Secretary of the Issuer is Ogier Secretaries <strong>Limited</strong>, whose registered office is at Whiteley Chambers, Don Street,<br />

St. Helier, Jersey, Channel Islands.<br />

Principal Bankers of the Issuer<br />

The principal bankers of the Issuer are Deutsche Genossenschafts-<strong>Hyp</strong>othekenbank AG and The Chase Manhattan Bank.<br />

Management and Principal Activities<br />

The activities of the Issuer will principally be the issue of the Notes, entering into all documents relating to such issue to<br />

which the Issuer is expressed to be a party, the exercise of related rights and powers and other activities reasonably<br />

incidental thereto.<br />

43


Share Capital<br />

The nominal share capital of the Issuer is € 10,000 comprising 10,000 shares of € 1.00 each. The issued and paid up<br />

share capital of the Issuer is € 2.00 as at the date of this <strong>Offering</strong> Circular.<br />

Capitalisation<br />

The following table shows the capitalisation of the Issuer as at 30th October, 2000, taking into account the issue of<br />

the Notes:<br />

Share capital €<br />

Authorised 10,000.00<br />

10,000 ordinary shares of € 1.00 each<br />

Issued<br />

2 ordinary shares of € 1.00 each fully paid 2.00<br />

Loan capital<br />

The Notes 1,006,250,000.00<br />

Since 25th August, 2000, the date of incorporation of the Issuer, there has been no material adverse change in the<br />

financial or trading position or the prospects of the Issuer. The Notes to which this <strong>Offering</strong> Circular pertains are the<br />

first and only debt transactions of the Issuer.<br />

Auditors' Report<br />

The Issuer's auditors are Arthur Andersen, 4th Floor, Forum House, Grenville Street, St. Helier, Jersey JE2 4UF,<br />

Channel Islands.<br />

Since the incorporation of the Issuer no auditors' report in respect of the Issuer has been prepared or distributed.<br />

44


THE ACCOUNT BANK, CUSTODIAN AND SWAP COUNTERPARTY<br />

DEUTSCHE GENOSSENSCHAFTS-HYPOTHEKENBANK AKTIENGESELLSCHAFT<br />

Incorporation and Seat<br />

Deutsche Genossenschafts-<strong>Hyp</strong>othekenbank Aktiengesellschaft ("<strong>DG</strong> HYP") was incorporated as a German stock<br />

corporation on 11th May, 1921. <strong>DG</strong> HYP is registered with the Companies Registers in Berlin-Charlottenburg (HR B 1229)<br />

and Hamburg (HR B 5604). Its head offices are located at Fasanenstraße 5, 10623 Berlin and Rosenstraße 2, 20095 Hamburg.<br />

Objects<br />

The object of <strong>DG</strong> HYP is the operation of a mortgage lending bank as defined by the German Mortgage Banking Act<br />

(<strong>Hyp</strong>othekenbankgesetz). § 14 of the Mortgage Banking Act permits <strong>DG</strong> HYP to issue mortgage bonds.<br />

Branches and Subsidiaries<br />

Although <strong>DG</strong> HYP conducts its business from its main offices in Berlin and Hamburg, <strong>DG</strong> HYP has 14 offices throughout<br />

Germany to maintain contact with potential customers.<br />

<strong>DG</strong> HYP has a 100% subsidiary, the Schleswig Holsteinische Landschaft <strong>Hyp</strong>othekenbank AG, based in Kiel which is<br />

also operating as mortgage lending bank as defined by the German Mortgage Banking Act.<br />

<strong>DG</strong> HYP has founded a new company called "VR Kreditwerk Hamburg-Schwäbisch Hall AG" ("VR Kreditwerk AG")<br />

together with Bausparkasse Schwäbisch Hall AG which started business operations on 1st July, 2000. <strong>DG</strong> HYP owns<br />

49.9% of VR Kreditwerk AG and has arranged for employees working in the respective areas within <strong>DG</strong> HYP to move<br />

to VR Kreditwerk AG.<br />

Furthermore, <strong>DG</strong> HYP holds interests in several other companies to supplement its business activities.<br />

Share Capital and Ownership<br />

From 27th April, 1999 the issued share capital of <strong>DG</strong> HYP was converted to euro and increased out of retained earnings<br />

to a total amount of euro 90,000,000 divided into 3,500,000 no-par value registered shares. The shares may not be<br />

transferred without the consent of the Supervisory Board of <strong>DG</strong> HYP. In the event of an increase in share capital, bearer<br />

shares may also be issued.<br />

The share capital of <strong>DG</strong> HYP is currently 100% owned by <strong>DG</strong> BANK Deutsche Genossenschaftsbank AG, Frankfurt<br />

am Main, Germany.<br />

45


Own Funds of <strong>DG</strong> HYP Group as at 30th June, 2000 31st December, 1999 31st December, 1998<br />

in € million in € million in € million<br />

a) Subscribed capital 684 684 664<br />

aa) Share capital 90 90 89<br />

ab) Dormant contributions 594 594 575<br />

b) Capital reserves and surplus reserves 531 536 517<br />

ba) Capital reserves 434 416 403<br />

bb) Revenue reserves 69 69 68<br />

bba) Legal reserves 1 1 1<br />

bbb) Other revenue reserves 68 68 67<br />

bc) Consolidated profit for the year 1 28 51 46<br />

Total Own Funds 1,215 1,219 1,181<br />

1 In 2000 consolidated profit for the first and the second quarter only<br />

Capitalisation as at 30th June, 2000 31st December, 1999 31st December, 1998<br />

in € million in € million in € million<br />

a) Outside capital 66,361 60,988 51,940<br />

aa) Outside capital in securitised form 59,413 55,067 43,739<br />

aaa) Liabilities to banks<br />

aaaa) Outstanding registered<br />

2,030 2,282 2,030<br />

mortgage bonds (Pfandbriefe)<br />

aaab) Outstanding registered<br />

877 991 819<br />

public bonds (Pfandbriefe) 1,153 1,291 1,211<br />

aab) Liabilities to customers<br />

aaba) Outstanding registered<br />

8,488 8,119 7,667<br />

mortgage bonds (Pfandbriefe)<br />

aabb) Outstanding registered<br />

4,124 3,963 3,628<br />

public bonds (Pfandbriefe) 4,364 4,156 4,039<br />

aac) Certificated liabilities 48,895 44,666 34,042<br />

aaca) Mortgage bonds (Pfandbriefe) 13,164 11,269 10,348<br />

aacb) Public bonds (Pfandbriefe) 29,927 29,088 21,802<br />

aacc) other debt securities 5,804 4,309 1,892<br />

ab) non-securitised outside capital 6,948 5,921 8,201<br />

aba) Other liabilities2 6,273 5,249 7,558<br />

abb) Subordinated liabilities 463 462 447<br />

abc) Capital with participation rights 179 179 170<br />

abd) Funds for general banking risks 33 31 26<br />

b) Share capital and reserves 1,215 1,219 1,181<br />

aa) Subscribed capital 684 684 664<br />

baa) Share capital 90 90 89<br />

bab) Dormant contributions 594 594 575<br />

bb) Capital reserves and surplus reserves 531 536 517<br />

bba) Capital reserves 434 416 403<br />

bbb) Revenue reserves 69 69 68<br />

bbba) Legal reserves 1 1 1<br />

bbbb) Other revenue reserves 68 68 67<br />

bbc) Consolidated profit for the year 1 28 51 46<br />

Total capitalisation 67,576 62,208 53,122<br />

1 In 2000 consolidated profit for the first and second quarter only.<br />

2 Including: other liabilities to banks, customers, savings deposits, trust liabilities, deferred income, accrued expenses.<br />

Save as disclosed herein, there has been no material adverse change in the capitalisation of <strong>DG</strong> HYP since 30th June, 2000.<br />

46


Management<br />

<strong>DG</strong> HYP is managed by its Board of Directors, its Supervisory Board and the General Meeting of Shareholders.<br />

The Board of Directors<br />

The Board of Directors is responsible for managing the day to day business of <strong>DG</strong> HYP as provided by law and by its<br />

Articles of Association.<br />

The Board of Directors must consists of at least two members appointed by the Supervisory Board.<br />

The current members of the Board of Directors are:<br />

Hermann M. Remaklus (Chairman)<br />

Franz-Josef Gesinn<br />

Herbert Otten<br />

Friedrich Piaskowski<br />

Dr. jur. Walter Weber<br />

The Supervisory Board<br />

The Supervisory Board consists of 21 members and has been newly elected in March 2000. Pursuant to the Works<br />

Council Constitution Act (Betriebsverfassungsgesetz 1952) 7 members of the Supervisory Board are employees of <strong>DG</strong><br />

HYP. The Supervisory Board appoints and dismisses the members of the Board of Directors and is responsible for<br />

the supervision of <strong>DG</strong> HYP's Board of Directors. The specific consent of the Supervisory Board is required for certain<br />

activities of <strong>DG</strong> HYP, among other things, the establishment of branch operations or agencies, the purchase and sale of<br />

business premises, and the conclusion of employment contracts providing particular pension rights or profit sharing.<br />

Currently the Supervisory Board consists of the following members:<br />

Dr. Bernd Thiemann (Chairman)<br />

Chairman of the Board of Managing Directors of <strong>DG</strong> BANK Deutsche Genossenschaftsbank AG<br />

Dr. Christopher Pleister (Vice-Chairman)<br />

President of Bundesverband der Deutschen Volks- und Raiffeisenbanken e.V.<br />

Winfried Willer (Vice-Chairman)<br />

Employee of <strong>DG</strong> HYP<br />

Dr. Dietrich Bartsch<br />

Speaker of the Board of Managing Directors of Hamburger Bank of 1861 Volksbank eG<br />

Rainer Bauer<br />

Chairman of the Board of Managing Directors of Volksbank Ludwigsburg eG<br />

Friedhelm Bellmann<br />

Employee of <strong>DG</strong> HYP<br />

Werner Böhnke<br />

Member of the Board of Managing Directors of WGZ Bank Westdeutsche Genossenschafts-Zentralbank eG<br />

47


Hans-Jürgen Buhlert<br />

Lawyer and employee of <strong>DG</strong> HYP<br />

Maren Ehlers<br />

Employee of <strong>DG</strong> HYP<br />

Holger Hinz<br />

Employee of <strong>DG</strong> HYP<br />

Hans Huber<br />

Chairman of the Board of Managing Directors of Raiffeisenbank Eching eG<br />

Jürgen Jacoby<br />

Executive Manager of VR Bank Südpfalz eG<br />

Klaus Kohlmorgen<br />

Employee of <strong>DG</strong> HYP<br />

Jürgen Küster<br />

Member of the Board of Managing Directors of Stralsunder Volksbank eG, retired<br />

Dietmar Küsters<br />

Chairman of the Board of Managing Directors of Volksbank Straubing eG<br />

Manfred Nüssel<br />

President of Deutscher Raiffeisenverband e.V.<br />

Herbert Schindler<br />

Union-director of Badischer Genossenschaftsverband Raiffeisen-Schulze-Delitzsch e.V.<br />

Martina Sternberg<br />

Employee of <strong>DG</strong> HYP<br />

Heino Westermann<br />

Chairman of the Board of Managing Directors of Volksbank Springe-Pattensen eG<br />

Manfred Wiethüchter<br />

Member of the Board of Managing Directors of Volksbank Rhein-Wupper eG<br />

Dieter Wößner<br />

Member of the Board of Managing Directors of GZ-Bank AG Frankfurt/Stuttgart<br />

48


The General Meeting of Shareholders<br />

The General Meeting passes resolutions regarding the formal approval of the Board of Directors and the Supervisory<br />

Board application of <strong>DG</strong> HYP's net profit and the approval of the annual accounts (Ordinary General Meeting).<br />

The General Meeting is called by either the Board of Directors or the Supervisory Board and must take place either<br />

in Berlin, Hamburg or Frankfurt am Main. The Ordinary General Meeting must take place within the first eight months<br />

of each business year.<br />

The resolutions of the General Meeting are passed by a simple majority of the votes cast unless otherwise specified<br />

by the German Stock Corporation Law. Each no-par value share entitles the holder to one vote.<br />

Trustees<br />

Pursuant to § 29 of the Mortgage Banking Act, <strong>DG</strong> HYP is required to maintain Trustees to ensure that the prescribed<br />

cover for the mortgage bonds exists at all times. To this end the Trustees supervise whether the assets used to cover<br />

the mortgage bonds are recorded in the cover register in accordance with the Mortgage Bank Act. Such Trustees are<br />

appointed by the German Federal Banking Supervisory Authority. The Trustees presently appointed are:<br />

Dr. Michael Labe<br />

Dr. Peter Lassen (Vice Trustee)<br />

Hilmar Schmudlach (Vice Trustee)<br />

Financial Year<br />

<strong>DG</strong> HYP's financial year is the calendar year.<br />

Auditors<br />

<strong>DG</strong> HYP's auditors are PwC Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (who carries on<br />

the business of C&L Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungsgesellschaft), New-York-Ring 13,<br />

22297 Hamburg.<br />

The annual financial statements and the consolidated financial statements of <strong>DG</strong> HYP as of 31st December 1997 and<br />

as of 31st December, 1998 were audited according to Generally Accepted Auditing Standards in Germany by C&L<br />

Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungsgesellschaft and an unqualified opinion was expressed on<br />

each of the statements. The annual financial statements and the consolidated financial statements of <strong>DG</strong> HYP as of<br />

31st December, 1999 were audited according to Generally Accepted Auditing Standards in Germany by PwC<br />

Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungsgesellschaft and an unqualified opinion was expressed on<br />

each of the statements.<br />

Business<br />

<strong>DG</strong> HYP is involved in mortgage banking operations in accordance with the regulations of the German Mortgage Bank<br />

Act. <strong>DG</strong> HYP's lending activities are restricted to mortgage loans for residential and commercial properties and public<br />

sector loans.<br />

Business in the Real Estate Lending segment includes the Private Customers activity with residential construction<br />

and commercial loans of up to DEM 1m and the Investor segment covering residential construction and commercial<br />

49


loans of over DEM 1m. The business with Municipalities includes the segments, loans, original business in association<br />

with the Volks- and Raiffeisenbanken as well as European government financing activities.<br />

Real Estate Lending<br />

In line with the business structure and <strong>DG</strong> HYP's function as a member of the cooperative banking segment, the bulk<br />

of <strong>DG</strong> HYP's real estate lending business is made up of loans to private customers passed on by the Volksbanken<br />

and Raiffeisenbanken. In close cooperation with its partners, <strong>DG</strong> HYP offers financing products for private investments<br />

in residential property. Comprehensive financing concepts taking into account the specific features of each<br />

individual case, which also integrate the current state of the capital market within the financing solution, are a major<br />

contribution to securing the future of the credit products within the cooperative banking segment.<br />

Most property loans in this segment are processed and authorised electronically using the specialised software<br />

'<strong>Hyp</strong>ofix'.<br />

Due to the low interest rates for long-term financing, the majority of new real estate lending has been undertaken with<br />

terms of ten years or longer, because the customers want to preserve the favourable interest rates for as long as<br />

possible.<br />

The fact that the product range is closely geared to customer wishes, the increase of special know-how and expansion<br />

of customer care and consulting capacity in this market segment are in response to strong demand for loans to<br />

Investors especially from the small and medium-sized corporate customers of the Volks- and Raiffeisenbanken. The<br />

service range on offer in the investor lending business reflects not only the growing expectations of cooperative<br />

customers but also the service provided to the partner banks. In this area, there has been a certain shift away from<br />

residential properties towards commercial properties.<br />

Real estate loans are used primarily for buying property, rescheduling loans and financing new properties. Financings<br />

are spread throughout the whole of the Federal Republic, with a particularly strong presence in Northern Germany.<br />

From 1991, German Mortgage banks have been allowed to finance properties outside Germany. <strong>DG</strong> HYP is active in<br />

member states of the European Union, focussing on France, the United Kingdom and The Netherlands. The majority<br />

of <strong>DG</strong> HYP's loans abroad are denominated in Deutsche Marks and since 1999 in euro.<br />

Business with Municipalities<br />

The government financing activity has grown in importance in the last few years, not only in the area of notes and<br />

bonds, but also in business via the Volks- and Raiffeisenbanken and European government financing. Accordingly, all<br />

segments in relation to such lending, including the issuance of loans, notes, bonds and European government financing,<br />

have expanded significantly.<br />

The implementation of the Third Financial Market Promotion Act in April 1998, has opened up further new business<br />

opportunities for <strong>DG</strong> HYP, as bonds issued by public sector authorities and institutions operating under public law<br />

are now deemed valid cover for public-sector Pfandbriefe.<br />

Finally, <strong>DG</strong> HYP has expanded its business in Europe in relation to sovereign issuers because of the general growth<br />

of this segment of the international financial market. Currently <strong>DG</strong> HYP concentrates mainly on Italy, Portugal, Austria<br />

and Spain.<br />

50


Refinancing and Pfandbrief Sales<br />

The positive valuation of the securities issued by <strong>DG</strong> HYP by the rating agencies and the increasing acceptance of<br />

the Pfandbrief as a European security are very important factors for refinancing. Pfandbriefe are debt securities<br />

issued under German law which must be secured ("covered") by mortgage loans (Mortgage Pfandbriefe) or obligations<br />

of public sector debtors (or certain other qualifying assets) (Public-sector Pfandbriefe) and whose terms must<br />

otherwise comply with the requirements and limitations imposed by the German Mortgage Bank Act. Such compliance<br />

is monitored by the German Federal Banking Supervisory Authority.<br />

Pfandbriefe are usually medium- to long-term bonds with a term of two to ten years. Pfandbriefe are general obligations<br />

of the issuing bank, and no separate vehicle is created for their issuance in general or for the issuance of any<br />

specific series of Pfandbriefe. Traditionally, Pfandbriefe have borne interest at a fixed rate, but recently mortgage<br />

banks have started issuing zero-coupon and floating rate Pfandbriefe, in some cases with additional features such<br />

as step-up coupons, caps or floors. Most issues of Pfandbriefe were denominated in Deutsche Mark and are currently<br />

denominated in euro. A mortgage bank may, however, also issue Pfandbriefe in other currencies, subject to certain<br />

limitations. The terms of Pfandbriefe exclude any right of the holders to require redemption of the Pfandbriefe prior<br />

to the scheduled date of maturity.<br />

Pursuant to the German Mortgage Banking Act, a mortgage bank must keep two different registers (the<br />

<strong>Hyp</strong>othekenregister and the Deckungsregister) in which the assets included in each of the two cover pools are listed.<br />

<strong>DG</strong> HYP's activities in the market for Jumbo Pfandbriefe have increased significantly in particular due to the fact that<br />

<strong>DG</strong> HYP's Public-sector Pfandbriefe and Mortgage Pfandbriefe were rated AAA by Standard & Poor's and Fitch, and<br />

this has laid the foundation for more extensive sales outside Germany. The major portion of <strong>DG</strong> HYP's issued securities<br />

are Public-sector Pfandbriefe followed by Mortgage Pfandbriefe and other bonds. In addition, <strong>DG</strong> HYP takes<br />

out loans some of which are issued as promissory notes (Schuldscheine).<br />

All of <strong>DG</strong> HYP's Jumbo Pfandbriefe issues were converted into euro at the beginning of 1999.<br />

In addition to issuing floating rate bonds, <strong>DG</strong> HYP is also active in issuing structured bonds such as callable step up<br />

bonds, multi-callable step-up bonds and step interest and callable step-up interest bonds. Generally, all structured<br />

issues are hedged with suitable derivatives, if applicable, resulting in cash flows meeting the refinancing requirements<br />

of the corresponding credit operations. Derivatives used for this purpose are interest rate swaps, FRAs, swaptions<br />

and currency swaps.<br />

51


Consolidated Balance Sheet of <strong>DG</strong> HYP Group as at 31st December, 1999<br />

Assets<br />

€ 000s € 000s € 000s<br />

31st Dec. 1998<br />

€ 000s<br />

Liquid funds 9,981 14,208<br />

a) Cash on hand 414 596<br />

b) Balances with central banks 9,567 13,612<br />

thereof: with the Deutsche Bundesbank 9,567 (13,612)<br />

Receivables from banks 14,916,226 14,443,007<br />

a) Credits secured by property mortgages 248,458 260,772<br />

b) Loans to municipalities 14,590,886 13,890,942<br />

c) Other receivables 76,882 291,343<br />

thereof: payable on demand 58,141 (280,572)<br />

collateralised by securities 5,113 (5,113)<br />

Receivables from customers 36,643,329 32,714,072<br />

a) Credits secured by property mortgages 23,263,033 20,860,114<br />

b) Loans to municipalities 13,373,105 11,846,670<br />

c) Other receivables 7,191 7,288<br />

thereof: collateralised by securities – (–)<br />

Debt securities and other fixed-interest securities 9,635,509 5,066,608<br />

a) Bonds and debt securities (8,683,781) (4,410,993)<br />

aa) Issued by public bodies 2,895,975 1,445,413<br />

bb) Issued by others 5,787,806 2,965,580<br />

thereof: eligible as collateral<br />

at the Deutsche Bundesbank 7,316,269 (3,022,277)<br />

b) Consolidated own bonds 951,728 655,615<br />

Face value 934,519 (635,772)<br />

Shares and other variable-yield securities 32 31<br />

Investments 9,230 8,224<br />

thereof: in banks 7,504 (6,753)<br />

in financial services institutions – (–)<br />

Shares in associated enterprises 52,982 39,835<br />

thereof: in banks – (–)<br />

in financial services institutions – (–)<br />

Trust assets 335,067 336,458<br />

thereof: trust credits 301,386 (320,825)<br />

Tangible fixed assets 146,904 146,012<br />

Other assets 17,249 14,980<br />

Prepaid and accrued income 17,752 –<br />

Prepaid and deferred expenses 423,606 338,231<br />

a) From issuing and lending business 422,135 337,578<br />

b) Other 1,471 653<br />

Total 62,207,867 53,121,666<br />

52


Liabilities and equity<br />

€ 000s € 000s € 000s<br />

31st Dec, 1998<br />

€ 000s<br />

Liabilities to banks 5,496,233 7,509,939<br />

a) Outstanding registered mortgage bonds (Pfandbriefe) 991,238 818,973<br />

b) Outstanding registered public bonds (Pfandbriefe) 1,290,755 1,211,071<br />

c) Other liabilities 3,214,240 5,479,895<br />

Thereof: payable on demand 624,060 (2,313,893)<br />

Registered mortgage bonds (Pfandbriefe) 15 (2,573)<br />

And registered public bonds (Pfandbriefe)<br />

presented to lenders as<br />

Collateral for funds taken up<br />

39,511 (52,101)<br />

Liabilities to customers 9,382,406 9,089,182<br />

a) Outstanding registered mortgage bonds (Pfandbriefe) 3,963,241 3,627,566<br />

b) Outstanding registered public bonds (Pfandbriefe) 4,155,689 4,039,349<br />

c) Savings deposits (84,307) (76,088)<br />

ca) With an agreed notice period of 3mths 49,269 42,060<br />

cb) With an agreed notice period of more than 3mths 35,038 34,028<br />

d) Other liabilities 1,179,169 1,346,179<br />

Thereof: payable on demand 139,334 (256,400)<br />

Registered mortgage bonds (Pfandbriefe) 79,091 (83,700)<br />

and registered public bonds (Pfandbriefe)<br />

presented to lenders as<br />

Collateral for funds taken up<br />

125,062 (199,711)<br />

Certificated liabilities<br />

Debt securities issued<br />

44,666,365 34,042,009<br />

a) Mortgage bonds (Pfandbriefe) 11,268,726 10,347,961<br />

b) Public bonds (Pfandbriefe) 29,088,469 21,802,022<br />

c) Other debt securities 4,309,170 1,892,026<br />

Trust liabilities 335,067 336,458<br />

thereof: trust credits 301,386 (320,825)<br />

Other liabilities 70,531 54,433<br />

Deferred income 275,757 186,234<br />

a) From issuing and lending business 275,757 186,230<br />

b) Other – 4<br />

Accrued expenses 89,733 79,157<br />

a) Pensions and similar accruals 54,425 51,676<br />

b) Tax accruals 7,509 6,914<br />

c) Other accrued expenses 27,799 20,567<br />

Subordinated liabilities 462,483 447,483<br />

Capital with participation rights 179,208 170,004<br />

Thereof: due within two years – (–)<br />

Fund for general banking risks 30,678 25,565<br />

Equity 1,219,406 1,181,202<br />

a) Subscribed capital (683,687) (664,245)<br />

aa) Share capital 90,000 89,476<br />

ab) Dormant contributions 593,687 574,769<br />

b) Capital reserve 415,936 403,154<br />

c) Revenue reserves (68,654) (67,787)<br />

ca) Legal reserves 945 945<br />

cb) Other revenue reserves 67,709 66,842<br />

d) Consolidated profit for the year 51,129 46,016<br />

Total 62,207,867 53,121,666<br />

Contingent liabilities<br />

Liabilities from guarantees and warranties 1,469 1,857<br />

Other liabilities<br />

Irrevocable lines of credit granted 1,481,424 1,552,712<br />

53


Consolidated profit and loss account<br />

for the period from 1st January to 31st December, 1999<br />

€ 000s € 000s € 000s<br />

31st Dec, 1998<br />

€ 000s<br />

Interest income from<br />

a) Credits and money market transactions 2,888,510 2,749,738<br />

b) Fixed-interest securities and<br />

debt register claims 308,785 112,329<br />

3,197,295 2,862,067<br />

Interest expense 2,852,153 2,544,252<br />

Interest from 345,142 317,815<br />

a) Investments 319 214<br />

b) Shares in associated enterprises 15,438 2,319<br />

15,757 2,533<br />

Income from profit pooling and<br />

Profit transfer and partial profit<br />

transfer agreements 168 167<br />

Commission income 8,583 9,192<br />

Commission expense 61,548 71,013<br />

Net commission income -52,965 -61,821<br />

General administrative expense 10,450 9,081<br />

a) Personnel expense<br />

aa) Wages and salaries<br />

ab) Social security contributions, pension and<br />

45,791 41,880<br />

welfare expense 14,075 15,667<br />

59,866 57,547<br />

thereof: pensions 6,644 (9,078)<br />

b) Other administrative expense 54,626 51,211<br />

114,492 108,758<br />

Amortisation and depreciation of intangible<br />

and tangible fixed assets 13,131 11,111<br />

Other operating expense<br />

Write-downs of and provisions against<br />

receivables and certain securities and additions<br />

4,247 2,369<br />

to accruals relating to credit business<br />

Write-downs of and provisions against<br />

investments and shares in associated enterprises<br />

57,784 43,058<br />

and securities treated as fixed assets<br />

Allocations to the fund for general banking<br />

risks pursuant to § 340 g<br />

115 –<br />

of the Commercial Code 5,113 –<br />

Result from normal operations 123,900 102,479<br />

Extraordinary expenses 898 –<br />

Taxes on income<br />

Other taxes not included under other<br />

35,209 38,015<br />

operating expense (refund) -2,137 -6,055<br />

33,072 31,960<br />

Profits transferred in accordance<br />

with partial profit transfer agreements 38,673 24,503<br />

Net profit 51,257 46,016<br />

Allocations to other revenue reserves 128 –<br />

Consolidated group profit 51,129 46,016<br />

54


Semi Annual Report<br />

The new subsidiary VR Kreditwerk Hamburg-Schwäbisch Hall AG ("Kreditwerk") which is held together with<br />

Bausparkasse Schwäbisch Hall commenced operations on schedule at the end of the second quarter. This new<br />

specialised processing company is important for future development. Kreditwerk will reinforce the uniquely interlinked<br />

character of partnership within the cooperative financial system, further improve service expertise, and enablethe<br />

provision of a modern, economical and quick full-service that covers every aspect of real estate. The set-up of<br />

Kreditwerk will alter the costs structure. The proportion of costs of material will increase at the expense of personnel<br />

costs. Its start-up costs and the planned substantial investment on information technology will initially have a perceptible<br />

impact on the profit and loss account. However, in the medium term, Kreditwerk should deliver sustained<br />

positive effects on the costs structure. Kreditwerk should enable <strong>DG</strong> HYP to continue the successful, trust-based<br />

cooperation with the Volks- and Raiffeisenbanken in a modern form and thereby contribute to the common future<br />

success of cooperative real estate financing.<br />

As at 30th June, 2000 there are two disparate trends of business development. Whereas <strong>DG</strong> HYP has achieved a<br />

satisfactory level of new business in government lending, mortgage lending is caught in a cyclical downturn.<br />

Following years in which new business has grown at approaching boom rates, this segment is currently experiencing<br />

a decline in activity . By 30th June, 2000, <strong>DG</strong> HYP agreed a total of approximately 10,000 loans for an aggregate volume<br />

of DEM 14.7 billion, 18.8% below the total for the same period of 1999 (by 30th June, 1999). Sales of Pfandbriefe and<br />

other bonds declined by 8.7% to just under DEM 19 billion.<br />

Private Customer Real Estate Loans<br />

The new business in private customer real estate loans has suffered the negative effect from the very cyclic mortgage<br />

lending business this year. However, this decline follows several successful years. The end of exceptionally low interest<br />

rates has resulted in a return to a calmer pace of activity. Another factor is that, as in previous cycles, <strong>DG</strong> HYP's partner<br />

banks have started to take onto their own books a higher proportion of the real estate loans they previously referred<br />

to <strong>DG</strong> HYP while interest rates remained extremely low. By 30th June, 2000, <strong>DG</strong> HYP made commitments totaling<br />

DEM 1.4 billion in new real estate loans to private customers.<br />

Investor Lending Business<br />

The same factors shaping the private customer business also made themselves felt in the investor lending business<br />

segment. The combined effect of the relatively sharp rise in interest rates compared to the previous year and a riskaware<br />

lending policy caused the volume of loans accepted in this business field to decline by 24.8% to DEM 0.6 billion.<br />

There has been a perceptible cyclical pickup in commercial lending to small and medium sized businesses, both<br />

in west and east Germany, and progress has been positive on this front. Though agricultural lending business declined<br />

overall, new fields of business were created in a difficult economic climate. The shift of focus towards the financing<br />

of ecological agriculture shows signs of success.<br />

Government Financing<br />

In spite of a difficult interest rate environment and a flattening yield curve, the previous high level of <strong>DG</strong> HYP's municipal<br />

lending business has been maintained. The total volume of this business segment declined by just 4% to DEM 12.8 billion.<br />

There was an increase in the acceptance volume of original loans to local authorities by 45% to DEM 3.6 billion.<br />

55


Global Jumbo Pfandbrief<br />

Sales of debt securities amounted to DEM 18.9 billion in the first six months of 2000, 9% below the corresponding<br />

volume of DEM 20.7 billion for the first half of 1999. Increases and new issues of Jumbo Pfandbriefe accounted for<br />

DEM 9.0 billion of the primary sales total. <strong>DG</strong> HYP also issued its first Global Jumbo Mortgage Pfandbrief (in the<br />

amount of € 2.5 billion or DEM 4.9 billion) in order to create a basis for worldwide distribution.<br />

Continued Expansion of Balance Sheet Total<br />

Total assets have increased by DEM 10.5 billion compared to December 31, 1999; this represents an 8.6% advance<br />

to a new total of DEM 132.2 billion.<br />

The business with municipalities made the biggest contribution to the business expansion, its share of the balance<br />

sheet total increasing to 60.2%. The municipal loans portfolio expanded by DEM 4.9 billion or 9% to DEM 59.7 billion,<br />

and the volume of bonds of government issuers and lending institutions operating under public law acquired for<br />

long-term investment in connection with lending to municipalities increased by DEM 3.1 billion or 18.5% to DEM 19.9<br />

billion. The real estate loan book increased by DEM 0.8 billion or 1.6% to DEM 46.7 billion.<br />

Earnings position<br />

Earnings are in line with expectations; net interest and commission income of DEM 306.6 million represents a clear<br />

increase (7.1%) on the previous year's figure. With interest income effectively unchanged, the improvement in commission<br />

income was the primary contributory factor.<br />

The rate of increase of administration expenses (10.4%) matches that of the previous year period. The expectation is<br />

that the start of operations by VR Kreditwerk Hamburg-Schwäbisch Hall AG will generate major structural shifts in<br />

this area and produce substantial savings in the longer term after increasing the burden initially. After making allowance<br />

for the approximately 10% lower risk provisioning charge compared to the first six months of 1999 (calculated<br />

by reference to equally strict criteria), there remains an operating profit of DEM 144 million or 7.7% more than the<br />

comparable previous year period. Looking to the full twelve months of 2000, we expect to achieve the planned 10%<br />

increase in net profit.<br />

Key trading data<br />

New business January 1 to June 30, 2000 January 1 to June 30, 1999 Change in %<br />

DEM mln € mln DEM mln<br />

Real estate loans 1,960 1,002 4,860 -59.7<br />

- Residential 1,567 801 4,286 -63.4<br />

- Commercial 303 155 412 -26.5<br />

- Agricultural 90 46 162 -44.4<br />

Government loans 12,771 6,530 13,289 -3.9<br />

- Municipal loans 8,513 4,353 7,012 21.4<br />

- Public bonds 4,258 2,177 6,277 -32.2<br />

Loan extensions 644 329 1,457 -55.8<br />

- Real estate loans 473 242 1,073 -55.9<br />

- Municipal loans 171 87 384 -55.5<br />

Sales of pfandbriefe and similar 18,950 9,689 20,749 -8.7<br />

Derivatives 29,255 14,958 28,091 4.1<br />

56


Consolidated Balance Sheet of <strong>DG</strong> HYP Group as at 30th June, 2000<br />

Assets June 30, 2000 December 31, 1999 Change in %<br />

DEM mln € mln DEM mln<br />

Receivable from banks 29,809 15,241 29,173 2.2<br />

Of which:<br />

- Credits secured by property mortgages 473 242 486 -2.7<br />

- Loans to municipalities 29,179 14,919 28,537 2.2<br />

- Other receivables 157 80 150 4.7<br />

Receivable from customers 76,763 39,248 71,668 7.1<br />

Of which:<br />

- Credits secured by property mortgages 46,264 23,654 45,499 1.7<br />

- Loans to municipalities 30,418 15,553 26,155 16.3<br />

- Other receivables 81 41 14 478.6<br />

Debt securities and other fixed-interest<br />

securities 23,462 11,996 18,845 24.5<br />

Of which:<br />

- Bonds and debt securities 21,443 10,964 16,984 26.3<br />

(investment portfolio) (19,930) (10,190) (16,820) (18.5)<br />

- Consolidated own bonds 2,019 1,032 1,861 8.5<br />

Investments, shares in associated<br />

enterprises 123 63 122 0.8<br />

Trust assets 635 325 655 -3.1<br />

Tangible fixed assets 283 145 287 -1.4<br />

Other assets 1,092 558 918 18.9<br />

Total assets 132,167 67,576 121,668 8.6<br />

Liabilities June 30, 2000 December 31, 1999 Change in %<br />

DEM mln € mln DEM mln<br />

Liabilities to banks 12,149 6,211 10,750 13,0<br />

Of which:<br />

- Outstanding registered mortgage bonds<br />

(Pfandbriefe) 1,716 877 1,939 -11.5<br />

- Outstanding registered public bonds<br />

(Pfandbriefe) 2,255 1,153 2,524 -10.7<br />

- Other liabilities 8,178 4,181 6,287 30.1<br />

Liabilities to customers 19,264 9,850 18,350 5.0<br />

Of which:<br />

- Outstanding registered mortgage bonds<br />

(Pfandbriefe) 8,065 4,124 7,751 4.1<br />

- Outstanding registered public bonds<br />

(Pfandbriefe) 8,535 4,364 8,128 5.0<br />

- Other liabilities 2,664 1,362 2,471 7.8<br />

Securitized liabilities 95,630 48,895 87,360 9.5<br />

Of which:<br />

- Mortgage bonds (Pfandbriefe) 25,746 13,164 22,040 16.8<br />

- Public bonds (Pfandbriefe) 58,533 29,927 56,892 2.9<br />

- Other debt securities 11,351 5,804 8,428 34.7<br />

Trust liabilities 635 325 655 -3.1<br />

Subordinated liabilities 905 463 905 0.0<br />

Capital with participation rights 351 179 351 0.0<br />

Fund for general banking risks 65 33 60 8,3<br />

Equity* 2,320 1,186 2,285 1.5<br />

Of which:<br />

Subscribed capital 1,337 684 1,337 0.0<br />

- Share capital 176 90 176 0.0<br />

- Dormant contributions 1,161 594 1,161 0.0<br />

Reserves 983 503 948 3.7<br />

Other liabilities 848 434 952 -10.9<br />

Total 132,167 67,576 121,668 8.6<br />

* excluding net profit attributable to group<br />

57


Consolidated Profit and Loss Account of <strong>DG</strong> HYP Group as at 30th June, 2000<br />

January 1 to June 30, 2000 January 1 to June 30, 1999 Change in %<br />

DEM mln € mln DEM mln € mln<br />

Interest income 3,387.7 1,732.1 3,031.1 11.8<br />

Current income 6.3 3.2 2.8 125.0<br />

Interest expense 3,049.5 1,559.2 2,689.9 13.4<br />

Net interest income 344.5 176.1 344.0 0.2<br />

Commission income 6.5 3.3 7.6 -14.5<br />

Commission expense 44.4 22.7 65.3 -32.0<br />

Net commission income -37.9 -19.4 -57.7 34.3<br />

Net interest and commission income 306.6 156.7 286.3 7.1<br />

Other operating income 5.9 3.0 8.1 -27.2<br />

Gross profit 312.5 159.7 294.4 6.1<br />

Wages and salaries<br />

Social security contributions, pension<br />

47.6 24.3 42.5 12.0<br />

and welfare expense 13.4 6.9 12.9 3.9<br />

Other administrative expenses 68.9 35.2 62.3 10.6<br />

Total administrative expenses 129.9 66.4 117.7 10.4<br />

Operating profit before provision for risks 182.6 93.3 176.7 3.3<br />

Provision for risks 38.6 19.7 43.0 -10.2<br />

Operating profit 144.0 73.6 133.7 7.7<br />

Taxes<br />

Profits transferred in accordance with<br />

49.9 25.5 40.4 23.5<br />

partial profit transfer agreements 39.0 19.9 43.2 -9.7<br />

Net profit 55.1 28.2 50.1 10.0<br />

Total employees*<br />

January 1 to June 30, 2000 January 1 to June 30, 1999<br />

Average number of employees<br />

Of which:<br />

930 (879) 935 (884)<br />

- Part-time 90 83<br />

- Trainees 29 24<br />

* Full-time-equivalents stated in brackets<br />

58


RECENT DEVELOPMENTS<br />

In the first nine months of the current financial year new business generated by <strong>DG</strong> HYP was clearly dominated by<br />

government lending. The weakening demand for real estate financing and the frequent direct approval by the cooperative<br />

banks of real estate loans had a negative impact on <strong>DG</strong> HYP's mortgage lending business. In line with the<br />

sector trend, this business segment was down by a substantial amount compared to the large figure of the previous<br />

year. By contrast, the previous year's high level of government lending was for the most part maintained. In spite of<br />

perceptible efforts to limit public debt, <strong>DG</strong> HYP could maintain this important cornerstone of business operations at<br />

a very healthy level.<br />

In mortgage lending, <strong>DG</strong> HYP was forced to acknowledge the rapid rate of business expansion of previous years: the<br />

intense level of purchasing and construction of owner-occupied homes during the period of low interest rates is now<br />

having a negative effect with private owners and purchasers of real estate slowing down their investment activity.<br />

The bank's earnings position developed according to plan despite the difficult interest rate situation and high investment<br />

costs. The lack of contributions from maturity transformation due to the stable interest rate structure prevented<br />

more positive development of business. Thus the figures adjusted for exceptional factors are in line with the expectations<br />

of <strong>DG</strong> HYP, net income for the year having increased by 10%. This can be viewed as a success, as this year's<br />

income statement is affected by extraordinarily ambitious investments in future growth areas of the market. Besides<br />

the formation of VR Kreditwerk AG for the purpose of optimising the processing of loans, <strong>DG</strong> HYP´s focus of on its<br />

future tasks in the area of risk management and refinancing has given rise to considerable start-up costs. However,<br />

these investments are expected to bear fruit over the coming years as they will greatly increase earning power and<br />

add to competitive strength.<br />

In the first nine months of 2000, <strong>DG</strong> HYP approved total new lending of DEM 21.1 billion (30.9.99: DEM 25.2 billion).<br />

The volume of real estate loans approved was well down and failed to reach the high figures of the previous year. In<br />

this segment, the <strong>DG</strong> HYP Group extended just over 15,000 new loans during the period to 30.9.00 with a value of<br />

around DEM 2.7 billion (30.9.99: DEM 6.5 billion) which corresponds to a decrease of 57.6%. This market segment is<br />

traditionally dominated by real estate loans to private customers. This customer group accounted for a lending volume<br />

of around DEM 2.1 billion or 76% of the total real estate lending business generated.<br />

Development of investor lending business was more encouraging. The volume achieved in this segment was<br />

DEM 655 million (-23.0%). Loans extended in this area of business were split between commercial lending, which<br />

accounted for around DEM 519 million, and agricultural lending business, accounting for DEM 136 million.<br />

The situation in the government financing segment is pleasing. The <strong>DG</strong> HYP Group succeeded in almost maintaining<br />

the high level of the previous year in spite of the difficult business environment. In the first three quarters of the current<br />

financial year, new business reached a volume of DEM 18.3 billion (previous year DEM 18.7 billion or -2.0%). Within<br />

this business segment, borrower's note loan business remained largely stable, just edging up by about 1% (DEM 7.0<br />

billion). New business in public sector lending fell by 10% (DEM 6.7 billion). The previous year's large volume of socalled<br />

original municipality lending business – the direct taking up by state institutions of loans extended by the <strong>DG</strong><br />

HYP Group or one of its cooperative partner banks – was improved compared to the good results of the previous<br />

year. Just short of DEM 4.7 billion (+11.3 % compared to 30.9.99) was approved for financing of municipal infrastructure<br />

investments.<br />

For refinancing of its lending business up to 30.9.00 the <strong>DG</strong> HYP group sold Pfandbriefe and other refinancing instruments<br />

to the value of DEM 27.7 billion (previous year DEM 31.6 billion: -12.4%).<br />

59


Despite the restrained level of new business activity, <strong>DG</strong> HYP´s consolidated balance sheet total improved by 12.6%<br />

taking it to its current level of DEM 137.0 billion (as per 30.9.00). The total loan portfolio grew by 10.4% to DEM 129.7<br />

billion. This is divided as follows: government financing DEM 82.3 billion; real estate lending DEM 47.4 billion. The<br />

ratio between the municipal and real estate lending portfolios is around 63:37.<br />

The earnings position is heavily influenced by investment in future operations and – compared to the previous year –<br />

the reduced contributions from maturity transformation. The net interest and commission income result achieved<br />

DEM 423.4 million a decrease of 0.7%. As the risk provisioning charge for the current financial year – using equally<br />

stringent evaluation measures – has at the same time been reduced by a substantial amount, net income for the year<br />

pro rata temporis is 10% up on the comparable figure year-on-year at DEM 82.7 million.<br />

<strong>DG</strong> HYP Consolidated Key Trading Data as at September 30, 2000<br />

DEM mln September 30, September 30, Changes<br />

2000 1999 in %<br />

Loans extended 21,077 25,173 - 16.3<br />

Real estate loans 2,747 6,476 - 57.6<br />

- Home 2,092 5,625 - 62.8<br />

- Commercial 519 610 - 14.9<br />

- Agricultural 136 241 - 43.6<br />

Government financing 18,330 18,697 - 2.0<br />

Pfandbriefe and similar 27,723 31,648 - 12.4<br />

Portfolio 129,670 117,498 10.4<br />

- Real estate loans 47,407 45,985 3.1<br />

- Government financing 82,263 71,513 15.0<br />

Balance sheet total 137,031 121,668 12.6<br />

<strong>DG</strong> HYP Consolidated Performance Data as at September 30, 2000<br />

DEM mln September 30, September 30, Changes<br />

Net interest and<br />

2000 1999 in %<br />

Commission income 423.4 426.4 -0.7<br />

Gross profit 445.5 461.2 - 3.4<br />

Risk provisioning<br />

Operating income after<br />

29.4 78.3 - 62.5<br />

net provision and before tax 200.8 199.7 0.6<br />

Net income for year 82.7 75.2 10.0<br />

60


THE REPO COUNTERPARTY<br />

<strong>DG</strong> BANK DEUTSCHE GENOSSENSCHAFTSBANK AG<br />

Incorporation and Seat<br />

<strong>DG</strong> BANK is incorporated as a stock corporation under the laws of the Federal Republic of Germany. <strong>DG</strong> BANK was<br />

formerly a credit cooperative (called Preußische Central-Genossenschaftskasse), which was founded in Berlin in<br />

1895. Pursuant to the Law governing the Transformation of Deutsche Genossenschaftsbank (Gesetz zur Umwandlung<br />

der Deutsche Genossenschaftsbank) of 18th August, 1998, <strong>DG</strong> BANK was transformed with retroactive effect as of<br />

1st January, 1998 from a corporation under public law to a stock corporation. Since the transformation, <strong>DG</strong> BANK has<br />

operated as <strong>DG</strong> BANK Deutsche Genossenschaftsbank AG.<br />

The corporate seat of <strong>DG</strong> BANK is at Am Platz der Republik, D-60265 Frankfurt am Main, Federal Republic of<br />

Germany. <strong>DG</strong> BANK is registered in the Commercial Register of the local court of Frankfurt am Main under No. HRB<br />

45651.<br />

Statutory Objectives<br />

<strong>DG</strong> BANK conducts general banking business and ancillary transactions.<br />

In its capacity as a central credit institution, <strong>DG</strong> BANK promotes the German cooperative system as a whole. An<br />

essential part of its statutory duty is the advancement of the primary-level German cooperatives and the German<br />

regional cooperative banks. It also assists in the promotion of the cooperative housing industry. Mergers between<br />

primary level cooperative credit institutions and <strong>DG</strong> BANK are not permissible.<br />

As a central credit institution, <strong>DG</strong> BANK carries out the function of liquidity manager pursuant to Section 4, paragraph 7(n)<br />

of the EC Directive on large loans (Directive 92/121/EEC of the Council dated 21st December, 1992 on the monitoring<br />

and control of large loans granted by credit institutions) (EU-Großkreditrichtlinie) on behalf of primary-level German<br />

cooperative credit institutions related to it and the regional cooperative banks.<br />

For the purpose of promoting the cooperative system and the cooperative housing industry <strong>DG</strong> BANK may, in exceptional<br />

cases, depart from the principle of granting loans in line with banking practice. In assessing the justifiability of loans,<br />

cooperative liability may be taken into account.<br />

For a more detailed description of <strong>DG</strong> BANK's business activities, see "Business Activities" below.<br />

Branches<br />

As well as having numerous branches and subsidiaries in Germany, <strong>DG</strong> BANK maintains branches, subsidiaries,<br />

representative offices and affiliates in Amsterdam, Atlanta, Bombay, Budapest, the Cayman Islands, Hong Kong,<br />

Johannesburg, London, Luxembourg, Madrid, Milan, Moscow, New York, Paris, São Paulo, Tokyo, Vienna, Warsaw,<br />

Zurich, as well as in Bangkok, Jakarta, Mexico City, Beijing, Prague, Seoul and Shanghai. <strong>DG</strong> BANK also supplements<br />

its range of services by means of minority interests held in special-purpose institutes and in joint ventures run by the<br />

German banking industry.<br />

Nominal Capital and Ownership<br />

The nominal capital of <strong>DG</strong> BANK presently amounts to € 1,473,638,400.00 divided into 566,784,000 registered nopar-value<br />

shares.<br />

61


The transfer of registered shares and subscription rights arising from such registered shares requires the prior consent<br />

of a three-quarters majority of the voting capital represented at the Shareholders' General Meeting.<br />

The Annual General Meeting of Shareholders of 16th June, 1998 approved the statutory framework for issuing participation<br />

certificates with an aggregate value of € 511,291,881.20 up until 15th June, 2001. Virtually all of such certificates<br />

have been issued.<br />

The Annual General Meeting of Shareholders of 15th June, 1999 authorised the Board of Managing Directors to issue<br />

participation certificates with an aggregate value of up to € 1.0 billion up until 31st December, 2002.<br />

The Annual General Meeting of Shareholders of June 20, 2000 decided to issue participation certificates with an<br />

aggregate nominal amount of up to DM 3.0 million. The participation certificates may only be subscribed for by<br />

employees of <strong>DG</strong> BANK. The lifetime of the participation certificates is limited to the end of the financial year 2006.<br />

Own Funds of <strong>DG</strong> BANK 1 as at<br />

62<br />

31st December<br />

1999 1998<br />

(in € million)<br />

Subscribed capital............................................................................................................ 1,474 1,449<br />

Capital reserves ................................................................................................................ 286 311<br />

Surplus reserves .............................................................................................................. 883 831<br />

Balancing item .................................................................................................................. 73 52<br />

Subscribed capital and reserves on the balance sheet ................................................ 2,716 2,643<br />

Own Funds of <strong>DG</strong> BANK Group 2 as at<br />

31st December<br />

1999 1998<br />

(in € million)<br />

Subscribed capital............................................................................................................ 1,469 1,448<br />

Capital reserves ................................................................................................................ 272 309<br />

Surplus reserves .............................................................................................................. 1,342 1,314<br />

Unappropriated profit attributable to Group .................................................................. 73 52<br />

Total capital and reserves ................................................................................................ 3,156 3,123<br />

1<br />

2<br />

In accordance with the German Commercial Code (Handelsgesetzbuch)<br />

In accordance with International Accounting Standards


<strong>DG</strong> BANK Shareholders as of 31st July, 2000<br />

63<br />

Number of (in %)<br />

no-par value<br />

shares held<br />

Cooperative holding companies ...................................................................................... 304,503,000 53.7247<br />

Regional cooperative banks ............................................................................................ 171,677,000 30.2897<br />

Local cooperative banks .................................................................................................. 6,379,000 1.1255<br />

Other cooperative enterprises ........................................................................................ 26,304,000 4.6409<br />

Cooperative central entities ............................................................................................ 20,441,000 3.6065<br />

Others ................................................................................................................................ 37,480,000 6.6127<br />

Total share capital ............................................................................................................ 566,784,000 100.0000<br />

Capitalisation 1<br />

The audited (non-consolidated) capital and reserves reported by <strong>DG</strong> BANK are as follows:<br />

as at 31st December<br />

1999 1998<br />

(in € million) (in € million)<br />

Outside capital in securitised form<br />

Bonds issued .................................................................................................................... 21,009 16,309<br />

Other liabilities in certificate form 3,633 2,512<br />

Total .................................................................................................................................. 24,642 18,821<br />

Share capital and reserves<br />

Subscribed capital............................................................................................................ 1,474 1,449<br />

Capital reserve and surplus reserves 1,169 1,142<br />

Subscribed capital and reserves 2,643 2,591<br />

Total capitalisation............................................................................................................ 27,285 21,412<br />

1<br />

In accordance with the German Commercial Code (Handelsgesetzbuch)<br />

Save as disclosed herein, there has been no material change in the capitalisation of <strong>DG</strong> BANK since 31st December,<br />

1999.<br />

Management<br />

<strong>DG</strong> BANK's corporate bodies are the Board of Managing Directors, the Supervisory Board and the General Meeting<br />

of Shareholders.<br />

The Board of Managing Directors is responsible for managing the affairs of <strong>DG</strong> BANK as provided by law and the<br />

Articles of Incorporation.<br />

The Board of Managing Directors consists of at least three members, appointed and dismissed by the Supervisory<br />

Board in accordance with the provisions of the German stock corporation law as well as the provisions of the German<br />

Employee Co-Determination Act (Mitbestimmungsgesetz).


The Board of Managing Directors is currently composed as follows:<br />

Dr. Bernd Thiemann (Chairman)<br />

Dr. Heiko Bruns<br />

Dr. Berthold Eichwald<br />

Uwe E. Flach<br />

Dr. Johann Rudolf Flesch<br />

Dr. Friedbert Malt<br />

Bedo Panner<br />

Dr. Friedrich-Leopold Freiherr von Stechow<br />

The Supervisory Board is responsible for supervising the management of <strong>DG</strong> BANK. It consists of 20 members of<br />

which nine members are elected by the General Meeting and ten members by the employees in accordance with the<br />

provisions of the German Employee Co-Determination Act (Mitbestimmungsgesetz). The Federal Association of<br />

German Cooperative Banks (Bundesverband der Deutschen Volksbanken und Raiffeisenbanken e.V.) has the right to<br />

delegate one member of its Board to the Supervisory Board.<br />

The Supervisory Board is currently composed as follows:<br />

Chairman:<br />

Dr. Christopher Pleister<br />

Chairman, Bundesverband der Deutschen Volksbanken und Raiffeisenbanken e.V.<br />

Deputies to the Chairman:<br />

Helga Preußer<br />

Employee, <strong>DG</strong> BANK, 1st Deputy to the Chairman<br />

Dr. Volker Dahlgrün<br />

Spokesman for the Board, Volksbank Hannover eG<br />

Members:<br />

Wolfgang Apitzsch<br />

Attorney at law<br />

Rüdiger Beins<br />

Employee, <strong>DG</strong> BANK<br />

Werner Böhnke<br />

Chairman of the Board of Managing Directors, WGZ-Bank Westdeutsche Genossenschafts-Zentralbank eG<br />

Gerhard Bramlage<br />

Chairman of the Board of Managing Directors, Emsländische Volksbank eG<br />

Dr. Ulrich Brixner<br />

Chairman of the Board of Managing Directors, GZ-Bank AG, Frankfurt/Stuttgart<br />

Carl-Christian Ehlers<br />

Chairman of the Board of Managing Directors, Kieler Volksbank eG<br />

64


Michael Groll<br />

Management employee, <strong>DG</strong> BANK<br />

Siegfried Hägele<br />

Employee, Bausparkasse Schwäbisch Hall AG<br />

Walter Kaufmann<br />

Trade union secretary, Deutsche Angestellten Gewerkschaft<br />

Sigmar Kleinert<br />

Employee, <strong>DG</strong> BANK<br />

Jürgen Partenheimer<br />

Chairman of the Board of Managing Directors, Münchner Bank eG<br />

Adolf Rückl<br />

Employee, Bausparkasse Schwäbisch Hall AG<br />

Gudrun Schmidt<br />

Trade union secretary, Gewerkschaft Handel, Banken und Versicherungen<br />

Rudi Schühle<br />

Deputy Chairman of the Board of Managing Directors, GZ-Bank AG Frankfurt/Stuttgart<br />

Bernhard Sorge<br />

Member of the Board of Managing Directors, Raiffeisen-Volksbank Grafing eG<br />

Winfried Willer<br />

Employee of <strong>DG</strong> HYP<br />

Uwe Zimpelmann<br />

Member of the Board of Managing Directors, Landwirtschaftliche Rentenbank<br />

The General Meeting of Shareholders ratifies the acts of the Board of Managing Directors and the Supervisory Board<br />

and decides on the allocation of profits and, to the extent necessary, the approval of the annual financial statements.<br />

The General Meeting is held at the corporate seat of <strong>DG</strong> BANK or at a place in the Federal Republic of Germany<br />

specified by the Supervisory Board. It is held within the first six months of each financial year.<br />

At the General Meeting, each no-par value share carries one vote.<br />

A qualified majority of 85% of the voting capital represented is required for increases in subscribed capital. In order<br />

to amend the duties of <strong>DG</strong> BANK to promote the cooperative system (as set forth in its Articles of Incorporation), a<br />

qualified majority of 90% of the voting capital represented is required.<br />

65


Trustees<br />

Pursuant to Article 9 sub-paragraph 5 of the Law governing the Transformation of Deutsche Genossenschaftsbank,<br />

the Trustees presently appointed by the Federal Banking Supervisory Authority (Bundesaufsichtsamt für das<br />

Kreditwesen) are:<br />

Trustee: Dr. Ulrich Fahr, Ministerialrat (retd.)<br />

Deputy trustee: Dr. Friedrich Quadflieg, Ministerialdirigent (retd.)<br />

Financial Year<br />

The Bank's financial year corresponds to the calendar year.<br />

Auditors<br />

The Annual General Meeting of 20th June, 2000 appointed PwC Deutsche Revision Aktiengesellschaft<br />

Wirtschaftsprüfungsgesellschaft, Frankfurt am Main, and Wollert-Elmendorff Deutsche Industrie-Treuhand GmbH,<br />

Wirtschaftsprüfungsgesellschaft, Frankfurt am Main, as auditors for the financial year 2000.<br />

The annual financial statements of <strong>DG</strong> BANK and for the Group as of 31st December, 1997 and 1998 were duly audited<br />

by C&L Deutsche Revision Aktiengesellschaft and an unqualified opinion was expressed on each of the statements.<br />

The annual financial statements of <strong>DG</strong> BANK and for the Group as of 31st December, 1999 were duly audited by PwC<br />

Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungsgesellschaft and an unqualified opinion was expressed on<br />

each of the statements.<br />

Right to Issue Covered Notes<br />

Even after its transformation into a stock corporation, <strong>DG</strong> BANK may issue Covered Notes up to fifteen times its liable<br />

equity capital in order to maintain its function as the lead institution of the German cooperative organisation. The right<br />

to issue Covered Notes will be lost if <strong>DG</strong> BANK's statutory objectives (the promotion of the cooperative system as a<br />

whole) is abolished by an amendment to the Articles of Incorporation or if the majority of its share capital is no longer<br />

held by cooperative institutions.<br />

Covered Notes are secured or "covered" by a single segregated, revolving pool of assets which must comply with<br />

the requirements of the Law governing the Transformation of Deutsche Genossenschaftsbank. The holders of<br />

Covered Notes have a preferential claim to this pool of assets. The amount of collateral is sufficient to absorb potential<br />

credit losses, and pay interest on and repay principal of the Covered Notes as they become due. Assets eligible as<br />

collateral for Covered Notes are loans to or guaranteed by European public authorities, and residential or commercial<br />

mortgage loans as outlined in the German Mortgage Banking Act (<strong>Hyp</strong>othekenbankgesetz), claims in respect of loans<br />

secured by mortgages on real estate, claims in respect of secured loans to affiliated cooperative credit institutions<br />

as well as mortgage bonds and similar bonds pursuant to the German Mortgage Banking Act or the Law on Mortgage<br />

Bonds and Similar Bonds Issued by Credit Institutions under Public Law (<strong>Hyp</strong>othekenbankgesetz or Gesetz über<br />

Pfandbriefe und verwandte Schuldverschreibungen öffentlich-rechtlicher Kreditanstalten).<br />

A trustee appointed by the Federal Banking Supervisory Office (Bundesaufsichtsamt für das Kreditwesen) ensures<br />

that the issuance, management and cover of the Covered Notes satisfy legal and statutory requirements.<br />

66


Business Activities<br />

<strong>DG</strong> BANK's range of domestic and international activities includes all aspects of the lending business, the syndication<br />

of loans, money market, foreign exchange, stock issue business and securities trading.<br />

Institutional Customers<br />

In <strong>DG</strong> BANK's business with institutional customers - reflecting its unique position as the central bank for the entire<br />

cooperative system - the activities involving the local cooperative banks are the primary focus.<br />

In keeping with the division of functions within the cooperative banking organisation, the responsiblities of <strong>DG</strong> BANK<br />

include, among other things, providing the credit cooperatives, in their role as distribution banks, with competitive<br />

basic products which may be adapted to the needs of the local cooperative banks. Therefore, <strong>DG</strong> BANK sees itself<br />

as an institution which supports the cooperative banks. On the one hand it provides assistance to the cooperative<br />

banks directly, as end-users, in such areas as balance sheet and liquidity management and technical support. On the<br />

other it acts in a marketing capacity, promoting the services it offers, especially in the fields of investment banking,<br />

electronic banking and international business.<br />

For several years, <strong>DG</strong> BANK has been developing concepts and strategies which enable the cooperative financial<br />

system to realise synergies and economies of scale. It also makes the resulting cooperative products available to third<br />

party customers. Through various subsidiaries, <strong>DG</strong> BANK is able to supply a wide range of products and financial<br />

services which enhances the ability of the banks in the cooperative alliance to compete effectively as full range financial<br />

service providers.<br />

Over the last few years, <strong>DG</strong> BANK has considerably strengthened its business relationships with insurance companies,<br />

banks, pension funds, investment companies, securities houses, public sector institutions, church institutions<br />

pension funds for certain professions and other institutional investors. It is very active for its wholesale clients in the<br />

primary market and secondary markets and, with its own securities offerings, it provides institutional investors with<br />

attractive investment opportunities both in terms of credit quality and liquidity. In addition, <strong>DG</strong> BANK offers a broad<br />

range of specialised services, from electronic banking to derivatives designed to control market risks or for balance<br />

sheet management.<br />

Corporate Customers<br />

The range of the services <strong>DG</strong> BANK provides to Germany's sector of small and medium-sized enterprises is the<br />

cornerstone of its Corporate Customers business. As a bank for small and medium sized enterprises, <strong>DG</strong> BANK,<br />

together with the institutions of the cooperative financial system, maintains business relations with more than 60 per<br />

cent. of the German companies in this segment. The international portion of the products offered by <strong>DG</strong> BANK continues<br />

to grow in importance, whether this be in the coaching of companies expanding into foreign markets, corporate<br />

or investment banking. The increasing demands of small and medium-sized enterprises which are moving into<br />

the transforming economies of eastern Europe and the high-growth markets of Asia is met by <strong>DG</strong> BANK by gradual<br />

expansion in these regions.<br />

The addition of equity financing options and certificated forms of borrowing to traditional corporate banking products<br />

will be an increasingly important focus.<br />

<strong>DG</strong> BANK's business with large corporate customers focuses on structured domestic and foreign financing deals and<br />

capital market activities. Development loans which are granted to both <strong>DG</strong> BANK's own corporate customers and to<br />

the customers of the local cooperative banks working directly with <strong>DG</strong> BANK are becoming an increasingly important<br />

business for <strong>DG</strong> BANK.<br />

67


Real Estate Customers<br />

Through its subsidiaries, <strong>DG</strong> BANK is active in both the commercial and private real estate business. An important<br />

condition for success in the real estate market is the efficient control of all the business activities undertaken by <strong>DG</strong><br />

BANK itself and its specialist subsidiaries and partners. A central task in the management of these activities is risk<br />

management. In the home loan savings business the strategic goal is the expansion into foreign markets which offer<br />

great potential for growth.<br />

Alongside the commercial real estate business, which is conducted by <strong>DG</strong> BANK and its subsidiary Deutsche<br />

Genossenschafts-<strong>Hyp</strong>othekenbank AG and several smaller specialist real estate companies, the most important<br />

business unit is private housing finance which is conducted through Bausparkasse Schwäbisch Hall AG and<br />

Deutsche Genossenschafts-<strong>Hyp</strong>othekenbank AG.<br />

Balance Sheet of <strong>DG</strong> BANK Group<br />

(in accordance with International Accounting Standards)<br />

68<br />

1999<br />

31st December<br />

1998 Changes<br />

(in € million) (in € million) (in %)<br />

Assets<br />

Cash reserve .......................................................................................... 2,964 934 >100.0<br />

Placement with, and loans and advances to, other banks ................ 71,825 68,251 5.2<br />

Loans and advances to (non-bank) customers.................................... 94,732 83,772 13.1<br />

Total provisions for losses or loans and advances.............................. -1,232 -1,277 -3.5<br />

Assets held for dealing purposes ........................................................ 18,266 17,818 2.5<br />

Investments ............................................................................................ 45,244 43,687 3.6<br />

Property and equipment........................................................................ 5,341 4,967 7.5<br />

Other Assets 6,077 5,934 2.4<br />

Total Assets .......................................................................................... 243,217 224,086 8.5<br />

1999<br />

31st December<br />

1998 Changes<br />

(in € million) (in € million) (in %)<br />

Liabilities<br />

Deposit from other banks...................................................................... 87,020 91,478 -4.9<br />

Amounts owed to other depositors ...................................................... 60,368 55,048 9.7<br />

Liabilities arising from dealing .............................................................. 7,110 7,024 1.2<br />

Promissory notes and other liabilities in certificate form .................... 70,196 54,082 29.8<br />

Provisions .............................................................................................. 5,498 5,650 -2.7<br />

Subordinated liabilities .......................................................................... 5,161 3,552 45.3<br />

Other liabilities ...................................................................................... 3,049 3,001 1.6<br />

Minority interests .................................................................................. 1,659 1,128 47.1<br />

Capital and reserves (equity) ................................................................ 3,156 3,123 1.1<br />

Total Liabilities ...................................................................................... 243,217 224,086 8.5


Income Statement of <strong>DG</strong> BANK Group<br />

(in accordance with International Accounting Standards)<br />

69<br />

1st January to 31st December<br />

1999 1998 Changes<br />

(in € million) (in € million) (in %)<br />

Interest income ...................................................................................... 9,840 9,261 6.2<br />

Interest expenses .................................................................................. 8,317 7,782 6.9<br />

Net interest income................................................................................ 1,523 1,479 3.0<br />

Provisions for losses on loans and advances......................................<br />

Net interest income after provisions for losses<br />

200 196 2.1<br />

on loans and advances.......................................................................... 1,323 1,283 3.1<br />

Fee and commission income ................................................................ 1,017 797 27.6<br />

Fee and commission expense .............................................................. 696 553 25.9<br />

Net commission income ........................................................................ 321 244 31.4<br />

Gains less losses arising from dealing activities (net trading income) 273 251 9.0<br />

General administrative expenses.......................................................... 1,704 1,566 8.8<br />

Balance of other operating income and expenses .............................. 212 178 19.0<br />

Operating Profit .................................................................................... 425 390 9.0<br />

Net income from investments .............................................................. 25 215 -88.6<br />

Balance of other sundry income and expense .................................... -67 -79 -15.5<br />

Net Income Before Tax ........................................................................ 383 526 -27.2<br />

Taxes on income .................................................................................... 165 245 -32.9<br />

Net Income ............................................................................................ 218 281 -22.2<br />

of which: Due to minority interests ...................................................... (114) (77) (48.7)<br />

Appropriation of profit<br />

Net income ............................................................................................ 218 281 -22.2<br />

Due to minority interests ...................................................................... 114 77 48.7<br />

Allocation to surplus reserves .............................................................. 31 152 -79.8<br />

Consolidated Profit .............................................................................. 73 52 41.2


Business Developments in the First Half of 2000<br />

Overview of key figures (unaudited)<br />

(based on International Accounting Standards)<br />

<strong>DG</strong> BANK Group<br />

70<br />

1.1.-30.06.2000 1.1.-30.06.1999<br />

(in € million) (in € million)<br />

Operating profit 211 257<br />

Cost-income ratio 74.5% 71.2%<br />

30.06.2000 31.12.1999<br />

Balance sheet total 255,682 243,217<br />

Total credit extended 159,012 146,271<br />

Placements, loans and advances 178,549 166,557<br />

Liabilities 149,195 147,388<br />

Derivates business<br />

Nominal volume 557,150 501,304<br />

Replacement costs 5,636 5,045<br />

BIS ratios<br />

Total capital & reserves 10,517 9,940<br />

Risk positions 109,112 100,862<br />

Total capital ratio 9.6% 9.9%<br />

Core capital ratio 5.4% 5.5%<br />

Total* Total*<br />

Employees 12,092 12,127<br />

In Germany 10,801 10,826<br />

Abroad 1,291 1,301<br />

Long-term ratings<br />

Moody's Investors Service, New York A2-<br />

Fitch, London AA-<br />

Thomson Financial BankWatch, New York AA-<br />

Rating of covered bonds<br />

Standard & Poor's, New York AAA<br />

Fitch, London AAA<br />

* not including trainees<br />

The figures are in euro currency (€). The figures expressing percentage changes are based on a precise calculation of<br />

the comparative values, so that there may be minimal deviations from the rounded down figures in € million.<br />

After positive profit growth during the first three months of 2000, in the second quarter of the year the dynamics of<br />

the profit situation became perceptibly weaker in comparison with the extraordinarily strong corresponding period of<br />

the previous year. Thus, during the overall period under report regular income - at € 1,148 million – only showed an<br />

increase of roughly 4 per cent. (1st half year 1999; € 1,104 million). As of 30th June, 2000, operating profits after risk


provision amounted to € 211 million. In comparison with the value in the corresponding period of the previous year,<br />

this constitutes a drop of 17.7 per cent.; compared with half of the previous year's total, the level stayed almost the<br />

same, with a slight decrease amounting to 0.6 per cent.<br />

On the one hand, this was a result of price increase pressure <strong>DG</strong> BANK has been subjected to on the expenditure<br />

side, as well as the flagging dynamics of important profit-making components. For the first time in years, several factors<br />

resulted in the inability to achieve the good respective figures of the previous year's net interest income. While <strong>DG</strong><br />

BANK has succeeded in increasing its interest income from bank lending and money market transactions, despite the<br />

pronounced recovery tendencies of the economy as a whole, continuing spread-pressure and the financial burdens<br />

caused by rising interest rates led to a decline in the parent bank's net interest income. Similarly, at <strong>DG</strong> BANK's subsidiary,<br />

Deutsche Genossenschafts-<strong>Hyp</strong>othekenbank AG, margin compression in the new mortgage business sector<br />

and a continued rise in interest rates were responsible for the fact that interest income did not live up to expectations.<br />

However, Bausparkasse Schwäbisch Hall AG was able to achieve a gratifying increase in its net interest income.<br />

Interest income derived from construction loans fell in comparison with the previous year because of special mortgage<br />

repayments and loans that were not taken advantage of as a result of low interest rates. Nevertheless, this<br />

decline was more than offset by a large increase in income from capital investments.<br />

Risk provision expenditure in the lending business amounted to € 99 million in the period to 30th June, 2000. Contrary to<br />

the trend in the business sector, this is effectively an increase of 14.5 per cent.; measured against half of the previous<br />

year's total, the rate of increase is reduced to 1.0 per cent.<br />

Development in the service sector was gratifying. With a net commission income of € 242 million, <strong>DG</strong> BANK was able to<br />

exceed the excellent results of the previous year by 89.4 per cent. This increase is primarily a result of the securities<br />

business. Despite increasing competitive pressures, <strong>DG</strong> BANK was able to maintain its leading market position in the<br />

"Neuer Markt"; at present, <strong>DG</strong> BANK is handling 57 companies that it launched into the "Neuer Markt" and, in the first<br />

half of 2000, it was responsible for lead managing thirteen further companies throughout the course of their initial<br />

public offerings. The slight decrease in new real estate property business, which led to a relief from commission<br />

expenditures typical for this business sector, contributed to the good net commission income result.<br />

A downward tendency is being shown in the development of the Group's own account trading. Primarily because of<br />

the extremely weak showing of the second quarter, at € 128 million, the proprietary trading result is 21.2 per cent.<br />

below the good results of the previous year; measured against half of the previous year's total, the decrease amounts<br />

to a comparatively moderate 6.3 per cent.<br />

The expenditure situation has hardly eased at all. <strong>DG</strong> BANK was able to considerably slow down the escalation of<br />

administrative expenses during the second quarter with an increase rate of 3.5 per cent. in relation to the corresponding<br />

period of the previous year, as opposed to the first three months of the year (plus 10 per cent.). However, at<br />

€ 907 million (this is equal to an increase of 6.6 per cent.), the overall expenditure level is too high and necessitates<br />

further cost cutting measures, which in the meantime were initiated at <strong>DG</strong> BANK. However, this cost structure programme<br />

will only lead to demonstrable success if it is combined with goal oriented efficiency improvement measures.<br />

In this context, during the period to 30th June, 2000 there has been further significant progress concerning the pooling<br />

of forces within the cooperative financial association and <strong>DG</strong> BANK demonstrated the innovative and adaptive capacity<br />

of its organisation, especially with regard to European integration.<br />

In October 1999, <strong>DG</strong> BANK and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank") signed a letter<br />

of intent agreeing to combine their international corporate and investment banking activities in a joint venture. The<br />

two partners foresee that the combined entity - so far bearing the working name <strong>DG</strong>-Rabo International ("<strong>DG</strong>RI") -<br />

will provide a full range of capital market, advisory and financing products in the domestic markets of <strong>DG</strong> BANK and<br />

Rabobank, as well as in major European and international markets.<br />

71


<strong>DG</strong> BANK and Rabobank have agreed further details of the merger of their international corporate and investment<br />

banking activities as the first step towards the creation of a pan-European alliance of cooperative banks. Before the<br />

end of this year, <strong>DG</strong> BANK will acquire 50% of the shares of Rabo <strong>Securities</strong> NV, the Dutch equity house of Rabobank<br />

to be then renamed <strong>DG</strong>-Rabo <strong>Securities</strong> N.V.<br />

By the end of the year, <strong>DG</strong> BANK and Rabobank International will also merge their international networks. The combined<br />

network under the lead of Rabobank International should deliver immediate cost synergies to both organisations<br />

as well as provide German corporate customers with more products, services and a global reach, through the<br />

German desks to be established at the Rabobank International offices. The new network will operate in more than 30<br />

countries. As a consequence of combining networks, <strong>DG</strong> BANK's Amsterdam office and Rabobank International's<br />

Frankfurt office will be closed. Certain businesses will continue to be served by <strong>DG</strong> BANK out of Frankfurt where<br />

customers' needs require. At this stage, <strong>DG</strong> BANK will maintain the investment banking units in London, New York<br />

and Tokyo. They will become part of <strong>DG</strong>RI upon the company being operational.<br />

Rabobank will separate Rabobank International, which will then become a legal entity, from Rabobank Nederland. <strong>DG</strong><br />

BANK will separate its investment banking and international corporate banking activities prior to completion of the<br />

joint venture. Completion of this process and the launch of <strong>DG</strong>RI as a fully operational bank is expected during 2002.<br />

Further European cooperative banking organisations will also profit from the advantages which <strong>DG</strong>RI with its prospect<br />

of a Pan-European alliance, can offer to cooperative banks. Thus, in June this year the two partners co-signed<br />

a letter of intent with the Italian Credito Cooperativo, which foresees a basic agreement pertaining to mutual services<br />

and consulting as well as the expansion or development of the business areas of asset management and leasing, in<br />

the spirit of a multi-domestic approach.<br />

The asset management business is to be consolidated within domestic boundaries. In this context, Union Fonds<br />

Holding AG, in which <strong>DG</strong> BANK and the cooperative central banks will have a proportional share, is to play a central<br />

role. Plans foresee a step-by-step amalgamation and national focussing of all asset management activities. At the<br />

same time, the possibility of creating a cooperatively oriented European asset management entity is being assessed.<br />

In this context, the strategic alliance with Rabobank and the Robeco investment company has opened up favourable<br />

prospects.<br />

Similar objectives are the core of the agreement between the Swiss Raiffeisen bank group and <strong>DG</strong> BANK's subsidiary<br />

company, <strong>DG</strong> BANK (Schweiz) AG, which aims at creating a new cooperative platform for European private banking.<br />

In order to strengthen this alliance, the Swiss Raiffeisen bank association will acquire a 25 per cent. share in <strong>DG</strong> BANK<br />

(Schweiz) AG. Clients will benefit from the easier access to an international banking network. Furthermore, the future<br />

objective is to also offer the services of <strong>DG</strong> BANK (Schweiz) AG to groups of cooperative banking institutes from other<br />

countries.<br />

Outlook<br />

In order to prevent significately negative financial burdens as a result of expenditure development, <strong>DG</strong> BANK has set<br />

up a cost structure programme. By means of this programme, the task portfolio will be streamlined, locations will be<br />

optimised and the concentration and management of resources will be directed towards those business fields crucial<br />

to success. In this context, the systematic and speedy realisation of the strategic alliance with the Rabobank will<br />

become a special focus.<br />

72


Nevertheless, the planned adaptation processes are ambitious and must be regarded in light of the volatility of the<br />

markets. This having been said, in the year 2000 as a whole, it might not be easy to match the results of the previous<br />

year.<br />

Balance Sheet <strong>DG</strong> BANK Group<br />

ASSETS 30.06.2000 31.12.1999 Change in per cent.<br />

In million €<br />

Cash reserve 888 2,964 -70.0<br />

Placements with, and loans and advances to, other banks 77,115 71,825 7.4<br />

Loans and advances to (non-bank) customers 101,434 94,732 7.1<br />

Total risk provisions for losses on loans and advances -1,289 -1,232 4.6<br />

Assets held for trading purposes 17,610 18,266 -3.6<br />

Financial investments 48,353 45,244 6.9<br />

Property and equipment 5,437 5,341 1.8<br />

Other assets 6,134 6,077 0.9<br />

TOTAL ASSETS 255,682 243,217 5.1<br />

LIABILITIES 30.06.2000 31.12.1999 Change in per cent.<br />

In million €<br />

Deposits from other banks 86,473 87,020 -0.6<br />

Amounts owed to other depositors 62,722 60,368 3.9<br />

Liabilities arising from trading 7,134 7,110 0.3<br />

Promissory notes and other liabilities in certificate form 79,981 70,196 13.9<br />

Provision for liabilities and charges 5,410 5,498 -1.6<br />

Subordinated capital 5,734 5,161 11.1<br />

Other liabilities 3,282 3,049 7.6<br />

Minority Interests 1,717 1,659 3.5<br />

Capital and reserves (equity) 3,229 3,156 2.3<br />

TOTAL LIABILITIES 255,682 243,217 5.1<br />

73


Income statement <strong>DG</strong> BANK Group<br />

In million € 01.01. - 01.01. - Change in per cent.<br />

74<br />

30.06.2000 30.06.1999<br />

Interest income 5,597 4,729 18.4<br />

Interest expenses 4,819 3,915 23.1<br />

Net interest income 778 814 -4.4<br />

Provision for losses on loans and advances<br />

Net interest income after provision for losses<br />

99 86 14.5<br />

on loans and advances 679 728 -6.6<br />

Fee and commission income 568 443 28.3<br />

Fee and commission expenses 326 315 3.5<br />

Net commission income 242 128 89.4<br />

Net trading income 128 162 -21.2<br />

General administrative expenses 907 850 6.6<br />

Balance of other operating income and expenses 69 89 -23.1<br />

Operating Profit 211 257 -17.7<br />

Movement of capital and reserve positions <strong>DG</strong> BANK Group<br />

in million € 2000<br />

Capital and reserves (equity) as of 01.01.2000<br />

Changes 01.01. - 30.06.2000<br />

3,156<br />

Subscribed capital -1<br />

Capital reserve -2<br />

Surplus reserves 81<br />

Consolidation group changes and changes resulting from currency exchange effects 63<br />

Other changes -5<br />

Capital and reserves (equity) as of 30.06.2000 3,229<br />

Cash flow statement <strong>DG</strong> BANK Group<br />

in million € 2000 1999<br />

Cash and cash equivalents as of 01.01. 2,964 934<br />

Cash flow from operating activities 1,048 2,441<br />

Cash flow from investment activities -3,631 -2,702<br />

Cash flow from financing activities 511 220<br />

Exchange rate induced changes in funds position -4 4<br />

Cash and cash equivalents as of 30.06. 888 897<br />

The half year report was prepared in accordance with the International Accounting Standards (IAS) and is based on<br />

the same accounting and valuation methods as the group financial statement as of 31.12.1999. The consolidation<br />

group has also not changed.


(1) Placements with, and loans and advances to, other banks<br />

in million € Affiliated banks Other banks<br />

30.06.2000 31.12.1999 30.06.2000 31.12.1999<br />

Repayable on demand 739 1,523 1,776 2,557<br />

Term deposits 2,248 801 17,788 8,967<br />

Loans 24,000 24,843 30,564 33,134<br />

Loans and advances as per Balance Sheet 26,987 27,167 50,128 44,658<br />

Provision for risks - - 79 78<br />

Total Loans and Advances<br />

after Provision for Risk 26,987 27,167 50,049 44,580<br />

of which: Reverse Repos 267 0 9,272 6,239<br />

of which: Cooperative central banks 1,950 2,991<br />

(2) Loans and advances to (non-bank) customers<br />

in million € 30.06.2000 31.12.1999<br />

Corporate clients 41,463 37,411<br />

Private clients1 45,247 42,925<br />

Public sector 14,088 13,768<br />

Other 636 628<br />

Loans and advances as per Balance Sheet 101,434 94,732<br />

Provision for risk 1,210 1,154<br />

Total Loans and Advances after Provision for Risk 100,224 93,578<br />

of which: Money market transactions 4,712 4,727<br />

of which: Reverse repos<br />

1<br />

including financially independent private individuals<br />

378 350<br />

(3) Provision for risk<br />

in million € 2000 1999<br />

Position as of 01.01. 1,232 1,277<br />

Additions to provisions<br />

Deductions from:<br />

128 130<br />

Utilisation of provisions 67 71<br />

Writing back of provisions 22 39<br />

Profit neutral changes 18 14<br />

Position as of 30.06. 1,289 1,311<br />

(4) Assets held for trading purposes<br />

in million € 30.06.2000 31.12.1999<br />

Bonds and other fixed interest securities 11,090 10,853<br />

Equity shares and other variable yield securities 895 1,439<br />

Positive market values from derivative financial investments 5,567 5,861<br />

Other assets held for trading purposes 58 113<br />

Total 17,610 18,266<br />

75


(5) Deposits from other banks<br />

in million € Affiliated banks Other banks<br />

30.06.2000 31.12.1999 30.06.2000 31.12.1999<br />

Repayable on demand 4,851 6,576 5,987 4,897<br />

Fixed term deposit or agreed on notice 13,492 21,701 62,143 53,846<br />

Total 18,343 28,277 68,130 58,743<br />

of which: Cooperative central banks 332 5,601<br />

(6) Amounts owed to other depositors<br />

in million € 30.06.2000 31.12.1999<br />

Corporate clients 32,914 31,295<br />

Private clients 25,496 25,748<br />

Public sector 3,005 2,183<br />

Other 1 1,307 1,142<br />

Total 62,722 60,368<br />

1 including savings account deposits<br />

(7) Net interest income<br />

in million € 01.01. - 01.01. -<br />

76<br />

30.06.2000 30.06.1999<br />

Interest income from<br />

Lending and money market business and<br />

fixed interest securities 5,449 4,635<br />

Current income1 Interest expenses for<br />

148 94<br />

Deposits and liabilities in certificate form 4,658 3,825<br />

Subordinated capital 161 90<br />

Total 778 814<br />

1 from equity shares and other variable yield securities as well as other shares in companies, shares in related companies (including transfer of profits agreements)<br />

and shares in companies valued according to the equity method.<br />

(8) Risk provision in the on-balance sheet and off-balance sheet lending business<br />

in million € 01.01. - 01.01. -<br />

30.06.2000 30.06.1999<br />

Additions and deductions in the on-balance sheet<br />

and off-balance sheet lending business -107 -91<br />

Payments received from written-off claims 8 5<br />

Total -99 -86


(9) Net commission income<br />

in million € 01.01. - 01.01. -<br />

77<br />

30.06.2000 30.06.1999<br />

<strong>Securities</strong> business 236 122<br />

Lending and guarantees business 26 30<br />

International lending and payment transaction business 40 41<br />

Asset management 4 42<br />

Other -64 -107<br />

Total 242 128<br />

(10) Net trading income<br />

in million € 01.01. - 01.01. -<br />

30.6.2000 30.6.1999<br />

Trading activities involving<br />

Interest sensitive products 66 119<br />

Share price sensitive products 50 18<br />

Foreign currency, foreign notes and coin, precious metals 13 24<br />

Other trading activities -1 1<br />

Total 128 162<br />

(11) General administrative expenses<br />

in million € 01.01. - 01.01. -<br />

30.06.2000 30.06.1999<br />

Personnel expenses 426 409<br />

Other administrative expenses 396 365<br />

Depreciation on office furniture, fixtures and equipment, land and buildings 85 76<br />

Total 907 850<br />

(12) Balance of other operating income and expenses<br />

in million € 01.01. - 01.01. -<br />

30.06.2000 30.06.1999<br />

Other operating income 717 657<br />

of which: Current income from leasing business 665 574<br />

Other operating expenses 648 568<br />

of which: Depreciation of leasing objects 386 328<br />

Other expenses from leasing business 225 198<br />

Balance 69 89


Other Information<br />

(13) Segment reporting<br />

Institutional Corporate Real estate Other/ Group total<br />

clients clients clients consolidation<br />

In million € 01.01.-30.06. 01.01.-30.06. 01.01.-30.06. 01.01.-30.06. 01.01.-30.06. 01.01.-30.06. 01.01.-30.06. 01.01.-30.06. 01.01.-300.6. 01.01.-30.06.<br />

2000 1999 1 2000 1999 1 2000 1999 1 2000 1999 1 2000 1999 1<br />

Operating income 461 508 201 195 501 488 -15 -132 1,148 1,059<br />

Provision for risk in lending business -1 4 -68 -77 -27 3 -3 -30 -99 -100<br />

Operating profit 198 281 -9 -15 202 246 -180 -299 211 213<br />

Administrative expenses<br />

Cost-income-ratio<br />

267 246 202 198 287 268 151 140 907 852<br />

(in %) 60.9 51.8 79.5 77.7 61.0 58.1 74.5 73.2<br />

1 proportional value 1999<br />

30.06. 31.12. 30.06. 31.12. 30.06. 31.12. 30.06. 31.12. 30.06. 31.12.<br />

2000 1999 2000 1999 2000 1999 2000 1999 2000 1999<br />

Risk positions 42,628 35,851 20,857 19,403 39,040 38,053 6,587 7,555 109,112 100,862<br />

Regulatory capital 3,410 2,868 1,668 1,553 3,123 3,044 2,316 2,475 10,517 9,940<br />

(14) Derivatives business<br />

Nominal volume<br />

Residual time to maturity as of 30.06.2000 Total volume Replacement costs<br />

In million € 1-5 years >5 years 30.06.2000 31.12.1999 30.06.2000 31.12.1999<br />

Interest related business 232,978 150,295 114,344 497,617 436,390 4,038 3,459<br />

Currency related business<br />

Equity share and<br />

45,021 7,710 2,602 55,333 53,449 1,593 1,573<br />

index related business 2,002 688 0 2,690 11,219 1 12<br />

Other business 14 0 0 14 0 0 0<br />

Lending derivatives 10 1,404 82 1,496 246 4 1<br />

TOTAL 280,025 160,097 117,028 557,150 501,304 5,636 5,045<br />

(15) Market price risk<br />

At <strong>DG</strong> BANK the market price risk for trading operations is determined on a daily basis by means of the value-at-risk<br />

concept. At the mid-year point the market price risk for trading operations amounted to € 18.4 million.<br />

The non-trading operations of <strong>DG</strong> BANK are divided into the lending business and the <strong>DG</strong> BANK's own bond issuance<br />

operations as well as the strategic portfolios handled by the executive management. The market price risk for<br />

the lending business and the <strong>DG</strong> BANK's own bond issuance is determined from day to day on the basis of scenarios<br />

selected according to risk-averse principles. At the mid-year point the market price risk in this area amounted to<br />

€ 0.8 million. For the strategic portfolios, the market price risk is determined on a daily basis by means of the valueat-risk<br />

concept. At the mid-year point the market price risk in this area amounted to € 22.9 million.<br />

78


WEIGHTED AVERAGE LIVES OF THE NOTES<br />

General<br />

The yields to maturity on the Notes will be affected by the rate of principal repayments on the Reference Obligations<br />

(including prepayments, which may include amounts received pursuant to a Pay Down Event), the amount and timing<br />

of Write Off Events indicating Reference Entity (i.e. obligor) defaults, the level of EURIBOR from time to time, the purchase<br />

price for the Notes and other factors.<br />

Principal prepayments may be influenced by a variety of economic, geographic, demographic, social, tax, legal and<br />

other factors. In general, if prevailing interest rates fall below the interest rates on the Mortgage Loans, the Mortgage<br />

Loans are likely to be subject to higher prepayments than if prevailing rates remain at or above the interest rates on<br />

the Mortgage Loans. Conversely, if prevailing interest rates rise above the interest rates on the Mortgage Loans, the<br />

rate of prepayment would be expected to decrease. Other factors affecting prepayment of the Mortgage Loans include<br />

changes in Reference Entities' economic situation, changes in the value of the relevant residential properties and servicing<br />

decisions. A Mortgage Loan may be prepaid by the relevant Reference Entity without prepayment fee either<br />

upon six months notice after ten years if an interest period was fixed for longer than ten years, or at a Reset Date. At<br />

all other dates, prepayment is subject to prepayment fees which are determined by the Swap Counterparty in accordance<br />

with its general guidelines and legal requirements applicable to the prepayment of mortgage loans. As a result,<br />

higher prepayments are likely to occur at the applicable reset dates and such other dates when no prepayment penalty<br />

will be payable than on any other date.<br />

The rate of principal repayments on the Reference Obligations will be affected by the amortisation of the Reference<br />

Obligations, the rate and timing of prepayments thereon by the Reference Entities, Work Outs of defaulted Mortgage<br />

Loans and removals of Reference Obligations from the Reference Portfolio due to not meeting the applicable<br />

Eligibility Criteria and/or any Reference Entity not having been substituted in compliance with the conditions to substitution.<br />

The weighted average seasoning from approval date of the Mortgage Loans is approximately 47 months and<br />

such seasoning may influence the performance of the Reference Obligations. The timing of changes in the rate of<br />

Pay-Down Events and removals of Reference Obligations may, and the timing of allocation of the Write-off Amounts<br />

will significantly affect the yield to an investor, even if the average rate of principal repayments experience over time<br />

is consistent with an investor's expectation. Since the rate and timing of principal repayments on the Reference<br />

Obligations will depend on future events and on a variety of factors, no assurance can be given as to such rate or the<br />

timing of principal repayments on the Notes. In general, the earlier a prepayment of principal of the related Reference<br />

Obligations is made, the greater the effect on an investor's yield to maturity. The effect on an investor's yield of principal<br />

repayments occurring at a rate higher (or lower) than the rate anticipated by the investor during the period immediately<br />

following the issue of the Notes may not be offset by a subsequent like decrease (or increase) in the rate of principal<br />

repayments.<br />

Pay-Down Events and removals of Reference Obligations will result in repayments to Noteholders of principal<br />

amounts that would otherwise be redeemed over the remaining terms of the Reference Obligations. The rate of<br />

defaults on the Mortgage Loans will also affect the rate and timing of principal repayment on the Reference<br />

Obligations. In general, defaults on Mortgage Loans are expected to occur with greater frequency in their early years.<br />

If the purchaser of a Note offered at a discount from its initial principal amount calculates its expected yield to maturity<br />

based on an assumed rate of repayment of principal that is faster than that actually experienced on the related<br />

Reference Obligations, the actual yield to maturity may be lower than that so calculated. Comparably, if the purchaser<br />

of a Note offered at a premium calculates its expected yield to maturity based on an assumed rate of repayment of<br />

principal that is slower than that actually experienced on the related Reference Obligations, the actual yield to maturity<br />

may be lower than that so calculated.<br />

79


The yield to maturity of the Notes will be reduced by the exercise of the Clean-up Call or the acceleration of the Notes<br />

due to a Tax Redemption Event or an Event of Default particularly if associated with a faster than expected rate of<br />

principal repayment, as described above.<br />

Weighted Average Life<br />

The following analysis provides one form of analysis of the data available regarding the Reference Portfolio and/or<br />

the Mortgage Loans to estimate a weighted average life ("Weighted Average Life") of the Notes. Data available on<br />

the Mortgage Loans and Reference Portfolio is limited, in particular with respect to historical levels of delinquency<br />

on and prepayments of the Mortgage Loans. Estimations of Weighted Average Life are based upon generalised<br />

assumptions relating to the Mortgage Loans and Reference Portfolio rather than the extrapolation of its past performance.<br />

Assumptions employed in this analysis may or may not be correct. Investors are advised to consider<br />

the validity of any assumptions made before placing any reliance upon the conclusions drawn thereby.<br />

Weighted Average Life refers to the average amount of time that will elapse from the date of issue of the Notes to the<br />

date of distribution to the investor of each euro paid in net reduction of principal of such security (assuming no losses<br />

on the Reference Portfolio). The Weighted Average Life of the Notes will be influenced by, among other things, the<br />

rate at which the principal of the Mortgage Loans is repaid, which may be in the form of amortisation, prepayments<br />

or liquidations.<br />

Prepayments on mortgage loans can be differentiated into (i) prepayments made by the debtors on each interest reset<br />

date and (ii) prepayments made by the debtors within a fixed interest period. Both types of prepayments cannot be<br />

predicted and are affected by various influencing parameters. However, <strong>DG</strong> HYP has recognised that a significant<br />

number of debtors use the possibility to prepay a mortgage on an interest reset date or during a fixed interest period,<br />

respectively.<br />

Although prepayments cannot be predicted, the impact that prepayments of Mortgage Loans may have on the Weighted<br />

Average Life and maturity of the Notes can be analysed through the application of an assumed prepayment rate<br />

("APR"). One method of applying an APR is to assume that within a given period a percentage of the outstanding<br />

principal balance of Mortgage Loans are prepaid. In preparing tables 1 through 5 a similar methodology has been<br />

applied as discussed below.<br />

€ 836.504.782 of the Reference Obligations have reset dates prior to 2010, out of which € 668.478.502 have reset<br />

dates between 2004 and 2010. As mentioned above, <strong>DG</strong> HYP has recognised that a significant number of debtors<br />

use the possibility to prepay a mortgage on an interest reset date. Therefore between 2004 and 2010 a greater amount<br />

of prepayments may occur. In order to evaluate the anticipated increase in prepayments, any APR that is applied must<br />

vary over time in a prepayment pattern (also known as a "prepayment curve"). The following prepayment curve has<br />

been developed to address the anticipated increase in prepayments between 2004 and 2010.<br />

80


Time period Annualised prepayment<br />

01.10.2000-01.01.2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00%<br />

01.01.2002-01.01.2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00%<br />

01.01.2003-01.01.2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00%-4.50%<br />

01.01.2004-01.01.2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50%<br />

01.01.2005-01.01.2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50%-6.14%<br />

01.01.2006-01.01.2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.14%-9.15%<br />

01.01.2007-01.01.2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15%<br />

01.01.2008-01.01.2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15%<br />

01.01.2009-01.01.2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15%-6.32%<br />

01.01.2010-01.01.2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.32%-4.00%<br />

from 01.01.2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.00%<br />

The prepayment curve does not purport to be either a historical description of the prepayments experience of any<br />

pool of the Mortgage Loans or a prediction of the expected rate of prepayments of any Mortgage Loans. Instead it is<br />

presented as a means for comparing the sensitivity of the Notes to faster and slower prepayments. Because prepayments<br />

of Mortgage Loans cannot be predicted, tables 1 through 5 present the repayment of the Notes under varying<br />

levels of prepayment patterns which may or may not apply.<br />

The following assumptions have been used:<br />

1. The Mortgage Loans have been aggregated into pools based on common characteristics.<br />

2. The Initial Principal Balance of each Class of Notes is as indicated on the cover of this <strong>Offering</strong> Circular.<br />

3. Each repayment of principal is received on regularly occurring payment dates commencing October 2000.<br />

4. There are no defaults or late payments on the Reference Obligations.<br />

5. There are no removals of Reference Obligations.<br />

6. The Notes are issued in October 2000.<br />

7. The Reference Pool consists of 53,126 Mortgage Loans.<br />

8. In case of annuity/installment Mortgage Loans the new monthly annuity/installment payment is calculated on each<br />

interest reset date assuming that there is no change in the mortgage type (annuity/installment) and furthermore<br />

there is no decrease in the next monthly principal payment compared to the principal payment on the last monthly<br />

principal payment preceding the interest reset date.<br />

9. Both the effects of prepayments on interest reset dates and within a fixed interest period are taken into account.<br />

The actual characteristics of the Reference Obligations may, and the performance of the Reference Obligations will,<br />

differ from the assumptions used in constructing the tables set out below, which are hypothetical in nature and are<br />

provided only to give a general sense of how the performance of the Reference Portfolio might behave under varying<br />

prepayment scenarios. For example, it is not expected that the Mortgage Loans will prepay at a fixed prepayment<br />

rate on each interest reset date rate until maturity, that all of the Mortgage Loans will prepay at the same rate or that<br />

there will be no defaults or late payments on the Mortgage Loans. Moreover, the diverse remaining terms to maturity<br />

81


of the Mortgage Loans could produce slower or faster principal payments than indicated in the tables at the various<br />

percentages of the prepayment curve specified, even if the weighted average remaining term to maturity of the<br />

Mortgage Loans is as assumed. Any difference between such assumptions and the actual characteristics and performance<br />

of the Reference Obligations or the Mortgage Loans, or actual prepayment or loss experience, will cause<br />

the percentages of the Initial Principal Balance of each Class of Notes outstanding over time and Weighted Average<br />

Life of the Notes to differ (which difference could be material) from the corresponding information in the tables for<br />

each indicated percentage of prepayment curve.<br />

Subject to the foregoing discussion and assumptions (which Investors are advised to consider and evaluate<br />

thoroughly) the following tables indicate the Weighted Average Life of the Notes with the exercise of the Clean-up<br />

Call and set out the percentages of the Initial Principal Balance of each Class of Notes that would be outstanding<br />

after each of the Interest Payment Dates shown at various constant percentages of prepayment curve.<br />

The following table is a short summary of the tables describing the outstanding of the Notes in more detail:<br />

Notes — Weighted Average Lives (Years)<br />

Percentages of Prepayment Curve<br />

25% 50% 75% 100% 125% 150% 175%<br />

Class A1 1.01 0.94 0.89 0.83 0.79 0.75 0.71<br />

Class A2 7.28 6.71 6.20 5.77 5.39 5.07 4.78<br />

Class B 15.49 15.00 13.99 13.46 12.74 11.99 11.00<br />

Class C 15.50 15.00 14.00 13.50 12.75 12.00 11.00<br />

Class D 15.50 15.00 14.00 13.50 12.75 12.00 11.00<br />

82


Table 1<br />

Percentage of Initial Principal Balance of Class A1 Notes<br />

Percentages of Prepayment Curve<br />

Payment Date 25% 50% 75% 100% 125% 150% 175%<br />

Closing Date 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2001 56.20% 52.92% 49.63% 46.35% 43.06% 39.77% 36.47%<br />

October 2002 4.60% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2003 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2004 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2005 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2006 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2007 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2008 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2009 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2010 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2011 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2012 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2013 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2014 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2015 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2016 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

WAL* (Years) 1.01 0.94 0.89 0.83 0.79 0.75 0.71<br />

* The Weighted Average Life ("WAL") of a Note is determined by (i) multiplying each net reduction, if any, of the Principal Balance of the relevant Class by<br />

the number of months from the date of issue of the Note to the related payment date, (ii) adding the results and (iii) dividing the sum by the aggregate of<br />

the net reductions of the Principal Balance of the relevant Class as described in (i) above.<br />

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Table 2<br />

Percentage of Initial Principal Balance of Class A2 Notes<br />

Percentages of Prepayment Curve<br />

Payment Date 25% 50% 75% 100% 125% 150% 175%<br />

Closing Date 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2001 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2002 100.00% 99.59% 97.93% 96.28% 94.64% 93.01% 91.39%<br />

October 2003 86.97% 84.69% 82.43% 80.21% 78.03% 75.87% 73.76%<br />

October 2004 71.13% 68.27% 65.48% 62.76% 60.11% 57.52% 55.00%<br />

October 2005 59.63% 56.33% 53.15% 50.08% 47.13% 44.28% 41.53%<br />

October 2006 53.62% 49.55% 45.68% 41.99% 38.50% 35.18% 32.03%<br />

October 2007 47.39% 42.36% 37.66% 33.29% 29.23% 25.45% 21.94%<br />

October 2008 41.59% 35.81% 30.54% 25.74% 21.38% 17.43% 13.84%<br />

October 2009 35.76% 29.55% 24.02% 19.09% 14.72% 10.84% 7.41%<br />

October 2010 30.28% 24.13% 18.73% 14.00% 9.87% 6.27% 3.14%<br />

October 2011 24.69% 18.96% 13.97% 9.66% 5.93% 2.71% 0.00%<br />

October 2012 19.22% 13.98% 9.49% 5.63% 2.34% 0.00% 0.00%<br />

October 2013 13.47% 8.88% 4.98% 1.67% 0.00% 0.00% 0.00%<br />

October 2014 6.19% 2.60% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2015 3.27% 0.04% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2016 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

WAL* (Years) 7.28 6.71 6.20 5.77 5.39 5.07 4.78<br />

* The Weighted Average Life ("WAL") of a Note is determined by (i) multiplying each net reduction, if any, of the Principal Balance of the relevant Class by<br />

the number of months from the date of issue of the Note to the related payment date, (ii) adding the results and (iii) dividing the sum by the aggregate of<br />

the net reductions of the Principal Balance of the relevant Class as described in (i) above.<br />

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Table 3<br />

Percentage of Initial Principal Balance of Class B Notes<br />

Percentages of Prepayment Curve<br />

Payment Date 25% 50% 75% 100% 125% 150% 175%<br />

Closing Date 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2001 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2002 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2003 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2004 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2005 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2006 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2007 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2008 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2009 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2010 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2011 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 99.47%<br />

October 2012 100.00% 100.00% 100.00% 100.00% 100.00% 94.74% 0.00%<br />

October 2013 100.00% 100.00% 100.00% 100.00% 0.00% 0.00% 0.00%<br />

October 2014 100.00% 100.00% 95.39% 0.00% 0.00% 0.00% 0.00%<br />

October 2015 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2016 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

WAL* (Years) 15.49 15.00 13.99 13.46 12.74 11.99 11.00<br />

* The Weighted Average Life ("WAL") of a Note is determined by (i) multiplying each net reduction, if any, of the Principal Balance of the relevant Class by<br />

the number of months from the date of issue of the Note to the related payment date, (ii) adding the results and (iii) dividing the sum by the aggregate of<br />

the net reductions of the Principal Balance of the relevant Class as described in (i) above.<br />

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Table 4<br />

Percentage of Initial Principal Balance of Class C Notes<br />

Percentages of Prepayment Curve<br />

Payment Date 25% 50% 75% 100% 125% 150% 175%<br />

Closing Date 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2001 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2002 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2003 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2004 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2005 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2006 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2007 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2008 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2009 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2010 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2011 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2012 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 0.00%<br />

October 2013 100.00% 100.00% 100.00% 100.00% 0.00% 0.00% 0.00%<br />

October 2014 100.00% 100.00% 100.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2015 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2016 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

WAL* (Years) 15.50 15.00 14.00 13.50 12.75 12.00 11.00<br />

* The Weighted Average Life ("WAL") of a Note is determined by (i) multiplying each net reduction, if any, of the Principal Balance of the relevant Class by<br />

the number of months from the date of issue of the Note to the related payment date, (ii) adding the results and (iii) dividing the sum by the aggregate of<br />

the net reductions of the Principal Balance of the relevant Class as described in (i) above.<br />

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Table 5<br />

Percentage of Initial Principal Balance of Class D Notes<br />

Percentages of Prepayment Curve<br />

Payment Date 25% 50% 75% 100% 125% 150% 175%<br />

Closing Date 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2001 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2002 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2003 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2004 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2005 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2006 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2007 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2008 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2009 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2010 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2011 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%<br />

October 2012 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 0.00%<br />

October 2013 100.00% 100.00% 100.00% 100.00% 0.00% 0.00% 0.00%<br />

October 2014 100.00% 100.00% 100.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2015 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

October 2016 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%<br />

WAL* (Years) 15.50 15.00 14.00 13.50 12.75 12.00 11.00<br />

* The Weighted Average Life ("WAL") of a Note is determined by (i) multiplying each net reduction if any, of the Principal Balance of the relevant Class by<br />

the number of months from the date of issue of the Note to the related payment date, (ii) adding the results and (iii) dividing the sum by the aggregate of<br />

the net reductions of Principal Balance of the relevant Class described in (i) above.<br />

87


THE CREDIT DEFAULT SWAP AGREEMENT<br />

The description of the Credit Default Swap Agreement set out below consists of a summary of certain provisions of<br />

the Credit Default Swap Agreement and is qualified by reference to the detailed provisions of the Credit Default Swap<br />

Agreement. The following summary does not purport to be complete, and prospective investors must refer to the<br />

Credit Default Swap Agreement for detailed information regarding the Credit Default Swap Agreement.<br />

On or prior to the Closing Date, the Issuer will enter into a credit default swap agreement (the "Credit Default Swap<br />

Agreement") with Deutsche Genossenschafts-<strong>Hyp</strong>othekenbank AG (in such capacity, the "Swap Counterparty")<br />

based on an ISDA Master Agreement (1992 Version, Multicurrency-Cross Border), including a Schedule and<br />

Confirmation (the "Swap Confirmation").<br />

The notional amount under the Credit Default Swap Agreement (the "Notional Swap Amount") will be 1,006,250,000<br />

on the Closing Date and will be reduced on each Interest Payment Date by an amount equal to the sum of (i) any Pay-<br />

Down Amount for the preceding Determination Period, (ii) any Credit Protection Payment for the preceding<br />

Determination Period; and (iii) any other amounts attributable to any redemption, in whole or in part, of the Notes. The<br />

Credit Default Swap Agreement will be terminated and the Notional Swap Amount will be reduced to zero on the<br />

Distribution Date or the Final Distribution Date, as the case may be, or, upon the occurrence of an Event of Default<br />

or a Termination Event, on the Final Determination Date. The sum of the Reference Obligations outstanding in the<br />

Reference Portfolio will at no time exceed the Notional Swap Amount.<br />

The Reference Portfolio and the Reference Obligations<br />

Under the Credit Default Swap Agreement, the Swap Counterparty has designated, as of the Cut-off Date, a<br />

Reference Portfolio consisting of Reference Obligations related to Mortgage Loans secured on residential properties<br />

located throughout the Federal Republic of Germany. A detailed description of the Reference Obligations and the<br />

Mortgage Loans is set out in "The Swap Counterparty's Origination of the Mortgage Loans" and "Servicing and<br />

Administration by VR Kreditwerk AG", below.<br />

On the Closing Date, the Swap Counterparty will deliver to the Issuer and the Security Trustee the Reference Register<br />

containing certain information in encoded form relating to the Reference Obligations and to the Data Trustee pursuant to<br />

the terms of the Data Protection Agreement a Reference List in sealed form containing the information necessary to<br />

decode the Reference Register. Only Reference Obligations denoted in the Reference List and the Reference Register<br />

constitute the Reference Portfolio. None of the Issuer, the Security Trustee or the Noteholders will have the right to<br />

see the Reference List or to know the specific identities of the Reference Entities or any Mortgage Loan, if applicable,<br />

relating to any Reference Entity. See "The Data Protection Agreement".<br />

Credit Protection Payments<br />

If a Credit Event in respect of a Reference Entity occurs on or before the Final Determination Date, the Issuer will be<br />

obliged, subject to certain other conditions to payment, to make a payment to the Swap Counterparty under the<br />

Credit Default Swap Agreement (each a "Credit Protection Payment") in respect of the Reference Obligation related<br />

to such Reference Entity. Prior to the occurrence of an Early Redemption Event, such Credit Protection Payment will<br />

be due and payable on the first Interest Payment Date falling after each Determination Period in which each of the<br />

following conditions to payment are satisfied:<br />

(i) the Swap Counterparty has given written notice of the relevant Credit Event to the Cash Administrator, acting on<br />

behalf of the Issuer;<br />

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(ii) the Swap Counterparty has determined the appropriate Write-off Amount; and<br />

(iii) the Independent Auditor has delivered the Independent Auditor Confirmation in relation to such Reference Obligation.<br />

Following the occurrence of an Early Redemption Event, each such Credit Protection Payment will become due and<br />

payable on the Distribution Date and on the Final Distribution Date, if any, provided that, before such date, the following<br />

conditions to payment have been met:<br />

(a) the Swap Counterparty has given written notice of such Credit Event to the Cash Administrator, acting on behalf<br />

of the Issuer;<br />

(b) the Independent Valuation Expert has determined the appropriate Evaluated Write-off Amount or has verified the<br />

Write-off Amount, if any; and<br />

(c) the Independent Valuation Expert has delivered the Valuation Report in relation to such Reference Obligation and<br />

the respective Evaluated Write-off Amount or the respective Write-off Amount (if applicable).<br />

The aggregate Credit Protection Payments in respect of any Interest Payment Date due and payable on such date<br />

shall equal the Quarterly Write-off Amount. The aggregate Credit Protection Payments due and payable on the Final<br />

Distribution Date shall equal the Aggregate Evaluated Write-off Amount.<br />

Credit Events<br />

With respect to a Reference Obligation and the related Reference Entity, each of the following events will constitute<br />

a credit event under the Credit Default Swap Agreement (each a "Credit Event"):<br />

(i) the Reference Entity becomes delinquent with one or more payments due under a Mortgage Loan amounting in<br />

total to at least one quarter of the amount owed to the Swap Counterparty under such Mortgage Loan during the<br />

current calendar year (including payments which were due in a previous calendar year, but remain unpaid);<br />

(ii) insolvency proceedings are commenced in respect of the Reference Entity; or<br />

(iii) a Mortgage Loan is terminated due to an "important reason" (wichtiger Grund) in relation to the Reference Entity.<br />

As a general principle of German law, the parties to a contract are bound by the terms of such contract. However,<br />

the German courts have developed an exception to this rule, according to which a contract may be terminated<br />

due to the occurrence of an important reason (wichtiger Grund). An important reason is given if circumstances<br />

occur which, upon consideration of the facts and taking into account the interests of the parties to the contract,<br />

would make it unacceptable for the party giving notice to be bound by the terms of such contract. Since the concept<br />

of termination due to an important reason is an exception to the general rule, the parties are not entitled to<br />

terminate the contract only on the basis that, for example, the contract provides for a commercial disadvantage.<br />

The termination due to an important reason and the underlying circumstances are subject to review by the courts.<br />

If a courts holds that the circumstances do not justify the termination of a contract, the party giving notice continues<br />

to be bound by the terms of the contract.<br />

In particular, a party may terminate a contract due to an important reason on the basis that there is a substantially<br />

adverse change of the circumstances. This might justify the termination of a Mortgage Loan by the Swap<br />

Counterparty if, for example, a court orders foreclosure proceedings in respect of the residential property, or a part<br />

of it, securing the Mortgage Loan on behalf of another creditor, or if a Reference Entity's conduct makes it other-<br />

89


wise unreasonable for the Swap Counterparty to continue to provide the Mortgage Loan. In the past, however, a<br />

termination of a mortgage loan granted by the Swap Counterparty due to an important reason has only rarely<br />

occurred.<br />

The Swap Counterparty will generally make its determination as to whether a Credit Event has occurred as soon as<br />

reasonably practicable on the basis of all information available to it in its capacity as lender of the Mortgage Loan.<br />

There may be circumstances in which, due to uncertainties regarding such information, questions of interpretation,<br />

the exercise of judgment by the Swap Counterparty in its capacity as lender of the Mortgage Loan or other reasons,<br />

a determination regarding the occurrence of a Credit Event is delayed. Neither the Swap Counterparty nor any of its<br />

affiliates will have any liability to the Issuer, the Security Trustee or to any Noteholder or any other person as a result<br />

of any such delay.<br />

Upon the occurrence of a Credit Event the principal amount outstanding of the affected Reference Obligation or<br />

Reference Obligations will be recorded in a separate ledger maintained by the Swap Counterparty and will be notified by<br />

the Swap Counterparty to the Issuer, the Swap Calculation Agent, the Note Calculation Agent, the Security Trustee<br />

and the Cash Administrator on the next following Reporting Date.<br />

A Credit Event with respect to a Reference Obligation will cease to exist if the Reference Entity has paid to the Swap<br />

Counterparty all amounts due and overdue on such Reference Obligation before the related Work Out Amount is<br />

transferred to the Swap Counterparty and no other Credit Event has occurred and is in existence with respect to such<br />

Reference Obligation. The Swap Counterparty will have sole discretion to determine whether a Credit Event in relation<br />

to a Reference Obligation has been or can be expected to be cured.<br />

Any principal payments made by a Reference Entity on a Reference Obligation in respect of which a Credit Event has<br />

occurred but for which the Write-off Amount has not been determined will be included in the Reference Obligation<br />

Reduction Amount or, following the Final Determination Date, in the Additional Work Out Amount, and will result in a<br />

corresponding redemption of the Notes.<br />

Determination of Write-off Amounts<br />

Work Out<br />

If after the occurrence of a Credit Event the Swap Counterparty determines that it would be appropriate to attempt<br />

to collect amounts due under the affected Mortgage Loan with a corresponding Reference Obligation, it will do so by<br />

means of a Work Out. For a description of Work Out methods, see "Servicing and Administration by VR Kreditwerk<br />

AG – Work Out".<br />

Work Out methods and terms will be established by the Swap Counterparty on a case-by-case basis. To the extent<br />

the Swap Counterparty has a choice between the Work Out methods, it will use its discretion to select in good faith<br />

the Work Out method which it deems will provide for the greatest recovery of proceeds; however, neither the Issuer<br />

nor the Security Trustee nor the Noteholders will have any right to demand that the Swap Counterparty chooses a<br />

certain Work Out method described above.<br />

Work Out Amount<br />

The Work Out Amount in respect of a Mortgage Loan with a corresponding Reference Obligation in relation to which<br />

a Credit Event has occurred is the amount of any proceeds transferred to the Swap Counterparty as a result of the<br />

Work Out of the related Mortgage Loan, net of, to the extent applicable, any amounts equal to prior ranking rights to<br />

the related residential property granted in favour of third parties, plus accrued but unpaid interest thereon and any<br />

amounts equal to other claims which according to the Law on Compulsory Sale and Administration (Gesetz über die<br />

90


Zwangsversteigerung und Zwangsverwaltung) rank prior to the real rights (Realrechte) securing the Mortgage Loans.<br />

These amounts will not be at the disposal of the Swap Counterparty and details of the calculation will not be available to<br />

the Swap Counterparty.<br />

Work Out Proceeds<br />

Following the Work Out, the Swap Counterparty will determine the Work Out Proceeds for the affected Mortgage<br />

Loan including the corresponding Reference Obligation. The Swap Counterparty will deliver the relevant details of the<br />

calculation based on such Work Out to the Independent Auditor in order that the Independent Auditor Confirmation<br />

be issued. The "Work Out Proceeds" for the affected Reference Obligation is an amount, as verified by the<br />

Independent Auditor, equal to:<br />

(i) to the extent the result of the following calculation is a positive number, the Work Out Amount of the related<br />

Mortgage Loan minus:<br />

(a) first, an amount equal to all fees, disbursements, costs and expenses (excluding internal costs such as prepayment<br />

fees and expenses of the Swap Counterparty) which the Swap Counterparty has paid or incurred in<br />

connection with the Work Out (the "Work Out Expenses"); and<br />

(b) secondly, an amount which equals the aggregate outstanding principal amount of the portions, if any, of any<br />

mortgage loans (including the relevant Mortgage Loan) which are secured by the residential property securing<br />

the Mortgage Loan and which are registered in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register; or<br />

(ii) to the extent the result of the calculation in (i) above is zero or a negative number, zero.<br />

Write-off Amount<br />

On the basis of the Work Out Proceeds the Swap Counterparty will determine the Write-off Amount in respect of the<br />

affected Reference Obligation. The "Write-off Amount" for a Reference Obligation is an amount as verified by the<br />

Independent Auditor equal to the outstanding principal balance of such Reference Obligation as of the Cut-off Date<br />

minus the sum of:<br />

(i) the aggregate amount of repayments of principal by the Reference Entity since the Cut-off Date made up to, and<br />

including, the day on which the Work Out Amount is transferred to the Swap Counterparty which are applied<br />

toward payment of the Reference Obligation; and<br />

(ii) the Work Out Proceeds.<br />

The period from the occurrence of a Credit Event to the actual determination of the Write-off Amount and the Work<br />

Out Proceeds relating to the Reference Obligation giving rise to such Credit Event is mainly dependent on the time<br />

required for the Work Out. If the Work Out of a Mortgage Loan is by means of foreclosure, a Write-off Amount will<br />

only be calculated after (i) foreclosure proceedings are initiated, (ii) the competent court determines a date for the<br />

actual foreclosure and (iii) a third party acquires the residential property subject to foreclosure and (iv) the Work Out<br />

Amount is transferred to the Swap Counterparty. The period between the occurrence of a Credit Event and the determination<br />

and verification of the Write-off Amount and the Work Out Proceeds is usually two years but in some cases<br />

may be longer.<br />

On each Reporting Date and the Final Reporting Date, the Swap Counterparty will distribute a report to the Issuer,<br />

the Swap Calculation Agent, the Note Calculation Agent, the Cash Administrator and the Security Trustee setting out<br />

the Reference Obligation Reduction Amount, number and amounts of Reference Obligations in Credit Event and<br />

91


those cured or satisfied, and Work Out Proceeds and Write-off Amount determined and verified in relation to each<br />

Work Out completed during the preceding Determination Period (the "Swap Counterparty Report").<br />

Independent Auditors and Independent Auditor Confirmation<br />

On each Determination Date on which the Swap Counterparty provides notification of any Write-off Amounts occurred<br />

during the preceding Determination Period, the Issuer or, after the acceleration of the Notes due to an Event of Default<br />

thereunder, the Security Trustee will provide a confirmation of the Independent Auditor (the "Independent Auditor<br />

Confirmation") to the Swap Counterparty and the Cash Administrator and, if the notification is provided by the Issuer,<br />

to the Security Trustee confirming (i) that the affected Reference Obligation was listed in the Reference Register and<br />

met the applicable Eligibility Criteria on the Cut-off Date and, if applicable, that the substitution of the Reference<br />

Entity in respect of such Reference Obligation was effected in compliance with the conditions to substitution set out<br />

in the Credit Default Swap Agreement, and (ii) the calculations (including the procedures relating to the calculations)<br />

of the Write-off Amounts and the Work Out Proceeds, if any, are correct.<br />

On the basis of the information in the Swap Counterparty Report, the Swap Calculation Agent will determine the<br />

amount of the Credit Protection Payment payable by the Issuer to the Swap Counterparty on each Interest Payment<br />

Date. On each Calculation Date, the Swap Calculation Agent will notify the amount of the Credit Protection Payment<br />

payable on the next following Interest Payment Date and the Notional Swap Amount for the next Interest Period to<br />

the Issuer, the Swap Counterparty, the Repo Counterparty, the Note Calculation Agent, the Cash Administrator and<br />

the Security Trustee.<br />

Calculations Final and Binding<br />

All calculations and other determinations made in respect of each Credit Protection Payment will be made in the sole<br />

judgment of the Swap Calculation Agent making such determination and will be final and binding (absent fraud, negligence,<br />

bad faith or manifest error) on the Issuer, the Swap Counterparty, the Security Trustee and each Noteholder.<br />

Reduction of Notional Swap Amount<br />

On each Interest Payment Date, the Notional Swap Amount will be reduced by an amount equal to any Pay-Down<br />

Amount and any Write-off Amount in respect of the preceding Determination Period. The Notional Swap Amount will<br />

also be reduced following the occurrence of an Early Redemption Event (see "Early Termination" below) and on any<br />

redemption of the Class A1 Notes on the Class A1 Final Maturity Date.<br />

"Pay-Down Event" means, as of any Interest Payment Date, any reduction in the Reference Obligations resulting from:<br />

(i) each repayment of principal by a Reference Entity made during the preceding Determination Period in relation to<br />

a Reference Obligation including any principal payment made by a Reference Entity on a Mortgage Loan in<br />

respect of which a Credit Event has occurred but for which the Write-off Amount has not been determined (the<br />

aggregate of such reductions, the "Reference Obligation Reduction Amount"); and<br />

(ii) the determination by the Swap Counterparty and verification by the Independent Auditor of any Work Out<br />

Proceeds following the Work Out of Mortgage Loans with corresponding Reference Obligations in Credit Event<br />

which is completed within the preceding Determination Period; and<br />

(iii) removal of a Reference Obligation from the Reference Portfolio during the preceding Determination Period due to (aa)<br />

such Reference Obligation not meeting the applicable Eligibility Criteria as of the Cut-off Date or (bb) the Reference<br />

Entity in respect of such Reference Obligation not having been substituted in compliance with the conditions to<br />

substitution set out in the Credit Default Swap Agreement.<br />

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To the extent that a Pay-Down Event has occurred, the Swap Calculation Agent will, on each Interest Payment Date,<br />

reduce the Notional Swap Amount by an amount (the "Pay-Down Amount") equal to the sum of:<br />

(i) the Reference Obligation Reduction Amount; and<br />

(ii) the aggregate Work Out Proceeds, if any, determined and verified during the preceding Determination Period; and<br />

(iii) the aggregate outstanding principal balance of any Reference Obligations which have been removed from the<br />

Reference Register during the preceding Determination Period due to such Reference Obligation not meeting the<br />

applicable Eligibility Criteria as of the Cut-off Date or (bb) the Reference Entity in respect of such Reference<br />

Obligation not having been substituted in compliance with the conditions to substitution set out in the Credit<br />

Default Swap Agreement.<br />

"Write-off Event" means, as of any Interest Payment Date, the determination by the Swap Counterparty and verification<br />

by the Independent Auditor within the preceding Determination Period of the Write-off Amount for a Reference<br />

Obligation in Credit Event following a Work Out of the related Mortgage Loan.<br />

On each Interest Payment Date, to the extent that a Write-off Event has occurred during the preceding Determination<br />

Period, the Issuer will apply proceeds from the sale of the Collateral under the Repo-Transaction terminating on the<br />

Repurchase Date preceding such Interest Payment Date or from the liquidation of Eligible Investments during the<br />

Collection Period preceding such Interest Payment Date, as the case may be, to make any Credit Protection<br />

Payments due to the Swap Counterparty in an amount equal to the Quarterly Write-off Amount for the preceding<br />

Determination Period, and the Notional Swap Amount will be reduced accordingly.<br />

Early Termination<br />

The Credit Default Swap Agreement provides for the following termination events (each a "Termination Event"):<br />

(i) failure by the Issuer or the Swap Counterparty to make, when due, any payment under the Credit Default Swap<br />

Agreement if such failure is not remedied three (3) Business Days after notice of such failure is given;<br />

(ii) the Issuer or the Swap Counterparty is subject to any of the insolvency or bankruptcy related events set forth in<br />

the Credit Default Swap Agreement; and<br />

(iii) it is or will become unlawful for the Issuer or the Swap Counterparty to perform or comply with its obligations<br />

under the Credit Default Swap Agreement.<br />

A Termination Event or an event described below under paragraph (iv) of the definition of "Additional Termination<br />

Event" (the occurrence of an Event of Default under the Notes) will entitle the Swap Counterparty to terminate the<br />

Credit Default Swap on the Final Determination Date (without prejudice to any Credit Protection Payment due following<br />

such date) and to enforce the Security Interests granted to it by the Issuer. A Termination Event will constitute<br />

an Event of Default under the Notes. See "Terms and Conditions of the Notes".<br />

In addition, the Credit Default Swap provides for the following additional termination events (each an "Additional<br />

Termination Event"):<br />

(i) the Issuer gives notice of the Clean-Up Call (whether in its own discretion or following a notice from the Swap<br />

Counterparty as described below); or<br />

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(ii) the Issuer gives notice of a Tax Redemption Event; or<br />

(iii) the occurrence of the Final Maturity Date; or<br />

(iv) the occurrence of an Event of Default under the Notes.<br />

If, at any time, the Notional Swap Amount is less than 10% of the Notional Swap Amount on the Closing Date, the<br />

Swap Counterparty will have the right to notify the Issuer, whereupon the Issuer will give notice of a Clean-up Call. In<br />

addition, if income or amounts under the Eligible Investments, the Repurchase Agreement or the Credit Default Swap<br />

Agreement payable to the Issuer become subject to any tax, withholding or deduction, the Swap Counterparty will<br />

have the option (i) to pay the Tax Gross-Up Amounts as part of the Swap Premium or (ii) to terminate the Credit Default<br />

Swap Agreement which will oblige the Issuer to give notice of a Tax Redemption Event.<br />

Settlement of Payments following the occurrence of an Early Redemption Event<br />

After the occurrence of an Early Redemption Event under the Notes, the Swap Counterparty will, on the Final<br />

Reporting Date, provide a final report to the Issuer, the Swap Calculation Agent, the Cash Administrator, the Security<br />

Trustee, the Note Calculation Agent and the Independent Valuation Expert in relation to the repayments under the<br />

Reference Obligations, any Work Out Proceeds received by the Swap Counterparty, any Write-off Amounts determined<br />

and any Credit Events cured during the Determination Period ending on the Final Determination Date and specify<br />

any continuing Credit Events and any Delayed Payment Amounts.<br />

If no Delayed Payment Amount is determined by the Swap Counterparty, the Credit Protection Payment payable by<br />

the Issuer to the Swap Counterparty on the Distribution Date will be equal to the Quarterly Write-off Amount specified in<br />

the report of the Swap Counterparty and verified by the Independent Auditor.<br />

If a Delayed Payment Amount is determined by the Swap Counterparty on the Final Determination Date, then the<br />

Issuer, or if the Issuer fails to do so or the Security Trustee has enforced the Transaction Security Interests the<br />

Security Trustee, will request an independent valuation expert (the "Independent Valuation Expert") to deliver a<br />

report (the "Valuation Report") on the Valuation Date, which will include (i) (a) the Write-off Amount or the Evaluated<br />

Write-off Amount, as the case may be, of each Reference Obligation giving rise to such Delayed Payment Amount,<br />

the (b) Work Out Proceeds or Evaluated Work Out Proceeds in respect of such Reference Obligations, as the case<br />

may be, and (c) the Aggregate Evaluated Write-off Amount and the Aggregate Evaluated Work Out Proceeds in<br />

respect of all such Reference Obligations, and (ii) confirmation that each of the affected Reference Obligations was<br />

listed in the Reference Register and in the Reference List and met the applicable Eligibility Criteria on the Cut-off Date<br />

and, if applicable, that the substitution of a Reference Entity has been effected in compliance with the conditions to substitution<br />

set out in the Credit Default Swap Agreement. The Independent Valuation Expert will make such determinations<br />

and evaluations based on certain valuation criteria and other factors to be considered as set out below and will<br />

deliver its report in respect thereof on the Valuation Date.<br />

The Independent Valuation Expert will utilise the following criteria and other factors to be considered (the "Valuation<br />

Criteria") in determining the Evaluated Work Out Proceeds and Evaluated Write-off Amounts (together "Evaluated<br />

Amounts") of each affected Mortgage Loan:<br />

(i) Assumptions<br />

In determining the Evaluated Amounts of each affected Mortgage Loan, the Independent Valuation Expert will<br />

make the following assumptions:<br />

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(a) all obligations of the Reference Entity under the affected Mortgage Loan, together with the obligations of any<br />

credit support provider in relation to such affected Mortgage Loan, are on the Cut-off Date legal, valid, binding<br />

and enforceable in accordance with their terms subject to principles of law including all limitations resulting<br />

from the laws of bankruptcy, insolvency, or other laws affecting generally the enforcement of creditors' rights;<br />

(b) all reasonable efforts will be made to maximise the value of the claims including without limitation by pursuing<br />

any rights against a guarantor and other credit support providers in accordance with the Swap Counterparty's<br />

normal business practices from time to time;<br />

(c) the residential property to which a Mortgage Loan relates is to be sold through a foreclosure process in which<br />

case seventy percent of the value, fixed by order of the court during a foreclosure process will be assumed;<br />

(d) all information supplied by the Swap Counterparty to the Independent Valuation Expert is true, accurate, complete<br />

and not misleading; and<br />

(e) if any amounts are recovered from a Reference Entity, guarantor or other credit support provider in respect of<br />

an affected Mortgage Loan, the Swap Counterparty will allocate those amounts first to the portion of the mortgage<br />

loans (including the Mortgage Loan) which are registered in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover<br />

Register, second to the outstanding principal balance of the Reference Obligation and third to all other parts<br />

of the mortgage loans.<br />

(ii) Secondary Market Information<br />

In determining the Evaluated Amounts of each affected Mortgage Loan, the Independent Valuation Expert will take<br />

into consideration the market value of the residential property or properties to which the mortgage relates as indicated<br />

by information provided by the Swap Counterparty together with publicly available information on residential<br />

property prices in the area where the residential property is located such as the information on the prices of other<br />

residential property transactions in the area ("Richtwerttabelle") or the index of residential property prices<br />

("Maklerspiegel") issued by associations of estate agents in Germany ("Ring Deutscher Makler" and "Verband<br />

Deutscher Makler") or other publicly available market information as disclosed by the Swap Counterparty.<br />

(iii) Other Factors to be Considered<br />

The Independent Valuation Expert will determine, using all privately available information provided by the Swap<br />

Counterparty to it (subject to any applicable duty of confidentiality) and public information, the Evaluated Amounts<br />

of each affected Mortgage Loan, taking into account:<br />

(a) the likelihood that the failure to pay in respect of the affected Mortgage Loan will be remedied and for the<br />

avoidance of doubt, the Independent Valuation Expert will only assume that a failure to pay will not be remedied<br />

if, in the reasonable determination of the Independent Valuation Expert in light of all communications<br />

between the Independent Valuation Expert and the Swap Counterparty in this regard, there is no likelihood that<br />

the Reference Entity will continue to service and/or repay the Mortgage Loan;<br />

(b) for Mortgage Loans that are not secured by first-ranking mortgages, the existence of precedent and more<br />

senior mortgages (whether constituting Third Party Rights or not) relating to the same residential property and<br />

the amounts owed to the holders of previous and more senior mortgages by the Reference Entity; and<br />

(c) any rights actually exercised by the Swap Counterparty to set off obligations of the Reference Entity under the<br />

affected Mortgage Loan against obligations of the Swap Counterparty to such Reference Entity.<br />

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The Independent Valuation Expert will deliver its report on the Valuation Date. If the Independent Valuation Expert<br />

determines any Aggregate Evaluated Write-off Amount, the Independent Valuation Expert will notify such amount to<br />

the Swap Calculation Agent, and the Credit Protection Payment payable to the Swap Counterparty by the Issuer on<br />

the Final Distribution Date will be an amount equal to such Aggregate Evaluated Write-off Amount.<br />

The Valuation Report delivered by the Independent Valuation Export will (in the absence of wilful default, bad faith or<br />

manifest error) be binding on the Issuer, the Swap Counterparty, the Security Trustee and the Noteholders and (in<br />

which absence as aforesaid) no liability to the Noteholders will attach to the Issuer, the Security Trustee or the<br />

Independent Valuation Expert.<br />

Swap Counterparty Payments<br />

On the Closing Date and subsequently on each Swap Payment Date, the Swap Counterparty will pay to the Issuer an<br />

amount (each, a "Swap Premium") equal to the sum of:<br />

(i) the aggregate amount of interest payable in respect of the Notes on the next following Interest Payment Date less<br />

the amount of any Repo Interest payable to the Issuer by the Repo Counterparty or any substitute repo counterparty<br />

under the relevant Repo-Transaction on the next Repurchase Date or any income payable to the Issuer on<br />

Eligible Investments during the preceding Collection Period; and<br />

(ii) an amount equal to the fees and expenses payable by the Issuer (aa) to the Security Trustee; (bb) in respect of<br />

Jersey taxes and exempt company and statutory fees; and (cc) any Expense Payments due during the following<br />

Interest Period.<br />

On the first anniversary of the Closing Date, and thereafter on each anniversary of the Closing Date, the Swap<br />

Counterparty will pay to the Issuer an additional amount of € 1,500 as Swap Premium.<br />

In the event of an Additional Termination Event attributable to the Clean-Up Call, a Tax Redemption Event or the<br />

occurrence of the Final Maturity Date, the Swap Counterparty will make the following payments as Swap Premium in<br />

each case less any income payable to the Issuer on Eligible Investments:<br />

(a) on the Final Determination Date, the Swap Counterparty will make a payment to the Issuer equal to the sum of (i)<br />

the aggregate amount of interest accruing during the period from and including the Final Determination Date to<br />

but excluding the Distribution Date and (ii) the sum of any fees and expenses payable by the Issuer (aa) to the<br />

Security Trustee; (bb) in respect of Jersey taxes and exempt company and statutory fees; and (cc) to the Service<br />

Providers in respect of any Expense Payments due on or prior to the Distribution Date; and<br />

(b) on the Distribution Date, the Swap Counterparty will make a payment to the Issuer equal to the sum of (i) the<br />

aggregate amount of interest accruing during the Interest Period from and including the Distribution Date to but<br />

excluding the Final Distribution Date and (ii) the sum of any fees and expenses payable by the Issuer (aa) to the<br />

Security Trustee; (bb) in respect of Jersey taxes and exempt company and statutory fees; and (cc) to the Service<br />

Providers in respect of any Expense Payments due on, prior to or after the Final Distribution Date.<br />

Upon the occurrence of an Event of Default under the Notes or a Termination Event, the Swap Counterparty shall not<br />

be required to make any further payments in respect of the Swap Premium.<br />

Each Swap Premium will be payable, and will be deposited, into the Interest Transaction Account on each Swap<br />

Payment Date. However, to the extent that the Swap Counterparty pays any Expense Payments to the relevant<br />

Service Provider or such other person as the Issuer may direct, such payment will discharge the Swap Counterparty's<br />

obligation to make such payment to the Issuer.<br />

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If income or amounts under the Eligible Investments, the Repurchase Agreement or the Credit Default Swap<br />

Agreement payable to the Issuer become subject to any tax, withholding or deduction, the Swap Counterparty will<br />

have the option (i) to pay the Tax Gross-Up Amounts as part of the Swap Premium or (ii) to terminate the Credit Default<br />

Swap Agreement which will result in the occurrence of a Tax Redemption Event.<br />

On the Closing Date, the Swap Counterparty will pay to the Issuer an additional amount representing the initial expenses<br />

related to the issuance of the Notes.<br />

Termination Fee<br />

Upon termination of the Credit Default Swap Agreement, the Issuer will pay to the Swap Counterparty the funds standing<br />

to the credit of the Principal Transaction Account (if any) after payment of all amounts due to all other creditors of the<br />

Issuer has been made (the "Termination Fee").<br />

Governing Law<br />

The Credit Default Swap Agreement will be governed by, and will be construed in accordance with, English law. Each<br />

of the Issuer and the Swap Counterparty will submit to the non-exclusive jurisdiction of the English courts in connection<br />

with the Credit Default Swap Agreement, and the Issuer will appoint Fleetside Legal Representative Services<br />

<strong>Limited</strong>, 9 Cheapside, London EC2V 6AD, United Kingdom to accept service of process on its behalf in England and<br />

the Swap Counterparty will appoint Andersen Legal, 126 The Strand, London to accept service of process on its<br />

behalf in England.<br />

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THE DATA PROTECTION AGREEMENT<br />

The description of the Data Protection Agreement set out below is of a summary of certain provisions of the Data<br />

Protection Agreement and is qualified by reference to the detailed provisions of the Data Protection Agreement. The<br />

following summary does not purport to be complete, and prospective investors must refer to the Data Protection<br />

Agreement for detailed information regarding the Data Protection Agreement.<br />

General<br />

On the Closing Date, the Swap Counterparty in its function as "Data Provider" will deliver (i) pursuant to the terms of<br />

the Credit Default Swap Agreement to the Issuer and the Security Trustee a register containing certain information in<br />

encoded form relating to the Reference Obligations (the "Reference Register") and (ii) pursuant to the terms of the<br />

Data Protection Agreement to the Data Trustee a list in sealed form containing the information necessary to decode<br />

the Reference Register (the "Reference List"). Only Reference Obligations denoted in the Reference List and the<br />

Reference Register constitute the Reference Portfolio. When a Work Out of a Mortgage Loan has been completed,<br />

the Data Provider will ensure that the Reference Register and Reference List are reviewed by the Independent<br />

Auditors and the Data Trustee, respectively, to ascertain that the Reference Obligation in respect of which a Credit<br />

Protection Payment must be made is in the Reference Portfolio.<br />

None of the Issuer, the Security Trustee or the Noteholders will have the right to see the Reference List or to know<br />

the specific identities of the Reference Entities or any Mortgage Loan, if applicable, relating to any Reference Entity.<br />

Review and Update of Reference List<br />

On or prior to the next Determination Date following a Work Out the Data Provider will procure that the Reference List<br />

is reviewed by the Data Trustee and the Reference Register is reviewed by the Independent Auditor to ascertain that<br />

the Reference Obligation in respect of which a Work Out has been completed, among other things, comprised part<br />

of the Reference Portfolio and met the applicable Eligibility Criteria as of the Cut-Off Date and/or any Reference Entity<br />

having been substituted in compliance with the conditions to substitution. The Independent Auditor Confirmation<br />

(which will not contain any personal data relating to the Reference Entities) will be made available to the Data<br />

Provider, the Data Trustee, the Issuer, the Cash Administrator and the Security Trustee.<br />

The Data Provider will amend the Reference Register and the Reference List to remove a Reference Obligation in the<br />

event that it is ascertained that such Reference Obligation did not meet the applicable Eligibility Criteria on the Cut<br />

Off Date or the relevant Reference Entity was not substituted in compliance with the conditions to substitution of<br />

Reference Entities, to amend the details of a Reference Obligation when obligations under the related Mortgage Loan<br />

are assumed by a new Reference Entity, or to remove a Reference Obligation once payment obligations in relation to<br />

such Reference Obligation are fulfilled or a Credit Protection Payment has been made in respect of such Reference<br />

Obligation as soon as reasonably practicable after such amendment, substitution or removal and deliver an updated<br />

Reference Register to the Issuer and the Security Trustee and an updated Reference List to the Data Trustee prior to the<br />

next succeeding Interest Payment Date.<br />

Safe Custody and Surrender of the Reference List<br />

The Data Trustee agrees under the terms of the Data Protection Agreement to keep the Reference List in safe custody<br />

and not to use the Reference List for its own purposes or to distribute the Reference List (or any part thereof) to any<br />

third parties, unless required by law or such distribution is permitted under the terms of the Data Protection<br />

Agreement.<br />

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THE CASH ADMINISTRATION AGREEMENT<br />

The following description of the Cash Administration Agreement consists of a summary of certain provisions of the<br />

Cash Administration Agreement and is qualified by reference to the detailed provisions of the Cash Administration<br />

Agreement. The following summary does not purport to be complete, and prospective investors must refer to the<br />

Cash Administration Agreement for detailed information regarding the Cash Administration Agreement.<br />

General<br />

On or prior to the Closing Date the Issuer, The Chase Manhattan Bank in its various capacities and the Swap<br />

Counterparty will enter into a cash administration agreement (the "Cash Administration Agreement"), pursuant to<br />

which the Issuer will appoint The Chase Manhattan Bank to provide certain services. Under the terms of the Cash<br />

Administration Agreement, The Chase Manhattan Bank will act in the capacity of the "Cash Administrator" in relation<br />

to the Transaction Documents, the "Swap Calculation Agent" in relation to the Credit Default Swap Agreement, the<br />

"Repo Calculation Agent" in relation to the Repurchase Agreement and the "Note Calculation Agent" in relation to<br />

the Notes.<br />

In its capacity as Cash Administrator The Chase Manhattan Bank will:<br />

(i) monitor all payments into and from the Issuer's Accounts. In particular, the Cash Administrator will instruct the<br />

Account Bank, amongst other things, to pay any Credit Protection Payment owed on any Interest Payment Date<br />

under the Credit Default Swap Agreement and any Purchase Price owed on any Purchase Date under each Repo-<br />

Transaction or, any purchase price for Eligible Investments (in the form of securities) as the case may be, on behalf<br />

of the Issuer from amounts standing to the credit of the Principal Collection Account;<br />

(ii) instruct the Transaction Account Bank to make all repayments of principal due in respect of the Notes from<br />

amounts standing to the credit of the Principal Transaction Account and to make all payments due in relation to<br />

interest on the Notes and to any other creditors of the Issuer from amounts standing to the credit of the Interest<br />

Transaction Account in the appropriate order and on the Issuer's behalf; and<br />

(iii) direct the Custodian to accept Collateral purchased by the Issuer from the Repo Counterparty on any Purchase<br />

Date for deposit on behalf of the Issuer, to transfer Collateral into and from the Collateral Deposit Account as<br />

necessary in order to maintain the Required Collateral Value, to transfer Collateral repurchased by the Repo<br />

Counterparty from the Collateral Deposit Account on any Repurchase Date, to transfer income on Collateral<br />

promptly to the Collateral Interest Account in accordance with the terms of the Repurchase Agreement and<br />

instruct the Custodian in relation to the deposit and investment of Eligible Investments and the transfer of income<br />

arising thereon to the Interest Transaction Account.<br />

It will be the responsibility of the Cash Administrator to maintain records and supply reports in respect of transactions<br />

carried out through or in respect of the Issuer's Accounts.<br />

Calculations and Determinations<br />

The Chase Manhattan Bank will:<br />

(i) in its capacity as Note Calculation Agent, determine for each Note of each Class of Notes, the Note Principal<br />

Payment and the Interest Amount payable on each Interest Payment Date, the Note Principal Amount of each Note<br />

and the Principal Amount Outstanding as of each Interest Payment Date and the Pool Factor for each Interest<br />

Period;<br />

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(ii) in its capacity as Note Calculation Agent, determine the Screen Rate for EURIBOR on each Fixing Date;<br />

(iii) in its capacity as Swap Calculation Agent, calculate the Notional Swap Amount and all payments to be made<br />

between the Swap Counterparty and the Issuer including but not limited to the Swap Premium and each Credit<br />

Protection Payment under the Credit Default Swap Agreement; and<br />

(iv) in its capacity as Repo Calculation Agent, calculate the Notional Repo Amount and all payments to be made<br />

between the Repo Counterparty and the Issuer, including, but not limited to the Purchase Price, the Repurchase<br />

Price and Repo Interest under the Repurchase Agreement and issue Repo-Confirmations for and on behalf of the<br />

Issuer for each and any Repo-Transaction entered or to be entered into under the terms of the Repurchase<br />

Agreement. The Repo Calculation Agent will also be responsible for monitoring the Collateral Value and calculating<br />

any Margin Deficit or Margin Surplus on a daily basis in accordance with the terms of the Repurchase Agreement.<br />

Investment in Eligible Investments<br />

If the Repo Counterparty elects not to enter into a new Repo-Transaction or if the Repurchase Agreement is terminated<br />

due to an Acceleration Event thereunder and no substitute repurchase agreement on substantially identical terms is<br />

entered into by the Issuer, the Cash Administrator will invest the amounts which would otherwise have been invested<br />

in a new Repo-Transaction in Eligible Investments. A description of Eligible Investments is contained in the section<br />

"The Collateral and the Eligible Investments" below.<br />

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THE REFERENCE PORTFOLIO<br />

The following description of the Reference Portfolio consists of a summary of certain provisions of the Credit Default<br />

Swap Agreement and the Data Protection Agreement and is qualified by reference to the detailed provisions of the<br />

Credit Default Swap Agreement and the Data Protection Agreement, respectively, to which prospective investors<br />

must refer for detailed information.<br />

The Reference Portfolio and the Reference Obligations<br />

Under the Credit Default Swap Agreement, the Swap Counterparty has designated, as of the Cut-off Date, a portfolio<br />

(the "Reference Portfolio") of Reference Obligations related to mortgage loans (the "Mortgage Loans") which are<br />

secured on residential properties located throughout the Federal Republic of Germany and which are granted to individual<br />

obligors (the "Reference Entities") to which the Swap Counterparty has incurred credit exposure in relation to<br />

its mortgage lending activities. The term "residential property" includes real property as well as hereditary building rights<br />

(Erbbaurechte) created under German law. Erbbaurechte are real property rights permitting the holder to use land for building<br />

purposes.<br />

A portion of many of the Mortgage Loans serves as security ("cover") for <strong>DG</strong> HYP Mortgage Pfandbriefe. The<br />

"Reference Obligations" consist of entire Mortgage Loans or, in respect of Mortgage Loans a portion of which serve<br />

as cover for <strong>DG</strong> HYP Mortgage Pfandbriefe, those portions thereof that do not serve as cover for such <strong>DG</strong> HYP<br />

Mortgage Pfandbriefe. See "<strong>DG</strong> HYP Mortgage Pfandbrief Cover Register". Only Reference Obligations denoted in the<br />

Reference Register and the Reference List constitute the Reference Portfolio and, aside from allowances for substitution<br />

of the Reference Entity or removal described below the constitution of the Reference Portfolio is fixed.<br />

In the event that a Reference Entity transfers title to the underlying residential property in relation to a Mortgage Loan<br />

to a third person, the Swap Counterparty is entitled to substitute the transferee as a substitute Reference Entity for<br />

the existing Reference Entity provided that the following conditions are met:<br />

(i) the substitute Reference Entity must be a natural person or business association in which at least one natural<br />

person is liable without limitation for the original Mortgage Loan and, where the debt is assumed by several<br />

persons, the liability must be joint and several;<br />

(ii) the assumption of the Mortgage Loan is made in connection with the sale of the charged residential property<br />

to the substitute Reference Entity;<br />

(iii) the existence, extent, priority and enforceability (including any immediate execution) of the Mortgage Loan are<br />

not affected by the assumption of debt;<br />

(iv) the assumption of debt satisfies all applicable legal requirements as well as the standard procedures of the<br />

Swap Counterparty; and<br />

(v) the assumption of the Mortgage Loan may not result in an increase of the loan to value ratio of the assumed<br />

Mortgage Loan.<br />

A detailed description of the Mortgage Loans is set out in "The Swap Counterparty's Origination of the Mortgage<br />

Loans" below.<br />

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The <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register<br />

<strong>DG</strong> HYP Pfandbriefe are debt securities issued under German law that must be secured ("covered") by mortgage<br />

loans or obligations of public sector debtors (or certain other qualifying assets) and whose terms must otherwise<br />

comply with the requirements and limitations imposed by the Mortgage Banking Act. Pfandbriefe are general obligations<br />

of the issuing bank, and no separate vehicle is created for their issuance in general or for the issuance of any<br />

specific series of Pfandbriefe.<br />

Only mortgage loans (or a portion thereof) with a loan-to-value ("LTV") ratio (i.e. the principal amount of a loan expressed<br />

as a percentage rate of the "lending value" of the mortgaged residential property as determined in accordance with<br />

the Mortgage Banking Act) not exceeding 60% qualify for inclusion in the asset pool backing the mortgage<br />

Pfandbriefe. The Mortgage Banking Act requires banks issuing mortgage Pfandbriefe to keep a register recording the<br />

mortgage loan and the percentage of the lending value of the residential property securing the mortgage loan which<br />

serves as 'cover' for the mortgage Pfandbriefe. See also "The Collateral" - "German Pfandbriefe". The Mortgage<br />

Loans and the percentage of the lending value of the real properties securing the Mortgage Loans which serve as<br />

cover for <strong>DG</strong> HYP Mortgage Pfandbriefe are registered in the "<strong>DG</strong> HYP Mortgage Pfandbrief Cover Register".<br />

Eligibility Criteria<br />

As of the Cut-off Date, each Mortgage Loan and the corresponding Reference Obligation satisfied the following criteria<br />

(the "Eligibility Criteria" and each an "Eligibility Criterion"):<br />

(i) The Swap Counterparty is the legal and beneficial owner of the outstanding principal amount of each<br />

Reference Obligation.<br />

(ii) Each Mortgage Loan, together with any other security in addition to the security on residential property (including,<br />

without limitation, any other credit support therefor such as assignment of life insurance or similar financial or<br />

savings products), constitutes a valid, binding and legally enforceable obligation of the Reference Entity and,<br />

as the case may be, any guarantor or other credit support provider.<br />

(iii) No Mortgage Loan has become overdue since 1994 within the meaning of that term in the internal operational<br />

guidelines of the Swap Counterparty.<br />

(iv) Each Mortgage Loan was originated, or transferred to, and booked by or on behalf of the Swap Counterparty<br />

in accordance with its usual origination and booking procedures for the mortgage loans of that type in effect<br />

at the date the Mortgage Loan was originated or transferred.<br />

(v) Each Reference Obligation is denominated in DEM or euro.<br />

(vi) The aggregate of the principal amounts outstanding under the Reference Obligations does not exceed<br />

DEM 1,968,420,491.34/€ 1,006,437,416.00.<br />

(vii) No Mortgage Loan exceeds the amount permitted by the German Mortgage Banking Act<br />

(<strong>Hyp</strong>othekenbankgesetz) (the "Mortgage Banking Act").<br />

(viii) No Reference Entity is an employee or executive (Organmitglied) of the Swap Counterparty.<br />

(ix) No amounts have been written off and no loss provisions have been made by the Swap Counterparty in respect<br />

of any Reference Obligation or Mortgage Loan.<br />

102


(x) Each Mortgage Loan satisfies the standard requirements of the Swap Counterparty concerning mortgage loans<br />

which include:<br />

(a) A legally binding contract exists between the Swap Counterparty and the Reference Entity.<br />

(b) The terms of interest as well as the terms of repayment of principal are determined in the loan contract or<br />

the reset confirmation respectively and are in compliance with the legal form requirements.<br />

(c) The security object is clearly defined through the land register data.<br />

(d) The loan contract includes a security agreement (Sicherungszweckerklärung).<br />

(e) The loan contract includes an obligation of the Reference Entity to provide for a mortgage security to be<br />

registered with the land register (grundbuchrechtliche Sicherheit).<br />

(f) The Reference Entity has no right to terminate the loan during the fixed interest period except for the legally<br />

given termination right.<br />

(g) The Swap Counterparty has the contractual right to terminate the loan in case of non-payment by the<br />

Reference Entity.<br />

(xi) All residential property securing the Mortgage Loans is located in the Federal Republic of Germany.<br />

(xii) Security Interests (if any) in favour of parties other than the Swap Counterparty are fully reflected in the loan to<br />

value calculation regarding such Mortgage Loan.<br />

(xiii) No Mortgage Loan has a variable interest rate.<br />

(xiv) The approval dates or oldest reset dates of the Mortgage Loans were between 1st January, 1991 and<br />

31st March, 2000, (approval) and between 1st January, 1991 and the Cut-off Date (reset), respectively.<br />

(xv) All Mortgage Loans have been extended for residential purposes (Wohnungsbau) as defined by the Swap<br />

Counterparty.<br />

(xvi) No Mortgage Loan had an original nominal amount in excess of DEM 1.5 million.<br />

(xvii) No Reference Entity is a financial institution or a legal entity (Juristische Person).<br />

On the Cut-off Date, there were 53,126 Reference Obligations granted to Reference Entities in the Reference Portfolio.<br />

Aside from allowances for substitution of Reference Entities or the removal of Reference Obligations, the constitution<br />

of the Reference Portfolio is fixed. The Reference Portfolio is constituted only by those Reference Obligations denoted in<br />

the Reference Register and the Reference List.<br />

The Swap Counterparty monitors the write-off and recovery experience with respect to its mortgage loans in general, but<br />

does not separately trace historical write-off and recovery information for mortgage loans registered in the <strong>DG</strong> HYP<br />

Mortgage Pfandbrief Cover Register and those not registered in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register.<br />

103


The Reference Portfolio has the aggregate characteristics indicated in the tables below.<br />

1. Type of Mortgage Loan<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Type of Mortgage Loan Loans Balance Balance Balance Loan Balance<br />

Annuity 44,979 823,094,264 81.8 4,254,286,861 84.8<br />

Bullet 7,786 178,722,629 17.8 756,314,317 15.1<br />

Installment 361 4,620,523 0.5 5,717,908 0.1<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

104


2. Range of original balance of Mortgage Loan<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Range of original balance Loans Balance Balance Balance Loan Balance<br />

1 - 50,000 7,314 80,593,608 8 234,247,348 4.7<br />

50,001 - 100,000 24,622 326,313,744 32.4 1,711,722,818 34.1<br />

100,001 - 150,000 14,043 292,273,728 29 1,593,035,489 31.8<br />

150,001 - 200,000 4,366 139,981,124 13.9 699,120,725 13.9<br />

200,001 - 250,000 1,311 58,988,466 5.9 273,860,234 5.5<br />

250,001 - 300,000 577 31,114,704 3.1 146,918,788 2.9<br />

300,001 - 400,000 497 36,724,582 3.6 161,232,853 3.2<br />

400,001 - 500,000 193 17,310,090 1.7 80,185,698 1.6<br />

500,001 - 750,000 184 20,645,449 2.1 102,197,527 2<br />

750,001 - 1,000,000 19 2,491,919 0.2 13,797,605 0.3<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

Minimum: 2,045<br />

Maximum: 766,938<br />

Average: 98,898<br />

3. Range of current balance of Mortgage Loan<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Range of current balance Loans Balance Balance Balance Loan Balance<br />

1 - 50,000 9,851 105,962,937 10.5 353,788,133 7.1<br />

50,001 - 100,000 24,818 341,009,288 33.9 1,853,412,892 36.9<br />

100,001 - 150,000 12,502 280,002,497 27.8 1,501,600,280 29.9<br />

150,001 - 200,000 3,561 126,190,440 12.5 602,744,190 12<br />

200,001 - 250,000 1,168 55,725,182 5.5 258,615,848 5.2<br />

250,001 - 300,000 443 26,415,768 2.6 120,034,896 2.4<br />

300,001 - 400,000 444 34,245,368 3.4 151,579,856 3<br />

400,001 - 500,000 185 17,945,820 1.8 82,192,968 1.6<br />

500,001 - 750,000 147 18,137,299 1.8 87,022,427 1.7<br />

750,001 - 1,000,000 7 802,817 0.1 5,327,597 0.1<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

Minimum: 836<br />

Maximum: 766,938<br />

Average: 94,423<br />

105


4. Range of Reference Obligation balance<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Range of Reference Obligation Loans Balance Balance Balance Loan Balance<br />

1 - 10,000 18,942 95,447,615 9.5 1,333,427,922 26.6<br />

10,001 - 20,000 16,292 238,973,704 23.7 1,330,611,425 26.5<br />

20,001 - 30,000 9,056 220,201,356 21.9 939,960,862 18.7<br />

30,001 - 40,000 3,903 133,754,616 13.3 479,443,358 9.6<br />

40,001 - 50,000 1,917 85,059,504 8.5 277,316,937 5.5<br />

50,001 - 75,000 1,952 116,568,588 11.6 345,903,538 6.9<br />

75,001 - 100,000 576 49,206,096 4.9 134,663,089 2.7<br />

100,001 - 125,000 219 24,186,663 2.4 64,743,306 1.3<br />

125,001 - 150,000 143 19,479,875 1.9 51,954,898 1<br />

150,001 - 175,000 63 10,162,845 1 26,339,193 0.5<br />

175,001 - 200,000 25 4,557,475 0.5 11,046,230 0.2<br />

200,001 - 225,000 20 4,172,670 0.4 10,422,190 0.2<br />

225,001 - 250,000 8 1,860,885 0.2 4,184,860 0.1<br />

250,001 - 275,000 4 1,065,459 0.1 2,488,026 0<br />

275,001 - 300,000 5 1,415,231 0.1 3,286,252 0.1<br />

300,001 - 400,000 1 324,834 0 526,999 0<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

Minimum: 0<br />

Maximum: 324,834<br />

Average: 18,944<br />

106


5. Range of interest payable on Mortgage Loans<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Range of interest payable Loans Balance Balance Balance Loan Balance<br />

2.501 - 3.000 5 195,188 0 622,832 0<br />

3.001 - 3.500 38 1,219,821 0.1 4,394,841 0.1<br />

3.501 - 4.000 166 6,042,072 0.6 21,821,614 0.4<br />

4.001 - 4.500 519 14,812,051 1.5 54,538,306 1.1<br />

4.501 - 5.000 3,525 85,427,360 8.5 345,308,554 6.9<br />

5.001 - 5.500 8,152 186,962,835 18.6 802,053,957 16<br />

5.501 - 6.000 10,539 213,533,237 21.2 1,002,342,374 20<br />

6.001 - 6.500 8,638 160,149,964 15.9 810,797,825 16.2<br />

6.501 - 7.000 9,695 164,206,764 16.3 916,924,595 18.3<br />

7.001 - 7.500 7,184 110,276,222 11 661,084,899 13.2<br />

7.501 - 8.000 3,274 45,500,846 4.5 283,628,296 5.7<br />

8.001 - 8.500 1,042 13,655,132 1.4 86,772,427 1.7<br />

8.501 - 9.000 304 3,917,334 0.4 23,252,308 0.5<br />

9.001 - 9.500 42 497,938 0 2,666,890 0.1<br />

9.501 - 10.000 3 40,651 0 109,369 0<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

Minimum: 2.580<br />

Maximum: 9.600<br />

weighted average interest: 6.228<br />

107


6. Next reset date (year)<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Next reset date (year) Loans Balance Balance Balance Loan Balance<br />

2000 821 13,511,089 1.3 67,440,060 1.3<br />

2001 1,946 34,476,521 3.4 164,168,444 3.3<br />

2002 2,277 40,029,247 4 190,805,909 3.8<br />

2003 5,002 80,009,423 7.9 445,227,275 8.9<br />

2004 4,104 65,585,149 6.5 378,427,891 7.5<br />

2005 4,078 67,381,969 6.7 371,444,441 7.4<br />

2006 6,579 112,050,390 11.1 616,412,774 12.3<br />

2007 7,261 132,076,510 13.1 687,489,519 13.7<br />

2008 8,528 176,105,375 17.5 823,002,402 16.4<br />

2009 4,653 107,393,574 10.7 458,626,143 9.1<br />

2010 387 7,885,535 0.8 33,930,846 0.7<br />

2011 309 6,670,487 0.7 31,242,019 0.6<br />

2012 1,012 18,924,360 1.9 100,364,694 2<br />

2013 2,938 66,117,717 6.6 302,329,677 6<br />

2014 2,606 63,437,232 6.3 276,259,666 5.5<br />

2015 33 608,279 0.1 3,295,425 0.1<br />

2016 8 205,882 0 1,146,046 0<br />

2017 25 542,829 0.1 2,823,702 0.1<br />

2018 93 2,570,534 0.3 11,116,318 0.2<br />

2019 428 10,019,687 1 46,610,189 0.9<br />

2020 6 139,766 0 538,932 0<br />

2021 3 62,635 0 377,335 0<br />

2022 5 43,751 0 522,422 0<br />

2023 7 208,854 0 760,078 0<br />

2024 5 98,287 0 501,696 0<br />

2025 2 62,326 0 283,256 0<br />

2026 3 73,859 0 407,733 0<br />

2027 2 32,121 0 196,501 0<br />

2028 4 92,653 0 480,775 0<br />

2029 1 21,372 0 86,920 0<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

earliest reset date: 29th July, 2000<br />

latest date: 30th August, 2029<br />

108


7. Seasoning from approval date (months)<br />

# of Reference % of Reference Mortgage % of<br />

Seasoning from Mortgage Obligation Obligation Loan Mortgage<br />

approval date (months) Loans Balance Balance Balance Loan Balance<br />

1 - 12 1,866 44,797,832 4.5 185,776,976 3.7<br />

13 - 24 11,971 285,003,498 28.3 1,191,526,201 23.8<br />

25 - 36 9,618 191,497,733 19 913,660,702 18.2<br />

37 - 48 9,096 167,090,917 16.6 874,491,519 17.4<br />

49 - 60 6,357 109,311,419 10.9 602,480,108 12<br />

61 - 72 2,727 44,513,012 4.4 262,173,353 5.2<br />

73 - 84 5,976 92,325,731 9.2 565,739,933 11.3<br />

85 - 96 2,047 29,091,400 2.9 181,618,664 3.6<br />

97 - 108 490 6,328,510 0.6 38,571,839 0.8<br />

109 - 120 173 2,441,610 0.2 11,983,697 0.2<br />

121 - 132 208 3,325,150 0.3 16,600,639 0.3<br />

133 - 144 322 3,673,388 0.4 22,683,783 0.5<br />

145 - 156 462 4,827,489 0.5 30,673,753 0.6<br />

157 - 168 378 3,639,505 0.4 23,541,234 0.5<br />

169 - 180 363 3,893,909 0.4 24,196,696 0.5<br />

181 - 192 139 1,858,190 0.2 10,209,222 0.2<br />

193 - 204 229 3,499,250 0.3 16,482,945 0.3<br />

205 - 216 319 4,607,299 0.5 22,160,869 0.4<br />

217 - 228 142 2,016,327 0.2 8,826,837 0.2<br />

229 - 240 102 1,331,306 0.1 5,909,874 0.1<br />

241 - 252 29 390,001 0 1,931,444 0<br />

253 - 264 51 517,908 0.1 2,505,913 0<br />

265 - 276 30 229,893 0 1,437,206 0<br />

277 - 288 13 93,047 0 523,503 0<br />

289 - 300 5 49,456 0 172,268 0<br />

301 - 312 1 1,813 0 15,720 0<br />

325 - 336 8 70,723 0 279,024 0<br />

337 - 348 3 4,984 0 109,748 0<br />

349 - 360 1 6,118 0 35,415 0<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

Minimum: 4<br />

Maximum: 358<br />

weighted average seasoning: 47<br />

109


8. Remaining term to maturity of Reference Obligation (months)<br />

# of Reference % of Reference Mortgage % of<br />

Remaining term to Mortgage Obligation Obligation Loan Mortgage<br />

maturity (months) Loans Balance Balance Balance Loan Balance<br />

0 - 60 15,365 111,499,142 11.1 1,327,890,424 26.5<br />

61 - 120 16,268 281,164,649 27.9 1,558,217,010 31.1<br />

121 - 180 12,445 305,959,279 30.4 1,270,794,725 25.3<br />

181 - 240 4,947 162,856,520 16.2 513,435,882 10.2<br />

241 - 300 2,441 86,283,497 8.6 231,772,851 4.6<br />

301 - 360 1,096 36,057,765 3.6 87,542,403 1.7<br />

361 - 420 473 18,636,019 1.9 22,473,265 0.4<br />

421 - 480 90 3,932,893 0.4 4,054,478 0.1<br />

481 - 540 1 47,652 0 138,049 0<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

Minimum: 0<br />

Maximum: 484<br />

weighted average remaining term: 153<br />

9. Payment frequency of Mortgage Loan<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Payment frequency Loans Balance Balance Balance Loan Balance<br />

Bullet 7,786 178,722,629 17.8 756,314,317 15.1<br />

Monthly 44,979 823,117,906 81.8 4,254,411,585 84.8<br />

Quarterly 3 36,943 0 89,606 0<br />

Semi-Annually 2 25,422 0 32,478 0<br />

Yearly 356 4,534,515 0.5 5,471,100 0.1<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

110


10. Employment status<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Employment status Loans Balance Balance Balance Loan Balance<br />

Employed 43,555 770,035,453 76.5 3,898,384,916 77.7<br />

Other self employed 6,308 168,038,426 16.7 780,125,813 15.6<br />

Other revenue receiver<br />

Self employed<br />

2,086 42,538,063 4.2 212,920,417 4.2<br />

(not registered) 548 12,393,524 1.2 62,140,509 1.2<br />

Civil servant<br />

Civil law partnership<br />

593 12,562,919 1.2 57,309,702 1.1<br />

of individuals 19 464,789 0 2,793,519 0.1<br />

Self employed<br />

Civil law partnership<br />

16 375,847 0 2,600,887 0.1<br />

of self employed 1 28,395 0 43,325 0<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

11. Type of residential property<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Type of residential property Loans Balance Balance Balance Loan Balance<br />

Single Family 26,189 469,172,016 46.6 2,454,677,034 48.9<br />

Flat 19,178 308,090,738 30.6 1,475,209,744 29.4<br />

Multi Family 2,813 105,015,798 10.4 483,686,720 9.6<br />

Two Family 3,119 61,780,556 6.1 311,965,437 6.2<br />

Mixed 1,430 51,764,122 5.1 240,295,120 4.8<br />

Three Family 397 10,614,185 1.1 50,485,032 1<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

12. Region of residential property<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Property region Loans Balance Balance Balance Loan Balance<br />

North 20,289 359,337,954 35.7 1,787,572,067 35.6<br />

West 10,987 207,679,653 20.6 1,052,921,772 21<br />

East 9,102 185,442,707 18.4 866,232,201 17.3<br />

Southwest 7,253 147,173,607 14.6 766,611,231 15.3<br />

South 5,495 106,803,495 10.6 542,981,815 10.8<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

111


13. Type of occupancy of residential property<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Property occupancy type Loans Balance Balance Balance Loan Balance<br />

Self Used 33,310 560,720,334 55.7 2,917,581,139 58.2<br />

Invest 16,113 361,705,885 35.9 1,687,735,597 33.6<br />

Mixed 3,703 84,011,197 8.3 411,002,351 8.2<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

14. Family status<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Family status Loans Balance Balance Balance Loan Balance<br />

Married 37,643 732,047,663 72.7 3,682,689,777 73.4<br />

Single 10,874 186,903,166 18.6 912,682,481 18.2<br />

Divorced 3,175 58,566,602 5.8 279,804,308 5.6<br />

Widowed 737 13,501,866 1.3 69,737,501 1.4<br />

Separated 498 9,848,146 1 45,478,697 0.9<br />

NA 199 5,569,973 0.6 25,926,323 0.5<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

15. Postal code (first number)<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

Postal code Loans Balance Balance Balance Loan Balance<br />

0 2,921 57,882,976 5.8 283,468,001 5.7<br />

1 4,892 102,811,060 10.2 460,097,188 9.2<br />

2 13,247 237,143,104 23.6 1,154,804,406 23<br />

3 8,051 141,207,163 14 725,589,655 14.5<br />

4 6,481 117,948,210 11.7 603,623,739 12<br />

5 6,707 130,325,374 12.9 665,857,583 13.3<br />

6 3,738 81,917,832 8.1 424,485,073 8.5<br />

7 4,164 76,581,182 7.6 400,830,751 8<br />

8 1,390 29,193,839 2.9 145,517,725 2.9<br />

9 1,535 31,426,676 3.1 152,044,965 3<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

112


16. LTV Ratio (calculated on the basis of the LTV (loan to value) Ratio determined by <strong>DG</strong> HYP in accordance with<br />

the substantive requirements of § 12 of the German Mortgage Banking Act (<strong>Hyp</strong>othekenbankgesetz)<br />

# of Reference % of Reference Mortgage % of<br />

Mortgage Obligation Obligation Loan Mortgage<br />

LTV Ratio % Loans Balance Balance Balance Loan Balance<br />

60.0 - 69.9 20,980 158,960,293 15.8 1,848,372,562 36.8<br />

70.0 - 79.9 22,284 464,297,856 46.1 2,100,270,488 41.9<br />

80.0 - 89.9 6,420 212,219,515 21.1 668,619,650 13.3<br />

90.0 - 99.9 2,170 98,867,942 9.8 245,937,846 4.9<br />

100.0 - 109.9 929 52,405,458 5.2 113,058,640 2.3<br />

110.0 - 119.9 322 18,637,269 1.9 38,468,901 0.8<br />

120.0 - 129.9 11 556,953 0.1 945,023 0<br />

130.0 - 139.9 1 15,804 0 28,689 0<br />

140.0 >= 9 476,326 0 617,289 0<br />

Total: 53,126 1,006,437,416 100 5,016,319,087 100<br />

All amounts in euro<br />

Any inaccuracies are due to rounding.<br />

Minimum: 60.0<br />

Maximum: 197.0<br />

Weighted Average LTV Ratio: 73.9<br />

113


THE SWAP COUNTERPARTY'S ORIGINATION OF THE MORTGAGE LOANS<br />

Delegation to VR Kreditwerk AG<br />

As of 1st July, 2000, <strong>DG</strong> HYP has delegated to VR Kreditwerk Hamburg-Schwäbisch Hall AG ("VR Kreditwerk AG"),<br />

to the extent legally permitted, the administration, servicing and collection of loans granted by <strong>DG</strong> HYP, including the<br />

Mortgage Loans. <strong>DG</strong> HYP holds 49.9% of the shares of VR Kreditwerk AG, while 49.9% of the shares are held by<br />

Bausparkasse Schwäbisch Hall AG and 0.2% of the shares are held by 1. Kreditwerk Beteiligungsgesellschaft GbR.<br />

<strong>DG</strong> HYP continues to be the legal and beneficial owner of the claims arising under the Mortgage Loans, including the<br />

Reference Obligations.<br />

Notwithstanding the delegation of the administration, servicing and collection function to VR Kreditwerk AG, any<br />

Work Out carried out in respect of any affected Mortgage Loan, as well as the calculation and determination of the<br />

Write-off Amounts and the Work Out Proceeds in respect of any such Work Out will be carried out by <strong>DG</strong> HYP.<br />

Moreover, the delegation of such functions to VR Kreditwerk AG will not affect <strong>DG</strong> HYP's rights and obligations under<br />

the Transaction Documents.<br />

Origination of the Loans<br />

<strong>DG</strong> HYP provides residential mortgages to its customers through five regional departments, using a standardised<br />

origination policy, documentation and systems. In addition, a sixth department is responsible for the origination of<br />

loans which exceed the limits set for the regional departments. The residential mortgage portfolio of <strong>DG</strong> HYP as at<br />

31st December, 1999 totalled over euro 20.1 billion.<br />

The local co-operative banks originate 90% of the residential mortgage loans granted by <strong>DG</strong> HYP. The remaining 10%<br />

are originated by other co-operative partners or customers of <strong>DG</strong> HYP.<br />

All Mortgage Loans within the Reference Portfolio were approved by <strong>DG</strong> HYP before 31st March, 2000.<br />

The Origination Process<br />

In order to ensure a consistent credit approval process across the co-operative banking network, <strong>DG</strong> HYP has developed<br />

and implemented its own "<strong>Hyp</strong>ofix" Mortgage origination software which is used throughout the co-operative<br />

banking sector alongside the traditional (written mortgage loan application) process.<br />

<strong>Hyp</strong>ofix is a program through which the local co-operative banks provide their mortgage loan applications to <strong>DG</strong> HYP<br />

and in which the current mortgage loan underwriting criteria of <strong>DG</strong> HYP are incorporated. (It should be noted that <strong>DG</strong><br />

HYP also provides loans to co-operative banks that do not use <strong>Hyp</strong>ofix.) In 1999, over 80% of <strong>DG</strong> HYP's mortgage<br />

loan commitments were generated through <strong>Hyp</strong>ofix. Within <strong>Hyp</strong>ofix certain loans are approved automatically – this<br />

will be the case when the information submitted by the co-operative bank in connection with the mortgage loan application<br />

corresponds to the set of criteria within <strong>Hyp</strong>ofix ("automatically approved loans"). In the case of loans where<br />

the information in the application does not or does not fully meet the criteria, an individual evaluation is performed<br />

by <strong>DG</strong> HYP ("individually approved loans").<br />

In the case of an automatically approved loan, the computer system approves the application instantly, but the loan<br />

department nonetheless verifies the application for completeness and plausibility with respect to the data provided<br />

by the co-operative bank in the application. Upon the approval of the application, the co-operative bank generates a<br />

standardised loan agreement. Since the data originates directly from the loan application section of <strong>Hyp</strong>ofix, <strong>DG</strong> HYP<br />

is able to minimise potential mistakes from the data entry.<br />

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In the case of a conventional individually approved loan, the application procedure for the loan differs in certain ways<br />

from the standardised procedure described above. This is also the case if the co-operative bank decides to make<br />

comments to a loan application submitted through <strong>Hyp</strong>ofix. In such cases, a lending specialist at one of <strong>DG</strong> HYP's<br />

regional departments reviews the loan. In order for such an application to be approved, it will require the signature of<br />

lending personnel.<br />

Delegation of Credit Authority and the "Four Eyes" Principle<br />

The "four eyes" principle requires two credit officials to take responsibility for each loan. The seniority level depends<br />

on the size of the loan, the loan to value ("LTV") ratio of the loan and the risk characterisation of the loan.<br />

Additional Review of Automatically and Individually Approved Loans Prior to Financing<br />

Each loan applicant must submit the following documents relating to the property providing security for the mortgage loan:<br />

(i) purchase contract;<br />

(ii) construction plans (in the case of new construction);<br />

(iii) calculation of total and usable space;<br />

(iv) floorplans;<br />

(v) excerpt from the land registry.<br />

In addition, the applicant must submit documents confirming his or her creditworthiness, such as an income tax<br />

assessment notice, salary statement or a statement of assets and liabilities.<br />

Prior to the payout of a loan, lending specialists ensure that all of the required information has been obtained. This<br />

information includes the following:<br />

(i) A credit report from the German credit agency "Schufa" (this is usually acquired as soon as possible after an<br />

application is received);<br />

(ii) information related to the payout prerequisites, this includes the following:<br />

(aa) adequate security for the loan;<br />

(bb) confirmation that the rights of <strong>DG</strong> HYP under the mortgage agreement will be duly reflected in the land<br />

register; and<br />

(cc) adequate evidence of the Reference Entity's earnings;<br />

(iii) an LTV (loan to value) ratio based on the amount requested and the appraised value of the property whereby<br />

the LTV ratio is calculated in accordance with the substantive requirements of § 12 of the German Mortgage<br />

Banking Act (<strong>Hyp</strong>othekenbankgesetz); and<br />

(iv) a total of assets versus total indebtedness of the applicant.<br />

In cases where a loan application has not been automatically approved, <strong>DG</strong> HYP undertakes with loan applicants that<br />

it will approve or reject a loan application submitted through <strong>Hyp</strong>ofix within 24 hours of its submission.<br />

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Appraisal of Properties<br />

Property appraisals are carried out by experienced and qualified regional property specialists employed or authorised<br />

by <strong>DG</strong> HYP. The property specialists are required to perform an on-site inspection of all properties and to produce a<br />

comprehensive and detailed valuation form. Local market price indications are obtained regularly from local real estate<br />

agents and are also considered in the course of the appraisal. The appraisal procedure follows <strong>DG</strong> HYP's valuation<br />

guidelines, which are in line with market standards as required for all mortgage banks in Germany and which were<br />

approved by the BAKred. <strong>DG</strong> HYP specialists review each external appraisal submitted by a loan applicant to ensure<br />

compliance with the guidelines.<br />

As a precautionary measure against market deterioration, <strong>DG</strong> HYP discounts the initial appraised value at a rate<br />

based on the year of construction and the dwelling type. In addition the <strong>DG</strong> HYP lending department reviews the<br />

appraisal report and may, at its discretion, decrease but not increase the amount determined through the appraisal.<br />

Calculation of the LTV Ratio<br />

<strong>Hyp</strong>ofix automatically calculates the LTV ratio on the basis of a property's lending value determined in accordance<br />

with the valuation guidelines of <strong>DG</strong> HYP. A calculation by a lending specialist using the valuation guidelines is only<br />

necessary when the loan is not arranged by <strong>Hyp</strong>ofix. Because the principles of calculating the LTV ratio are exactly<br />

the same in both cases, the results arrived at by <strong>Hyp</strong>ofix or by the credit official performing the individual calculation<br />

are the same.<br />

The two methods used in the calculation are the reduction method and the index method. The reduction method is<br />

used for buildings constructed or sold within the last 10 years. This method allows the calculation of the property<br />

value by determining the construction costs (this figure is decreased by at least 10%) and the land value. The index<br />

method is used for buildings older than 10 years. Under this method property value is calculated by determining the<br />

construction costs (this figure is calculated using the construction value from 1914 as adjusted by the price index for<br />

residential property published by the Federal Statistical Office) and land value.<br />

Description of the Mortgage Loans in the Reference Portfolio<br />

The total mortgage loan portfolio of <strong>DG</strong> HYP consists of approximately 275,000 residential mortgage loans<br />

(Wohnungsbaukredite) provided within Germany with a total balance as at June 30, 2000 of DEM 39.9 billion. The portion<br />

of the total balance included in the Reference Portfolio is equal to € 1,006,437,416.00 billion.<br />

The Reference Portfolio is drawn both from Mortgage Loans which <strong>DG</strong> HYP has registered in the <strong>DG</strong> HYP Mortgage<br />

Pfandbrief Cover Register and from Mortgage Loans which are not in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover<br />

Register. Those Mortgage Loans which are registered in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register serve as<br />

"cover" for <strong>DG</strong> HYP Mortgage Pfandbriefe in either of the following proportions:<br />

(i) at the legally permissible limit of 60% of the lending value of the underlying residential property; or<br />

(ii) at a certain percentage less than 60% of the lending value of the underlying residential property.<br />

The Reference Obligations under the Credit Default Swap Agreement consist of:<br />

(a) in respect of those Mortgage Loans which are registered in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register,<br />

those portions of such Mortgage Loans which do not serve as "cover" for <strong>DG</strong> HYP Mortgage Pfandbriefe; and<br />

(b) the entirety of those Mortgage Loans which are not registered in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover<br />

Register.<br />

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In respect of the Mortgage Loans referred to under (ii) above and the Mortgage Loans which are not in the <strong>DG</strong> HYP<br />

Mortgage Pfandbrief Cover Register, Third Party Rights to the residential property may rank prior to <strong>DG</strong> HYP's mortgages.<br />

The aggregate value of prior ranking Third Party Rights to the residential property, in respect of the entire<br />

Reference Portfolio, amounts to not more than DEM 400 million/euro 204,516,752.48 as at the Cut-off Date plus any<br />

amounts payable as interest with respect thereof which are outstanding for not more than two years.<br />

<strong>DG</strong> HYP offers three different amortisation profiles:<br />

(i) annuity loans: on each payment date the Reference Entity pays a fixed amount comprising interest on the outstanding<br />

loan balance and the redemption amount. The redemption amount reduces the outstanding loan<br />

balance for the next payment date. Thus, interest due on the next payment date is reduced and the portion of<br />

the fixed amount available for redemption increases. This is repeated on each payment date until the loan is<br />

fully amortised;<br />

(ii) instalment loans: on each payment date the Reference Entity pays a fixed instalment on principal together with<br />

an amount of interest due on the outstanding loan balance. Payments are made until the loan is fully repaid;<br />

and<br />

(iii) bullet loans: on each payment date the Reference Entity makes an interest payment only. The principal of the<br />

loan is fully repaid at the maturity date.<br />

It is up to the Reference Entity to select the payment frequency; in the case of 81.37% of the loans of the Reference<br />

Portfolio, this is monthly. For the balance, it is quarterly, semi-annually or annually.<br />

Most of the loans have an interest rate which is fixed for a period ranging from one (1) to ten (10) years at the end of<br />

which the interest rate is adjusted based on actual market conditions. The interest rate thus adjusted may, but will<br />

not necessarily, differ from the interest rate applicable for the previous period. Where the interest rate is fixed for more<br />

than ten (10) years , the Reference Entity is entitled by law to terminate and prepay the mortgage loan pursuant to<br />

§ 609a German Civil Code (Bürgerliches Gesetzbuch) after 10 years.<br />

The Properties Charged<br />

The residential properties underlying the Mortgage Loans are of residential nature located throughout the Federal<br />

Republic of Germany. The geographic distribution of the charged residential properties within Germany is concentrated<br />

in the Northern (35.6%) and Western (21.0%) part of the country, with 17.3% located in Eastern Germany and<br />

the balance located in the South and Southwest.<br />

Geographic Number Reference Principal Percentage of<br />

Region Mortgage Obligation Mortgage Mortgage Loans<br />

Loans HEL Balance Loan Balance by Reference<br />

(€) (€) Pool Balance<br />

East 9,102 185,442,707 866,232,201 17.30%<br />

North 20,289 359,337,954 1,787,572,067 35.60%<br />

South 5,495 106,803,495 542,981,815 10.80%<br />

Southwest 7,253 147,173,607 766,611,231 15.30%<br />

West 10,987 207,679,653 1,052,921,772 21.00%<br />

Total: 53,126 1,006,437,416 5,016,319,087 100.00%<br />

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The Mortgages Securing the Loans<br />

The Mortage Loans in the Reference Portfolio consist primarily of a special type of non accessory mortgage called a<br />

"land charge" (Grundschuld). According to § 1113 of the German Civil Code, the mortgage secures a personal claim<br />

against the owner of the property or a third party. Its existence depends (in an ancillary capacity) on the claim it secures.<br />

In contrast to this, the land charge (§ 1191 German Civil Code) provides an abstract guarantee of a specific sum of<br />

money. The guarantee is independent of the actual existence of a claim. According to § 40(1) of the German Mortgage<br />

Banking Act, the mortgage within the meaning of the German Mortgage Banking Act is equivalent to the land charge as<br />

a form of security. Whereas mortgage banks previously used the mortgage almost exclusively as security, with the<br />

change to financing tranches with clauses for the adaptation of terms, the more flexible land charge has gained<br />

acceptance and is used almost exclusively as security by the institutions that continue to be known as "mortgage<br />

banks".<br />

The enforcement of the security constituted by a land charge typically serves the purpose of satisfying the underlying<br />

claim. The underlying claim is the loan which is connected with the land charge by way of an agreement on the security<br />

purpose of the mortgage (Sicherungsabrede), which forms part of the loan agreement, and which states which claims<br />

are to be secured by the land charge. The security agreement restricts the chargee in enforcing the land charge such<br />

that enforcement may only be undertaken to obtain satisfaction for the underlying claim.<br />

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SERVICING AND ADMINISTRATION BY VR KREDITWERK AG<br />

Since 1st July, 2000 the administration, servicing and collection of the loans granted by <strong>DG</strong> HYP, including the<br />

Mortgage Loans, has been carried out by VR Kreditwerk AG. All of the regulations and processes applied correspond<br />

to those formerly applied by <strong>DG</strong> HYP. The employees of VR Kreditwerk AG consist primarily of former employees of<br />

<strong>DG</strong> HYP or Bausparkasse Schwäbisch Hall AG (including the members of the Board of Directors and the Heads of<br />

Departments).<br />

Servicing Department within VR Kreditwerk AG<br />

The servicing department of VR Kreditwerk AG is divided into four units which carry out various functions to ensure<br />

that the residential and commercial property loans granted by <strong>DG</strong> HYP are effectively serviced and monitored. The<br />

servicing department is responsible for the collection of interest and principal payments as well as the disbursement<br />

of newly granted loans. Although the servicing department does not have a formal control function in relation to credit<br />

approval, servicing personnel have the power to delay the disbursement of loans if they are concerned about executing<br />

a payment order.<br />

The residential and commercial loans unit is responsible for ensuring that the payments on the loans are received by<br />

<strong>DG</strong> HYP on time. This unit maintains customer accounts, handles payments, calculates and pays origination fees,<br />

assists in the restructuring process in respect of loans where payment difficulties have occurred and ensures that<br />

direct debits for customers are set up properly.<br />

Another unit is responsible for servicing loans which are in the foreclosure process. This unit produces all of the<br />

calculations required to proceed with a foreclosure. It also controls the sending of reminder notices to borrowers. In<br />

addition, it is responsible for the administration of any additional security to be provided for a loan (e.g. a life insurance).<br />

This unit acts only in accordance with instructions given to it by the legal department of <strong>DG</strong> HYP. See<br />

"Arrears, Defaults and Enforcement Procedures" below.<br />

The servicing process is significantly streamlined by encouraging borrowers to implement payments through direct<br />

debit. By incorporating this arrangement as part of the standard loan documentation for approved loans, over 99%<br />

of the Reference Portfolio is handled through direct debit.<br />

Prepayment on the Loans<br />

In the event a prepayment is made on a loan, the borrower must pay a prepayment fee which covers the bank's full<br />

costs. The calculation method for the fee is based on a ruling of the highest German civil court (Bundesgerichtshof).<br />

The calculation compares the effective interest rate on the loan with the actual rate for Government Bonds with a<br />

maturity that equals the length of the remaining fixed interest period for the prepaid loan. From the difference in rates,<br />

0.25% is subtracted based on saved administration and risk costs. The resulting amount is then discounted to its net<br />

present value.<br />

Adjustment of Loan Rates<br />

On the reset date, the borrower is offered a new fixed rate by VR Kreditwerk AG. The offer must fall within a range of<br />

rates established by <strong>DG</strong> HYP, taking into account the actual market conditions for fixed rate mortgage loans. A<br />

borrower may choose on the reset date to have the interest rate converted from a fixed rate to a floating rate. In such<br />

case, the interest rate is reset from time to time by VR Kreditwerk AG based on a margin which must be within a range<br />

established by <strong>DG</strong> HYP and a reference base, for example, three month EURIBOR.<br />

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Quality Control<br />

On the reset date, the lending specialist of VR Kreditwerk AG may carry out a credit check in respect of Reference<br />

Entities who have had payment difficulties. Annual credit checks are made in the case of Reference Entities with loans<br />

which have an LTV in excess of 60%, and where the difference between (i) the loan amount and (ii) the amount equal<br />

to 60% of the lending value, exceeds DEM 750,000.<br />

Assumption of a Loan by a New Reference Entity<br />

During the term of the Notes, some of the Reference Entities may sell their residential property to a third party or a<br />

change in the ownership of the residential property may otherwise occur. If the new owner fulfils the conditions set<br />

out in the loan agreement, VR Kreditwerk AG may authorise the assumption of the debt by such owner (otherwise the<br />

loan must be repaid) according to regulations given to it by <strong>DG</strong> HYP. The assumption may only take place if it does<br />

not have a negative impact on the value of the mortgage right of <strong>DG</strong> HYP in relation to the subject property. In addition,<br />

the following criteria must be fulfilled:<br />

(i) The new Reference Entity must be a natural person or business association in which at least one natural person<br />

is liable without limitation for the original Mortgage Loan and where the debt is assumed by several persons,<br />

the liability must be joint and several;<br />

(ii) the assumption of the Mortgage Loan is made in connection with the sale of the charged residential property<br />

to the new Reference Entity;<br />

(iii) the existence, extent, priority and enforceability (including any immediate execution) of the Mortgage Loan are<br />

not affected by the assumption;<br />

(iv) the assumption satisfies all applicable legal requirements as well as the standard procedures of <strong>DG</strong> HYP; and<br />

(v) the assumption of the Mortgage Loan may not result in an increase in the loan to value ratio of the assumed<br />

Mortgage Loan.<br />

The Independent Auditor, or following an Early Redemption Event, the Independent Valuation Expert will confirm that<br />

each of the above requirements are satisfied.<br />

Arrears, Defaults and Enforcement Procedures<br />

Arrears and Defaults<br />

As soon as a Reference Entity fails to make a payment, VR Kreditwerk AG begins an intensive servicing process<br />

through which repeated attempts are made to contact the Reference Entity in order to collect the payments in arrear.<br />

The execution of this process in practice depends on the method of payment chosen by the Reference Entity.<br />

If the Reference Entity pays by direct debit the notice procedure is as follows:<br />

(i) As soon as the first direct debit fails, a second direct debit is executed;<br />

(ii) if the second direct debit fails, the servicing specialist sends a notice to the Reference Entity requesting payment<br />

and warning the Reference Entity that if payment is not received within 10 business days the Morgage<br />

Loan will be transferred to the legal department of <strong>DG</strong> HYP for further action;<br />

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(iii) a servicing agent contacts the Reference Entity and tries to organise the restructuring of the Mortgage Loan;<br />

(iv) the transfer of the Mortgage Loan from the servicing department of VR Kreditwerk AG to the legal department<br />

of <strong>DG</strong> HYP takes place approximately 3 months after payments have become overdue; and<br />

(v) the legal department of <strong>DG</strong> HYP begins the work out procedure described in the section entitled "Work Out",<br />

below.<br />

If the payment is made by transfer or by standing order, the computer system used by the servicing department of<br />

VR Kreditwerk AG automatically generates the notices which are sent to the Reference Entity.<br />

Work Out<br />

The Work Out of any Mortgage Loan will be handled by the legal department of <strong>DG</strong> HYP. In the event the servicing<br />

department of VR Kreditwerk AG fails to recover the amounts which are past due, the Mortgage Loan is transferred<br />

from the servicing department of VR Kreditwerk AG to the legal department of <strong>DG</strong> HYP via the loan department of VR<br />

Kreditwerk AG. The legal department of <strong>DG</strong> HYP commences the work out process and the Work Out of the affected<br />

Mortgage Loan with a corresponding Reference Obligation, which will be effected by means of one of the following<br />

methods (each a "Work Out"):<br />

(i) Termination of the Mortgage Loan and foreclosure (Zwangsversteigerung) on the residential property securing<br />

such Mortgage Loan; or<br />

(ii) if the Reference Entity so elects and with the consent of <strong>DG</strong> HYP, termination of the affected Mortgage Loan<br />

and repayment or prepayment of such affected Mortgage Loan; or<br />

(iii) upon receipt by <strong>DG</strong> HYP of an offer to buy the Mortgage Loan, the sale and transfer of such Mortgage Loan or<br />

claims thereunder to a third party.<br />

Work Out methods and terms are established by <strong>DG</strong> HYP on a case-by-case basis. To the extent that <strong>DG</strong> HYP has a<br />

choice between the Work Out methods, it will use its discretion to select in good faith the Work Out method which it<br />

deems will provide for the greatest recovery of proceeds.<br />

In particular, the Work Out process involves:<br />

(i) The verification of the mortgage security;<br />

(ii) the preparation of foreclosure prerequisites (e.g. transfer of claim, service of title);<br />

(iii) the review of the mortgage/land charge to ascertain if the Reference Entity has agreed to immediate foreclosure<br />

(sofortige Zwangsvollstreckung). In the event such agreement is not present, a court application for foreclosure<br />

will be prepared; and<br />

(iv) the foreclosure department will formally terminate the Mortage Loan in writing.<br />

The legal process itself includes the following steps:<br />

(i) An application for foreclosure by public auction (Zwangsversteigerungsantrag);<br />

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(ii) if necessary, an application for forced administration (Zwangsverwaltungsantrag) (e.g. in the case of real property<br />

held as investment to receive rental income or to prevent devastation); and<br />

(iii) commencement of foreclosure upon any moveable assets (if this is deemed worthwhile). This will be terminated<br />

upon a "statement in lieu of oath" (Versicherung an Eides statt) of the Reference Entity officially declaring the<br />

lack of funds to pay the debt.<br />

Foreclosure procedures are conducted by the responsible German lower courts (Amtsgerichte) which act as follows:<br />

(i) issuing an order for foreclosure;<br />

(ii) determining the market value of the property; and<br />

(iii) setting the date for the public auction.<br />

Upon completion of the court proceedings, a valuation of the residential property by independent surveyors will be<br />

made for <strong>DG</strong> HYP and the marketing of the residential property to interested third parties will begin.<br />

The process is concluded with the sale of the residential property at a public auction. According to the Law on<br />

Compulsory Sale and Administration (Gesetz über die Zwangsversteigerung und Zwangsverwaltung), all rights which<br />

rank prior to the right of the creditor who has initiated the foreclosure proceedings continue to exist so that, for the<br />

public auction, a "minimum bid" (Geringstes Gebot) is required which needs to cover all prior ranking rights including the<br />

work out expenses.<br />

The rights having a lower ranking priority will expire at the moment the adjudication (Zuschlag) occurs. They will be<br />

satisfied by the proceeds of the auction to the extent that the proceeds exceed the amount of the required "minimum<br />

bid" (Geringstes Gebot).<br />

Further, with regard to the amount of the purchase price, a valuation by an independent valuation expert (assigned<br />

by the court) is performed for the legal process. To avoid a sale of the residential property for a price, which is significantly<br />

below the market value, a minimum value of 50% of the expert's valuation price must be reached through the<br />

bidding.<br />

At the first auction all lenders whose position will not be covered by the sale have a veto right on bids lower than 70%<br />

but higher than 50%. If (i) a lender is exercising his veto right, (ii) there is no bid greater than 50%, or (iii) no bid at all<br />

a second auction date has to be fixed. Past experience shows that when starting foreclosure proceedings today a<br />

court will fix an auction date after approximately one year. 70% of all properties are sold at the first auction (on<br />

average 1.5 years from acceleration of the mortgage loan), and 30% of the real estate will be sold at the second or<br />

third auction date. The second date will on average be one year after the first auction.<br />

If the auction has not brought satisfactory bids, the Swap Counterparty may itself bid and purchase the residential<br />

property and sell the residential property by private sale at a later date.<br />

Distribution of Work Out Amounts<br />

After enforcement of a Mortgage Loan, the Work Out Amount will be applied firstly to Work Out Expenses, secondly<br />

to the portions, if any, of mortgage loans (including the relevant Mortgage Loan) representing 'cover' for <strong>DG</strong> HYP<br />

Mortgage Pfandbriefe, and lastly to the portion of the Mortgage Loan represented by the corresponding Reference<br />

Obligation.<br />

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That means that even if <strong>DG</strong> HYP has first ranking security interest in the residential property, there is preference given<br />

to satisfying the Work Out Expenses and the portion of the loan that is assigned to the <strong>DG</strong> HYP Mortgage Pfandbrief<br />

Cover Register prior to satisfying the Reference Obligation. Therefore, the Reference Obligation (i.e. the portion not<br />

in the cover register which is being securitised) can be considered to be for all practical purposes (however, not legally)<br />

in the same position as a subordinated lien mortgage.<br />

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THE REPURCHASE AGREEMENT<br />

The description of the Repurchase Agreement set out below consists of a summary of certain provisions of the<br />

Repurchase Agreement and is qualified by reference to the detailed provisions of the Repurchase Agreement. The<br />

following summary does not purport to be complete, and prospective investors must refer to the Repurchase<br />

Agreement for detailed information regarding the Repurchase Agreement.<br />

Repurchase Agreement<br />

On or prior to the Closing Date, the Issuer will enter into a master repurchase agreement substantially in the form of<br />

a 1995 PSA/ISMA Global Master Repurchase Agreement (the "Repurchase Agreement") with <strong>DG</strong> BANK Deutsche<br />

Genossenschaftsbank AG (in such capacity, the "Repo Counterparty"), pursuant to which the Issuer will purchase on<br />

the Closing Date Collateral from the Repo Counterparty with a Purchase Price and an initial Notional Repo Amount<br />

equal to the aggregate Initial Principal Balance of all of the Classes of the Notes. On the Closing Date, the Issuer will<br />

pay the Purchase Price, and the Repo Counterparty will transfer the purchased Collateral from its sub-account with<br />

Clearstream Germany to the sub-account of the Custodian with Clearstream Germany and the Collateral will be credited<br />

by the Custodian to the Collateral Deposit Account.<br />

Prior to the Closing Date, <strong>DG</strong> HYP issued floating rate Pfandbriefe which constitute the Collateral under the first<br />

Repo-Transaction. The Collateral was created pursuant to the terms of a bond purchase agreement between <strong>DG</strong> HYP<br />

and <strong>DG</strong> BANK Deutsche Genossenschaftsbank AG ("<strong>DG</strong> BANK") in its capacity as underwriter of the Collateral. The<br />

Collateral will be physically delivered to Clearstream Germany as custodian for <strong>DG</strong> BANK.<br />

Substitution of the Repo Counterparty and Eligible Investments<br />

It is intended that the Issuer and the Repo Counterparty will enter into Repo-Transactions with the Purchase Date of<br />

each new Repo-Transaction falling on the Repurchase Date of the previous Repo-Transaction. However, the Repo<br />

Counterparty may, upon prior notice to the Issuer and the Security Trustee and subject to the satisfaction of the conditions<br />

set forth herein, substitute a subsidiary or affiliate of the Repo Counterparty as the new Repo Counterparty<br />

under the Repurchase Agreement or may otherwise elect not to enter into a Repo Transaction. The conditions required<br />

to be satisfied by the Repo Counterparty include:<br />

(i) the delivery by the Repo Counterparty to the Issuer and Security Trustee of an opinion of counsel acceptable to<br />

the Issuer and the Security Trustee stating that (a) payments made under the Repurchase Agreement would not<br />

be subject to any withholding tax and (b) no entity level tax will be imposed on the Issuer in the jurisdiction in<br />

which the substitute subsidiary or affiliate is located; and<br />

(ii) the receipt by the Repo Counterparty, the Issuer and the Security Trustee of written confirmation from each of the<br />

Rating Agencies that such substitution will not result in such Rating Agency reducing, suspending or withdrawing<br />

its then existing rating of any outstanding Class of Notes.<br />

If, on any Repurchase Date, the Repo Counterparty elects not to enter into a new Repo-Transaction, the Issuer may,<br />

upon prior written approval by the Swap Counterparty, the Security Trustee, the Cash Administrator and prior written<br />

confirmation from each of the Rating Agencies that the ratings then assigned to the Notes are not adversely affected<br />

thereby, enter into a substitute repurchase agreement with a substitute repo counterparty on terms substantially identical<br />

to the Repurchase Agreement.<br />

If the Repo Counterparty elects not to enter into a new Repo-Transaction or the Repurchase Agreement is terminated<br />

due to an Acceleration Event thereunder and the Issuer does not enter into a substitute repurchase agreement, the<br />

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Cash Administrator, acting on behalf of the Issuer, will invest in Eligible Investments the amounts which it would otherwise<br />

invest in a new Repo-Transaction or a substitute repurchase transaction. A description of the instruments constituting<br />

Eligible Investments is contained in the section "The Collateral and the Eligible Investments", below.<br />

Repo-Transactions<br />

The term of each transaction under the Repurchase Agreement or under any substitute repurchase agreement (each<br />

a "Repo-Transaction") will be approximately three months. The first Repo-Transaction will commence on the Closing<br />

Date and terminate on the first Repurchase Date, and each new Repo-Transaction will commence on the Purchase<br />

Date preceding an Interest Payment Date and terminate on the Repurchase Date following such Interest Payment<br />

Date (each a "Repo-Transaction Period"). Upon each Repurchase Date, the Repo Counterparty or, as applicable the<br />

substitute repo counterparty, will repurchase the Collateral. The Repurchase Price will equal the sum of the Purchase<br />

Price paid by the Issuer on the Purchase Date plus Repo Interest accrued during the relevant Repo-Transaction<br />

Period. On each Purchase Date, the notional repurchase amount outstanding for the relevant Repo-Transaction (the<br />

"Notional Repo Amount") will be reduced as described in "Application of the Repurchase Price" below.<br />

Repo Interest<br />

On each Repurchase Date, the Repo Counterparty or any substitute repo counterparty will pay to the Issuer interest<br />

in arrears (the "Repo Interest") on the respective Notional Repo Amount outstanding at the previous Purchase Date<br />

on the basis of the actual number of days in the Repo-Transaction Period divided by 360. Interest will accrue during<br />

the Repo-Transaction Period at a rate per annum (the "Repo Rate") as agreed between the Issuer and the Repo<br />

Counterparty or, as applicable, any substitute repo counterparty. The Repo Rate was fixed for the first Repo-<br />

Transaction two (2) TARGET Business Days before the Closing Date and for each new Repo-Transaction will be fixed<br />

one (1) TARGET Business Day before each Purchase Date. On each Repurchase Date, the Repo Counterparty will pay<br />

Repo Interest in arrears as part of the Repurchase Price.<br />

Repurchase of Collateral<br />

On each Repurchase Date, the Repo Counterparty or the substitute repo counterparty, if applicable, will repurchase<br />

the Collateral at the Repurchase Price determined on the Purchase Date of the relevant Repo-Transaction. On each<br />

Repurchase Date, the Collateral repurchased on the Repurchase Date will be debited to the sub-account of the<br />

Custodian with Clearstream Germany and the Repo Counterparty or if applicable, the substitute repo counterparty,<br />

will pay the Repurchase Price to the Issuer. On the Repurchase Date the Cash Administrator, acting on behalf of the<br />

Issuer, will instruct the Account Bank to credit the Repurchase Price to the Principal Collection Account, whereupon<br />

it will be applied as described below.<br />

Application of the Repurchase Price<br />

From the amount of the Repurchase Price, the sum of:<br />

(i) any Credit Protection Payments payable by the Issuer to the Swap Counterparty under the Credit Default Swap<br />

Agreement on the next succeeding Interest Payment Date; and<br />

(ii) an amount equal to the Pay-Down Amount payable to the Noteholders on the next succeeding Interest Payment Date,<br />

will be deducted. After transferring to the Interest Transaction Account an amount equal to any Repo Interest, the<br />

Issuer will apply the remaining amount standing to the credit of the Principal Collection Account as the Purchase<br />

Price for the purchase of Collateral pursuant to a new Repo-Transaction, the purchase of Collateral under a substi-<br />

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tute repurchase transaction, or for investment in Eligible Investments, as the case may be. The new Notional Repo<br />

Amount will be equal to the Purchase Price of such new Repo-Transaction.<br />

Balancing of Excess Amounts and Settlement of Repo Transactions<br />

Any Repo-Transaction will be credited to or debited from the Collateral Deposit Account or the Principal Collection<br />

Account in full, but payment will be made only to the extent required to balance any excess amounts (Spitzenausgleich).<br />

Accordingly, each party's obligation to make payment of any such amount will be satisfied and discharged and, if the<br />

aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would<br />

otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate<br />

amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller<br />

aggregate amount (netting).<br />

The transfer of the Collateral by the Repo Counterparty and payment of the Purchase Price by the Issuer against the<br />

transfer of such Collateral with respect to such excess amounts will be made simultaneously (delivery versus payment).<br />

The settlement will be effected through the real-time-gross-settlement ("RTGS") procedure of Clearstream<br />

Germany. The Repo Counterparty and the Custodian (on behalf of the Issuer) will enter into and confirm each Repo-<br />

Transaction to be settled through RTGS on the EDP-systems of Clearstream Germany. Upon such confirmation<br />

Clearstream Germany will become the owner of the Collateral which will be transferred to the Issuer and will hold<br />

such ownership in trust (treuhänderisch) for and on behalf of the Repo Counterparty and the Issuer. Settlement of<br />

payment of the Purchase Price will be effected through the accounts of the Repo Counterparty and the Custodian<br />

(on behalf of the Issuer) with the relevant state central bank (Landeszentralbank). Clearstream Germany will instruct<br />

the state central bank to debit the account of the Custodian (on behalf of the Issuer) and to credit the account of the<br />

Repo Counterparty with an amount equal to the relevant Purchase Price. Immediately upon receipt of the confirmation<br />

that the Purchase Price has been credited to the account of the Repo Counterparty with the state central bank,<br />

ownership of the Collateral will be transferred by way of transfer of the Collateral to the sub-account of the Custodian<br />

with Clearstream Germany. The same mechanics also apply to each Repurchase on the respective Repurchase Date.<br />

Margin Maintenance and Mark to Market<br />

On each Business Day on which a Repo-Transaction is in effect, the Repo Calculation Agent will monitor the aggregate<br />

market value of the Collateral in accordance with the market value calculation procedure (the "Collateral Value") and<br />

determine, by reference to certain overcollateralisation tables provided by the Rating Agencies to the Repo<br />

Calculation Agent, the required value of the Collateral for such Repo-Transaction (the "Required Collateral Value").<br />

The Required Collateral Value in respect of a Repo-Transaction will in no event be less than 102.8 per cent. of the<br />

aggregate Principal Balance of all the Classes of Notes or of the Principal Amount Outstanding, plus the Repo Interest<br />

due on the Repurchase Date under such Repo-Transaction.<br />

If on any Business Day on which a Repo-Transaction is in effect, the Repo Calculation Agent determines that the<br />

Collateral Value is less than the Required Collateral Value for such Repo-Transaction, it will notify the Issuer and the<br />

Repo Counterparty or the substitute repo counterparty and the Repo Counterparty or to the substitute repo counterparty<br />

will deliver to the Issuer Collateral with a market value equal to or greater than the amount of such deficiency<br />

(the "Margin Deficit").<br />

If on any Business Day on which a Repo-Transaction is in effect, the Repo Calculation Agent determines that the<br />

Collateral Value exceeds the Required Collateral Value for such Repo-Transaction, it will notify the Issuer and the<br />

Repo Counterparty or the substitute repo counterparty and the Issuer will deliver to the Repo Counterparty or to the<br />

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substitute repo counterparty Collateral with a market value equal to the amount of such surplus (the "Margin<br />

Surplus").<br />

If, due to any regulatory changes, the amount of the Required Collateral Value has to be increased, the Repo Calculation<br />

Agent will adjust the amount of the Required Collateral Value accordingly, and will determine the occurrence of<br />

any Margin Deficit or Margin Surplus on the basis of the amended amount of the Required Collateral Value.<br />

Income on Collateral<br />

The Issuer will pay to the Repo Counterparty, no later than on the first Business Day following receipt, all income<br />

received by it in respect of the Collateral provided that no payment will be made to the Repo Counterparty, if and to<br />

the extent a Margin Deficit would arise or be increased as a result of such payment.<br />

Acceleration Events and Termination of Repurchase Agreement<br />

The Repurchase Agreement provides for the following acceleration events (each an "Acceleration Event"):<br />

(i) the occurrence of an Event of Default under the Notes,<br />

(ii) failure by the Issuer or the Repo Counterparty to make, when due, any payment or delivery under the Repo<br />

Agreement, if such failure is not remedied within two (2) Business Days; or<br />

(iii) the Issuer or the Repo Counterparty is subject to any of the insolvency or bankruptcy related events contained in<br />

the Repurchase Agreement.<br />

An Acceleration Event will constitute an Event of Default under the Notes (see "Terms and Conditions of the Notes")<br />

unless such Acceleration Event was caused by a payment or delivery default by, or an insolvency or bankruptcy related<br />

event in relation to, the Repo Counterparty and unless the Issuer enters into a substitute repurchase agreement<br />

the terms of which are substantially identical to the terms of the Repurchase Agreement or the Cash Administrator,<br />

acting on behalf of the Issuer, invests the proceeds from the sale of the Collateral in Eligible Investments (as described<br />

in "The Collateral and Eligible Investments").<br />

If a Repo-Transaction is in effect on the Repurchase Date on or prior to the Final Determination Date, the Repo<br />

Counterparty will repurchase the Collateral from the Issuer on the Repurchase Date or, in case of an Event of Default,<br />

on the Final Determination Date, no further Repo-Transaction will be entered into.<br />

Tax Events under the Repurchase Agreement<br />

The Repurchase Agreement provides for certain tax events (each a "Tax Event"), including but not limited, a determination<br />

by the Issuer (on the basis of a written opinion of independent counsel) that:<br />

(i) it will cease to be entitled to the benefit of its tax exempt finance company status, or ceases to be in possession<br />

of any relevant license needed under Jersey law to maintain its tax exempt status in respect of its activities, or<br />

otherwise becomes subject to corporation tax, or<br />

(ii) its income or any other amounts payable to it by the Repo Counterparty under the Repurchase Agreement are<br />

subject to any tax or deduction or withholding for or on account of any tax, duty, assessment or other governmental<br />

charge unless the Issuer receives the relevant Tax Gross-Up Amounts from the Swap Counterparty prior<br />

to it being obliged to serve notice of a Tax Redemption Event.<br />

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The occurrence of a Tax Event will result in the Issuer being obliged to serve an irrevocable notice of a Tax<br />

Redemption Event under the Notes.<br />

Withholding<br />

If any payment under the Repurchase Agreement is subject to any deduction or withholding for or on account of any<br />

tax, duty, assessment or other governmental charge, the affected party will not have the obligation to gross-up such<br />

payment for any such deduction or withholding, and the unaffected party will receive such payment less the amount<br />

of any such withholding or deduction. However, if the affected party is the Issuer, the Swap Counterparty has the<br />

option under the Credit Default Swap Agreement to pay the relevant Tax Gross-up Amounts or to terminate the Credit<br />

Default Swap Agreement. If the Swap Counterparty elects not to pay, or otherwise does not pay any such Tax Gross-<br />

Up Amounts, the Issuer will be required to issue an irrevocable notice of a Tax Redemption Event. A Tax Redemption<br />

Event will result in the termination of the Repurchase Agreement.<br />

Collateral under the Repurchase Agreement<br />

A summary of the types of Collateral which may be subject to a Repo-Transaction is contained in the section<br />

"Collateral and Eligible Investments", below.<br />

Security over Collateral and Accounts<br />

A summary of the security over the Collateral and the rights connected thereto and the various accounts of the Issuer,<br />

including the Principal Collection Account and the Custody Account, is contained in the section "Security and<br />

Account Structure", below.<br />

Governing Law<br />

The Repurchase Agreement will be governed by, and will be construed in accordance with, English law. Each of the<br />

Issuer and the Repo Counterparty will submit to the non-exclusive jurisdiction of the English courts in connection with<br />

the Repurchase Agreement. The Issuer will appoint Fleetside Legal Representative Services <strong>Limited</strong>, 9 Cheapside,<br />

London EC2V 6AD to accept service of process on its behalf in England and the Repo Counterparty will appoint <strong>DG</strong><br />

BANK, London branch, 10 Aldersgate Street, London EC1 4XX to accept services of process on its behalf in England.<br />

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SECURITY AND ACCOUNT STRUCTURE<br />

The description of the Security and Account Structure set out below consists of a summary of certain provisions of<br />

the Security Documents, the Account Bank Agreement, the Transaction Account Bank Agreement and the Custody<br />

Agreement and is qualified by reference to the detailed provisions of these documents. The following does not purport<br />

to be complete and prospective Noteholders must refer to the Security Documents, the Account Bank<br />

Agreement, the Transaction Account Bank Agreement and the Custody Agreement for detailed information.<br />

General<br />

On the Closing Date, the Issuer will grant the Security Interests over the Security Assets for the benefit of the Secured<br />

Creditors for the security purposes described below. The Security Interests relate to (i) the Collateral or Eligible<br />

Investments, as the case may be, (ii) various accounts opened with <strong>DG</strong> HYP as Account Bank or Custodian and The<br />

Chase Manhattan Bank as Transaction Account Bank and (iii) to various Transaction Documents, as more particularly<br />

described below. See "Security Assets". The Transaction Security Interests will be held on trust by the Security<br />

Trustee for the benefit of the Transaction Secured Creditors pursuant to the terms of the German Trust Agreement.<br />

The provisions of the Security Documents relating to the creation and enforcement of the Security Interests are more<br />

particularly described below.<br />

Secured Creditors<br />

The secured creditors (the "Secured Creditors") are <strong>DG</strong> HYP as Swap Counterparty, <strong>DG</strong> BANK as Repo Counterparty and<br />

the transaction secured creditors (the "Transaction Secured Creditors") which are (i) the Noteholders, (ii) the Paying Agents,<br />

the Note Calculation Agent, the Swap Calculation Agent, the Repo Calculation Agent, the Cash Administrator, the<br />

Transaction Account Bank, the directors of the Issuer, the auditors of the Issuer, the Corporate Administrator and the<br />

Data Trustee (together referred to as the "Service Providers") and (iii) the Security Trustee.<br />

Security Purpose<br />

The Issuer will grant the security contemplated by the Security Documents for the following purposes:<br />

(i) The first ranking pledge in favour of the Swap Counterparty, as set forth in the German Swap Counterparty Pledge<br />

Agreement, will constitute security for the "<strong>DG</strong> HYP Secured Obligations" which are <strong>DG</strong> HYP's rights as Swap<br />

Counterparty against the Issuer under the Credit Default Swap Agreement, thereby simultaneously securing<br />

<strong>DG</strong> HYP's claims against the Reference Entities in relation to the Reference Obligations.<br />

(ii) The first ranking pledge in favour of the Repo Counterparty, as set forth in the German Repo Counterparty Pledge<br />

Agreement, will constitute security for the Repo Counterparty's right against the Issuer to receive any and all income<br />

accruing on the Collateral credited to the Collateral Deposit Account.<br />

(iii) The Transaction Security Interests will constitute security for the Transaction Secured Creditors secured obligations<br />

(the "Transaction Secured Creditors Secured Obligations") which are:<br />

(a) the rights of the Noteholders against the Issuer under the Notes;<br />

(b) the rights of the Service Providers against the Issuer under the respective Transaction Document or<br />

Transaction Documents to which each such Service Provider is a party; and<br />

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(c) the claims of the Security Trustee against the Issuer, including a separate Trustee Claim granted by the Issuer<br />

to the Security Trustee entitling the Security Trustee to demand from the Issuer the performance of the Issuer's<br />

obligations under the various Transaction Documents as joint creditor (Gesamtgläubiger). The Security Trustee<br />

is entitled to demand the performance of the Transaction Secured Creditors Secured Obligations under the<br />

Transaction Documents (including the Notes) in addition to and independently of the other creditors, although<br />

the Issuer is obliged to perform only once.<br />

Security Assets<br />

The Issuer will create security over the following assets (the "Security Assets"):<br />

(i) the Collateral or Eligible Investments (in the form of securities), as the case may be;<br />

(ii) the rights of the Issuer against the Cash Administrator under the Cash Administration Agreement;<br />

(iii) the rights of the Issuer against the Paying Agents under the Agency Agreement;<br />

(iv) the rights of the Issuer against the Custodian under the Custody Agreement with respect to the Collateral Deposit<br />

Account;<br />

(v) the rights of the Issuer against the Account Bank under the Account Bank Agreement with respect to the<br />

Principal Collection Account and the Collateral Interest Account;<br />

(vi) the Issuer's right, title, interest and benefit, present and future, in, to and under the Credit Default Swap<br />

Agreement including, but not limited to, any present and future right to demand from the Swap Counterparty payment<br />

of the Swap Premium and any Tax Gross-Up Amounts, if the Swap Counterparty opts to pay such Tax Gross<br />

Up Amounts;<br />

(vii) the Issuer's right, title, interest and benefit, present and future, in, to and under the Repurchase Agreement<br />

including, but not limited to, any present and future right to demand from the Repo Counterparty payment of the<br />

Repurchase Price;<br />

(viii) the Issuer's rights, title, interest and benefit, present and future, against the Transaction Account Bank in, to and<br />

under the Transaction Account Bank Agreement with respect to the Transaction Accounts; and<br />

(ix) the Issuer's rights, title, interest and benefit, present and future, against the Corporate Administrator in, to and<br />

under the Corporate Administration Agreement.<br />

Creation of Security Interests<br />

The Security Interests over the Security Assets will be created as more particularly detailed in this section.<br />

Custody Agreement, Account Bank Agreement and Transaction Account Bank Agreement<br />

On or prior to the Closing Date, the Issuer, the Custodian, the Security Trustee and the Cash Administrator will enter<br />

into the Custody Agreement, pursuant to which the Issuer will open and maintain in its name a collateral deposit<br />

account, to which will be credited any (present and future) Collateral that the Issuer has purchased and may purchase<br />

under each Repo-Transaction or any Eligible Investments (in the form of securities) purchased by the Issuer, as the<br />

case may be (the "Collateral Deposit Account").<br />

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On or prior to the Closing Date, the Issuer, the Account Bank, the Security Trustee and the Cash Administrator will<br />

enter into the Account Bank Agreement, pursuant to which the Issuer will open and maintain in its name:<br />

(i) a principal collection account, to which will be credited the net proceeds of the Notes, the Repurchase Price payable<br />

under each Repo-Transaction on each Repurchase Date and any Eligible Investments (in the form of cash)<br />

(the "Principal Collection Account"); and<br />

(ii) a collateral interest account, to which will be credited the income accruing on the Collateral (other than Repo<br />

Interest) (the "Collateral Interest Account").<br />

On or prior to the Closing Date the Issuer, the Transaction Account Bank, the Security Trustee and the Cash<br />

Administrator will enter into a transaction account bank agreement (the "Transaction Account Bank Agreement").<br />

Pursuant to the Transaction Account Bank Agreement, the Issuer will open and maintain in its name a principal transaction<br />

account (the "Principal Transaction Account"), to which the Cash Administrator will transfer from the Principal<br />

Collection Account an amount equal to the principal payable on the Notes on each Interest Payment Date and an interest<br />

transaction account (the "Interest Transaction Account" and together with the Principal Transaction Account, the<br />

"Transaction Accounts"), to which the Cash Administrator will transfer from the Principal Collection Account and<br />

from the other sources available to pay interest, including income on Eligible Investments, an amount equal to the<br />

interest payable on the Notes and any Expense Payments.<br />

The German Swap Counterparty Pledge Agreement<br />

On or prior to the Closing Date, the Issuer, the Security Trustee, the Swap Counterparty, the Account Bank and the<br />

Custodian will enter into the German Swap Counterparty Pledge Agreement, pursuant to which the Issuer will grant<br />

a first priority pledge (erstrangiges Pfandrecht) in favour and for the benefit of the Swap Counterparty over:<br />

(i) any Collateral (excluding the right to demand payment of any present and future income accruing on the<br />

Collateral) or any Eligible Investments (in the form of securities) (excluding the right to demand payment of any<br />

present and future income accruing on Eligible Investments), as the case may be, which are presently or will in the<br />

future be credited to the Collateral Deposit Account. Such pledge will be effected by way of agreement between<br />

the Issuer and the Swap Counterparty to the effect that any such Collateral or any such Eligible Investments which<br />

are presently or will in the future be credited to the Collateral Deposit Account will be pledged to the Swap<br />

Counterparty. Physical transfer to the Swap Counterparty of such Collateral or Eligible Investments will not be necessary<br />

because the Swap Counterparty in its capacity as Custodian will be in possession of the Collateral or any<br />

such Eligible Investments (in the form of securities), as the case may be, upon the transfer thereof to the Custodian<br />

for credit to the Collateral Deposit Account; and<br />

(ii) its right to demand payment of any present and future credit balance of the Principal Collection Account. Such<br />

pledge will be effected by way of agreement between the Issuer and the Swap Counterparty to the effect that the<br />

Issuer’s right to demand payment of any present and future balance standing to the credit of the Principal<br />

Collection Account will be pledged in favour and for the benefit of the Swap Counterparty.<br />

The German Repo Counterparty Pledge Agreement<br />

On or prior to the Closing Date, the Issuer, the Security Trustee, the Account Bank, the Custodian and the Repo<br />

Counterparty will enter into the German Repo Counterparty Pledge Agreement, pursuant to which the Issuer will:<br />

(i) grant a first priority pledge (erstrangiges Pfandrecht) over its right to demand payment of any present and future<br />

credit balance of the Collateral Interest Account in favour and for the benefit of the Repo Counterparty. Such pledge<br />

will be effected by way of agreement between the Issuer and the Repo Counterparty that the Issuer's right to<br />

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demand payment of any present and future credit balance of the Collateral Interest Account will be pledged in<br />

favour of the Repo Counterparty and by notification of the pledge to <strong>DG</strong> HYP in its capacity as Account Bank; and<br />

(ii) assign by way of security (Sicherungsabtretung) to the Repo Counterparty its right to demand payment from the<br />

Custodian of any present and future income accruing on the Collateral credited to the Collateral Deposit Account.<br />

Such assignment by way of security will be effected by way of agreement between the Issuer and the Repo<br />

Counterparty that the right to demand payment from the Custodian of any present and future income accruing on<br />

the Collateral will be assigned by way of security and by notification of the security assignment to <strong>DG</strong> HYP in its<br />

capacity as Custodian.<br />

The Transaction Security Interests<br />

German Subordinated Pledge and Security Agreement<br />

On or prior to the Closing Date, the Issuer, the Account Bank, the Custodian, the Swap Counterparty, the Cash<br />

Administrator and the Security Trustee will enter into the German Subordinated Pledge and Security Agreement pursuant<br />

to which the Issuer will create the following Security Interests (the "Transaction Security Interests") in favour of the<br />

Security Trustee (for the benefit of the Transaction Secured Creditors):<br />

(i) a subordinated pledge (nachrangiges Pfandrecht) over:<br />

(a) any Collateral (excluding the right to demand payment of any present and future income accruing on the<br />

Collateral) or any Eligible Investments (in the form of securities) (excluding the right to demand payment of any<br />

present and future income accruing on Eligible Investments), as the case may be, which are presently or will<br />

in the future be credited to the Collateral Deposit Account. Such subordinated pledge will be effected by way<br />

of agreement between the Issuer and the Security Trustee that such Collateral or Eligible Investments, as the<br />

case may be, will be pledged to the Security Trustee and the Issuer by assigning to the Security Trustee its present<br />

and future claims against the Swap Counterparty and, if any, against the Custodian, for the surrender of<br />

the Collateral or Eligible Investments (in the form of securities), as the case may be, upon complete and irrevocable<br />

satisfaction of the <strong>DG</strong> HYP Secured Obligations and notification to the Custodian and the Swap<br />

Counterparty; and<br />

(b) the Issuer’s right to demand payment of any present and future balance standing to the credit of each of the<br />

Principal Collection Account and the Collateral Interest Account. Such subordinated pledges will be effected by<br />

way of agreement between the Issuer and the Security Trustee that the Issuer’s right to demand payment of<br />

any present and future balance standing to the credit of each of the Principal Collection Account and the<br />

Collateral Interest Account will be pledged in favour of the Security Trustee and notification of the pledges to<br />

the Account Bank;<br />

(ii) an assignment by way of security (Sicherungsabtretung) to the Security Trustee of any and all of its present and<br />

future, actual or contingent rights and claims under:<br />

(a) the Cash Administration Agreement;<br />

(b) the Agency Agreement; and<br />

(c) the Custody Agreement (including, but not limited to, the right to demand payment from the Custodian of any<br />

present and future income accruing on any Eligible Investments and excluding the right to demand payment<br />

from the Custodian of any present and future income accruing on the Collateral credited to the Collateral<br />

Deposit Account and the rights to the Collateral itself or to any Eligible Investments (in the form of securities),<br />

in each case together with any claims for damages (Schadensersatzansprüche) thereunder.<br />

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The assignment by way of security will be effected by way of agreement between the Issuer and the Security<br />

Trustee that the rights and claims under the Cash Administration Agreement, the Agency Agreement and the<br />

Custody Agreement (to the extent referred to above) will be assigned by way of security and notification of the<br />

security assignment to the Cash Administrator with respect to the Cash Administration Agreement, to the Paying<br />

Agents with respect to the Agency Agreement and to the Custodian with respect to the Custody Agreement.<br />

English Deed of Assignment<br />

On or prior to the Closing Date, the Issuer and the Security Trustee will enter into the English Deed of Assignment<br />

pursuant to which the Issuer will assign by way of security to the Security Trustee (for the benefit of the Security<br />

Trustee and the other Transaction Secured Creditors) its right, title, interest and benefit, present and future, in, to and<br />

under:<br />

(i) the Credit Default Swap Agreement;<br />

(ii) the Repurchase Agreement;<br />

(iii) the Transaction Account Bank Agreement (including certain other ancillary rights and claims); and<br />

(iv) the Corporate Administration Agreement.<br />

Ranking of Security Interests<br />

The Security Interests created over the Security Assets pursuant to the German Swap Counterparty Pledge<br />

Agreement and the German Repo Counterparty Pledge Agreement will rank ahead of the Transaction Security<br />

Interests created with respect to such Security Assets pursuant to the German Subordinated Pledge and Security<br />

Agreement.<br />

German Security Trustee<br />

On or prior to the Closing Date, the Issuer and the Security Trustee will enter into the German Trust Agreement pursuant<br />

to which the Security Trustee has agreed to act as trustee (Treuhänder) for the benefit of the Transaction<br />

Secured Creditors, and to hold the Transaction Security Interests on trust for the Transaction Secured Creditors. The<br />

German Trust Agreement is attached as Schedule 1 to the Conditions. See "Terms and Conditions of the Notes".<br />

Enforcement of Security Interests<br />

The enforcement of the Security Interests will take place as more particularly described hereafter.<br />

Enforcement of the <strong>DG</strong> HYP Secured Obligations<br />

Upon the occurrence of a Termination Event under the Credit Default Swap Agreement <strong>DG</strong> HYP may enforce any of<br />

the pledges created under the German Swap Counterparty Pledge Agreement:<br />

(i) with respect to the Collateral or any Eligible Investments (in the form of securities), as the case may be, credited<br />

to the Collateral Deposit Account by way of public auction or through an officially authorised broker (öffentlich<br />

ermächtigter Handelsmakler); and<br />

(ii) with respect to the Principal Collection Account, by collecting the credit balance of the Principal Collection Account.<br />

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The pledges will be realised to the extent necessary to discharge in full the <strong>DG</strong> HYP Secured Obligations. Upon the<br />

complete and irrevocable satisfaction of any and all <strong>DG</strong> HYP Secured Obligations any remaining proceeds resulting<br />

from the enforcement of the pledges will, subject to the Transaction Security Interests, be transferred to the Issuer or<br />

the Security Trustee, as the case may be.<br />

Enforcement of the Repo Counterparty's Rights to Income on the Collateral<br />

Upon termination of the Repurchase Agreement due to an Acceleration Event thereunder, the Repo Counterparty may<br />

enforce the security created under the German Repo Counterparty Pledge Agreement:<br />

(i) with respect to the Collateral Interest Account by way of collecting the balance standing to the credit of the<br />

Collateral Interest Account; and<br />

(ii) with respect to the right to demand any (present and future) income accruing on the Collateral by way of demanding<br />

from the Custodian payment of income accrued on the Collateral standing to the credit of the Collateral<br />

Deposit Account at the time of enforcement.<br />

The security will be realised to the extent necessary to discharge in full the Issuer's obligation to pay income accruing on<br />

the Collateral to the Repo Counterparty. Upon the complete and irrevocable satisfaction of the obligations secured<br />

by the German Repo Counterparty Pledge Agreement any remaining proceeds resulting from the enforcement of the<br />

security created under the German Repo Counterparty Pledge Agreement will, subject to the Transaction Security<br />

Interests, be transferred to the Security Trustee or the Issuer, as the case may be.<br />

Enforcement of the Transaction Secured Creditors Secured Obligations<br />

In the event of an acceleration of the Notes following the occurrence of an Event of Default under the Notes and<br />

receipt of an Enforcement Notice, the Security Trustee will be entitled to, and upon instruction by one or more<br />

Noteholders will be obliged to enforce the Transaction Security Interests in accordance with the provisions of the<br />

German Trust Agreement and the English Deed of Assignment.<br />

Enforcement with respect to the Collateral or any Eligible Investments (in the form of securities), as the case may be,<br />

credited to the Collateral Deposit Account, the Principal Collection Account and the Collateral Interest Account will<br />

be effected in accordance with the requirements set forth in §§ 1204 et seq. of the German Civil Code (Bürgerliches<br />

Gesetzbuch) with regard to the enforcement of pledges (Pfandreife), and notwithstanding § 1277 of the German Civil<br />

Code (Bürgerliches Gesetzbuch), without enforceable judgment or other instruments (vollstreckbarer Titel):<br />

(i) with respect to the Collateral or any Eligible Investments (in the form of securities), as the case may be, credited<br />

to the Collateral Deposit Account by way of public auction or through an officially authorised broker (öffentlich<br />

ermächtigter Handelsmakler); and<br />

(ii) with respect to the Principal Collection Account and the Collateral Interest Account by collecting the balance<br />

standing to the credit of the Principal Collection Account and the Collateral Interest Account, respectively;<br />

provided that, the enforcement will be subject to:<br />

(i) the first priority pledge (erstrangiges Pfandrecht) over (aa) the Collateral (excluding the right to demand payment of<br />

any present and future income accruing on the Collateral) or any Eligible Investments (in the form of securities)<br />

(excluding the right to demand payment of any present and future income accruing on any Eligible Investments),<br />

as the case may be, credited to the Collateral Deposit Account and (bb) the Principal Collection Account granted<br />

to the Swap Counterparty under the German Swap Counterparty Pledge Agreement; and<br />

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(ii) the first priority pledge (erstrangiges Pfandrecht) over the Collateral Interest Account, granted to the Repo<br />

Counterparty under the German Repo Counterparty Pledge Agreement.<br />

The Security Trustee will not be entitled to enforce the Security Interests created under the German Subordinated<br />

Pledge and Security Agreement (i) in respect of the Collateral or Eligible Investments (in the form of securities) as<br />

the case may be, and the Principal Collection Account until the <strong>DG</strong> HYP Secured Obligations have been fully and<br />

finally satisfied and (ii) in respect of the Collateral Interest Account, until the obligation of the Issuer to pay to the<br />

Repo Counterparty any income accruing on the Collateral credited to the Collateral Deposit Account has been fully<br />

and finally satisfied.<br />

Enforcement of the security assignment with respect to any and all of the Issuer's present or future, actual or contingent<br />

rights and claims under:<br />

(i) the Transaction Accounts will be effected by collecting the balance standing to the credit of the Transaction<br />

Accounts;<br />

(ii) the Cash Administration Agreement will be effected by demanding and collecting any monies owed by the Cash<br />

Administrator to the Issuer under the Cash Administration Agreement;<br />

(iii) the Agency Agreement will be effected by demanding and collecting any monies owed by the Paying Agents to<br />

the Issuer under the Agency Agreement;<br />

(iv) the Custody Agreement (to the extent referred to above) will be effected by collecting the balance standing to the<br />

credit of the Custody Account;<br />

(v) the Corporate Administration Agreement will be effected by demanding and collecting any monies owed by the<br />

Corporate Secretary to the Issuer under the Corporate Administration Agreement;<br />

(vi) the Repurchase Agreement will be effected by demanding and collecting any monies owed by the Repo<br />

Counterparty to the Issuer under the Repurchase Agreement; and<br />

(vii) the Credit Default Swap Agreement will be effected by demanding and collecting any monies owed by the Swap<br />

Counterparty to the Issuer under the Credit Default Swap Agreement.<br />

Governing law of the Security Documents<br />

The German Swap Counterparty Pledge Agreement, the German Repo Counterparty Pledge Agreement, the German<br />

Subordinated Pledge and Security Agreement and the German Trust Agreement will be governed by German law. The<br />

English Deed of Assignment will be governed by English law.<br />

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THE COLLATERAL AND ELIGIBLE INVESTMENTS<br />

The Collateral<br />

The collateral purchased by the Issuer under each Repo-Transaction (the "Collateral") will consist only of the following<br />

types of securities which will be in bearer form:<br />

(i) floating rate <strong>DG</strong> HYP Pfandbriefe with a maximum maturity of ten years; or<br />

(ii) French or German government securities having ratings of AAA by each of Fitch and Standard & Poor's with a<br />

maximum maturity of ten years,<br />

or any combination thereof.<br />

In this <strong>Offering</strong> Circular "<strong>DG</strong> HYP Pfandbriefe" shall mean Pfandbrief debt securities issued by <strong>DG</strong> HYP having<br />

ratings of AAA by each of Fitch and Standard & Poor’s.<br />

On the Closing Date, the Issuer will purchase from the Repo Counterparty under the terms of the Repurchase<br />

Agreement Collateral with an initial Notional Repo Amount equal to the aggregate Initial Principal Balance of all of the<br />

Classes of the Notes.<br />

German Pfandbriefe<br />

The Mortgage Banking Sector<br />

German banks are divided into two general categories: universal banks (also known as full-service or multi-purpose<br />

banks) and specialised banks (banks permitted to transact only certain specified types of banking activities).<br />

Pfandbriefe generally may only be issued by (i) mortgage banks (<strong>Hyp</strong>othekenbanken), which are specialised banks<br />

permitted to transact mortgage lending, public sector lending and certain auxiliary business activities and (ii) certain<br />

types of banks organised under public law (public sector banks) such as the Landesbanken.<br />

Characteristics of Pfandbriefe<br />

Pfandbriefe are debt securities issued under German law that must be secured ("covered") by mortgage loans or obligations<br />

of public sector debtors (or certain other qualifying assets) and whose terms must otherwise comply with the<br />

requirements and limitations imposed by the German Mortgage Banking Act (<strong>Hyp</strong>othekenbankgesetz) (the "Mortgage<br />

Banking Act"). Such compliance is monitored by the German Federal Banking Supervisory Authority<br />

(Bundesaufsichtsamt für das Kreditwesen) (the "German Banking Supervisory Authority").<br />

Pfandbriefe are usually medium- to long-term bonds with a term of two to ten years. Pfandbriefe are general obligations<br />

of the issuing bank, and no separate vehicle is created for their issuance in general or for the issuance of any<br />

specific series of Pfandbriefe. Traditionally, Pfandbriefe have borne interest at a fixed rate, but recently mortgage<br />

banks have started issuing zero-coupon and floating rate Pfandbriefe, in some cases with additional features such<br />

as step-up coupons, caps or floors. Most issues of Pfandbriefe were denominated in Deutsche Mark and are currently<br />

denominated in euro. A mortgage bank may, however, also issue Pfandbriefe in other currencies, subject to certain<br />

limitations. The terms of Pfandbriefe may not give the holders any right to require redemption of the Pfandbriefe prior<br />

to the scheduled date of maturity.<br />

The aggregate principal amount of the outstanding mortgage Pfandbriefe of a mortgage bank must be covered by<br />

assets that qualify for use as cover under the provisions of the Mortgage Banking Act. One single pool of assets<br />

covers all outstanding mortgage Pfandbriefe (<strong>Hyp</strong>othekenregister), and another pool of assets covers all outstanding<br />

136


public sector Pfandbriefe (Deckungsregister), of the issuing bank. In the case of mortgage Pfandbriefe, only mortgage<br />

loans (or a portion thereof) with a loan-to-value ratio (i.e. the principal amount of the loan expressed as a percentage<br />

rate of the value of the mortgaged residential property as determined in accordance with the Mortgage Banking Act)<br />

not exceeding 60% qualify for inclusion in the asset pool. In addition to mortgage loans (see "- Mortgage Lending"),<br />

assets that are eligible as cover ("substitute cover") include obligations of the German federal government, state<br />

governments (Bundesländer) and certain other public sector borrowers, and credit balances with Deutsche<br />

Bundesbank and qualifying banks, subject to a limitation of all "substitute cover" to 10% of the aggregate principal<br />

amount of the mortgage Pfandbriefe and public sector Pfandbriefe of the mortgage bank that are outstanding.<br />

Accordingly, it is possible that a substantial amount of the assets that cover the mortgage Pfandbriefe of a mortgage<br />

bank consist of assets other than mortgage loans. The Mortgage Banking Act imposes strict limitations on the aggregate<br />

principal amount of Pfandbriefe that a mortgage bank may issue.<br />

Pursuant to the Mortgage Banking Act, the mortgage bank must keep two different registers (the <strong>Hyp</strong>othekenregister<br />

and the Deckungsregister) in which the assets included in each of the two cover pools are listed. In order to ensure<br />

that the pools provide adequate coverage for the outstanding Pfandbriefe, the registration is supervised and controlled<br />

by a trustee who is appointed by the German Banking Supervisory Authority after consultation with the mortgage<br />

bank. In addition, the trustee also monitors the mortgage bank's compliance with other provisions of the<br />

Mortgage Banking Act. Together with the mortgage bank, the trustee has joint custody of the assets included in the<br />

cover pools and of any documents evidencing such assets. The trustee may release such assets to the mortgage<br />

bank only under circumstances expressly provided for by statute. Moreover, the mortgage bank may remove any<br />

assets from the pool only with the permission of the trustee. Any issuance of Pfandbriefe may take place only upon<br />

prior certification by the trustee that the Pfandbriefe to be issued meet all statutory requirements.<br />

As a general rule, the Mortgage Banking Act requires that Pfandbriefe and assets included in the pool of assets that<br />

covers such Pfandbriefe be denominated in the same currency. The issuance of Pfandbriefe in a currency different<br />

from the currency of the assets included in the pool covering such Pfandbriefe is permitted only if any currency risks<br />

arising therefrom are fully hedged.<br />

In addition to the monitoring conducted by the trustee, the German Banking Supervisory Authority conducts audits<br />

every two or three years, which focus particularly on assets which were newly added to the pools. The German<br />

Banking Supervisory Authority also generally supervises compliance of mortgage banks with the provisions of the<br />

Mortgage Banking Act, including approval of valuation guidelines for mortgaged property, approval of the principal<br />

characteristics of the provisions of the loans, the resolution of disputes between the bank and the trustee, and the<br />

enforcement of the limitations on the issuance of Pfandbriefe.<br />

In addition to the provisions of the Mortgage Banking Act, German mortgage banks, like other types of banks, are<br />

subject to governmental supervision and regulation in accordance with the Banking Act. Supervision is primarily conducted<br />

by the German Banking Supervisory Authority, which is supported by the Deutsche Bundesbank in its capacity<br />

as the German central bank. The German Banking Supervisory Authority has comprehensive powers to instruct<br />

banks to take actions to comply with applicable laws and regulations. In addition, German banks, including mortgage<br />

banks, are required to submit extensive confidential reports to the German Banking Supervisory Authority and the<br />

Deutsche Bundesbank, which include disclosure of the statistical and operational aspects of the banks' businesses.<br />

In their oversight and regulatory capacities, the German Banking Supervisory Authority and the Deutsche<br />

Bundesbank may take immediate action whenever required.<br />

The holders of outstanding Pfandbriefe rank pari passu among themselves, and have preferential claims with respect<br />

to the assets registered in the <strong>Hyp</strong>othekenregister or Deckungsregister, as the case may be. With respect to other<br />

assets of a mortgage bank, holders of Pfandbriefe rank pari passu with unsecured creditors of the mortgage bank.<br />

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In the event of the opening of insolvency proceedings with respect to a mortgage bank, the outstanding Pfandbriefe,<br />

unlike the other debt obligations of the mortgage bank, will not be accelerated. The two pools of assets (the<br />

<strong>Hyp</strong>othekenregister and the Deckungsregister) will be treated as separate pools of assets of the mortgage bank which<br />

will not be part of the insolvency proceedings with respect to the mortgage bank. Only if a pool becomes insolvent, will<br />

a separate insolvency proceeding be opened.<br />

Mortgage Lending<br />

The principal type of cover for mortgage Pfandbriefe are loans secured by mortgages on German real estate. Subject<br />

to certain limitations, loans secured by mortgages on real estate located in other member states of the European<br />

Union or other contracting states of the Treaty establishing the European Economic Region or in Switzerland are also<br />

eligible as cover.<br />

In Germany, consumer mortgage loans and large residential or commercial mortgage loans are typically fixed-rate<br />

obligations secured by underlying residential property of the borrower, repayable on an amortising basis over a period of<br />

time. The terms of the loan generally do not allow the borrower to prepay the loan prior to the expiration of its term,<br />

which is usually five to ten years during which time the interest rate is fixed (although the term of the loan may be longer).<br />

If a mortgage loan remains outstanding after the fixed interest rate period and is renewed, the rate of interest is reset<br />

for an additional fixed period. Under German law, the right to prepay the loan cannot be excluded for a fixed interest<br />

period longer than ten years. After such ten years borrowers generally have a statutory right to prepayment, after<br />

giving six months' notice, see "The Swap Counterparty's Origination of the Mortgage Loans" and "Servicing and<br />

Administration by VR Kreditwerk”.<br />

Eligible Investments<br />

In the event the Repo Counterparty elects not to enter into a new Repo-Transaction and no substitute repurchase<br />

agreement is entered into by the Issuer on the terms set out in "The Repurchase Agreement – Substitution of the Repo<br />

Counterparty and Eligible Investments", the Cash Administrator, on behalf of the Issuer, will invest in Eligible<br />

Investments the amounts which would otherwise have been invested in a new Repo-Transaction. "Eligible<br />

Investments" means any investment in eligible instruments (as described below) including, but not limited to,<br />

Collateral, provided that the eligible instruments mature during the relevant Collection Period. The following order of<br />

priority shall apply:<br />

(i) floating rate <strong>DG</strong> HYP Pfandbriefe, provided that (aa) <strong>DG</strong> HYP is acting as Custodian and the short-term unsecured,<br />

unsubordinated, unguaranteed debt obligations of <strong>DG</strong> HYP are rated at least A1+ by Standard & Poor's and<br />

F1+ by Fitch or (bb) <strong>DG</strong> HYP provides an equivalent account guarantee following written confirmation by the<br />

Rating Agencies that the then current ratings of the Notes are not affected thereby;<br />

(ii) securities rated at least A1+ or AAA by Standard & Poor's and at least F1+ or AAA by Fitch with a risk weighting<br />

of 0% under the German capital adequacy regime (Grundsatz I);<br />

(iii) a cash deposit with <strong>DG</strong> HYP; provided <strong>DG</strong> HYP is acting as Account Bank and provided further that (aa) the<br />

short-term unsecured, unsubordinated, unguaranteed debt obligations of <strong>DG</strong> HYP are rated at least A1+ by<br />

Standard & Poor's and F1+ by Fitch or (bb) <strong>DG</strong> HYP provides an equivalent account guarantee following written<br />

confirmation by the Rating Agencies that the then current ratings of the Notes are not affected thereby; or<br />

(iv) a guaranteed investment contract entered into with <strong>DG</strong> HYP; provided that the short-term unsecured, unsubordinated<br />

unguaranteed debt obligations of <strong>DG</strong> HYP are rated at least A1+ by Standard & Poor's and F1+ by<br />

Fitch following written confirmation by the Rating Agencies that the then current ratings of the Notes are not<br />

affected thereby.<br />

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TERMS AND CONDITIONS OF THE NOTES<br />

The Notes will be obligations solely of the Issuer and will not be guaranteed by, or be the responsibility of, any other entity. In particular, the Notes<br />

will not be obligations or responsibilities of, or guaranteed by, the Manager, the Security Trustee, the Paying Agents, the Cash Administrator, the Note<br />

Calculation Agent, the Swap Calculation Agent, the Repo Calculation Agent, the Custodian, the Account Bank, the Transaction Account Bank, the<br />

Data Trustee, the Independent Auditor or the Independent Valuation Expert, the Swap Counterparty or the Repo Counterparty or any substitute repo<br />

counterparty.<br />

The amount required to be repaid by the Issuer to the Noteholders in respect of principal on the Notes will depend, among other things, upon whether,<br />

and to what extent, the Issuer is obliged to make Credit Protection Payments to the Swap Counterparty under the Credit Default Swap<br />

Agreement. The obligation of the Issuer to make payments to the Swap Counterparty under the Credit Default Swap Agreement will depend on the<br />

performance of the pool of Reference Obligations, thereby exposing the Issuer to the credit risk of such Reference Obligations, and exposing the<br />

Noteholders to the creditworthiness of the Reference Entities to the full extent of their investment in the Notes. On each Interest Payment Date on<br />

which the Issuer is required to make a Credit Protection Payment to the Swap Counterparty, the Principal Balance of the most junior Class or Classes<br />

of the Notes outstanding will be written down as a result of such Credit Protection Payment, without any commensurate repayment of principal being<br />

made to the Noteholders. Any such write down will lead to a loss for the Noteholders of the affected Class or Classes of Notes, commencing with<br />

the most junior Class of Notes and progressing to the next most senior Class of Notes, with the Class A1 Notes and the Class A2 Notes being reduced<br />

on a pro rata basis.<br />

The Credit Default Swap Agreement does not constitute a purchase or other acquisition or assignment of any interest in any Mortgage Loan or any<br />

other obligation of any Reference Entity. Therefore, the Issuer and the Security Trustee will have a contractual relation with, and rights solely against,<br />

the Swap Counterparty and will have no contractual relationship with, or recourse against, any Reference Entity. Furthermore, none of the Issuer, the<br />

Security Trustee or the Noteholders will have any rights to acquire from the Swap Counterparty (or to require the Swap Counterparty to transfer,<br />

assign or otherwise dispose of) any interest in any Mortgage Loan or any other obligation of any Reference Entity, notwithstanding the payment by<br />

the Issuer of a Credit Protection Payment to the Swap Counterparty with respect to such Reference Entity, or otherwise. Moreover, the Swap<br />

Counterparty will not be required to grant to the Issuer, the Security Trustee or any Noteholder any security interest in any such Mortgage Loan or<br />

other obligation.<br />

No assurance can be made that the proceeds available for and allocated to the payment of interest or the repayment of principal in respect of any<br />

particular Class of Notes at any particular time will be sufficient to cover all amounts that would otherwise be due and payable in respect of such<br />

Class of Notes, and Noteholders must rely solely on (i) payments under the Repurchase Agreement (or any substitute repurchase agreement, as the<br />

case may be) or proceeds from Eligible Investments, which will be subject to the prior obligation of the Issuer to make payment of Credit Protection<br />

Payments from such sources, for the repayment of principal on the Notes, (ii) payment of the Swap Premium by the Swap Counterparty and of the<br />

Repo Interest by the Repo Counterparty (or any repo interest paid by any substitute repo counterparty) or any income on Eligible Investments, as<br />

the case may be, for interest payments on the Notes and (iii) the enforcement of the Transaction Security Interests in the Security Assets for the<br />

repayment of principal of, and interest payments on, the Notes, all as more particularly set forth in these Conditions.<br />

The Transaction Security Interest of the Security Trustee for the benefit of the Transaction Secured Creditors (other than in respect of the rights and<br />

interest of the Issuer in the Credit Default Swap Agreement and the proceeds thereof and the Repurchase Agreement and the proceeds thereof, as<br />

the case may be) is subordinate to the Security Interests of the Swap Counterparty in connection with Credit Protection Payments and to the Security<br />

Interests of the Repo Counterparty in connection with the Issuer's obligation to transfer interest accrued on the Collateral to the Repo Counterparty.<br />

If the proceeds of enforcement with respect to the Transaction Security Interests received by the Issuer or the Security Trustee for the benefit of the<br />

Transaction Secured Creditors are insufficient to make all payments due in respect of the Notes, no other assets will be available for payment of the<br />

deficiency and, following liquidation of the available assets, the obligation of the Issuer to pay such deficiency shall be extinguished.<br />

The yield to maturity of the Notes will be mainly affected by the Issuer's obligation to make repayments of principal on the Notes whenever (i)<br />

Reference Entities make repayments (or prepayments) of principal on the Mortgage Loans, (ii) Work Out Proceeds are recovered, (iii) one or more<br />

Reference Obligations are removed from the Reference Portfolio due to non-compliance of such Reference Obligation with the applicable Eligibility<br />

Criteria as of the Cut-off Date, (iv) any Reference Obligation in relation to which the Reference Entity has not been substituted in compliance with<br />

the conditions to substitution is removed from the Reference Portfolio, or (iv) the Notes are redeemed as a result of an Early Redemption Event, and<br />

will depend on other factors, such as the level of EURIBOR and the purchase price of the Notes. With regard to (i) and (ii) above, the rate of distributions<br />

of principal and the yield to maturity on the Notes will be related directly to the rate of repayments of principal on the Mortgage Loans and<br />

the amount and timing of the occurrence of Credit Events in relation to Reference Obligations resulting in Credit Protection Payments to be made<br />

to the Swap Counterparty.<br />

.<br />

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1. Definitions and Incorporation of Schedules<br />

(a) Definitions<br />

In these Conditions:<br />

"Acceleration Event" means any one of the following acceleration events pursuant to the terms of the Repurchase Agreement:<br />

(i) the occurrence of an Event of Default under the Notes;<br />

(ii) failure by the Issuer or the Repo Counterparty to make, when due, any payment of Purchase Price or Repurchase Price or to deliver<br />

Collateral or income on Collateral as set forth in paragraphs 10(i), 10(ii) and 10(iii) of the Repo Agreement if such failure is not remedied<br />

on or before the second (2nd) Business Day after such failure; and<br />

(iii) the Issuer or the Repo Counterparty is subject to any of the insolvency or bankruptcy related provisions of paragraph 10(iv) of the<br />

Repurchase Agreement;<br />

"Account Bank" means Deutsche Genossenschafts-<strong>Hyp</strong>othekenbank AG or any successor acting as account bank under the Account<br />

Bank Agreement;<br />

"Account Bank Agreement" means the account bank agreement dated 26th October, 2000 between the Issuer, the Account Bank, the<br />

Cash Administrator and the Security Trustee;<br />

"Additional Termination Event" means any one of the following additional termination events pursuant to the terms of the Credit Default<br />

Swap Agreement:<br />

(i) the Issuer gives notice of a Clean-Up Call as set forth in Condition 9(b); or<br />

(ii) the Issuer gives notice of a Tax Redemption Event as set forth in Condition 9(c); or<br />

(iii) the occurrence of the Final Maturity Date; or<br />

(iv) the occurrence of an Event of Default under the Notes;<br />

"Additional Work Out Amount" means, with respect to a Mortgage Loan, any monies received by the Swap Counterparty from the<br />

Reference Entity under the Mortgage Loan, after the Final Determination Date but on or prior to the Valuation Date in respect of a Reference<br />

Obligation in respect of which a Delayed Payment Amount subsists on the Final Determination Date;<br />

"Agency Agreement" means the agency agreement dated 26th October, 2000 between the Issuer, the Principal Paying Agent and the<br />

Luxembourg Paying Agent;<br />

"Aggregate Evaluated Work Out Proceeds" means an amount equal to the sum of all Evaluated Work Out Proceeds determined by the<br />

Independent Valuation Expert on or prior to the Valuation Date plus any Work Out Proceeds determined by the Swap Counterparty and<br />

verified by the Independent Valuation Expert after the Final Determination Date but on or prior to the Valuation Date, as disclosed in the<br />

Valuation Report;<br />

"Aggregate Evaluated Write-off Amount" means an amount equal to the sum of all Evaluated Write-off Amounts determined by the<br />

Independent Valuation Expert on or prior to the Valuation Date plus any Write-off Amounts determined by the Swap Counterparty and verified<br />

by the Independent Valuation Expert after the Final Determination Date but on or prior to the Valuation Date, as disclosed in the<br />

Valuation Report;<br />

"Available Distribution Funds" means, on each Interest Payment Date, the sum of:<br />

(i) any Swap Premium received by the Issuer from the Swap Counterparty under the Credit Default Swap Agreement on the Swap<br />

Payment Date falling on the Interest Payment Date preceding such Interest Payment Date, as set forth in Condition 5(c);<br />

(ii) any Repo Interest received by the Issuer from the Repo Counterparty under the Repurchase Agreement or any substitute repo counterparty<br />

under any substitute repurchase agreement on the Repurchase Date immediately preceding such Interest Payment Date or any<br />

140


income received by the Issuer on Eligible Investments during the Collection Period ending on the Business Day immediately preceding<br />

such Interest Payment Date, in each case, as set forth in Condition 5(h); and<br />

(iii) an amount equal to the difference between any Repurchase Price (net of any Repo Interest) received by the Issuer from the Repo<br />

Counterparty under the Repurchase Agreement or any substitute repo counterparty under any substitute repurchase agreement on the<br />

Repurchase Date immediately preceding such Interest Payment Date or any proceeds received by the Issuer from the realisation of<br />

Collateral (net of income thereon) or Eligible Investments (net of income thereon), as the case may be, during the Collection Period<br />

preceding such Interest Payment Date, and the sum of:<br />

(aa) any Credit Protection Payment payable by the Issuer to the Swap Counterparty on such Interest Payment Date; and<br />

(bb) any (x) Purchase Price paid by the Issuer to the Repo Counterparty or any substitute repo counterparty on the Purchase Date<br />

under the Repo-Transaction entered into by the Issuer and the Repo Counterparty or any substitute repo counterparty on the<br />

Purchase Date immediately preceding such Interest Payment Date, or (y) funds to be invested in Eligible Investments by the<br />

Issuer during the current Collection Period commencing on the Business Day prior to such Interest Payment Date, as the case<br />

may be; and<br />

(iv) any other amount standing to the credit of the Transaction Accounts;<br />

"Business Day" means any day, other than a Saturday or Sunday, on which commercial banks are generally open for business in Frankfurt,<br />

Jersey, Luxembourg and London, and on which the TARGET System is open;<br />

"Calculation Date" means the day four (4) Business Days after each Determination Date, after the Final Determination Date and after the<br />

Valuation Date;<br />

"Cash Administration Agreement" means the cash administration agreement dated 26th October, 2000 between the Issuer, the Cash<br />

Administrator, the Note Calculation Agent, the Swap Calculation Agent, the Repo Calculation Agent, the Swap Counterparty and the<br />

Security Trustee;<br />

"Cash Administrator" means The Chase Manhattan Bank, London, or any successor acting as cash administrator under the Cash<br />

Administration Agreement;<br />

a reference to a "Class" of Notes has the meaning given to it in Condition 2(a);<br />

"Class A Notes" has the meaning given to it in Condition 2(a);<br />

"Class A1 Notes" has the meaning given to it in Condition 2(a);<br />

"Class A2 Notes" has the meaning given to it in Condition 2(a);<br />

"Class B Notes" has the meaning given to it in Condition 2(a);<br />

"Class C Notes" has the meaning given to it in Condition 2(a);<br />

"Class D Notes" has the meaning given to it in Condition 2(a);<br />

"Clean-Up Call" has the meaning given to it in Condition 9(b);<br />

"Clearing System" means each of Clearstream Luxembourg, Clearstream Germany and Euroclear;<br />

"Clearstream Germany" means Clearstream Banking AG, Frankfurt am Main, or any successor;<br />

"Clearstream Luxembourg" means Clearstream Banking, société anonyme, Luxembourg, or any successor;<br />

"Closing Date" means 30th October, 2000;<br />

"Collateral" means the securities in bearer form purchased by the Issuer, from time to time, from the Repo Counterparty pursuant to the<br />

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Repurchase Agreement, or from any substitute repo counterparty under any substitute repurchase agreement, which shall consist of:<br />

(i) floating rate <strong>DG</strong> HYP Pfandbriefe with a maximum maturity of ten (10) years; or<br />

(ii) French or German government securities having ratings of AAA by each of Fitch and Standard & Poor's with a maximum maturity of<br />

ten (10) years,<br />

or any combination thereof;<br />

"Collateral Interest Account" means the account maintained by the Issuer with the Account Bank to which any interest accruing on the<br />

Collateral (other than Repo Interest) shall be credited;<br />

"Collection Period" means, with respect to any Interest Payment Date, the period from and including one (1) Business Day prior to the<br />

preceding Interest Payment Date to but excluding the day one Business Day prior to such Interest Payment Date, provided that following<br />

the occurrence of an Early Redemption Event, the penultimate Collection Period will be the period from and including the Final<br />

Determination Date to, but excluding, the day one Business Day prior to the Distribution Date and the final Collection Period will be the<br />

period from, and including the day one Business Day prior to the Distribution Date to, but excluding, the Business Day prior to the Final<br />

Distribution Date;<br />

"Conditions" means the terms and conditions applicable to the Notes and to each respective Class of Notes as set forth herein and any<br />

reference in these Conditions to a particular numbered Condition shall be construed accordingly and references in these Conditions to a<br />

paragraph of a particular Condition shall be construed as a paragraph of such Condition;<br />

"Corporate Administration Agreement" means the corporate administration agreement dated 26th October, 2000 between the Issuer and<br />

the Corporate Administrator;<br />

"Corporate Administrator" means Ogier Secretaries <strong>Limited</strong>;<br />

"Credit Default Swap Agreement" means the credit default swap agreement dated 26th October, 2000 between the Issuer and the Swap<br />

Counterparty in the form of an ISDA Master Agreement (1992 Version, Multicurrency — Cross Border) including the Swap Schedule and<br />

the Swap Confirmation incorporated therein;<br />

"Credit Event" means, with respect to a Reference Obligation and the related Reference Entity, the determination by the Swap<br />

Counterparty that any of the following events have occurred on or after the Closing Date:<br />

(i) the Reference Entity becomes delinquent with respect to one or more payments due under a Mortgage Loan amounting in total to at<br />

least one quarter of the amount owed to the Swap Counterparty under such Mortgage Loan during the current calendar year (including<br />

payments which were due in a previous calendar year, but remain unpaid);<br />

(ii) insolvency proceedings in respect of the Reference Entity are commenced; or<br />

(iii) a Mortgage Loan is terminated due to the occurrence of an important reason (wichtiger Grund) under German law in relation to the<br />

Reference Entity,<br />

provided; however, that a Credit Event in respect of a Reference Obligation will cease to exist if the Reference Entity has paid to the Swap<br />

Counterparty all amounts due and overdue on such Reference Obligation before the Work Out Amount in respect of such Credit Event has<br />

been transferred to the Swap Counterparty and provided further that no other Credit Event has occurred and is in existence with respect<br />

to such Reference Obligation;<br />

"Credit Protection Payment" means any payment made or to be made by the Issuer to the Swap Counterparty under the Credit Default<br />

Swap Agreement in respect of Reference Obligations in Credit Event, which shall be equal to any Quarterly Write-Off Amount or Aggregate<br />

Evaluated Write-Off Amount in respect of such Reference Obligations;<br />

"Custodian" means <strong>DG</strong> HYP or any successor acting as custodian under the Custody Agreement;<br />

"Custody Agreement" means the custody agreement dated 26th October, 2000 between the Issuer, the Custodian, the Cash Administrator<br />

and the Security Trustee;<br />

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"Cut-off Date" means 28th July, 2000;<br />

"Data Protection Agreement" means the data protection agreement dated 26th October, 2000 between the Swap Counterparty, the<br />

Security Trustee, the Issuer and the Data Trustee;<br />

"Data Provider" means <strong>DG</strong> HYP;<br />

"Data Trustee" means Arthur Andersen Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft mbH, Frankfurt am Main or any successor<br />

acting as data trustee pursuant to the Data Protection Agreement;<br />

"Delayed Payment Amount" means, as of the Final Determination Date, an amount equal to the aggregate of the outstanding principal<br />

amounts of the Reference Obligations in respect of which a Credit Event has occurred but for which no Write-off Amounts have been determined<br />

and verified as of the Final Determination Date;<br />

"Determination Date" means, with respect to each Interest Payment Date other than the Final Determination Date, the Distribution Date<br />

and the Final Distribution Date, the day ten (10) Business Days prior to such Interest Payment Date;<br />

"Determination Period" means (i) for any Interest Payment Date (excluding the Distribution Date and the Final Distribution Date) the period<br />

from but excluding the Determination Date preceding the previous Interest Payment Date (or, in the case of the first Determination<br />

Period from and including the Cut-Off Date) to and including the Determination Date preceding such Interest Payment Date, and (ii) for the<br />

Distribution Date the period from but excluding the Determination Date preceding the previous Interest Payment Date to and including the<br />

Final Determination Date. There shall be no Determination Period for the Final Distribution Date;<br />

"<strong>DG</strong> HYP" means Deutsche Genossenschafts-<strong>Hyp</strong>othekenbank AG, Hamburg and Berlin;<br />

"<strong>DG</strong> HYP Pfandbriefe" means Pfandbrief debt securities issued by <strong>DG</strong> HYP having ratings of AAA by each of Fitch and Standard & Poor's;<br />

"<strong>DG</strong> HYP Mortgage Pfandbrief Cover Register" means the register in which those parts of Mortgage Loans which serve as cover for <strong>DG</strong><br />

HYP Mortgage Pfandbriefe are registered;<br />

"Distribution Date" means the day 10 Business Days after the Final Determination Date;<br />

"Early Redemption" means the redemption of the Notes following an Early Redemption Event as set forth in Condition 9;<br />

"Early Redemption Event" has the meaning given to it in Condition 9(a);<br />

"EC Treaty" means the Treaty establishing the European Community (signed in Rome on 25th March, 1957) as amended by the Treaty on<br />

European Union (signed in Maastricht on 7th February, 1992) and as amended by the Treaty of Amsterdam (signed in Amsterdam on 2nd<br />

October, 1997);<br />

"Eligibility Criteria" means the following criteria with respect to the Mortgage Loans and the corresponding Reference Obligations:<br />

(i) The Swap Counterparty is the legal and beneficial owner of the outstanding principal amount of each Reference Obligation;<br />

(ii) Each Mortgage Loan, together with any other security in addition to the security on residential property (including, without limitation,<br />

any other credit support therefor such as an assignment of life insurance or similar financial or savings products), constitutes a valid,<br />

binding and legally enforceable obligation of the Reference Entity and, as the case may be, any guarantor or other credit support<br />

provider;<br />

(iii) No Mortgage Loan has become overdue since 1994 within the meaning of that term in the internal operational guidelines of the Swap<br />

Counterparty;<br />

(iv) Each Mortgage Loan was originated, or transferred to, and booked by or on behalf of the Swap Counterparty in accordance with its<br />

usual origination and booking procedures for the mortgage loans of that type in effect at the date such Mortgage Loan was originated<br />

or transferred;<br />

143


(v) Each Reference Obligation is denominated in DEM or euro;<br />

(vi) The aggregate of the principal amounts outstanding under the Reference Obligations does not exceed DEM 1,968,420,491.34/<br />

€ 1,006,437,416.00;<br />

(vii) No Mortgage Loan exceeds the amount permitted by the German Mortgage Banking Act (<strong>Hyp</strong>othekenbankgesetz);<br />

(viii) No Reference Entity is an employee or executive (Organmitglied) of the Swap Counterparty;<br />

(ix) No amounts have been written off and no loss provisions have been made by the Swap Counterparty in respect of any Reference<br />

Obligation or Mortgage Loan;<br />

(x) Each Mortgage Loan satisfies the standard requirements of the Swap Counterparty concerning mortgage loans which include:<br />

(aa) A legally binding contract exists between the Swap Counterparty and the Reference Entity;<br />

(bb) The terms of interest as well as the terms of repayment of principal are determined in the loan contract or the reset confirmation<br />

respectively and are in compliance with the legal form requirements;<br />

(cc) The security object is clearly defined through the land register data;<br />

(dd) The loan contract includes a security agreement (Sicherungszweckerklärung);<br />

(ee) The loan contract includes an obligation of the Reference Entity to provide for a mortgage security to be registered with the<br />

land register (grundbuchrechtliche Sicherheit);<br />

(ff) The Reference Entity has no right to terminate the loan during the fixed interest period except for the legally given termination<br />

right;<br />

(gg) The Swap Counterparty has the contractual right to terminate the loan in case of non-payment by the Reference Entity;<br />

(xi) All residential property securing the Mortgage Loans is located in the Federal Republic of Germany;<br />

(xii) Security interests (if any) in favour of parties other than the Swap Counterparty are fully reflected in the loan to value calculation<br />

regarding such Mortgage Loan;<br />

(xiii) No Mortgage Loan has a variable interest rate;<br />

(xiv) The approval dates or oldest reset dates of the Mortgage Loans were between 1st January, 1991 and 31st March, 2000 (approval)<br />

and between 1st January, 1991 and the Cut-off Date (reset), respectively;<br />

(xv) All Mortgage Loans have been extended for residential purposes (Wohnungsbau) as defined by the Swap Counterparty;<br />

(xvi) No Mortgage Loan had an original nominal amount in excess of DEM 1.5 million; and<br />

(xvii) No Reference Entity is a financial institution or a legal entity (Juristische Person).<br />

"Eligible Investments" means an investment made by the Cash Administrator on behalf of the Issuer in any of the following eligible instruments<br />

including, but not limited to, Collateral provided that such instrument shall mature during the Collection Period in which such instrument<br />

is purchased. The following order of priority shall apply:<br />

(i) floating rate <strong>DG</strong> HYP Pfandbriefe, provided that (aa) <strong>DG</strong> HYP is acting as Custodian and the short-term unsecured, unsubordinated,<br />

unguaranteed debt obligations of <strong>DG</strong> HYP are rated at least A1+ by Standard & Poor's and F1+ by Fitch or (bb) <strong>DG</strong> HYP provides an<br />

equivalent account guarantee following prior written confirmation by the Rating Agencies that the then current ratings of the Notes<br />

are not affected thereby;<br />

144


(ii) securities rated at least A1+ or AAA by Standard & Poor's and at least F1+ or AAA by Fitch with a risk weighting of 0% under the<br />

German capital adequacy regime (Grundsatz I);<br />

(iii) a cash deposit with <strong>DG</strong> HYP; provided <strong>DG</strong> HYP is acting as Account Bank and provided further that (aa) the short-term unsecured,<br />

unsubordinated, unguaranteed debt obligations of <strong>DG</strong> HYP are rated at least A1+ by Standard & Poor's and F1+ by Fitch or (bb) <strong>DG</strong><br />

HYP provides an equivalent account guarantee following prior written confirmation by the Rating Agencies that the then current<br />

ratings of the Notes are not affected thereby; or<br />

(iv) a guaranteed investment contract entered into with <strong>DG</strong> HYP; provided that the short-term unsecured, unsubordinated, unguaranteed<br />

debt obligations of <strong>DG</strong> HYP are rated at least A1+ by Standard & Poor's and F1+ by Fitch and following prior written confirmation by<br />

the Rating Agencies that the then current ratings of the Notes are not affected thereby;<br />

"Enforcement Notice" has the meaning given to it in Condition 3(b);<br />

"English Deed of Assignment" means the English deed of assignment dated 26th October, 2000 between the Issuer and the Security<br />

Trustee,<br />

a copy of which is attached hereto as Schedule 2;<br />

"English Security Assets" means the assets assigned by way of security pursuant to Clause 2 of the English Deed of Assignment;<br />

"EURIBOR" has the meaning given to it in Condition 6(c);<br />

"euro" or "€" means the lawful currency of the member states that adopt the single currency in accordance with the EC Treaty;<br />

"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear system or any successor;<br />

"Euro-Zone" means the region comprised of member states of the European Union that adopt the euro in accordance with the EC Treaty;<br />

"Evaluated Amounts" has the meaning given to it in Condition 9(f);<br />

"Evaluated Work Out Proceeds" means with respect to a Mortgage Loan:<br />

(i) to the extent the result of the following calculation is a positive number, any and all monies which the Independent Valuation Expert<br />

anticipates will be transferred to the Swap Counterparty from the enforcement of the residential property securing the Mortgage<br />

Loan, after taking into account, to the extent applicable, any anticipated amounts equal to any prior ranking rights to the related residential<br />

property in favour of third parties, plus accrued but unpaid interest thereon and any anticipated amounts equal to all other<br />

claims which, according to the Law on Compulsory Sale and Administration (Gesetz über die Zwangsversteigerung und<br />

Zwangsverwaltung) rank prior to the real rights (Realrechte) securing such Mortgage Loan, as determined pursuant to the valuation<br />

procedure referred to in Condition 9(f) plus any Additional Work Out Amount, in each case minus:<br />

(aa) first, all fees, disbursements, costs and expenses (excluding internal costs, such as prepayment fees, and expenses of the<br />

Swap Counterparty) which the Independent Valuation Expert anticipates will be paid or incurred by the Swap Counterparty in<br />

connection with the recovery of monies in relation to such Mortgage Loan;<br />

(bb) second, an amount which equals the aggregate outstanding principal amount of the portions, if any, of any mortgage loans<br />

(including the relevant Mortgage Loan), which are secured by residential property securing the Mortgage Loan and which are<br />

registered in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register; or<br />

(ii) to the extent the calculation in (i) above is zero or is a negative number, zero;<br />

"Evaluated Write-off Amount" means, with respect to a Reference Obligation, the outstanding principal amount of the Reference<br />

Obligation as of the Cut-off Date minus the sum of (i) the aggregate amount of repayments of principal since the Cut-Off Date by the<br />

Reference Entity made prior to the Final Determination Date which are applied towards payment of the Reference Obligation and (ii) the<br />

Evaluated Work Out Proceeds in respect of the Mortgage Loan relating to such Reference Obligation. The Evaluated Write-off Amount for<br />

a Reference Obligation cannot be greater than the outstanding principal balance of such Reference Obligation as of the Final Determination<br />

Date;<br />

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"Event of Default" has the meaning given to it in Condition 9(e);<br />

"Exchange Date" has the meaning given to it in Condition 2(c);<br />

"Expense Payments" means the amounts payable by the Issuer as set forth in Clause 15.1(ii) and Clause 15.1(xi) of the German Trust<br />

Agreement;<br />

"Final Determination Date" means:<br />

(i) following (aa) the exercise of the Clean-Up Call (bb) the occurrence of a Tax Redemption Event or (cc) the occurrence of the Final<br />

Maturity Date, the day that would otherwise be the next Interest Payment Date; or<br />

(ii) in the case of an Event of Default, the day on which the Notes are accelerated;<br />

"Final Distribution Date" means the day ten (10) Business Days after the Valuation Date;<br />

"Final Maturity Date" means 30th October, 2052, if any Notes are outstanding on such date;<br />

"Fitch" means Fitch Ratings Ltd;<br />

"Fixing Date" means the day two (2) TARGET Business Days prior to each Interest Payment Date and, in respect of the first Interest Period,<br />

two (2) TARGET Business Days prior to the Closing Date;<br />

"German Repo Counterparty Pledge Agreement" means the German repo counterparty pledge agreement dated 26th October, 2000 between<br />

the Issuer, the Repo Counterparty, the Security Trustee, the Custodian and the Account Bank;<br />

"German Security Documents" means the German Swap Counterparty Pledge Agreement, the German Repo Counterparty Pledge<br />

Agreement and the German Subordinated Pledge and Security Agreement;<br />

"German Subordinated Pledge and Security Agreement" means the German subordinated pledge and security agreement dated 26th<br />

October, 2000 between the Issuer, the Account Bank, the Custodian, the Swap Counterparty, the Cash Administrator and the Security<br />

Trustee;<br />

"German Swap Counterparty Pledge Agreement" means the German swap counterparty pledge agreement dated 26th October, 2000 between<br />

the Issuer, the Security Trustee, the Swap Counterparty, the Account Bank and the Custodian;<br />

"German Trust Agreement" means the German trust agreement dated 26th October, 2000 between the Issuer and the Security Trustee, a<br />

copy of which is attached hereto as Schedule 1;<br />

"Global Note" and "Global Notes" has the meaning given to it in Condition 2(c);<br />

"Independent Auditor" means PwC Deutsche Revision Wirtschaftsprüfungsgesellschaft Aktiengesellschaft, Hamburg or its successor;<br />

"Independent Auditor Confirmation" has the meaning given to it in Condition 5(b)(iii);<br />

"Independent Valuation Expert" has the meaning given to it in Condition 9(f);<br />

"Initial Principal Balance" means the initial principal balance of each Class of Notes as set forth in Condition 2(a);<br />

"Interest Amount" has the meaning given to it in Condition 6(d);<br />

"Interest Payment Date" has the meaning given to it in Condition 6(a);<br />

"Interest Period" has the meaning given to it in Condition 6(b);<br />

"Interest Rate" has the meaning given to it in Condition 6(c);<br />

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"Interest Transaction Account" means the interest transaction account in the name of the Issuer under the terms of the Transaction<br />

Account Bank Agreement;<br />

"Issuer" means <strong>Bauhaus</strong> <strong>Securities</strong> <strong>Limited</strong>, a public company incorporated with limited liability under the laws of Jersey, company number<br />

78047, having its registered offices at Whiteley Chambers, Don Street, St. Helier, Jersey;<br />

"Luxembourg Paying Agent" means The Chase Manhattan Bank Luxembourg S.A. or any successor acting as Luxembourg paying agent<br />

under the Agency Agreement;<br />

"Manager" means <strong>DG</strong> BANK Deutsche Genossenschaftsbank AG;<br />

"mortgage" means a security interest over residential property known as "Grundschuld" or "<strong>Hyp</strong>othek" within the meaning of the German<br />

Civil Code (Bürgerliches Gesetzbuch);<br />

"Mortgage Loans" has the meaning given to it in Condition 5(a);<br />

"Noteholder" means any holder of a proportionate co-ownership or other beneficial interest or right in a Note;<br />

"Notes" has the meaning given in Condition 2(a) and shall include the Global Note of each Class;<br />

"Note Calculation Agent" means The Chase Manhattan Bank, London, or any successor acting as note calculation agent under the Cash<br />

Administration Agreement;<br />

"Note Principal Amount" means in respect of any Note, as of any Interest Payment Date, the initial principal amount of such Note on the<br />

Closing Date minus the sum of (i) the aggregate amount of repayments, if any, of principal in respect of such Note attributable to Pay-Down<br />

Events or made in respect of any Aggregate Evaluated Work Out Proceeds, (ii) the aggregate amount of reductions of principal in respect<br />

of such Note attributable to Credit Protection Payments, and (iii) the aggregate amount of repayments of principal in respect of such Note,<br />

if any, resulting from the occurrence of an Early Redemption Event;<br />

"Note Principal Payment" means, with respect to an Interest Payment Date, the amount of principal repaid or required to be repaid by the<br />

Issuer in respect of each Note on such Interest Payment Date, as calculated pursuant to Condition 7 or Condition 9;<br />

"Notional Repo Amount" means the notional amount outstanding from time to time under each Repo-Transaction which shall be<br />

€ 1,006,250,000 on the Closing Date;<br />

"Notional Swap Amount" means the notional amount outstanding from time to time under the Credit Default Swap Agreement which shall<br />

be € 1,006,250,000 on the Closing Date;<br />

"Order of Seniority" has the meaning given to it in Condition 7(b);<br />

"Pay-Down Amount" has the meaning given to it in Condition 7(b);<br />

"Pay-Down Event" has the meaning given to it in Condition 7(b);<br />

"Paying Agents" means the Principal Paying Agent and the Luxembourg Paying Agent;<br />

"Permanent Global Note" has the meaning given to it in Condition 2(c);<br />

"Pool Factor" has the meaning given to it in Condition 8(a);<br />

"Principal Amount Outstanding" means the aggregate Principal Balance of all of the Classes of Notes outstanding from time to time;<br />

"Principal Balance" means, with respect to a Class of Notes as of any date after the Closing Date, the Initial Principal Balance of such<br />

Class of Notes minus the sum of (i) the aggregate amount of repayments in respect of such Class of Notes, if any, of principal attributable<br />

to Pay-Down Events or made in respect of any Aggregate Evaluated Work Out Proceeds, (ii) the aggregate amount of reductions of prin-<br />

147


cipal in respect of such Class of Notes attributable to Credit Protection Payments, and (iii) the aggregate amount of repayments of principal<br />

in respect of such Class of Notes, if any, resulting from the occurrence of an Early Redemption Event;<br />

"Principal Collection Account" means the account in the name of the Issuer held with the Account Bank to which the proceeds from the<br />

sale of Collateral to the Repo Counterparty or any substitute repo counterparty or Eligible Investments (in the form of cash) will be credited;<br />

"Principal Paying Agent" means the Chase Manhattan Bank AG, Frankfurt am Main, or any successor acting as principal payment agent<br />

under the Agency Agreement;<br />

"Principal Transaction Account" means the principal transaction account opened in the name of the Issuer under the terms of the<br />

Transaction Account Bank Agreement;<br />

"Purchase Date" means, with respect to the first Repo-Transaction, the Closing Date, and with respect to each subsequent Repo-<br />

Transaction the Repurchase Date of the previous Repo-Transaction; provided, however, that there shall be no Purchase Date on the<br />

Repurchase Date prior to the Final Determination Date;<br />

"Purchase Price" means the price paid or required to be paid by the Issuer to the Repo Counterparty or any substitute repo counterparty<br />

for the purchase of Collateral on any Purchase Date, which shall, on any Purchase Date, equal the Notional Repo Amount as calculated<br />

on such Purchase Date;<br />

"Quarterly Write-off Amount" has the meaning given to it in Condition 7(c);<br />

"Rating Agencies" means Standard & Poor’s and Fitch;<br />

"Reference Banks" means the banks selected by the Note Calculation Agent in accordance with Condition 6(g) which shall be major banks<br />

in the Euro-Zone interbank market that are members of the EURIBOR panel;<br />

"Reference Entity" has the meaning given to it in Condition 5(a)(ii);<br />

"Reference List" has the meaning given to it in Condition 5(a)(ii);<br />

"Reference Obligations" means those entire Mortgage Loans, or in respect of Mortgage Loans a portion of which serves as cover for <strong>DG</strong><br />

HYP Mortgage Pfandbriefe, those portions of Mortgage Loans which do not serve as cover for <strong>DG</strong> HYP Mortgage Pfandbriefe, in each<br />

case which are included in the Reference Portfolio;<br />

"Reference Obligation Reduction Amount" has the meaning given to it in Condition 7(b);<br />

"Reference Portfolio" has the meaning given to it in Condition 5(a)(i);<br />

"Reference Register" has the meaning given to it in Condition 5(a)(ii);<br />

"Relevant Margin" has the meaning given to it in Condition 6(c);<br />

"Repo Calculation Agent" means The Chase Manhattan Bank, London, or any successor acting as repo calculation agent under the Cash<br />

Administration Agreement;<br />

"Repo Counterparty" means <strong>DG</strong> BANK Deutsche Genossenschaftsbank AG, Frankfurt am Main;<br />

"Repo Interest" has the meaning given to it in Condition 5(h);<br />

"Repo Rate" means, for the first Repo-Transaction, the percentage rate per annum agreed by the Issuer and the Repo Counterparty two<br />

(2) TARGET Business Days before the Closing Date. For any subsequent Repo-Transaction, the Repo Rate will be agreed by the Issuer and<br />

the Repo Counterparty, or any substitute repo counterparty, one (1) TARGET Business Day before the Purchase Date in respect of such<br />

Repo-Transaction.<br />

"Repo-Transaction" has the meaning given to it in Condition 5(f);<br />

148


"Repo-Transaction Period" means, with respect to the first Repo-Transaction, the period commencing on the Closing Date and terminating<br />

on the initial Repurchase Date, and, with respect to any subsequent Repo-Transaction, the period commencing on the Purchase Date<br />

preceding an Interest Payment Date and terminating on the Repurchase Date following such Interest Payment Date;<br />

"Repurchase Agreement" means an agreement dated 26th October, 2000 substantially in the form of a 1995 PSA/ISMA Global Master<br />

Repurchase Agreement between the Issuer and the Repo Counterparty;<br />

"Repurchase Date" means, with respect to an Interest Payment Date, one (1) Business Day before such Interest Payment Date except that<br />

(i) following the acceleration of the Notes due to the exercise of the Clean-Up Call, the occurrence of a Tax Redemption Event or the occurrence<br />

of the Final Maturity Date, the Repurchase Date shall be one (1) Business Day prior to the Final Determination Date and (ii) following<br />

the acceleration of the Notes due to an Event of Default, the Repurchase Date shall be the Final Determination Date;<br />

"Repurchase Price" means the price to be paid by the Repo Counterparty or any substitute repo counterparty to the Issuer for the repurchase<br />

of Collateral on any Repurchase Date, which shall, on any Repurchase Date, be equal to the Purchase Price paid on the previous<br />

Purchase Date plus Repo Interest;<br />

"residential property" means real property as well as a hereditary building right (Erbbaurecht) created under German law;<br />

"Reverse Order of Seniority" has the meaning given to it in Condition 7(c);<br />

"Screen Rate" means EURIBOR for three month euro deposits displayed on the Bridge Telerate Page (or such replacement or successor<br />

page on that service which displays the information) and "Bridge Telerate Page" means page 248 of the Associated Press-Dow Jones<br />

Telerate Service;<br />

"Security Assets" has the meaning given to it in Clause 4.2 of the German Trust Agreement;<br />

"Security Documents" means the German Swap Counterparty Pledge Agreement, the German Repo Counterparty Pledge Agreement, the<br />

German Subordinated Pledge and Security Agreement, the German Trust Agreement and the English Deed of Assignment;<br />

"Security Interests" means (i) the first priority pledge over the Collateral or Eligible Investments (in the form of securities and excluding<br />

any income accruing on either Collateral or Eligible Investments) and the Principal Collection Account in favour of the Swap Counterparty<br />

as more particularly set forth in the German Swap Counterparty Pledge Agreement and referred to in Clause 4.1(a) of the German Trust<br />

Agreement, (ii) the first ranking pledge over the Collateral Interest Account in favour of <strong>DG</strong> BANK as Repo Counterparty as more particularly<br />

set forth in the German Repo Counterparty Pledge Agreement and referred to in Clause 4.1(b) of the German Trust Agreement, and<br />

(iii) the Transaction Security Interests;<br />

"Security Trustee" means The Chase Manhattan Bank, London, or any successor acting as security trustee under the Security Documents;<br />

"Standard & Poor's" means Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc.;<br />

"Swap Calculation Agent" means The Chase Manhattan Bank or any successor acting as swap calculation agent under the Cash<br />

Administration Agreement;<br />

"Swap Counterparty" means <strong>DG</strong> HYP;<br />

"Swap Payment Date" means, with respect to an Interest Period, the Interest Payment Date on which such Interest Period commences,<br />

and in the case of the first Interest Period, the Closing Date. In the event of the exercise of the Clean-Up Call, the occurrence of a Tax<br />

Redemption Event or the occurrence of the final Maturity Date, the Swap Payment Date will include the Final Determination Date and the<br />

Distribution Date, but not the Final Distribution Date. Following the acceleration of the Notes due to an Event of Default or a Termination<br />

Event, there will be no further Swap Payment Dates;<br />

"Swap Premium" has the meaning given to it in Condition 5(c);<br />

"TARGET Business Day" means a day on which the TARGET System is open;<br />

"TARGET System" means the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) System or any successor thereto;<br />

149


"Tax" or "Taxes" includes all taxes, imposts, duties, levies, charges, deductions and withholdings in the nature or on account of tax, together<br />

with all interest thereon and penalties with respect thereto;<br />

"Tax Gross-Up Amounts" means an amount equal to any Tax or any deduction or withholding for or on account of any present or future<br />

Tax, duty, assessment or other governmental charge imposed on the Issuer's income, the Eligible Investments or any amounts payable to<br />

it by the Repo Counterparty under the Repurchase Agreement or by any substitute repo counterparty under a substitute repurchase agreement<br />

or by the Swap Counterparty under the Credit Default Swap Agreement, but will not include any amounts to be deducted or withheld<br />

for or on account of any present and future Tax, duty, assessment or governmental charge imposed upon, or as a result of payments by<br />

the Issuer under the Notes;<br />

"Tax Redemption Event" has the meaning given to it in Condition 9(c);<br />

"Temporary Global Note" has the meaning given to it in Condition 2(b);<br />

"Termination Event" means:<br />

(i) Failure by the Issuer or the Swap Counterparty to make, when due, any payment under the Credit Default Swap Agreement if such<br />

failure is not remedied on or before the third (3rd) Business Day after notice of such failure is given;<br />

(ii) The Issuer or the Swap Counterparty is subject to any of the insolvency or bankruptcy related provisions of Clause 5(vii) of the Credit<br />

Default Swap Agreement; or<br />

(iii) It is or will become unlawful for the Issuer or the Swap Counterparty to perform or comply with its obligations under the Credit Default<br />

Swap Agreement as set forth in Clause 5(b)(i) thereof;<br />

"Transaction Accounts" means the Interest Transaction Account and the Principal Transaction Account;<br />

"Transaction Account Bank" means The Chase Manhattan Bank, London, or any successor acting as transaction account bank under the<br />

Transaction Account Bank Agreement;<br />

"Transaction Account Bank Agreement" means the account bank agreement dated 26th October, 2000 between the Issuer, the<br />

Transaction Account Bank, the Cash Administrator and the Security Trustee;<br />

"Transaction Documents" means these Conditions, the Master Definitions and Interpretation Schedule, the Agency Agreement, the Credit<br />

Default Swap Agreement, the Data Protection Agreement, the Repurchase Agreement, the Cash Administration Agreement, the Account<br />

Bank Agreement, the Corporate Administration Agreement, the Transaction Account Bank Agreement, the Custody Agreement, the<br />

German Swap Counterparty Pledge Agreement, the German Repo Counterparty Pledge Agreement, the German Subordinated Pledge and<br />

Security Agreement, the German Trust Agreement and the English Deed of Assignment;<br />

"Transaction Secured Creditors" has the meaning given to it in Clause 3.1 of the German Trust Agreement;<br />

"Transaction Security Interests" means the subordinated security interests, first ranking pledge and first ranking security assignments in<br />

favour of the Security Trustee (as trustee for the benefit of itself and the other Transaction Secured Creditors) as set forth in the German<br />

Subordinated Pledge and Security Agreement, Clauses 4.1(c) and 4.1(d) of the German Trust Agreement and Clause 2 of the English Deed<br />

of Assignment;<br />

"Valuation Criteria" has the meaning given to it in Condition 9(f)(ii);<br />

"Valuation Date" means the date on which the Independent Valuation Expert determines the Aggregate Evaluated Write-off Amount and<br />

the Aggregate Evaluated Work Out Proceeds, which will be sixty (60) Business Days after the Distribution Date;<br />

"Valuation Report" has the meaning given in Condition 9(f)(ii);<br />

"Work Out" means, with respect to a Mortgage Loan in respect of which a Credit Event has occurred, any one of the following procedures,<br />

as applied by the Swap Counterparty:<br />

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(i) termination of the affected Mortgage Loan and foreclosure (Zwangsversteigerung) on the residential property securing such affected<br />

Mortgage Loan;<br />

(ii) if the Reference Entity so elects and with the consent of the Swap Counterparty, termination of the affected Mortgage Loan and<br />

repayment or prepayment of such affected Mortgage Loan; or<br />

(iii) upon receipt by the Swap Counterparty of an offer to buy the affected Mortgage Loan, the sale and transfer of such Mortgage Loan<br />

or claims thereunder to a third party.<br />

"Work Out Amount" means, in respect of a Mortgage Loan with a corresponding Reference Obligation in relation to which a Credit Event<br />

has occurred, the amount of any proceeds transferred to the Swap Counterparty as a result of the completion of the Work Out of such<br />

Mortgage Loan, after taking into account and deducting, to the extent applicable, any amounts equal to prior ranking rights to the related<br />

residential property in favour of third parties, plus accrued but unpaid interest thereon and any amounts equal to other claims which according<br />

to the Law on Compulsory Sale and Administration (Gesetz über die Zwangsversteigerung und Zwangsverwaltung) rank prior to the<br />

real rights (Realrechte) securing such Mortgage Loan. For the avoidance of doubt these amounts deducted will not be at the disposal of<br />

the Swap Counterparty and details of the calculation will not be available to the Swap Counterparty;<br />

"Work Out Expenses" means, in relation to a Work Out, an amount equal to all fees, disbursements, costs and expenses (excluding internal<br />

costs, such as prepayment fees and expenses of the Swap Counterparty) which the Swap Counterparty has paid or incurred in connection<br />

with the Work Out;<br />

"Work Out Proceeds" means, with respect to a Reference Obligation, an amount, as verified by the Independent Auditor, equal to:<br />

(i) to the extent the result of such calculation is a positive number, the Work Out Amount of the related Mortgage Loan minus:<br />

(aa) first, an amount equal to the Work Out Expenses;<br />

(bb) second, an amount which equals the aggregate outstanding principal amount of the portions, if any, of any mortgage loans<br />

(including the relevant Mortgage Loan) which are secured by the residential property securing the Mortgage Loan and which<br />

are registered in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register; or<br />

(ii) to the extent the result of the calculation in (i) above is zero or a negative number, zero;<br />

"Write-off Amount" means, in respect of a Reference Obligation, an amount equal to the outstanding principal balance of such Reference<br />

Obligation as of the Cut-off Date minus the sum of:<br />

(i) the aggregate amount of repayments of principal by the Reference Entity made up to, and including, the day on which the Work Out<br />

Amount is transferred to the Swap Counterparty, which are applied toward payment of the Reference Obligation; and<br />

(ii) the Work Out Proceeds; and<br />

"Write-off Event" has the meaning given to it in Condition 7(c).<br />

(b) Incorporation of Schedules<br />

The Schedules, which consist of the German Trust Agreement and the English Deed of Assignment, form an integral part of these<br />

Conditions.<br />

2. Classes of Notes, Form and Denomination, Exchange, Custody, Title and Transfer<br />

(a) Classes of Notes<br />

The Issuer will issue Notes in an aggregate initial principal balance of € 1,006,250,000, consisting of the following classes: (i) Class A1<br />

Floating Rate Notes with the Initial Principal Balance of € 194,500,000 (the "Class A1 Notes"), (ii) Class A2 Floating Rate Notes with the<br />

Initial Principal Balance of € 707,500,000 (the "Class A2 Notes" and together with the Class A1 Notes, the "Class A Notes"), (iii) Class B<br />

Floating Rate Notes with the Initial Principal Balance of € 63,250,000 (the "Class B Notes"), (iv) Class C Floating Rate Notes with the Initial<br />

Principal Balance of € 18,750,000 (the "Class C Notes") and (v) Class D Floating Rate Notes with the Initial Principal Balance of<br />

€ 22,250,000 (the "Class D Notes" and together with the Class A Notes, the Class B Notes and the Class C Notes, the "Notes"). Any refe-<br />

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ence to a "Class" of Notes or of Noteholders shall be a reference to any or all of the Class A1 Notes, the Class A2 Notes, the Class B<br />

Notes, the Class C Notes and the Class D Notes or any or all of their respective Noteholders, as the case may be.<br />

(b) Form and Denomination<br />

The Notes of each Class will be in bearer form in the denomination of € 250,000 each (subject to pro rata redemption as hereinafter provided)<br />

and will be initially represented by a Temporary Global Note without coupons in the Initial Principal Balance of € 194,500,000 for the<br />

Class A1 Notes, € 707,500,000 for the Class A2 Notes, € 63,250,000 for the Class B Notes, € 18,750,000 for the Class C Notes and<br />

€ 22,250,000 for the Class D Notes (each, a "Temporary Global Note").<br />

(c) Exchange<br />

Each Temporary Global Note will be exchangeable not earlier than the date (the "Exchange Date") which is 40 days after the Closing Date,<br />

provided certification of non-U.S. beneficial ownership in respect of the relevant Noteholders has been received, for interests in a<br />

Permanent Global Note representing the same Class of Notes, without coupons (each, a "Permanent Global Note", and the expression<br />

"Global Notes" and "Global Note" meaning, respectively, (i) all of the Temporary Global Notes and the Permanent Global Notes, or the<br />

Temporary Global Note and the Permanent Global Note of a particular Class, or (ii) any of the Temporary Global Notes or the Permanent<br />

Global Notes, as the context may require). Interest payments on Notes represented by a Temporary Global Note shall be made only after<br />

delivery of such certification. A separate certification shall be required in respect of each such interest payment. Any such certification<br />

received on or after the day which is 40 days after the Closing Date shall be treated as a request to exchange such Temporary Global Note.<br />

On the exchange of the Temporary Global Note for the Permanent Global Note of the relevant Class, the Temporary Global Note shall be<br />

cancelled. The Temporary Global Note and the Permanent Global Note shall each be signed manually by a duly authorised officer of the<br />

Issuer and shall each be authenticated by a duly authorised officer of the Principal Paying Agent or by such other person as the Principal<br />

Paying Agent may appoint for such purpose with the consent of the Issuer.<br />

(d) Custody<br />

The Global Notes shall be kept in custody by Clearstream Germany until all obligations of the Issuer under the Notes have been satisfied.<br />

The Global Notes represent the Notes kept in custody for financial institutions that are accountholders of Clearstream Germany, including<br />

such Notes which are held through Clearstream Luxembourg or Euroclear.<br />

(e) Title and Transfer<br />

The Noteholders shall be entitled to co-ownership participations in the respective Global Note.<br />

Transfers of Notes shall require appropriate entries in the securities accounts:<br />

(i) Transfers of Notes between Clearstream Germany account holders shall be effected in accordance with procedures established with<br />

this purpose by Clearstream Germany.<br />

(ii) Transfers of Notes between Euroclear participants, between Clearstream Luxembourg participants and between Euroclear participants<br />

on the one hand and Clearstream Luxembourg participants on the other hand shall be effected in accordance with the procedures<br />

established for these purposes by Euroclear and Clearstream Luxembourg, respectively.<br />

(iii) Transfers of Notes between Euroclear and/or Clearstream Luxembourg participants on the one hand and Clearstream Germany<br />

account holders on the other hand shall be effected via Clearstream Germany in accordance with the procedures established by<br />

Clearstream Germany, Euroclear and Clearstream Luxembourg for this purpose.<br />

3. Status and Security<br />

(a) Status, <strong>Limited</strong> Recourse and Priority of Payments<br />

Each of the Notes within each Class of Notes constitute direct, secured and (subject to Condition 3(c)) unconditional limited recourse obligations<br />

of the Issuer, ranking pari passu among themselves, payable solely out of the assets assigned or pledged by the Issuer to secure<br />

the Notes. The Issuer shall have no other assets or sources of revenue. If these assets or sources of revenue are insufficient to make payments<br />

on the Notes, no other assets or sources of revenue shall be available for payment of the deficiency, and following liquidation of the<br />

available assets, the obligation of the Issuer to pay such deficiency shall be extinguished.<br />

Interest payments in respect of a Class of Notes shall not be made until payments of all interest due or overdue in respect of all more senior<br />

Classes of Notes have been made. Thus, (i) the rights to receive interest payments in respect of the Class D Notes shall be subordinated<br />

to the rights to receive interest payments in respect of the Class A Notes, the Class B Notes and the Class C Notes, (ii) the rights to recei-<br />

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ve interest payments in respect of the Class C Notes shall be subordinated to the rights to receive interest payments in respect of the Class<br />

B Notes and the Class A Notes, (iii) the rights to receive interest payments in respect of the Class B Notes shall be subordinated to the<br />

rights to receive interest payments in respect of the Class A Notes and (iv) the rights to receive interest payments in respect of the Class<br />

A Notes shall be senior to the rights to receive interest payments in respect of all other Classes of Notes.<br />

Repayment of principal in respect of a Class of Notes shall not be made until repayments of all principal due in respect of all more senior<br />

Classes of Notes have been made. Thus, prior to the enforcement of the Transaction Security Interests, (i) the rights to receive repayments<br />

of principal in respect of the Class D Notes shall be subordinated to the rights to receive repayments of principal in respect of the Class<br />

A Notes, the Class B Notes and the Class C Notes, (ii) the rights to receive repayments of principal in respect of the Class C Notes shall<br />

be subordinated to the rights to receive repayments of principal in respect of the Class B Notes and the Class A Notes, (iii) the rights to<br />

receive repayments of principal in respect of the Class B Notes shall be subordinated to the rights to receive repayments of principal in<br />

respect of the Class A Notes, (iv) the rights to receive repayments of principal in respect of the Class A2 Notes shall be subordinated to<br />

the rights to receive repayments of principal in respect of the Class A1 Notes and (v) the rights to receive repayments of principal with<br />

respect of the Class A1 Notes shall be senior to the rights to receive repayments of principal in respect of all other Classes of Notes.<br />

Following the enforcement of the Transaction Security Interests, repayments of principal in respect of the Notes shall continue to be made<br />

in the order of priority set forth above, except that repayments of principal in respect of the Class A1 Notes and the Class A2 Notes shall<br />

be made on a pro rata basis.<br />

(b) Security<br />

As security for the payment of all monies payable in respect of all Notes and for the payment of certain other amounts, the Issuer has entered<br />

into the Security Documents including, but not limited to, the German Subordinated Pledge and Security Agreement, the German Trust<br />

Agreement and the English Deed of Assignment creating the Transaction Security Interests in favour of the Security Trustee for the benefit<br />

of the Transaction Secured Creditors. The German Trust Agreement and the English Deed of Assignment are attached as schedules to<br />

these Conditions and form an integral part hereof. However:<br />

(i) the Class A Notes shall rank in priority to the Class B Notes in the event of the Transaction Security Interests being enforced;<br />

(ii) the Class A Notes and the Class B Notes shall rank in priority to the Class C Notes in the event of the Transaction Security Interests<br />

being enforced; and<br />

(iii) the Class A Notes, the Class B Notes and the Class C Notes shall rank in priority to the Class D Notes in the event of the Transaction<br />

Security Interests being enforced.<br />

The Security Trustee shall perform such functions, exercise such rights and fulfil such obligations as are specified in the German Trust<br />

Agreement and incorporated by reference into the English Deed of Assignment. The German Trust Agreement and, by incorporation by<br />

reference, the English Deed of Assignment contain provisions requiring the Security Trustee to have regard to the interests of the<br />

Noteholders of the Class A Notes, the Class B Notes, the Class C Notes and the Class D Notes as regards all powers, trusts, authorities,<br />

duties and discretions of the Security Trustee but requiring the Security Trustee in any such case to have regard only to the interests of the<br />

Noteholders higher in the ranking if, in the Security Trustee's opinion, there is a conflict between the interests of the Noteholders with the<br />

higher ranking on the one hand and the interests of the Noteholders with the lower ranking on the other hand.<br />

As long as any Notes are outstanding, the Issuer shall ensure that a security trustee is appointed at all times who will perform the same<br />

functions, exercise the same rights and fulfil the same obligations as the Security Trustee under the Transaction Documents.<br />

In the event of an acceleration of the Notes following the occurrence of an Event of Default in accordance with Condition 9(e) the Security<br />

Trustee shall give a notice (an "Enforcement Notice") to the Issuer and to the Noteholders in accordance with Condition 14. Upon receipt<br />

of the Enforcement Notice by the Issuer, the Issuer shall redeem the Notes in accordance with Condition 9(f) and the Security Trustee may,<br />

and upon request of one or more Noteholders shall, enforce the Transaction Security Interests in accordance with Clauses 14.2 to 14.6 of<br />

the German Trust Agreement. However, the right of the Security Trustee to enforce the Transaction Security Interests shall be subordinated<br />

to (i) the right of the Swap Counterparty to enforce the Security Interests created in favour of the Swap Counterparty under the German<br />

Swap Counterparty Pledge Agreement and (ii) the right of the Repo Counterparty to enforce the Security Interests created in favour of the<br />

Repo Counterparty under the German Repo Counterparty Pledge Agreement.<br />

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(c) Available Distribution Funds<br />

Available Distribution Funds shall be applied as follows:<br />

(i) Prior to the enforcement by the Security Trustee of the Transaction Security Interests in accordance with Condition 3(b), the Issuer<br />

shall apply Available Distribution Funds on any Interest Payment Date in accordance with Clauses 15.1 and 15.2 of the German Trust<br />

Agreement.<br />

(ii) Following enforcement by the Security Trustee of the Transaction Security Interests in accordance with Condition 3(b), any proceeds<br />

resulting from the enforcement of the Transaction Security Interests shall be applied in accordance with Clause 15.3 of the German<br />

Trust Agreement.<br />

(iii) In the event that, on any Interest Payment Date, the aggregate of the amount standing to the credit of the Interest Transaction<br />

Account which may be used for such purpose in accordance with the order of priorities pursuant to Clause 15.1 of the German Trust<br />

Agreement is not sufficient to pay in full the aggregate amount of interest due on the Class A Notes, the Class B Notes, the Class C<br />

Notes or the Class D Notes on such Interest Payment Date such amount shall be applied in the order of priorities pursuant to Clause<br />

15.1 of the German Trust Agreement, with the Notes of the affected Class or Classes receiving a pro rata share of such amount.<br />

(iv) In the event that, on any Interest Payment Date, the aggregate of the amount standing to the credit of the Principal Transaction<br />

Account which may be used for such purpose in accordance with the order of priorities pursuant to Clause 15.2 of the German Trust<br />

Agreement is not sufficient to pay in full the aggregate amount of principal due on the Class A Notes, the Class B Notes, the Class<br />

C Notes or the Class D Notes on such Interest Payment Date such amount shall be applied in the order of priorities pursuant to<br />

Clause 15.2 of the German Trust Agreement, with the Notes of the affected Class or Classes receiving a pro rata share of such<br />

amount.<br />

4. Covenants<br />

Save with the prior written consent of the Security Trustee or as otherwise provided in the Transaction Documents, the Issuer shall not, so long<br />

as any Note remains outstanding:<br />

(i) dispose of or, except under the Security Documents, create or permit to subsist any mortgage, pledge, lien (unless arising by operation of<br />

law) or charge upon, the whole or any part of its assets, present or future (including any uncalled capital) or its undertaking; or<br />

(ii) engage in any activity which is not reasonably incidental to any of the activities which the Transaction Documents provide or envisage that<br />

the Issuer will engage in; or<br />

(iii) open any account whatsoever with any bank or other financial institution, save where obliged to do so under the Cash Administration<br />

Agreement; or<br />

(iv) incur any indebtedness in respect of borrowed money whatsoever (except in respect of the Notes) or give any guarantee in respect of any<br />

obligation of any person; or<br />

(v) consolidate or merge with any other person or convey or transfer its properties or assets substantially as an entirety to any other person; or<br />

(vi) cause or permit any of the Transaction Documents, or the priority of the security interests created thereby, to be amended, terminated or<br />

discharged or cause or permit any party to any of the Transaction Documents to be released from any obligations thereunder; or<br />

(vii) have any employees; or<br />

(viii)purchase, own, lease or otherwise acquire any real property (other than office premises or the like facilities for the purposes of this transaction);<br />

or<br />

(ix) declare any dividends in excess of euro 10,000 per annum (or its equivalent in another currency); or<br />

(x) have any subsidiaries; or<br />

(xi) issue any further shares in the Issuer (other than such shares as are in issue at the date hereof and such shares which may be issued to<br />

the trustee or its nominee from time to time of the <strong>Bauhaus</strong> <strong>Securities</strong> Charitable Trust) or make any distribution to its shareholders except<br />

those permitted in (ix).<br />

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In giving any consent to the foregoing, the Security Trustee may require the Issuer to make or to cause the relevant parties to consent to<br />

such modifications or additions to the provisions of any of the Transaction Documents, or may impose such other conditions or requirements<br />

as the Security Trustee may deem expedient in the interests of the Noteholders.<br />

5. The Credit Default Swap Agreement and the Repurchase Agreement<br />

(a) Credit Default Swap Agreement - Reference Register and Reference List<br />

(i) Pursuant to the Credit Default Swap Agreement, the Swap Counterparty has designated, as of the Cut-off Date, a portfolio (the<br />

"Reference Portfolio") consisting of the Reference Obligations relating to mortgage loans granted by the Swap Counterparty (the<br />

"Mortgage Loans"). In the event that it is determined at any time that a Reference Obligation did not satisfy the applicable Eligibility<br />

Criteria as at the Cut-off Date, or that a Reference Entity in respect of a Reference Obligation was not substituted in compliance with<br />

the conditions to substitution set out below, such Reference Obligation shall be removed from the Reference Portfolio and the Issuer<br />

shall make a corresponding repayment to the Noteholders in accordance with Condition 7(a). In the event that a Reference Entity<br />

transfers title to the underlying residential property in relation to a Mortgage Loan to a third person, the Swap Counterparty is entitled<br />

to substitute the transferee as a substitute Reference Entity for the existing Reference Entity provided that the following conditions<br />

are met:<br />

(aa) the substitute Reference Entity must be a natural person or business association in which at least one natural person is liable<br />

without limitation for the original Mortgage Loan and, where the debt is assumed by several persons, the liability must be joint<br />

and several;<br />

(bb) the assumption of the Mortgage Loan is made in connection with the sale of the charged residential property to the substitute<br />

Reference Entity;<br />

(cc) the existence, extent, priority and enforceability (including any immediate execution) of the Mortgage Loan are not affected by<br />

the assumption of debt;<br />

(dd) the assumption of debt satisfies all applicable legal requirements as well as the standard procedures of the Swap Counterparty; and<br />

(ee) the assumption of the Mortgage Loan may not result in an increase of the loan to value ratio of the assumed Mortgage Loan.<br />

(ii) On or prior to the Closing Date, the Swap Counterparty will deliver to the Issuer and the Security Trustee a register (the "Reference<br />

Register") containing certain information in encoded form relating to the Reference Obligations and to the Data Trustee a list in sealed<br />

form (the "Reference List") necessary to decode the Reference Register and which is sufficient to identify each obligor in respect of<br />

the Reference Obligation (the "Reference Entity"). The Swap Counterparty will amend the Reference Register and the Reference List<br />

from time to time to reflect the removal of a Reference Obligation in respect of which it is ascertained that the applicable Eligibility<br />

Criteria were not met as of the Cut-off Date or the relevant Reference Entity was substituted in violation of the conditions to substitution<br />

set forth above, the substitution of a Reference Entity or the removal of any Reference Obligation once payment obligations<br />

in relation to such Reference Obligation are fulfilled or a Credit Protection Payment in respect of such Reference Obligation has been<br />

made and will deliver an updated Reference Register to the Issuer and the Security Trustee and an updated Reference List to the<br />

Data Trustee following any such removal or substitution. The Swap Counterparty, the Data Trustee, the Independent Auditor and/or<br />

any Independent Valuation Expert will not disclose to the Issuer the identity of any of the Reference Entities unless required by any<br />

law, regulation or requirement of any government or governmental, fiscal, monetary, supervisory or other authority.<br />

(b) Credit Protection Payments, Notional Swap Amount<br />

(i) Pursuant to the terms of the Credit Default Swap Agreement, the Issuer will be required to make Credit Protection Payments to the<br />

Swap Counterparty on each Interest Payment Date, other than the Final Distribution Date, in an amount equal to the sum of all Writeoff<br />

Amounts arising during the preceding Determination Period in accordance with Condition 7(c); provided, however, that the obligation<br />

of the Issuer to make a Credit Protection Payment in respect of a Write-off Amount shall be subject to the following:<br />

(aa) the Swap Counterparty has given written notice of the relevant Credit Event to the Cash Administrator on behalf of the Issuer;<br />

(bb) the Swap Counterparty has determined the appropriate Write-off Amount;<br />

(cc) the Independent Auditor has delivered to the Issuer and the Swap Counterparty the Independent Auditor Confirmation in<br />

respect of such Reference Obligation.<br />

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On the Final Distribution Date, the Issuer shall be required to pay to the Swap Counterparty a Credit Protection Payment in an amount<br />

equal to the Aggregate Evaluated Write off Amounts, if any, as determined in accordance with Condition 9(f).<br />

On each Interest Payment Date (including, for the avoidance of doubt, the Final Distribution Date) on which the Issuer makes a Credit<br />

Protection Payment to the Swap Counterparty, the Note Principal Amount of each Note of the affected Class or Classes of Notes will be<br />

written down as set forth in Condition 7(c) or 9(f), as applicable, without any commensurate repayment of principal being made to any of<br />

the Noteholders.<br />

On the Closing Date, the Notional Swap Amount will equal € 1,006,250,000. The Notional Swap Amount will be reduced on each Interest<br />

Payment Date by an amount equal to the sum of (i) the Pay-Down Amount for the preceding Determination Period, and (ii) the Credit Protection<br />

Payments for the preceding Determination Period, and (iii) any other amounts attributable to any redemption, in whole or in part, of the Notes.<br />

(ii) The Swap Counterparty will generally make its determination as to whether a Credit Event has occurred as soon as reasonably practicable<br />

on the basis of all information available to it in its capacity as lender under the Mortgage Loans. There may be circumstances<br />

in which, due to uncertainties regarding such information, questions of interpretation, the exercise of judgment by the Swap<br />

Counterparty in its capacity as lender under the Mortgage Loans or other reasons, a determination regarding the occurrence of a<br />

Credit Event is delayed. Neither the Swap Counterparty nor any of its affiliates will have any liability to any Noteholder or any other<br />

person as a result of any such delay. The Swap Counterparty will have sole discretion to determine whether a Credit Event in relation<br />

to a Reference Obligation has been or can be expected to be cured.<br />

A Credit Event with respect to a Reference Obligation will cease to exist if the Reference Entity has paid the Swap Counterparty all<br />

amounts due and overdue before the related Work Out Amount is transferred to the Swap Counterparty and no other Credit Event<br />

has occurred and is in existence with respect to such Reference Obligation.<br />

(iii) If, after the determination of the occurrence of a Credit Event, the Swap Counterparty determines that it would be appropriate to collect<br />

amounts due from the Reference Entity, it will do so by means of a Work Out of the affected Mortgage Loan. The Swap<br />

Counterparty shall establish Work Out methods and terms on a case by case basis. To the extent the Swap Counterparty has a choice<br />

between the Work Out methods, the Swap Counterparty will use its discretion to select in good faith the Work Out method which<br />

it deems will provide for the greatest recovery of proceeds; however, neither the Issuer nor the Security Trustee nor the Noteholders<br />

shall have any right to demand that the Swap Counterparty choose a certain Work Out method.<br />

Upon completion of the Work Out and the transfer of the Work Out Amount to the Swap Counterparty, the Swap Counterparty will<br />

determine the Write-off Amount and the Work-Out Proceeds in respect of the affected Mortgage Loan and its corresponding<br />

Reference Obligation. The Swap Counterparty will deliver the relevant details of such determination to the Independent Auditor. The<br />

Independent Auditor will deliver to the Swap Counterparty and the Issuer a confirmation (the "Independent Auditor Confirmation")<br />

in relation to the relevant Reference Obligation, which will include a confirmation that (aa) the affected Reference Obligation was<br />

listed in the Reference Register and the Reference List and met the applicable Eligibility Criteria on the Cut-off Date, or, if applicable,<br />

the Reference Entity in respect of a Reference Obligation was substituted in compliance with the conditions to compliance set<br />

out in Condition 5(a)(i), and (bb) that the calculations (including the procedures relating to the calculation) of the Write-off Amount<br />

and the Work Out Proceeds are correct.<br />

(c) Swap Premium<br />

On each Swap Payment Date, the Swap Counterparty will pay to the Issuer (i) an amount equal to the aggregate amount of interest payable<br />

on the next following Interest Payment Date in respect of the outstanding Notes, less the amount of any Repo Interest payable to the<br />

Issuer by the Repo Counterparty on the next Repurchase Date or by a substitute repo counterparty under a substitute repurchase transaction<br />

or income on Eligible Investments payable to the Issuer during the Collection Period preceding such next following Interest Payment<br />

Date, as the case may be, and (ii) an amount equal to the fees and expenses of the Security Trustee, any amounts payable under Jersey<br />

law with respect to taxes, exempt company and statutory fees and the Expense Payments falling due during the following Interest Period<br />

(the "Swap Premium").<br />

In the event of an Early Redemption due to the exercise of the Clean-Up Call, the occurrence of a Tax Redemption Event or the occurrence<br />

of the Final Maturity Date, the Swap Counterparty will make the following payments as Swap Premium, in each case less any income<br />

payable to the Issuer on Eligible Investments: (i) on the Final Determination Date, the Swap Counterparty will pay to the Issuer the sum of<br />

(aa) the aggregate amount of interest accruing during the period from and including the Final Determination Date to but excluding the<br />

Distribution Date and (bb) any fees and expenses of the Security Trustee, any amounts payable under Jersey law with respect to taxes,<br />

exempt company and statutory fees and the Expense Payments due on or prior to the Distribution Date, and (ii) on the Distribution Date,<br />

the Swap Counterparty will make a payment to the Issuer equal to the sum of (aa) the aggregate amount of interest accruing during the<br />

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Interest Period from and including the Distribution Date to but excluding the Final Distribution Date and (bb) any fees and expenses of the<br />

Security Trustee, any amounts payable under Jersey law with respect to taxes, exempt company and statutory fees and the Expense<br />

Payments due on, prior to or after the Final Distribution Date. In the event of an Early Redemption due to the occurrence of an Event of<br />

Default, the Swap Counterparty shall not be required to make any further payments in respect of the Swap Premium.<br />

On the first anniversary of the Closing Date and, thereafter, annually on each anniversary of the Closing Date, the Swap Counterparty will<br />

pay to the Issuer an additional amount of € 1,500 as Swap Premium.<br />

(d) Tax Gross-Up Amounts<br />

In the event that the Swap Counterparty receives written notification from the Issuer confirmed by a written opinion of independent counsel<br />

experienced in such matters to the effect that the Issuer's income, the Eligible Investments or any amounts payable by the Repo<br />

Counterparty under the Repurchase Agreement or any substitute repo counterparty under any substitute repurchase agreement, or by the<br />

Swap Counterparty under the Credit Default Swap Agreement are, or will become, subject to any Tax or a deduction or withholding for or<br />

on account of any Tax, duty, assessment or other governmental charge, the Swap Counterparty will have the option, provided that a Tax<br />

Redemption Event has not yet occurred, to (i) notify the Issuer of its intent to terminate the Credit Default Swap Agreement; or (ii) pay on<br />

the Swap Payment Date falling on or before the Interest Payment Date on which such deduction or withholding is required to be made the<br />

Tax Gross-Up Amounts. If the Swap Counterparty elects to terminate the Credit Default Swap Agreement or otherwise does not pay to the<br />

Seller when due the Tax Gross-Up Amounts, the Issuer will give notice of a Tax Redemption Event in accordance with Condition 9(c).<br />

(e) Calculations by the Swap Calculation Agent, Independent Auditor and Independent Evaluation Expert<br />

(i) The Issuer has appointed by way of separate agreements the Swap Calculation Agent, the Independent Auditor and the Independent<br />

Valuation Expert to make certain calculations with respect to the Credit Default Swap Agreement. The Swap Calculation Agent will<br />

calculate, inter alia, the Swap Premia and the Credit Protection Payments.<br />

(ii) All calculations and determinations made by the Swap Calculation Agent, the Independent Auditor or the Independent Valuation<br />

Expert, as applicable, in respect of the Credit Default Swap Agreement will be made in the sole judgment of the Swap Calculation<br />

Agent or, if applicable, the Independent Auditor or the Independent Valuation Expert making such determination and will, in the case<br />

of the Swap Calculation Agent be final and binding (absent fraud, negligence, bad faith or manifest error) on the Issuer, the Security<br />

Trustee, the Noteholders and the Swap Counterparty.<br />

(iii) The Swap Calculation Agent, the Independent Auditor and the Independent Valuation Expert are not acting as fiduciaries for or as<br />

advisers to the Issuer or the Swap Counterparty in respect of their respective duties in connection with the Credit Default Swap<br />

Agreement.<br />

(f) Repurchase Agreement<br />

On or prior to the Closing Date, the Issuer will enter into the Repurchase Agreement pursuant to which the Issuer will, on the Closing Date,<br />

purchase Collateral from the Repo Counterparty with an initial Notional Repo Amount equal to the aggregate Initial Principal Balance of<br />

each of the Classes of Notes. The Repurchase Agreement provides that the parties will enter into on the Closing Date, and thereafter may<br />

enter into individual repurchase transactions, each with terms equal to a Repo-Transaction Period (each, together with the repurchase<br />

transaction on the Closing Date and including any repurchase transaction between the Issuer and a substitute repo counterparty, a "Repo-<br />

Transaction"). On any Purchase Date, the Repo Counterparty may elect not to enter into a new Repo-Transaction. In the event the Repo<br />

Counterparty elects not to enter into a new Repo-Transaction, the Issuer may, upon prior written approval by the Swap Counterparty, the<br />

Security Trustee, the Cash Administrator and prior written confirmation by each of Fitch and Standard & Poor's that the ratings then assigned<br />

to the Notes are not adversely affected thereby, enter into a substitute repurchase agreement (a "substitute repurchase agreement")<br />

with a substitute repo counterparty (a "substitute repo counterparty") on terms substantially identical to the Repurchase Agreement. If<br />

the Repo Counterparty elects not to enter into a new Repo-Transaction, and no substitute repurchase agreement on substantially identical<br />

terms is entered into by the Issuer, the Cash Administrator, acting on behalf of the Issuer, will invest in Eligible Investments the amounts<br />

which would otherwise have been invested in a new Repo-Transaction.<br />

(g) Repo-Transaction<br />

Under the terms of each Repo-Transaction, the Issuer will purchase Collateral from the Repo Counterparty or the substitute repo counterparty<br />

on a Purchase Date and the Repo Counterparty or the substitute repo counterparty will repurchase the Collateral on the following<br />

Repurchase Date for the Repurchase Price. From the proceeds of such Repurchase Price, the sum of all amounts in respect of Pay Down<br />

Amounts to the Noteholders and Credit Protection Payments payable by the Issuer pursuant to Condition 7 on the relevant Interest<br />

Payment Date will be deducted and the Notional Repo Amount will be reduced accordingly. After transfer to the Interest Transaction<br />

Account of an amount equal to (aa) any Repo Interest; or (bb) any income on Eligible Investments, payable to the Noteholders as part of<br />

157


the interest on the Notes the resulting amount will be reinvested in (cc) the purchase of Collateral pursuant to a new Repo-Transaction or<br />

(dd) Eligible Investments, as the case may be. If a Repo-Transaction is in effect on the Repurchase Date on or prior to the Final<br />

Determination Date, the Repo Counterparty or the substitute repo counterparty will repurchase the Collateral from the Issuer on the<br />

Repurchase Date or, in case of the acceleration of the Notes due to an Event of Default, on the Final Determination Date, or if no Repo-<br />

Transaction is in effect on such dates the Issuer will liquidate Eligible Investments, and the Issuer will use proceeds of such sale or liquidation<br />

to redeem the Notes and to pay Credit Protection Payments to the Swap Counterparty on the Distribution Date and, if applicable,<br />

the Final Distribution Date, and no further Repo-Transaction will be entered into.<br />

(h) Repo Interest<br />

On each Repurchase Date, the Repo Counterparty or any substitute repo counterparty will pay to the Issuer interest in arrears ("Repo<br />

Interest") at the Repo Rate on the Notional Repo Amount outstanding at the previous Purchase Date on the basis of the actual number of<br />

days elapsed in the relevant Repo-Transaction Period divided by 360.<br />

6. Interest Payments<br />

Subject as provided in Condition 3(c), each Note of the Class A1 Notes, the Class A2 Notes, the Class B Notes, the Class C Notes and the<br />

Class D Notes shall bear interest on its Note Principal Amount from and including the Closing Date to but excluding the day on which the Notes<br />

are redeemed in accordance with Condition 9 or the Note Principal Balance of such Note is reduced to zero in accordance with Condition 7.<br />

(a) Interest Payment Dates<br />

Interest shall be paid quarterly in arrears on 30th January, 30th April, 30th July and 30th October of each year (or, if such day is not a<br />

Business Day, the next following Business Day unless such following Business Day falls in the next succeeding calendar month in which<br />

case interest shall be paid on the immediately preceding Business Day) and, in the event of an Early Redemption Event, on the Distribution<br />

Date and the Final Distribution Date, if applicable (each such date, an "Interest Payment Date"). The first Interest Payment Date shall be<br />

30th January, 2001.<br />

(b) Interest Periods<br />

The "Interest Period" for the first Interest Payment Date shall be the period from and including the Closing Date to but excluding the first<br />

Interest Payment Date and, for each Interest Payment Date thereafter, the period from and including the previous Interest Payment Date<br />

to but excluding such subsequent Interest Payment Date.<br />

In the event of the occurrence of an Early Redemption Event, the Interest Period for the Distribution Date shall be amended and shall be<br />

from and including the previous Interest Payment Date to but excluding the Distribution Date (with no payments being made on the Final<br />

Determination Date), and the Interest Period for the Final Distribution Date, if any, shall be from and including the Distribution Date to but<br />

excluding the Final Distribution Date.<br />

(c) Interest Rate<br />

The rate of interest payable in respect of each Note of each Class (the "Interest Rate") shall be the sum of EURIBOR for three month euro<br />

deposits plus the relevant margin per annum (the "Relevant Margin") as specified below:<br />

Class of Notes Relevant Margin<br />

Class A1 Notes 0.19% per annum<br />

Class A2 Notes 0.32% per annum<br />

Class B Notes 0.69% per annum<br />

Class C Notes 1.40% per annum<br />

Class D Notes 3.50% per annum<br />

"EURIBOR" for each Interest Period shall be determined by the Note Calculation Agent as follows:<br />

(i) On each Fixing Date, the Note Calculation Agent shall determine the Screen Rate as at or about 11.00 a.m. (Brussels time). If the<br />

Screen Rate is unavailable, the Note Calculation Agent shall request five Reference Banks to provide the Note Calculation Agent with<br />

their offered quotation to prime banks in the Euro-Zone interbank market for euro deposits for a period of three months commencing<br />

on the first day of the relevant Interest Period, as at or about 11.00 a.m. (Brussels time) on the relevant Fixing Date. If at least<br />

two of the Reference Banks provide such offered quotations, EURIBOR for the relevant Interest Period shall be the arithmetic average<br />

(rounded upwards if necessary to the nearest third decimal place with 0.0005 being rounded upwards) of the offered quotations as<br />

established by the Note Calculation Agent.<br />

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(ii) If on any Fixing Date, the Screen Rate is unavailable and less than two Reference Banks provide such offered quotations, EURIBOR<br />

for the relevant Interest Period shall be EURIBOR as determined for the last preceding Interest Period to which sub-paragraph (i) of<br />

this Condition 6(c) shall have applied.<br />

(d) Calculation of Interest Rates and Interest Amounts<br />

The Note Calculation Agent shall, on each Fixing Date, determine the Interest Rate in respect of the Notes of each Class applicable to the<br />

Interest Period beginning on and including the following Interest Payment Date and the amount in euro (the "Interest Amount") in respect<br />

of each Note of each Class payable on the Interest Payment Date following such Interest Period, by applying the Interest Rate of the<br />

respective Class to the Note Principal Amount applicable to each Note of the relevant Class for the next following Interest Period, multiplying<br />

the result by the actual number of days in the relevant Interest Period divided by 360, and rounding the resulting figure to the nearest<br />

€ 0.01 (with € 0.005 being rounded upwards).<br />

(e) Publication of Interest Rate and Interest Amounts<br />

The Issuer shall promptly cause the Interest Rate for each Class of Notes, the immediately succeeding Interest Payment Date and the<br />

Interest Amount for each the Notes of each Class to be notified to the Frankfurt Stock Exchange (for so long as the Notes are listed on the<br />

Frankfurt Stock Exchange) and to the Luxembourg Stock Exchange (for so long as the Notes are listed on the Luxembourg Stock<br />

Exchange) and shall cause notice thereof to be given to the Noteholders in accordance with Condition 14. The Interest Payment Date and<br />

the Interest Amount so notified may subsequently be amended (or appropriate alternative arrangements made by way of adjustment)<br />

without notice in the event of any extension or shortening of the Interest Period other than due to an Early Redemption Event.<br />

(f) Determination of Calculation by Security Trustee<br />

If the Note Calculation Agent does not at any time, for any reason, determine EURIBOR or an Interest Rate and/or calculate an Interest<br />

Amount, as the case may be, in accordance with the foregoing paragraphs, the Security Trustee shall determine EURIBOR, the Interest<br />

Rates or the Interest Amounts at such rate as described in the paragraphs above and any such determination and/or calculation shall be<br />

deemed to have been made by the Note Calculation Agent.<br />

(g) Reference Banks and Note Calculation Agent<br />

The Issuer shall ensure that, so long as any of the Notes remains outstanding, there shall at all times be a Note Calculation Agent, who will<br />

select five (5) Reference Banks.<br />

(h) Accrual of Interest<br />

Each Note shall cease to bear interest from its due date for redemption as published in accordance with Condition 14 unless payment of<br />

the relevant amount of principal is improperly withheld or refused. In such event, interest will continue to accrue thereon at the prevailing<br />

Interest Rate determined in accordance with this Condition 6 for the preceding Interest Period (as well after as before any judgement) up<br />

to (but excluding) the date on which payment in full of the relevant amount of principal is made or (if earlier) the seventh day after notice<br />

is duly given to the Noteholders in accordance with Condition 14 that such payment will be made, provided that payment is in fact made.<br />

(i) Notification to be Final<br />

All notifications, determinations, certificates, calculations, quotations and decisions given, expressed, made or obtained for the purposes<br />

of this Condition 6, whether by the Reference Banks (or any of them), the Note Calculation Agent or the Security Trustee shall (in the absence<br />

of wilful default, bad faith or manifest error) be binding on the Issuer, the Reference Banks, the Note Calculation Agent, the Principal<br />

Paying Agent, the Luxembourg Paying Agent, the Security Trustee and the Noteholders and (in which absence as aforesaid) no liability to<br />

the Noteholders shall attach to the Issuer, the Reference Banks, the Note Calculation Agent, the Principal Paying Agent, the Luxembourg<br />

Paying Agent or the Security Trustee in connection with the exercise or non-exercise by them or any of them of their powers, duties and<br />

discretions hereunder.<br />

7. Redemption of the Notes, Reduction of Principal Balance corresponding to Repayment of Principal and Credit Protection Payments<br />

(a) Reduction of Principal Balance<br />

The Principal Balance of a Class or Classes of Notes shall be reduced as a result of (i) Pay-Down Events and (ii) Credit Protection<br />

Payments, if any. Pay-Down Events shall result in repayments of principal to Noteholders in the Order of Seniority and Condition 3(c) and<br />

Credit Protection Payments shall result in the writing down of the Principal Balance of a Class or Classes of Notes in the Reverse Order of<br />

Seniority without any corresponding repayments of principal being made to the Noteholders of the affected Class or Classes.<br />

The Principal Balance of a Class or Classes of Notes shall also be paid down and/or written down following the occurrence of an Early<br />

Redemption Event in accordance with Condition 9.<br />

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(b) Redemption of Notes corresponding to Repayment of Principal by Reference Entities<br />

On each Interest Payment Date, the Issuer shall, if a Pay-Down Event has occurred during the preceding Determination Period, redeem<br />

the Notes in an amount (the "Pay-Down Amount") determined by the Swap Counterparty during the preceding Determination Period to be<br />

equal to the sum of:<br />

(i) the Reference Obligation Reduction Amount;<br />

(ii) the aggregate Work Out Proceeds, if any, determined by the Swap Counterparty and verified by the Independent Auditor during the<br />

preceding Determination Period, and<br />

(iii) the aggregate outstanding principal balance of all of the Reference Obligations removed from the Reference Register during the preceding<br />

Determination Period due to (aa) the non-compliance of such Reference Obligation in relation to the applicable Eligibility<br />

Criteria as of the Cut-off Date or (bb) the Reference Entity in respect of such Reference Obligation not having been substituted in<br />

compliance with the conditions to substitution set out in Condition 5(a)(i),<br />

in the following order of priority (the "Order of Seniority") and in accordance with Condition 3(c)(i):<br />

(aa) in or towards repayment of principal due on the Class A1 Notes, until the Principal Balance of the Class A1 Notes has been<br />

reduced to zero;<br />

(bb) in or towards repayment of principal due on the Class A2 Notes, until the Principal Balance of the Class A2 Notes has been<br />

reduced to zero;<br />

(cc) in or towards repayment of principal due on the Class B Notes, until the Principal Balance of the Class B Notes has been reduced<br />

to zero;<br />

(dd) in or towards repayment of principal due on the Class C Notes, until the Principal Balance of the Class C Notes has been reduced<br />

to zero; and<br />

(ee) in or towards repayment of principal due on the Class D Notes, until the Principal Balance of the Class D Notes has been reduced<br />

to zero.<br />

"Pay-Down Event" means any reduction in the Reference Obligations resulting from:<br />

(i) each repayment of principal by a Reference Entity made during the preceding Determination Period in relation to a Reference<br />

Obligation including any principal repayment made by a Reference Entity on a Mortgage Loan in respect of which a Credit Event has<br />

occurred but for which the Write-off Amount has not been determined (the aggregate of such reductions, the "Reference Obligation<br />

Reduction Amount");<br />

(ii) the determination and verification of any Work Out Proceeds following the Work Out of Mortgage Loans with corresponding<br />

Reference Obligations in Credit Event which is completed within the preceding Determination Period; or<br />

(iii) the removal of one or more Reference Obligations from the Reference Register during the preceding Determination Period due to (aa)<br />

the non-compliance of such Reference Obligation in relation to the applicable Eligibility Criteria as of the Cut-off Date or (bb) the<br />

Reference Entity in respect of such Reference Obligation not having been substituted in compliance with the conditions to substitution<br />

set out in the Condition 5(a)(i).<br />

Each Note of the most senior Class of Notes outstanding shall be redeemed on the relevant Interest Payment Date in an amount equal to<br />

the product obtained by multiplying (i) the fraction of which the numerator is the Pay-Down Amount and the denominator is the number of<br />

Notes of such Class, by (ii) the Note Principal Amount of such Note (rounding the resulting product down to the nearest € 0.01) and, in the<br />

event that the Pay-Down Amount exceeds the Principal Balance of the most senior Class of Notes outstanding, the difference between the<br />

Pay-Down Amount and the Principal Balance of such most senior Class of Notes outstanding shall be allocated to the next junior following<br />

Class of Notes outstanding and the Notes of such Class shall be redeemed pro rata on the relevant Interest Payment Date on the<br />

basis of the calculation described herein.<br />

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(c) Reduction of Principal Balance corresponding to Credit Protection Payments prior to an Early Redemption<br />

On each Interest Payment Date, if a Write-off Event has occurred during the preceding Determination Period, the Issuer shall make a Credit<br />

Protection Payment due to the Swap Counterparty under the Credit Default Swap Agreement in an amount equal to the aggregate Writeoff<br />

Amounts determined by the Swap Counterparty and verified by the Independent Auditor during the preceding Determination Period<br />

(the "Quarterly Write-off Amount"). The Principal Balance of a Class or Classes of Notes shall be written down by an amount equal to such<br />

Quarterly Write-off Amount in the following order of priority (the "Reverse Order of Seniority") without any commensurate payments being<br />

made to the Noteholders of the affected Class or Classes of the Notes:<br />

(i) to write down the Principal Balance of the Class D Notes until the Principal Balance of the Class D Notes has been reduced to zero;<br />

(ii) to write down the Principal Balance of the Class C Notes until the Principal Balance of the Class C Notes has been reduced to zero;<br />

(iii) to write down the Principal Balance of the Class B Notes until the Principal Balance of the Class B Notes has been reduced to zero;<br />

(iv) to write down the Principal Balance of the Class A Notes, on a pro rata basis, until the Principal Balance of the Class A Notes has<br />

been reduced to zero.<br />

As of any Interest Payment Date, "Write-off Event" means the determination by the Swap Counterparty and verification by the Independent<br />

Auditor within the preceding Determination Period of the Write-off Amount following a Work Out of a Mortgage Loan with a corresponding<br />

Reference Obligation in respect of which a Credit Event has occurred.<br />

Each Note of the most junior Class of Notes outstanding shall be written down on the relevant Interest Payment Date in an amount equal<br />

to the product obtained by multiplying (i) the fraction of which the numerator is the Quarterly Write-Off Amount and the denominator is the<br />

number of Notes of such Class, by (ii) the Note Principal Amount of such Note (rounding the resulting product down to the nearest € 0.01)<br />

and, in the event that the Quarterly Write-off Amount exceeds the Principal Balance of the most junior Class of Notes outstanding, the difference<br />

between the Quarterly Write-off Amount and the Principal Balance of such most junior Class of Notes outstanding shall be allocated<br />

to the next most senior Class of Notes outstanding and the Notes of such Class shall be written down pro rata on the relevant Interest<br />

Payment Date on the basis of the calculation described herein.<br />

(d) Redemption or Write-off to be Final<br />

The final redemption or write-off of the Notes at any time in accordance with this Condition 7, as the case may be, shall constitute full and<br />

final repayment of principal in respect of the Notes. The Noteholders shall have no further claim against the Issuer and the obligations of<br />

the Issuer shall be extinguished.<br />

(e) Cancellation<br />

All Notes redeemed in full shall be cancelled upon redemption and may not be resold or re-issued.<br />

8. Determinations by the Note Calculation Agent<br />

(a) Determinations on the Calculation Date<br />

On each Calculation Date, the Note Calculation Agent shall determine:<br />

(i) the Note Principal Payment in respect of each Note of each Class due on the next following Interest Payment Date;<br />

(ii) the reduction in principal in respect of each Note of each Class following Credit Protection Payments to be made to the Swap<br />

Counterparty on the next following Interest Payment Date;<br />

(iii) the Note Principal Amount of each Note of each Class and the Principal Amount Outstanding as of the next following Interest<br />

Payment Date; and<br />

(iv) the fraction expressed as a decimal to the sixth place ("Pool Factor") of which the numerator is the Note Principal Amount of a Note<br />

of the relevant Class (after deduction of any Note Principal Payment payable on the Note and any reduction of principal in respect<br />

of such Note following the Credit Protection Payment to be made to the Swap Counterparty on the next following Interest Payment<br />

Date) and the denominator is € 250,000.<br />

The Issuer shall cause the determinations set forth in paragraphs (i) to (iv) above to be notified to the Frankfurt Stock Exchange (for so long<br />

as the Notes are listed on the Frankfurt Stock Exchange) and to the Luxembourg Stock Exchange (for so long as the Notes are listed on<br />

161


the Luxembourg Stock Exchange) and shall cause notice thereof to be given to the Noteholders in accordance with Condition 14. If no<br />

Note Principal Payment is due to be made on the Notes of a particular Class on an Interest Payment Date, a notice to this effect will be<br />

given to the Noteholders of the relevant Class in accordance with Condition 14.<br />

(b) Notifications to be Final<br />

All notifications, opinions, determinations, certificates, calculations, quotations and decisions given, expressed, made or obtained for the<br />

purposes of this Condition 8 by the Note Calculation Agent shall (in the absence of wilful default, bad faith or manifest error) be binding<br />

on the Issuer, the Principal Paying Agent, the Luxembourg Paying Agent, the Security Trustee and the Noteholders and (in which absence<br />

as aforesaid) no liability to the Noteholders shall attach to the Issuer, the Note Calculation Agent, the Principal Paying Agent, the<br />

Luxembourg Paying Agent or the Security Trustee in connection with the exercise or non-exercise by them or any of them of their powers,<br />

duties and discretions hereunder.<br />

9. Early Redemption<br />

(a) Early Redemption Events<br />

Upon the occurrence of any of the following events (each, an "Early Redemption Event") the Issuer shall be required to redeem the Notes<br />

in accordance with this Condition 9:<br />

(i) the exercise of the Clean-Up Call;<br />

(ii) the occurrence of a Tax Redemption Event;<br />

(iii) the occurrence of the Final Maturity Date; or<br />

(iv) the acceleration of the Notes due to the occurrence of an Event of Default.<br />

(b) Clean-Up Call<br />

The Issuer shall redeem the Notes (the "Clean-Up Call") in the manner set forth in Condition 9(f) if: (i) on any Business Day on which the<br />

Notional Swap Amount is less than 10% of the Notional Swap Amount on the Closing Date the Swap Counterparty gives notice to the<br />

Issuer under the Credit Default Swap Agreement pursuant to which the Issuer will give notice of a Clean-Up Call; or (ii) on any Business<br />

Day on which the Principal Amount Outstanding is less than 10% of the Principal Amount Outstanding of the Notes on the Closing Date<br />

the Issuer decides in its discretion to provide notice of its decision to exercise the Clean-up Call and does, in fact, provide such notice.<br />

Notice of a Clean-Up Call (which shall be irrevocable) shall be given by the Issuer to the Noteholders in accordance with Condition 14 and<br />

to the Security Trustee not less than thirty (30) but not more than sixty (60) days prior to an Interest Payment Date. For the avoidance of<br />

doubt, if the Swap Counterparty provides the notice described in paragraph (i) above on a date which is less than thirty (30) days prior to<br />

the next succeeding Interest Payment Date, the Issuer shall be required to provide notice of a Clean-Up Call, as aforesaid, not less than<br />

thirty (30) nor more than sixty (60) days prior to the Interest Payment Date following such next succeeding Interest Payment Date.<br />

(c) Tax Redemption Events<br />

A Tax Redemption Event (a "Tax Redemption Event") shall occur on any day on which the Issuer provides notice, in accordance with this<br />

Condition 9(c), that:<br />

(i) the Issuer has determined on the basis of a written opinion of independent counsel that its income, the Eligible Investments or any<br />

amounts payable to it by the Repo Counterparty under the Repurchase Agreement or by any substitute repo counterparty under any<br />

substitute repurchase agreement or the Swap Counterparty under the Credit Default Swap Agreement are or will be subject to any<br />

Tax or deduction or withholding for or on account of any Tax, duty, assessment or other governmental charge unless, prior to the<br />

giving of notice of a Tax Redemption Event, the Issuer receives the relevant Tax Gross-Up Amounts from the Swap Counterparty on<br />

or before the Swap Payment Date or Swap Payment Dates on which such deduction or withholding is or will be required to be made;<br />

or<br />

(ii) the Swap Counterparty has determined on the basis of a written opinion of independent counsel that payments to it under the Credit<br />

Default Swap Agreement are or will be subject to any Tax or deduction or withholding for or on account of any Tax, duty, assessment<br />

or other governmental charge and has notified the Issuer that as a result it elects to terminate the Credit Default Swap Agreement;<br />

or<br />

(iii) the Issuer has ceased or will cease to be entitled to the benefit of its tax exempt finance company status, or ceases or will cease to<br />

be in possession of any relevant licence needed under Jersey law to maintain its tax exempt status in respect of its activities, or<br />

otherwise becomes or will become subject to corporation tax.<br />

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If any event as described above in this Condition 9(c) occurs, the Issuer shall give notice of a Tax Redemption Event (which notice shall<br />

be irrevocable) to the Noteholders in accordance with Condition 14 and to the Security Trustee not less than thirty (30) but not more than<br />

sixty (60) days prior to the next succeeding Interest Payment Date, and shall be obliged to redeem the Notes in the manner set forth in<br />

Condition 9(f). For the avoidance of doubt, if any event occurs on a date which is less than thirty (30) days prior to the next succeeding<br />

Interest Payment Date and such event would, but for the giving of notice, as aforesaid, constitute a Tax Redemption Event, the Issuer shall<br />

be required to provide notice of a Tax Redemption Event, as aforesaid, not less than thirty (30) nor more than sixty (60) days prior to the<br />

Interest Payment Date following such next succeeding Interest Payment Date.<br />

(d) Final Maturity Date<br />

If the Final Maturity Date occurs, the Issuer shall redeem the Notes in the manner set forth in Condition 9(f).<br />

(e) Event of Default under the Notes<br />

An event of default (an "Event of Default") shall occur on any day on which:<br />

(i) the Issuer defaults in the payment of any interest or repayment of principal due and payable in respect of any Note and such default<br />

continues for a period of five (5) Business Days; or<br />

(ii) the Issuer fails to perform or observe any of its other material obligations under the Conditions or any other Transaction Document and<br />

such failure continues unremedied for a period of thirty (30) days following the delivery by the Security Trustee to the Issuer of notice<br />

requiring the same to be remedied; or<br />

(iii) the Swap Counterparty, the Repo Counterparty or any of the Transaction Secured Creditors ceases to have a valid and enforceable<br />

security interest in, or such Security Interest proves not to have been valid or enforceable when granted or purported to have been<br />

granted in, the relevant Security Assets under any of the Security Documents; or<br />

(iv) the Credit Default Swap Agreement is terminated other than due to an event described in paragraph (i), (ii) or (iii) of the definition of<br />

Additional Termination Event; or<br />

(v) the Issuer becomes subject to a declaration that its property has been rendered en désastre, is wound up or otherwise subject to liquidation<br />

proceedings; or<br />

(vi) an Acceleration Event occurs under the Repurchase Agreement or any substitute repurchase agreement, unless such Acceleration<br />

Event was caused by a payment or delivery default by or an insolvency event in relation to the Repo Counterparty or the substitute<br />

repo counterparty and unless the Issuer enters into a new repurchase agreement the terms of which are substantially identical to the<br />

terms of the Repurchase Agreement or the Cash Administrator (on behalf of the Issuer), invests the proceeds from the sale of the<br />

Collateral in Eligible Investments; or<br />

(vii) it is or will become unlawful for the Issuer to perform or comply with any of its obligations under or in respect of the Notes or any<br />

Transaction Document.<br />

In the case of any event described in:<br />

(aa) paragraphs (i) or (v) above, the Notes shall be accelerated immediately upon the occurrence of such event; and<br />

(bb) paragraphs (ii), (iii), (iv), (vi) or (vii) above, the Notes shall be accelerated on the first Business Day on which the Security Trustee<br />

receives notice or has actual knowledge of the occurrence of such event.<br />

A Noteholder electing to provide notice to the Security Trustee of an Event of Default (and thereby exercising his right to declare his Notes<br />

due for redemption) or of its instruction to the Security Trustee to enforce the Transaction Security Interests shall be required to do so by<br />

registered mail enclosing a statement issued by the bank with whom such Noteholder maintains a securities account in respect of the<br />

Notes (i) stating the full name and address of the Noteholder, and (ii) specifying the aggregate principal amount of Notes credited to such<br />

securities account on the date of such statement.<br />

In the event of acceleration of the Notes due to the occurrence of an Event of Default, the Security Trustee shall provide an Enforcement<br />

Notice to the Noteholders in accordance with Condition 14, the Issuer shall be obliged to redeem the Notes in the manner set forth in<br />

Condition 9(f), and the Transaction Security Interests shall become enforceable in accordance with Condition 3(b).<br />

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(f) Early Redemption of the Notes following an Early Redemption Event<br />

(i) Upon the occurrence of an Early Redemption Event, the Issuer shall be required to redeem the Notes without premium in whole, but<br />

not in part, together with accrued interest, if any, on the Distribution Date and, if a Delayed Payment Amount is determined to subsist<br />

on the Final Determination Date in accordance with Condition 9(f)(ii), on the Final Distribution Date. The Notes shall be redeemed in<br />

accordance with Condition 3(c)(i) unless, prior to the Distribution Date, the Security Trustee shall have enforced the Transaction<br />

Security Interests in accordance with Condition 3(b), in which case the Notes shall be redeemed in accordance with Condition 3(c)(ii).<br />

Subject to Condition 3(c)(iv), the aggregate amount of principal to be repaid on the Notes on the Distribution Date shall be an amount<br />

up to, but not exceeding the Principal Amount Outstanding on such date (after deducting any Credit Protection Payments due to the<br />

Swap Counterparty) minus any Delayed Payment Amount as determined by the Swap Counterparty. If a Delayed Payment Amount is<br />

determined to subsist on the Final Determination Date, the aggregate amount of principal to be repaid on the Notes on the Final<br />

Distribution Date shall be an amount equal to any Aggregate Evaluated Work Out Proceeds.<br />

An Early Redemption of the Notes shall be subject to any obligation of the Issuer to make a Credit Protection Payment to the Swap<br />

Counterparty on the Distribution Date in an amount equal to the Quarterly Write-off Amounts, if any, and, on or prior to the Final<br />

Distribution Date, an amount equal to any Aggregate Evaluated Write-off Amount as determined by the Independent Valuation Expert.<br />

In each case the Principal Balance of a Class or Classes of Notes shall be written down on such dates and in such amounts in the<br />

Reverse Order of Seniority in accordance with Condition 7(c) or Condition 9(f)(ii), as applicable.<br />

(ii) Pursuant to the terms of the Credit Default Swap Agreement, the Swap Counterparty shall notify the Issuer and the Security Trustee if<br />

a Delayed Payment Amount subsists as at the Final Determination Date. In the event that the Issuer or the Security Trustee receives<br />

such a notice, then the Issuer or, if the Issuer fails to do so on the Final Determination Date or the Security Trustee has enforced the<br />

Transaction Security Interests, the Security Trustee, shall request an independent valuation expert of internationally recognised standing<br />

(the "Independent Valuation Expert") to deliver the report (the "Valuation Report") on the Valuation Date which will include (i) (a)<br />

the Write-off Amount or the Evaluated Write-off Amount, as the case may be, of each Reference Obligation giving rise to such Delayed<br />

Payment Amount, (b) the Work Out Proceeds or the amount of Evaluated Work Out Proceeds in respect of each such Reference<br />

Obligation, as the case may be and (c) the Aggregate Evaluated Write-off Amount and the Aggregate Evaluated Work Out Proceeds<br />

(together, the "Evaluated Amounts") and (ii) confirmation that each such Reference Obligation was listed in the Reference Register<br />

and in the Reference List and met the applicable Eligibility Criteria as of the Cut-off Date and, if applicable, that the substitution of the<br />

Reference Entity in respect of such Reference obligation was effected in compliance with the conditions to substitution set forth in the<br />

Credit Default Swap Agreement. In determining the Evaluated Amounts of each affected Mortgage Loan, the Independent Valuation<br />

Expert will utilise the following criteria (the "Valuation Criteria"). The Independent Valuation Expert will make the following assumptions:<br />

(aa) all obligations of the Reference Entity under the affected Mortgage Loan, together with the obligations of any credit support<br />

provider in relation to such affected Mortgage Loan, are on the Cut-off Date legal, valid, binding and enforceable in accordance<br />

with their terms subject to principles of law including all limitations resulting from the laws of insolvency or other laws affecting<br />

generally the enforcement of creditors' rights;<br />

(bb) all reasonable efforts will be made to maximise the value of the claims including without limitation by pursuing any rights against<br />

a guarantor and other credit support providers in accordance with the Swap Counterparty's normal business practices from<br />

time to time;<br />

(cc) the residential property to which a Mortgage Loan relates is to be sold through a foreclosure process in which case seventy<br />

percent of the value, fixed by order of the court during a foreclosure process will be assumed;<br />

(dd) all information supplied by the Swap Counterparty to the Independent Valuation Expert is true, accurate, complete and not misleading;<br />

and<br />

(ee) if any amounts are recovered from a Reference Entity, guarantor or other credit support provider in respect of an affected<br />

Mortgage Loan, the Swap Counterparty will allocate those amounts first to the portion of the mortgage loans (including the<br />

Mortgage Loan) which are registered in the <strong>DG</strong> HYP Mortgage Pfandbrief Cover Register, second to the outstanding principal<br />

balance of the Reference Obligation, and third to all other parts of the mortgage loans.<br />

In determining the Evaluated Amounts of each affected Mortgage Loan, the Independent Valuation Expert will take into consideration<br />

the market value of the residential property or properties to which the Mortgage Loan relates as indicated by information provided by<br />

the Swap Counterparty together with publicly available information on residential property prices in the area where the residential property<br />

is located such as the information on the prices of other residential property transactions in the area ("Richtwerttabelle") or the<br />

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index of residential property prices ("Maklerspiegel") issued by associations of estate agents in Germany ("Ring Deutscher Makler"<br />

and "Verband Deutscher Makler") or other publicly available market information as disclosed by the Swap Counterparty.<br />

The Independent Valuation Expert will determine, using all privately available information provided by the Swap Counterparty to it (subject<br />

to any applicable duty of confidentiality) and public information, the Evaluated Amounts of each affected Reference Obligation,<br />

taking into account:<br />

(a) the likelihood that the failure to pay in respect of the affected Mortgage Loan will be remedied and for the avoidance of doubt,<br />

the Independent Valuation Expert will only assume that a failure to pay will not be remedied if, in the reasonable determination<br />

of the Independent Valuation Expert in light of all communications between the Independent Valuation Expert and the Swap<br />

Counterparty in this regard, there is no likelihood that the Reference Entity will continue to service and/or repay the Mortgage<br />

Loan;<br />

(b) for Mortgage Loans that are not secured by first-ranking mortgages, the existence of precedent and more senior mortgages<br />

(whether constituting Third Party Rights or not) relating to the same residential property and the amounts owed to the holders<br />

of previous and more senior mortgages by the Reference Entity; and<br />

(c) any rights actually exercised by the Swap Counterparty to set off obligations of the Reference Entity under the affected<br />

Mortgage Loan against obligations of the Swap Counterparty to such Reference Entity.<br />

(iii) If the Valuation Report discloses any Aggregate Evaluated Write-off Amount, the Credit Protection Payment payable to the Swap<br />

Counterparty by the Issuer on the Final Distribution Date will be an amount equal to such Aggregate Evaluated Write-off Amount. Each<br />

Note of the most junior Class of Notes outstanding on the Final Distribution Date shall be written down in an amount equal to the<br />

product obtained by multiplying (aa) the fraction of which the numerator is the Aggregate Evaluated Write-Off Amount and the<br />

denominator is the number of Notes of such Class, by (bb) the Note Principal Amount of such Note (rounding the resulting product<br />

down to the nearest € 0.01) and, in the event that the Aggregate Evaluated Write-Off Amount exceeds the Principal Balance of the<br />

most junior Class of Notes outstanding, the difference between the Aggregate Evaluated Write-Off Amount and the Principal Balance<br />

of such most junior Class of Notes outstanding shall be allocated to the next most senior Class of Notes outstanding and the Notes<br />

of such Class shall be written down on the Final Distribution Date pro rata on the basis of the calculation described herein, without<br />

any commensurate payments being made to the Noteholders of the affected Class or Classes.<br />

If the Valuation Report discloses any Aggregate Evaluated Work Out Proceeds, the Issuer shall redeem the Notes in an amount equal<br />

to such Aggregate Evaluated Work Out Proceeds. On the Final Distribution Date, each Note of the most senior Class of Notes outstanding<br />

shall be redeemed in an amount equal to the product obtained by multiplying (aa) the fraction of which the numerator is the<br />

Aggregate Evaluated Work Out Proceeds and the denominator is the number of Notes of such Class, by (bb) the Note Principal Amount<br />

of such Note (rounding the resulting product down to the nearest € 0.01) and, in the event that the Aggregate Evaluated Work Out<br />

Proceeds exceeds the Principal Balance of the most senior Class of Notes, the difference between the Aggregate Evaluated Work Out<br />

Proceeds and the Principal Balance of such most senior Class of Notes outstanding shall be allocated to the next junior Class of Notes<br />

outstanding and the Notes of such Class shall be redeemed pro rata on the Final Distribution Date on the basis of the calculation described<br />

herein.<br />

The Valuation Report shall (in the absence of wilful default, bad faith or manifest error) be binding on the Issuer, the Security Trustee,<br />

the Swap Counterparty and the Noteholders and (in which absence as aforesaid) no liability to the Noteholders shall attach to the<br />

Issuer, the Security Trustee or the Independent Valuation Expert.<br />

(iv) The redemption of the Notes upon the occurrence of any of the Conditions 9(b) to (e) and in accordance with this Condition 9(f) on the<br />

Distribution Date or the Final Distribution Date, as the case may be, shall constitute full and final repayment of principal in respect of<br />

the Notes. The Noteholders shall have no further claim against the Issuer and the obligations of the Issuer shall be extinguished.<br />

(g) Class A1 Notes Redemption<br />

On 30th October, 2010, if any Class A1 Notes are outstanding, and provided there is no Event of Default under the Notes which is continuing,<br />

the Issuer shall redeem the Class A1 Notes without premium in whole, but not in part, together with accrued interest, if any. The<br />

redemption of the Class A1 Notes in accordance with this Condition 9(g) shall constitute full and final repayment of principal in respect of<br />

the Class A1 Notes. The holders of the Class A1 Notes shall have no further claim against the Issuer and the obligations of the Issuer shall<br />

be extinguished.<br />

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10. Payments<br />

Payments of interest and repayments of principal in respect of the Notes shall be made by the Issuer, subject in all cases to any fiscal or other<br />

laws and regulations applicable thereto, to the Principal Paying Agent for transfer on each Interest Payment Date to Clearstream Germany or<br />

to its order for credit to the accounts of the relevant account holders of Clearstream Germany for subsequent transfer to the Noteholders. All<br />

payments made by the Principal Paying Agent on behalf of the Issuer to Clearstream Germany shall discharge the liability of the Issuer under<br />

the Notes to the extent of the sums so paid.<br />

11. Presentation Period<br />

The presentation period provided in § 801 (1), sentence 1 German Civil Code (Bürgerliches Gesetzbuch) is reduced to ten years for the Notes.<br />

The Global Notes shall be presented by transfer of the co-ownership participations in the respective Global Notes to the account of the<br />

Principal Paying Agent with Clearstream Germany.<br />

12. Taxation<br />

All payments in respect of the Notes shall be made without withholding or deduction for, or on account of, any present or future Taxes, duties<br />

or charges of whatsoever nature unless the Issuer or any Paying Agent is required by applicable law to make any payment in respect of the<br />

Notes subject to any withholding or deduction for, or on account of, any present or future Taxes, duties or charges of whatsoever nature. In<br />

that event the Issuer or such Paying Agent (as the case may be) shall make such payment after such withholding or deduction has been made<br />

and shall account to the relevant authorities for the amount so required to be withheld or deducted. Neither the Paying Agents nor the Issuer<br />

shall be obliged to make any additional payments to Noteholders in respect of such withholding or deduction.<br />

13. Paying Agents and Note Calculation Agent<br />

(a) Specified Offices<br />

The Principal Paying Agent, the Luxembourg Paying Agent and the Note Calculation Agent and their respective offices are:<br />

Principal Paying Agent: Chase Manhattan Bank AG<br />

Grüneburgweg 2<br />

60322 Frankfurt am Main<br />

Luxembourg Paying Agent: Chase Manhattan Bank Luxembourg S.A.<br />

5 rue Plaetis<br />

22 38 Luxembourg Grund<br />

Note Calculation Agent: The Chase Manhattan Bank<br />

Trinity Towers<br />

9 Thomas More Street<br />

London E1W 9YT<br />

(b) Variation or Termination of Appointment<br />

The Issuer may at any time, by giving not less than 30 calendar days notice, replace the Note Calculation Agent or any of the Paying Agents<br />

by one or more other banks or other financial institutions which assume such functions. However, as long as any Note remains outstanding,<br />

the Issuer shall ensure that there will always be a Note Calculation Agent, a Principal Paying Agent (who, for so long as the Notes<br />

are listed on the Frankfurt Stock Exchange, is located in Germany) and (for so long as the Notes are listed on the Luxembourg Stock<br />

Exchange) a Luxembourg Paying Agent, to perform the respective functions assigned to any of them.<br />

Each of the Note Calculation Agent and the Paying Agents may resign its appointment hereunder at any time by giving to the Issuer not<br />

less than 30 calendar days notice to that effect, provided that the Issuer has appointed a successor Note Calculation Agent, a successor<br />

Principal Paying Agent or a successor Luxembourg Paying Agent, as the case may be, to perform the respective functions assigned to any<br />

of them.<br />

Upon the effectiveness of the appointment of any successor Paying Agent or Note Calculation Agent pursuant to this Condition, the Paying<br />

Agent or Note Calculation Agent so superseded shall cease to be a Paying Agent or, as the case may be, a Note Calculation Agent hereunder.<br />

Prior to the effectiveness of such appointment, the incumbent Paying Agent or Note Calculation Agent shall hold all moneys deposited<br />

with it or held by it hereunder in respect of the Notes to the order of the respective successor Paying Agent or, as the case may be,<br />

a successor Note Calculation Agent. Upon its resignation or removal becoming effective in respect of the Notes, the incumbent Paying<br />

Agent or Note Calculation Agent shall forthwith transfer to the successor Paying Agent or, as the case may be, successor Note Calculation<br />

Agent all records and documents in relation to the Notes held by it.<br />

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(c) Agents of the Issuer<br />

In acting hereunder and in connection with the Notes, the Paying Agents and the Note Calculation Agent shall act solely as agents of the<br />

Issuer and do not assume any obligations towards or relationship of agency or trust for or with the Noteholders, and shall not have any<br />

obligation towards the Noteholders except that all funds held by the Paying Agents for payments under the Notes shall be held exclusively<br />

for the benefit of and for payment to the Noteholders, but need not be segregated from other funds, except as required by law or as<br />

set forth in these Conditions, and shall be applied as set forth in these Conditions. The Paying Agents and the Note Calculation Agent shall<br />

be released from the restrictions set out in § 181 German Civil Code (Bürgerliches Gesetzbuch).<br />

14. Notices to Noteholders<br />

(a) Notice by Publication<br />

All notices regarding the Notes shall be published in a national mandatory newspaper of the stock exchanges on which the Notes are listed.<br />

Any notice so given shall be deemed to have been validly given on the date of such publication (or, if published more than once, on the<br />

date of the first of such publications).<br />

(b) Notice by Delivery to Clearing System<br />

Any publication provided for in paragraph (a) above may, provided that as long as the Notes are listed on a stock exchange and the rules<br />

of the relevant stock exchange so permit, be substituted with the delivery of the relevant notice to the applicable Clearing System for communication<br />

by it to the Noteholders. Any such notice shall be deemed to have been given to all the Noteholders on the seventh day after<br />

the day on which the said notice was delivered to the respective Clearing System. So long as the Notes are listed on the Luxembourg Stock<br />

Exchange, all notices concerning the Notes shall be published pursuant to Condition 14(a).<br />

15. Partial Invalidity<br />

Without prejudice to any other provision hereof, if one or more provisions hereof is or becomes invalid, illegal or unenforceable in any<br />

respect in any jurisdiction or with respect to any party, such invalidity, illegality or unenforceability in such jurisdiction or with respect to<br />

such party or parties shall not, to the fullest extent permitted by applicable law render invalid, illegal or unenforceable such provision or<br />

provisions in any other jurisdiction or with respect to any other party or parties. Any such invalid, illegal or unenforceable provision shall<br />

be replaced to the fullest extent permitted by law in accordance with the intent and purpose of the Conditions by such valid, legal or enforceable<br />

provision which in their economic effect come as close as legally possible to the invalid, illegal or unenforceable provision.<br />

16. Applicable Law, Place of Performance, Place of Jurisdiction and Enforcement, Process Agent<br />

(a) Applicable Law<br />

The Notes, as to form and content, and all rights and obligations of the Noteholders, the Issuer, the Note Calculation Agent and the Paying<br />

Agents shall in all respects be governed by, and construed in accordance with, German law. The creation of the security interests created<br />

under the English Deed of Assignment shall be governed by, and construed in accordance with, English law, and the creation of the security<br />

interests created under the German Trust Agreement shall be governed by, and construed in accordance with, German law.<br />

(b) Place of Performance<br />

Place of performance shall be Frankfurt am Main, Federal Republic of Germany.<br />

(c) Submission to Jurisdiction<br />

The Issuer hereby expressly submits to the jurisdiction of the courts of the Federal Republic of Germany. The Noteholders however are<br />

entitled at their option to pursue their claims also before any competent court in Jersey. In any such court the laws of the Federal Republic<br />

of Germany shall likewise be applied.<br />

The District Court (Landgericht) in Frankfurt am Main shall have non-exclusive jurisdiction for any action or other legal proceedings arising<br />

out of or in connection with the Notes. The German courts shall have exclusive jurisdiction over the annulment of lost or destroyed Global<br />

Notes.<br />

(d) Process Agent<br />

The Issuer hereby appoints PriceWaterhouseCoopers Veltins Rechtsanwaltsgesellschaft mbH, Im Trutz Frankfurt 55, 60322 Frankfurt am<br />

Main, Federal Republic of Germany as its agent for service of process with respect to any legal proceedings brought before any German<br />

court. The Issuer undertakes to maintain an agent for the service of process in the Federal Republic of Germany so long as any Note<br />

remains outstanding.<br />

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THIS GERMAN TRUST AGREEMENT is made on 26th October, 2000<br />

BETWEEN:<br />

SCHEDULE 1<br />

German Trust Agreement<br />

(1) <strong>Bauhaus</strong> <strong>Securities</strong> <strong>Limited</strong>, a company incorporated under the laws of the island of Jersey, having its registered office at Whiteley Chambers,<br />

Don Street, St. Helier, Jersey, Channel Islands, the "Issuer"; and<br />

(2) The Chase Manhattan Bank, acting through its office at 9 Thomas More Street, London E1W 9YT, the "Security Trustee", which expression<br />

shall include any additional or successor security trustee appointed in accordance with this Agreement.<br />

WHEREAS:<br />

(A) The Issuer was incorporated on 25th August, 2000 as a limited liability company under the Companies (Jersey) Law 1991.<br />

(B) Pursuant to the Subscription Agreement dated 26th October, 2000 between the Issuer and the Manager, the Issuer has agreed to issue on or<br />

about the Closing Date the following classes of notes (the "Notes"):<br />

€ 194,500,000 Class A1 Floating Rate Notes;<br />

€ 707,500,000 Class A2 Floating Rate Notes;<br />

€ 63,250,000 Class B Floating Rate Notes;<br />

€ 18,750,000 Class C Floating Rate Notes; and<br />

€ 22,250,000 Class D Floating Rate Notes.<br />

A description of the issue of the Notes and of the Transaction Documents entered into by the Issuer in connection therewith is contained in<br />

the offering <strong>circular</strong> dated 30th October, 2000 prepared by the Issuer in respect of the Notes (hereinafter the "<strong>Offering</strong> Circular"). The terms<br />

and conditions of the Notes (the "Conditions") are set forth in the <strong>Offering</strong> Circular and will be attached to each of the Global Notes representing<br />

the Notes of each Class.<br />

(C) Pursuant to the Repurchase Agreement dated 26th October, 2000 between the Issuer and the Repo Counterparty, the Issuer shall purchase<br />

Collateral with a value of € 1,006,250,000, which the Repo Counterparty shall repurchase on the Repurchase Date preceding the first Interest<br />

Payment Date. Thereafter, it is intended that the parties to the Repurchase Agreement enter into individual Repo-Transactions each having a<br />

term of three months.<br />

(D) Pursuant to the Credit Default Swap Agreement dated 26th October, 2000 between the Issuer and the Swap Counterparty, the Issuer has<br />

agreed to make Credit Protection Payments to the Swap Counterparty in accordance with the terms thereof and as set forth in the Conditions.<br />

(E) In addition to the Subscription Agreement, the Repurchase Agreement and the Credit Default Swap Agreement, the Issuer has entered into,<br />

inter alios, the following Transaction Documents on or before the Closing Date:<br />

(1) the Agency Agreement, pursuant to which the Principal Paying Agent and the Luxembourg Paying Agent shall provide various services in<br />

connection with the issue;<br />

(2) the Corporate Administration Agreement, pursuant to which the Corporate Administrator shall perform certain administrative services for<br />

the Issuer;<br />

(3) the Cash Administration Agreement, pursuant to which the Cash Administrator, the Note Calculation Agent, the Swap Calculation Agent<br />

and the Repo Calculation Agent shall, inter alios, perform certain cash administration and calculation services for the Issuer;<br />

(4) the Custody Agreement, pursuant to which the Issuer has opened in its own name with the Custodian a collateral deposit account, to which<br />

any present and future Collateral that the Issuer has purchased and may purchase under each Repo-Transaction or Eligible Investments<br />

(in the form of securities) purchased by the Issuer, as the case may be, will be credited (the "Collateral Deposit Account");<br />

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(5) the Account Bank Agreement, pursuant to which the Issuer has opened in its own name with the Account Bank:<br />

(i) a principal collection account, to which the net proceeds of the Notes, the Repurchase Price payable under each Repo-Transaction<br />

on each Repurchase Date and any Eligible Investments (in the form of cash) will be credited (the "Principal Collection Account"); and<br />

(ii) a collateral interest account, to which the income accruing on the Collateral (other than Repo Interest) will be credited (the "Collateral<br />

Interest Account");<br />

(6) the Transaction Account Bank Agreement, pursuant to which the Issuer has opened in its own name with the Transaction Account Bank:<br />

(i) a principal transaction account, to which principal payable on the Notes on each Interest Payment Date will be credited (the "Principal<br />

Transaction Account"); and<br />

(ii) an interest transaction account, to which interest payable on the Notes on each Interest Payment Date and any Expense Payments<br />

will be credited (the "Interest Transaction Account" and, together with the Principal Transaction Account, the "Transaction<br />

Accounts"); and<br />

(7) the Data Protection Agreement, pursuant to which the Data Trustee shall keep, in sealed custody, records that are required for the decoding<br />

of the Reference Register.<br />

(F) The Issuer will create security pursuant to the Security Documents with respect to the Security Assets (as defined in Clause 4.2 of this<br />

Agreement).<br />

(G) The Issuer has agreed to appoint the Security Trustee to act for and on behalf of the Transaction Secured Creditors under the Transaction<br />

Documents and pursuant to the terms of this Agreement and, subject to the terms and conditions of this Agreement, and the Security Trustee<br />

has agreed to act accordingly.<br />

NOW IT IS AGREED as follows:<br />

1. DEFINITIONS<br />

In this Agreement and in the Recitals hereto, except so far as the context otherwise requires or save where expressed to the contrary herein,<br />

words and expressions herein shall have the meanings given to them in the Conditions.<br />

2. APPOINTMENT OF THE SECURITY TRUSTEE<br />

2.1 The Issuer hereby appoints the Security Trustee to act as trustee (Treuhänder) pursuant to the Conditions and the other Transaction<br />

Documents. The Security Trustee hereby accepts such appointment.<br />

2.2 Unless otherwise set out in this Agreement or in the other Transaction Documents, the Security Trustee shall not be obliged at any time<br />

to supervise or monitor the discharge of the payment and other obligations of the Issuer arising under and in connection with the Notes<br />

and the other Transaction Documents or to perform any such obligations in lieu of the Issuer.<br />

3. POSITION OF THE SECURITY TRUSTEE IN RELATION TO THE TRANSACTION SECURED CREDITORS<br />

3.1 The Security Trustee shall carry out the duties specified in this Agreement and in the other Transaction Documents as security trustee<br />

for the benefit of the Noteholders, the Service Providers and itself (together, the "Transaction Secured Creditors"). Without affecting the<br />

order of priority set out in Clause 15 of this Agreement, the Security Trustee shall exercise its duties hereunder with particular regard to<br />

the interests of the Noteholders to the extent possible and give priority to the interests of the Noteholders of those Notes that rank most<br />

senior at the relevant time.<br />

3.2 Without prejudice to the rights of the Issuer pursuant to Clause 4.4 hereof, this Agreement grants to the Noteholders the right to demand<br />

from the Security Trustee the performance of the duties of the Security Trustee under Clause 2 of this Agreement and under the other<br />

Transaction Documents (contract for the benefit of a third party (echter Vertrag zugunsten Dritter) pursuant to § 328 of the German Civil<br />

Code (Bürgerliches Gesetzbuch).<br />

4. POSITION OF THE SECURITY TRUSTEE IN RELATION TO THE ISSUER<br />

4.1 Pursuant to the Security Documents, the Issuer will create the following Security Interests:<br />

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(a) pursuant to the German Swap Counterparty Pledge Agreement the Issuer will grant:<br />

(i) a first priority pledge (erstrangiges Pfandrecht) over any Collateral (excluding the right to demand payment of any present and<br />

future income accruing on the Collateral) or any Eligible Investments (in the form of securities) (excluding the right to demand<br />

payment of any present and future income accruing on the Eligible Investments), as the case may be, which are presently or will<br />

in the future be credited to the Collateral Deposit Account in favour and for the benefit of the Swap Counterparty; and<br />

(ii) a first priority pledge (erstrangiges Pfandrecht) over the Issuer's right to demand payment of any present and future credit<br />

balance of the Principal Collection Account in favour and for the benefit of the Swap Counterparty.<br />

(b) pursuant to the German Repo Counterparty Pledge Agreement the Issuer will:<br />

(i) grant a first priority pledge (erstrangiges Pfandrecht) over its right to demand payment of any present and future credit balance<br />

of the Collateral Interest Account in favour and for the benefit of the Repo Counterparty; and<br />

(ii) assign by way of security (Sicherungsabtretung) to the Repo Counterparty its right to demand payment from the Custodian of<br />

any present and future income accruing on the Collateral.<br />

(c) pursuant to the German Subordinated Pledge and Security Agreement (which will be entered into subsequently to the entering into<br />

of the German Swap Counterparty Pledge Agreement and the German Repo Counterparty Pledge Agreement) the Issuer will:<br />

(i) grant a subordinated pledge (nachrangiges Pfandrecht) over any Collateral (excluding the right to demand payment of any present<br />

and future income accruing on the Collateral) or any Eligible Investments (in the form of securities) (excluding the right to<br />

demand payment of any present and future income accruing on the Eligible Investments), as the case may be, which are presently<br />

or will in the future be credited to the Collateral Deposit Account in favour of the Security Trustee (for the benefit of the<br />

Transaction Secured Creditors);<br />

(ii) grant a subordinated pledge (nachrangiges Pfandrecht) over the Issuer's right to demand payment of any present and future<br />

credit balance of the Principal Collection Account in favour of the Security Trustee (for the benefit of the Transaction Secured<br />

Creditors);<br />

(iii) grant a subordinated pledge (nachrangiges Pfandrecht) over the Issuer's right to demand payment of any present and future<br />

credit balance of the Collateral Interest Account in favour of the Security Trustee (for the benefit of the Transaction Secured<br />

Creditors);<br />

(iv) assign by way of security (Sicherungsabtretung) to the Security Trustee (for the benefit of the Transaction Secured Creditors) its<br />

present or future, actual or contingent rights and claims under the Custody Agreement (including, but not limited to, the right to<br />

demand payment of any present and future income accruing on any Eligible Investments credited to the Collateral Deposit<br />

Account and excluding the right to demand payment of any present and future income accruing on the Collateral credited to<br />

the Collateral Deposit Account and the rights to Collateral itself or to any Eligible Investment (in the form of securities), (together<br />

with any claims for damages (Schadensersatzansprüche) thereunder);<br />

(v) assign by way of security (Sicherungsabtretung) to the Security Trustee (for the benefit of the Transaction Secured Creditors) its<br />

present or future, actual or contingent rights and claims under the Agency Agreement together with any claims for damages<br />

(Schadensersatzansprüche) thereunder);<br />

(vi) assign by way of security (Sicherungsabtretung) to the Security Trustee (for the benefit of the Transaction Secured Creditors) its<br />

present or future, actual or contingent rights and claims under the Cash Administration Agreement (together with any claims for<br />

damages (Schadensersatzansprüche) thereunder.<br />

(d) pursuant to the English Deed of Assignment the Issuer will assign by way of security to the Security Trustee (for the benefit of the<br />

Transaction Secured Creditors) its right, title, interest and benefit, present and future, in, to and under:<br />

(i) the Repurchase Agreement;<br />

(ii) the Credit Default Swap Agreement;<br />

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(iii) the Transaction Account Bank Agreement (including certain other ancillary rights and claims); and<br />

(iv) the Corporate Administration Agreement.<br />

4.2 The Issuer will create security over the following assets (the "Security Assets"):<br />

(i) the Collateral or Eligible Investments (in the form of securities), as the case may be;<br />

(ii) the rights of the Issuer against the Cash Administrator under the Cash Administration Agreement;<br />

(iii) the rights of the Issuer against the Paying Agents under the Agency Agreement;<br />

(iv) the rights of the Issuer against the Custodian under the Custody Agreement with respect to the Collateral Deposit Account;<br />

(v) the rights of the Issuer against the Account Bank under the Account Bank Agreement with respect to the Principal Collection<br />

Account and the Collateral Interest Account;<br />

(vi) the Issuer's right, title, interest and benefit, present and future, in, to and under the Credit Default Swap Agreement including, but<br />

not limited to, any present and future right to demand from the Swap Counterparty payment of the Swap Premium and any Tax<br />

Gross-Up Amounts, if the Swap Counterparty opts to pay such Tax Gross Up Amounts;<br />

(vii) the Issuer's right, title, interest and benefit, present and future, in, to and under the Repurchase Agreement including, but not limited<br />

to, any present and future right to demand from the Repo Counterparty payment of the Repurchase Price;<br />

(viii)the rights, title, interest and benefit, present and future, of the Issuer against the Transaction Account Bank in, to and under the<br />

Transaction Account Bank Agreement with respect to the Transaction Accounts; and<br />

(ix) the Issuer's rights, title, interest and benefit, present and future, against the Corporate Administrator in, to and under the Corporate<br />

Administration Agreement.<br />

4.3 Without prejudice to the right of the Issuer to make payments to the Transaction Secured Creditors, the Issuer hereby grants the Security<br />

Trustee a separate and independent claim (the "Trustee Claim"), entitling the Security Trustee to demand from the Issuer as joint creditor<br />

(Gesamtgläubiger):<br />

(i) that any present or future obligation of the Issuer under the Transaction Documents be fulfilled; and<br />

(ii) (if the Issuer is in default in respect of any Transaction Secured Creditors Secured Obligations and insolvency proceedings have not<br />

been instituted with respect to the Security Trustee) that any payment owed in connection with the respective Transaction Secured<br />

Creditors Secured Obligation will be made directly to the Security Trustee for on-payment to the respective Transaction Secured<br />

Creditors under the relevant Transaction Documents.<br />

4.4 The Trustee Claim may be enforced separately from the Transaction Secured Creditors' claim related thereto, although the Issuer is obliged<br />

to perform only once. Subject to Condition 10, in the event of a payment pursuant to Clause 4.3(ii) the respective Transaction<br />

Secured Creditors Secured Obligation shall only be deemed satisfied when the payment due has in fact been on-paid by the Security<br />

Trustee to the respective Transaction Secured Creditors and the Issuer shall have a claim against the Security Trustee, if it fails to onpay<br />

to the respective Transaction Secured Creditor.<br />

4.5 Except for the obligations of the Security Trustee to the Issuer pursuant to Clause 4.3 (ii), all other obligations of the Security Trustee<br />

under this Agreement are owed exclusively to the Transaction Secured Creditors.<br />

5. SECURITY PURPOSE<br />

5.1 Subject to Clauses 5.3 and 5.4 hereof, the Transaction Security Interests created under the Security Documents referred to in Clause<br />

4.1 (c) and (d) above shall secure the complete and irrevocable satisfaction of the Transaction Secured Creditors Secured Obligations.<br />

5.2 "Transaction Secured Creditors Secured Obligations" means:<br />

(i) the rights of the Noteholders against the Issuer;<br />

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(ii) the rights of the Service Providers against the Issuer;<br />

(iii) the claims of the Security Trustee against the Issuer, including the separate Trustee Claim.<br />

5.3 The Security Interests created pursuant to the German Swap Counterparty Pledge Agreement shall secure the Swap Counterparty's<br />

rights against the Issuer under the Credit Default Swap Agreement and the Swap Counterparty's claims against the Reference Entities<br />

in relation to the Reference Obligations (together the "<strong>DG</strong> HYP Secured Obligations").<br />

5.4 The Security Interests created pursuant to the German Repo Counterparty Pledge Agreement shall secure the Repo Counterparty's<br />

rights under the Repurchase Agreement to receive income accruing on the Collateral credited to the Collateral Deposit Account.<br />

6. ISSUER'S RIGHTS IN RESPECT OF SECURITY<br />

6.1 Prior to the enforcement by the Security Trustee of the Transaction Security Interests, the Issuer (or the Cash Administrator on its behalf)<br />

shall be authorised to make payments under, and to otherwise act in accordance with, the Transaction Documents.<br />

6.2 The Security Trustee is authorised:<br />

(i) in the event that the Security Trustee is to be replaced in accordance with Clause 22, to transfer the security set forth in Clause 4<br />

and all specific rights set out in this agreement to the successor Security Trustee; or<br />

(ii) to enforce the Security Interests in accordance with Clause 14.<br />

6.3 In the case of a transfer pursuant to Clause 6.2(i) above, the Security Trustee shall be obliged to agree with the respective successor<br />

Security Trustee that such successor shall assume the obligations of the Security Trustee pursuant to Clause 2.<br />

7. REPRESENTATIONS OF THE ISSUER<br />

The Issuer represents to the Security Trustee that the Security Assets have not been transferred, assigned, pledged, charged (if relevant) or<br />

otherwise encumbered in favour of or for the benefit of a third party, other than in accordance with the terms of the Security Documents.<br />

8. REPRESENTATIONS OF THE SECURITY TRUSTEE<br />

The Security Trustee represents to the Issuer that it has the capacity and authority to perform its duties (under this Agreement and other<br />

Transaction Documents) in accordance with the terms of this Agreement and the other Transaction Documents, respectively, and that, as at<br />

the date of entering into this Agreement, a reason for resigning from its position pursuant to Clause 22 has neither occurred nor is foreseen.<br />

9. RELEASE OF COLLATERAL<br />

Upon the complete and irrevocable satisfaction of the Transaction Secured Creditors Secured Obligations the Security Trustee shall promptly<br />

release the Security Assets under the Transaction Security Interests and retransfer or reassign, as the case may be, such released Security<br />

Assets to the Issuer.<br />

10. STANDARD OF CARE FOR LIABILITY<br />

10.1 In performing its duties under this Agreement, the Security Trustee shall apply the standard of care of a prudent merchant (Sorgfalt eines<br />

ordentlichen Kaufmanns).<br />

10.2 The Security Trustee in discharging its duties under this Agreement or the other Transaction Documents shall be liable for any wilful<br />

misconduct or negligence on its part.<br />

10.3 The Security Trustee shall not be liable for any action or omissions by any other party to any other Transaction Document or for the validity<br />

or enforceability of the Transaction Documents.<br />

11. ACTIONS OF THE ISSUER REQUIRING CONSENT<br />

In the event that the Issuer requests that the Security Trustee grants any consent to the Issuer under this Agreement, the Security Trustee shall take<br />

into account the reasonable interests of the Transaction Secured Creditors when exercising its discretion to grant or deny the requested approval.<br />

12. BREACH OF OBLIGATIONS BY THE ISSUER<br />

12.1 In the event that the Security Trustee becomes aware that the value of the Collateral is at risk due to any failure of the Issuer to properly<br />

discharge its obligations under this Agreement or any of the other Transaction Documents, the Security Trustee may in its sole dis-<br />

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cretion, subject to the provisions in Clause 14 below, take or cause to be taken all actions which in its opinion are necessary to preserve<br />

the value of the Collateral.<br />

12.2 In the event that the Issuer, in the opinion of the Security Trustee, does not duly discharge its obligations under the Transaction Secured<br />

Creditors Secured Obligations, the Security Trustee is authorised to exercise all rights arising under the Transaction Documents on<br />

behalf of the Issuer.<br />

12.3 Without prejudice to Clause 19 hereof, the Security Trustee shall not be bound to take any steps or institute any proceedings or to take<br />

any action to enforce the Transaction Security Interests unless it shall have been indemnified to its reasonable satisfaction against all<br />

actions, proceedings, claims and demands to which it may thereby render itself liable and all costs, charges and damages which it may<br />

incur by so doing.<br />

13. POWER OF ATTORNEY<br />

The Issuer hereby grants power of attorney to the Security Trustee with the right to grant substitute power of attorney, waiving the restrictions<br />

set forth in § 181 of the German Civil Code (Bürgerliches Gesetzbuch), and to act in the name of the Issuer with respect to all rights of the<br />

Issuer arising under the Transaction Documents (except for the rights against the Security Trustee). Such power of attorney is irrevocable.<br />

It shall expire as soon as a new Security Trustee has been appointed pursuant to Clause 23 below and the Issuer has issued a power of attorney<br />

to such new Security Trustee having substantially the same content as the above power of attorney. The Security Trustee shall only act<br />

under this power of attorney in the context of its rights and obligations pursuant to this Agreement.<br />

14. ENFORCEMENT OF THE SECURITY<br />

14.1 Following the acceleration of the Notes due to the occurrence of an Event of Default as set forth in Condition 9(e), the Security Trustee<br />

shall provide to the Issuer, the Noteholders, the Swap Counterparty, the Repo Counterparty, the Cash Administrator, the Paying Agents,<br />

the Independent Auditor and the Independent Valuation Expert an enforcement notice (the "Enforcement Notice"). Following the delivery<br />

by the Security Trustee of an Enforcement Notice, the Security Trustee may, and upon the request of one or more Noteholders shall,<br />

enforce the Transaction Security Interests in accordance with Clause 14.2 to Clause 14.6 of this Agreement, and the authorisation provided<br />

by Clause 6.1 shall be deemed to be revoked.<br />

14.2 The Security Trustee shall enforce the Transaction Security Interests described in Clause 4.1(c)(i) to 4.1(c)(iii) over the Collateral, the<br />

Principal Collection Account and the Collateral Interest Account in accordance with the requirements set forth in §§ 1204 et seq. of the<br />

German Civil Code (Bürgerliches Gesetzbuch) with regard to the enforcement of pledges (Pfandreife), notwithstanding § 1277 of the<br />

German Civil Code (Bürgerliches Gesetzbuch) without enforceable judgement or other instruments (vollstreckbarer Titel):<br />

(i) with respect to the Collateral, by way of public auction or through an officially authorised broker (öffentlich ermächtigter<br />

Handelsmakler); and<br />

(ii) with respect to the Principal Collection Account and the Collateral Interest Accounts by collecting the balance standing to the credit<br />

of the Principal Collection Account and the Collateral Interest Account, respectively;<br />

however, such enforcement will be subject to:<br />

(i) the Security Interests in favour and for the benefit of the Swap Counterparty by way of a first priority pledge (erstrangiges<br />

Pfandrecht) over the Collateral (excluding the right to demand payment of any present and future income accruing on the Collateral)<br />

or any Eligible Investments (in the form of securities) (excluding the right to demand payment of any present and future income<br />

accruing on Eligible Investments) and the Principal Collection Account created under the terms of the German Swap Counterparty<br />

Pledge Agreement; and<br />

(ii) the Security Interests in favour and for the benefit of the Repo Counterparty by way of a first priority pledge (erstrangiges<br />

Pfandrecht) over the Collateral Interest Account created under the terms of the German Repo Counterparty Pledge Agreement.<br />

14.3 The Security Trustee shall enforce the security assignment described in Clause 4.1(c)(iv) with respect to the Issuer's rights to, and interests<br />

in, the Custody Agreement (including but not limited to, the right to demand payment of any present and future income accruing<br />

on any Eligible Investments credited to the Collateral Deposit Account and excluding the right to demand payment of any present and<br />

future income accruing on the Collateral credited to the Collateral Deposit Account and the rights to the Collateral itself or to any Eligible<br />

Investments (in the form of securities)) by collecting the balance standing to the credit of the Custody Account.<br />

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14.4 The Security Trustee shall enforce the security assignment described in Clause 4.1(c)(v) with respect to the Issuer's rights to, and interests<br />

in, the Agency Agreement by demanding and collecting any monies owed by the Principal Paying Agent or the Luxembourg Paying<br />

Agent to the Issuer under the Agency Agreement.<br />

14.5 The Security Trustee shall enforce the security assignment described in Clause 4.1(c)(vi) with respect to the Issuer's rights to, and interests<br />

in, the Cash Administration Agreement by demanding and collecting any monies owed by the Cash Administrator to the Issuer<br />

under the Cash Administration Agreement.<br />

14.6 The Security Trustee shall enforce the Transaction Security Interests described in Clause 4.1(d) in respect of the English Security Assets<br />

by demanding and collecting any monies owed to the Issuer under the agreements constituting the English Security Assets.<br />

14.7 The Security Trustee shall apply the proceeds resulting from the enforcement of the Transaction Security Interests pursuant to this<br />

Clause 14 in accordance with Clause 15.3 below.<br />

15. ORDER OF PRIORITY OF PAYMENTS<br />

15.1 Pre-Enforcement Priority of Interest Payments<br />

Prior to the enforcement of the Transaction Security Interests, monies standing to the credit of the Interest Transaction Account will be<br />

applied on any Interest Payment Date in the following order of priority:<br />

(i) first, in or towards payment of all amounts payable to the Security Trustee (including any fees and expenses of the Security<br />

Trustee) under the Security Documents;<br />

(ii) secondly, in or towards payment (pro rata) of (a) any and all amounts payable to the Principal Paying Agent and the Luxembourg<br />

Paying Agent in respect of amounts properly paid by them to the Noteholders and not reimbursed by the Issuer, (b) any and all<br />

amounts payable under Jersey law with respect to taxes, exempt company and statutory fees, and (c) the fees and expenses<br />

(when due) to the Paying Agents and the Note Calculation Agent, the Swap Calculation Agent, the Repo Calculation Agent, the<br />

Cash Administrator, the Transaction Account Bank, the directors of the Issuer, the auditors of the Issuer, the Corporate<br />

Administrator and the Data Trustee (together referred to as "Service Providers") pursuant to the relevant Transaction<br />

Documents (together referred to as the "Expense Payments");<br />

(iii) thirdly, in or towards payment (pro rata) of interest due on the Class A1 Notes and the Class A2 Notes;<br />

(iv) fourthly, in or towards payment (pro rata) of interest accrued and not paid when due (if any) on the Class A1 Notes and the Class<br />

A2 Notes;<br />

(v) fifthly, in or towards payment of interest due on the Class B Notes;<br />

(vi) sixthly, in or towards payment of interest accrued and not paid when due (if any) on the Class B Notes;<br />

(vii) seventhly, in or towards payment of interest due on the Class C Notes;<br />

(viii) eighthly, in or towards payment of interest accrued and not paid when due (if any) on the Class C Notes;<br />

(ix) ninthly, in or towards payment of interest due on the Class D Notes;<br />

(x) tenthly, in or towards payment of interest accrued and not paid when due (if any) on the Class D Notes;<br />

(xi) eleventhly, in or towards payment of amounts (when due) in excess of the fees and expenses or other amounts specified in paragraph<br />

(ii) above to the Service Providers under the relevant Transaction Documents;<br />

(xii) twelfthly, in or towards payment of any and all amounts due in respect of taxes that the Issuer is required to pay in any jurisdiction<br />

other than the amounts identified in paragraph (ii) (b) above to the relevant tax authority;<br />

(xiii) thirteenthly, to pay a dividend to its shareholder; and<br />

(xiv) fourteenthly, to pay any surplus to the Principal Transaction Account.<br />

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15.2 Pre-Enforcement Priority of Principal Payments<br />

Prior to the enforcement of the Transaction Security Interests, any monies standing to the credit of the Principal Transaction Account<br />

will be applied on any Interest Payment Date in the following order of priority:<br />

(i) first, in or towards repayment of principal due on the Class A1 Notes until the Principal Balance of the Class A1 Notes has been<br />

reduced to zero;<br />

(ii) secondly, in or towards repayment of principal due on the Class A2 Notes until the Principal Balance of the Class A2 Notes has<br />

been reduced to zero;<br />

(iii) thirdly, in or towards repayment of principal due on the Class B Notes until the Principal Balance of the Class B Notes has been<br />

reduced to zero;<br />

(iv) fourthly, in or towards repayment of principal due on the Class C Notes until the Principal Balance of the Class C Notes has been<br />

reduced to zero;<br />

(v) fifthly, in or towards repayment of principal due on the Class D Notes until the Principal Balance of the Class D Notes has been<br />

reduced to zero; and<br />

(vi) sixthly, in or towards payment of the Termination Fee to the Swap Counterparty when due.<br />

15.3 Post-Enforcement Priority of Payments<br />

Following the enforcement of the Transaction Security Interests, any proceeds thereof will be applied in the following order of priority:<br />

(i) first, in or towards payment (pro rata) of all amounts payable (including any fees and expenses) to the Security Trustee under<br />

the Security Documents and to any receiver appointed in respect of the Issuer;<br />

(ii) secondly, in or towards payment (pro rata) of (a) any and all amounts payable to the Principal Paying Agent and the Luxembourg<br />

Paying Agent in respect of amounts properly paid by them to the Noteholders and not reimbursed by the Issuer, (b) any and all<br />

amounts payable under Jersey law with respect to taxes, exempt company and statutory fees, and (c) the Expense Payments<br />

(when due) to the Service Providers pursuant to the relevant Transaction Documents;<br />

(iii) thirdly, in or towards payment (pro rata) of interest due on the Class A1 Notes and the Class A2 Notes;<br />

(iv) fourthly, in or towards payment (pro rata) of interest accrued and not paid when due (if any) on the Class A1 Notes and the Class<br />

A2 Notes;<br />

(v) fifthly, in or towards repayment (pro rata) of principal due on the Class A1 Notes and the Class A2 Notes until the Principal<br />

Balance of the Class A1 Notes and the Class A2 Notes has been reduced to zero;<br />

(vi) sixthly, in or towards payment of interest due on the Class B Notes;<br />

(vii) seventhly, in or towards payment of interest accrued and not paid when due (if any) on the Class B Notes;<br />

(viii) eighthly, in or towards repayment of principal due on the Class B Notes until the Principal Balance of the Class B Notes has<br />

been reduced to zero;<br />

(ix) ninthly, in or towards payment of interest due on the Class C Notes;<br />

(x) tenthly, in or towards payment of interest accrued and not paid when due (if any) on the Class C Notes;<br />

(xi) eleventhly, in or towards repayment of principal due on the Class C Notes until the Principal Balance of the Class C Notes has<br />

been reduced to zero;<br />

(xii) twelfthly, in or towards payment of interest due on the Class D Notes;<br />

(xiii) thirteenthly, in or towards payment of interest accrued and not paid when due (if any) on the Class D Notes;<br />

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(xiv) fourteenthly, in or towards repayment of principal due on the Class D Notes until the Principal Balance of the Class D Notes has<br />

been reduced to zero;<br />

(xv) fifteenthly, in or towards payment of amounts (when due) in excess of the fees and expenses or other amounts specified in paragraph<br />

(ii) above to the Service Providers under the relevant Transaction Documents;<br />

(xvi) sixteenthly, in or towards payment of any and all amounts due in respect of taxes that the Issuer is required to pay in any jurisdiction<br />

other than the amounts identified in paragraph (ii) (b) above (such amount to be paid to the relevant tax authority);<br />

(xvii) seventeenthly, in or towards payment of the Termination Fee to the Swap Counterparty when due; and<br />

(xviii) eighteenthly, to pay any surplus to the Issuer.<br />

16. RETAINING OF THIRD PARTIES<br />

16.1 The Security Trustee may, in specific cases, retain the services of a suitable law firm or credit institution at market prices (if appropriate,<br />

after obtaining several offers) to assist it in performing its duties under this Agreement and may delegate to such law firm or credit<br />

institution the entire or partial performance of the following duties:<br />

(a) the undertaking of individual measures pursuant to Clause 12, specifically the enforcement of certain claims against the Issuer; and<br />

(b) the enforcement of the Transaction Security Interests pursuant to Clause 14.<br />

16.2 In the event that a third party is retained pursuant to Clause 16.1 above, the Security Trustee shall only be liable for the exercise of due<br />

care in the selection and supervision of such third party. The Security Trustee shall, however, not be liable for any negligence of such<br />

third party.<br />

16.3 The Security Trustee shall promptly notify Standard & Poor's, Fitch, the Swap Counterparty, the Repo Counterparty, the Issuer and the<br />

Cash Administrator of every retention pursuant to Clause 16.1 above.<br />

17. ADVISORS<br />

17.1 The Security Trustee shall be entitled, in connection with the performance of its duties under the Transaction Documents, to seek information<br />

and advice from legal counsel, financial advisers, banks, and other experts in the Federal Republic of Germany, the United<br />

Kingdom, Jersey or any other jurisdiction (and irrespective of whether such persons are already retained by the Security Trustee, the<br />

Issuer, a Transaction Secured Creditor, or any other person involved in the transactions under the Notes or the Transaction Documents),<br />

at market prices (if appropriate, after obtaining several offers).<br />

17.2 The Security Trustee may rely on the information and advice given by such advisors without conducting its own investigation. The<br />

Security Trustee shall not be liable for any damage or loss caused by its reliance on such information or advice. The Security Trustee<br />

shall not be liable for any negligence of such advisors, but shall be obliged to pursue any claim it may have against such advisors for<br />

the benefit of the Transaction Secured Creditors.<br />

18. FEES<br />

The Issuer shall pay the Security Trustee a fee, the amount of which shall be separately agreed between the Issuer and the Security Trustee.<br />

19. REIMBURSEMENT OF EXPENSES<br />

The Issuer shall bear all costs and disbursements (including costs for legal advice) properly incurred by the Security Trustee in connection with<br />

the performance of its duties under this Agreement, including all costs and disbursements incurred in relation to the creation, holding, and<br />

enforcement of security.<br />

20. INDEMNIFICATION<br />

The Issuer shall indemnify the Security Trustee against all losses, liabilities, obligations (including any taxes), actions in and out of court, costs<br />

and disbursements properly incurred by the Security Trustee in connection with this Agreement, except where such costs and expenses are<br />

incurred by the Security Trustee due to a breach of its standard of care (as set out in Clause 25).<br />

21. TAXES<br />

21.1 The Issuer shall bear all transfer taxes and other similar taxes or charges imposed in Jersey, in the United Kingdom or in the Federal<br />

Republic of Germany on or in connection with (i) the creation, holding, or enforcement of security, (ii) any measure taken by the Security<br />

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Trustee pursuant to the Conditions or the other Transaction Documents, and (iii) the execution of the Transaction Documents.<br />

21.2 All payments of fees and reimbursements of expenses to the Security Trustee shall include any turnover taxes, value added taxes or<br />

similar taxes, other than taxes on the Security Trustee's overall income or gains, which are imposed now or in the future on the services<br />

of the Security Trustee.<br />

22. TERMINATION OF APPOINTMENT OF SECURITY TRUSTEE FOR GOOD CAUSE<br />

22.1 The Security Trustee may resign from its capacity as Security Trustee for an important reason (aus wichtigem Grund) at any time, provided<br />

that upon or prior to its resignation the Security Trustee, on behalf of the Issuer, either appoints a reputable bank or an auditing<br />

company of international standing in the Federal Republic of Germany or in the United Kingdom and/or fiduciary company as successor.<br />

Such appointee will assume all rights and obligations arising from this Agreement and will be given all authorities and powers that<br />

have been granted to the Security Trustee.<br />

22.2 Without prejudice to the obligation of the Security Trustee to appoint a successor in accordance with Clause 22.1, the Issuer shall be<br />

authorised to make such appointment in lieu of the Security Trustee.<br />

22.3 The appointment of the new Security Trustee pursuant to Clauses 22.1 and 22.2 shall only be effective if the Issuer, the Swap<br />

Counterparty and the Cash Administrator consent to the appointment of the proposed new Security Trustee. Such appointment will also<br />

be effective if the Issuer, the Swap Counterparty and the Cash Administration withhold such consent without providing the Security<br />

Trustee with good cause for such denial (where the appointee is not a bank and the appointment is made by the Security Trustee pursuant<br />

to Clause 22.1). Consent of the Issuer, the Swap Counterparty or the Cash Administrator shall be deemed granted if the Security<br />

Trustee requests the Issuer, the Swap Counterparty and the Cash Administrator in writing for consent to the appointment and consent<br />

or proof of good cause for denial is not provided within five banking days in London after the Issuer, the Swap Counterparty and the<br />

Cash Administrator have received the request.<br />

22.4 Notwithstanding the rights and obligations of the Security Trustee, the duties of the existing Security Trustee shall continue in full force<br />

and effect until the new Security Trustee has been validly appointed.<br />

22.5 Any corporation into which the Security Trustee may be merged, or any corporation with which the Security Trustee may be consolidated,<br />

or any corporation resulting from any merger or consolidation to which the Security Trustee shall sell or otherwise transfer all or<br />

substantially all the assets or the business of the Security Trustee, shall be the successor Security Trustee under this Agreement, to the<br />

extent permitted by applicable law, without the execution or filing of any paper or any further act on the part of the parties hereto.<br />

23. TRANSFER OF SECURITY; COSTS; PUBLICATION<br />

23.1 In the case of a replacement of the Security Trustee pursuant to Clause 22, the Security Trustee shall forthwith transfer to the new<br />

Security Trustee the assets and other rights, including its rights to the Security Interests created in favour of the Security Trustee (for the<br />

benefit of the Transaction Secured Creditors), all rights it holds as fiduciary under this Agreement, as well as its rights to make a Trustee<br />

Claim under Clause 4.3 in its capacity as security trustee. Without prejudice to this obligation, the Issuer is hereby irrevocably authorised<br />

to effect such transfer on behalf of the Security Trustee subject to the condition set forth in the first sentence.<br />

23.2 The costs incurred in connection with replacing the Security Trustee pursuant to Clause 22 shall be borne by the Issuer. If the replacement<br />

pursuant to Clause 22 is due to the Security Trustee's conduct, the Issuer shall be entitled, without prejudice to any additional<br />

rights, to demand damages from the existing Security Trustee in the amount of such costs.<br />

23.3 The appointment of a new Security Trustee in accordance with Clause 22 shall be published without delay in accordance with the<br />

Conditions, or, if this is not possible, in any other appropriate way.<br />

23.4 The Security Trustee shall provide the new Security Trustee with a synopsis of all its activities in relation to this Agreement.<br />

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24. UNDERTAKINGS OF THE ISSUER IN RESPECT OF THE COLLATERAL<br />

The Issuer undertakes:<br />

(a) not to sell the Collateral and to refrain from all actions and omissions which may result in a significant decrease in the aggregate value<br />

or in a loss of the Collateral save where a transfer of the Collateral is effected pursuant to the terms of the Repurchase Agreement; to<br />

the extent that there are indications that a Transaction Secured Creditor does not properly fulfil its obligations under any of the<br />

Transaction Documents, the Issuer shall apply the standard of care of a prudent merchant (die Sorgfalt eines ordentlichen Kaufmanns)<br />

to take all necessary actions to prevent the Collateral or its value from being jeopardised;<br />

(b) to mark in its books and documents, the pledges and the security assignments in favour of the Security Trustee (for the benefit of the<br />

Security Trustee and the other Transaction Secured Creditors), to notify the Custodian and the Account Bank of the pledges and the<br />

security assignments, respectively, and to disclose to third parties having a legal interest in becoming aware of such pledges and/or<br />

such security assignments the pledges and/or such security assignments; and<br />

(c) if the rights of the Security Trustee in the Transaction Security Interests are impaired or jeopardised by way of an attachment or other<br />

actions of any third party to promptly notify the Security Trustee of such impairment or jeopardy, by sending a copy of the attachment<br />

or transfer order or of any other document on which the enforcement of the third party is based, as well as all further documents which<br />

are required or useful to enable the Security Trustee to file proceedings and take other actions in defence of its rights. In addition, the<br />

Issuer shall promptly inform the attachment creditor or other third party in writing of the rights of the Security Trustee in the Transaction<br />

Security Interests;.<br />

25. OTHER UNDERTAKINGS OF THE ISSUER<br />

The Issuer undertakes to:<br />

(a) submit to the Security Trustee, at least once a year, and in any event not later than one hundred and twenty days after the end of its<br />

fiscal year, and at any time upon demand within five days, a certificate signed by a Director of the Issuer in which such Director, in good<br />

faith and to the best of his or her knowledge based on the information available, represents that during the period between the date of<br />

submission of the preceding certificate (or, in the case of the first certificate, the date of this Agreement) and the date on which the relevant<br />

certificate is submitted, the Issuer has fulfilled its obligations under the Notes and the Transaction Documents or (if this is not the<br />

case) which specifies the details of any breach;<br />

(b) give the Security Trustee, at any time, such other information it may reasonably demand for the purpose of performing its duties under<br />

this Agreement;<br />

(c) make forthwith all representations and take all other actions which are required, in the opinion of the Security Trustee, to ensure the<br />

occurrence of the conditions precedent of all Transaction Documents;<br />

(d) send or cause to be sent to the Security Trustee a copy of any notice, other than notices pursuant to Conditions 6(e) and 8(a), given in<br />

accordance with the Conditions immediately, or at the latest on the day of the publication of such notice; and<br />

(e) ensure that the Principal Paying Agent or the Luxembourg Paying Agent, as applicable, notifies the Security Trustee immediately if it<br />

does not receive the moneys needed to discharge in full any obligation to repay, in full or in part, a principal amount due to the<br />

Noteholders on any Interest Payment Date.<br />

26. ACTIONS OF THE ISSUER REQUIRING CONSENT<br />

26.1 The Issuer confirms to the Security Trustee that it has taken all necessary steps to enable it to pledge or assign as security the Security<br />

Assets in accordance with Clause 4, and that it has taken no action or steps to prejudice its right, title and interest in and to the Security<br />

Assets.<br />

26.2 The Issuer covenants with the Security Trustee, that so long as any Notes are outstanding, that unless the Security Trustee expressly<br />

agrees otherwise, it will:<br />

(a) at all times, carry on and conduct its affairs in a proper and efficient manner;<br />

(b) give to the Security Trustee such information and evidence as the Security Trustee shall require for the purpose of the discharge<br />

of the duties, trusts, powers, authorities and discretions vested in it under this Agreement, the Accounts Administration<br />

178


Agreement or by operation of law;<br />

(c) cause to be prepared and certified by the auditors, in respect of each financial year, accounts in such form as will comply with<br />

the requirements for the time being of the Companies (Jersey) Law 1991;<br />

(d) at all times keep proper books of accounts and allow the Security Trustee and any person appointed by the Security Trustee (to<br />

whom the Issuer shall have no reasonable objection) free access to such books of accounts at all reasonable times during normal<br />

business hours for the purpose of verifying and enforcing the Transaction Security Interests, to give any information necessary<br />

for such purpose and to make the relevant records available for inspection;<br />

(e) send to the Security Trustee two copies of every balance sheet, profit and loss accounts, report, <strong>circular</strong> and notice of general<br />

meeting and every other document issued or sent to its shareholders, together with any of the foregoing and every document<br />

issued or sent to holders of securities other than its shareholders together with any of the foregoing, as soon as practicable after<br />

the issue or publication thereof;<br />

(f) forthwith upon becoming aware thereof, give notice in writing to the Security Trustee of the occurrence of any Event of Default<br />

or any condition, event or act which with the giving of notice and/or the lapse of time and/or the issue of a certificate would<br />

constitute an Event of Default; and<br />

(g) at all times, comply with and perform all its obligations under this Agreement.<br />

26.3 The Issuer covenants with the Security Trustee that, so long as any Notes are outstanding, it will not, without the express written consent<br />

of the Security Trustee:<br />

(a) engage in any business activity other than:<br />

(i) entering into and performing its obligations under the Transaction Documents, applying its funds and making payments in<br />

accordance with such Transaction Documents and engaging in any transaction incidental thereto; and<br />

(ii) preserving and/or exercising and/or enforcing its rights and performing and observing its obligations under the Transaction<br />

Documents;<br />

(b) incur, create, assume or suffer to exist or otherwise become or be liable in respect of any indebtedness (whether present or<br />

future) other than:<br />

(i) indebtedness in respect of taxes, assessments or governmental charges not yet overdue, or<br />

(ii) indebtedness as expressly contemplated in and permitted by the Transaction Documents;<br />

(c) make, incur, assume or suffer to exist any loan, advance or guarantee (including any indemnity) to any person except as<br />

expressly contemplated or permitted by the Transaction Documents;<br />

(d) take, or knowingly permit to be taken, any action which would amend, terminate or discharge or prejudice the validity or effectiveness<br />

of any of the Transaction Documents or which would permit any party to the Transaction Documents to be released<br />

from its obligations thereunder or which, subject to the performance of its obligations thereunder, could adversely affect the<br />

ratings of the Notes by Standard & Poor's or Fitch;<br />

(e) have an interest in any bank account, save as may be expressly contemplated or permitted by the Transaction Documents.<br />

26.4 If, pursuant to Clause 13 the Security Trustee performs any obligation on behalf of the Issuer, then the Issuer shall provide the Security<br />

Trustee with such assistance as reasonably required by the Security Trustee in order to carry out the Issuer's obligation.<br />

27. FURTHER ASSURANCE<br />

The parties hereto agree that they will co-operate fully to do all such further acts and execute any further documents as may be necessary or<br />

reasonably desirable to give full effect to the arrangements contemplated by this Agreement.<br />

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28. NOTICES<br />

28.1 Each communication to be made hereunder shall (except expressly permitted otherwise) be made in writing but, unless otherwise stated,<br />

may be made by facsimile or letter.<br />

28.2 Any communication or document to be made or delivered by one person to another pursuant to this Agreement shall (unless that other<br />

person has, by fifteen Business Days' written notice to the other, specified another address) be made or delivered to that other person:<br />

if to the Issuer:<br />

Whiteley Chambers<br />

Don Street<br />

St. Helier<br />

Jersey<br />

Channel Islands<br />

Facsimile: +44 1534 735328<br />

if to the Security Trustee:<br />

9 Thomas More Street<br />

United Kingdom<br />

London E1W 9YT<br />

United Kingdom<br />

Facsimile: +44 20 7777 5410<br />

and shall be deemed to have been made or delivered (in the case of any communication made by facsimile) when despatched or (in the<br />

case of any communication made by letter) when left at that address. Any communication sent by facsimile shall be promptly confirmed<br />

by letter but the non-delivery or non-receipt of any such letter shall not affect the validity of the original facsimile communication.<br />

28.3 All notices to the Noteholders to be given by the Security Trustee under this Agreement shall be published in accordance with Condition<br />

14 of the Conditions.<br />

29. VARIATION<br />

No variation of this Agreement (including this Clause 29) shall be effective unless it is in writing and signed by (or by some person duly authorised<br />

by) each of the parties.<br />

30. COUNTERPARTS<br />

This Agreement may be executed in one or more counterparts.<br />

31. PARTIAL INVALIDITY<br />

Without prejudice to any other provision hereof, if one or more provisions, is or hereafter becomes invalid, illegal or unenforceable in any<br />

respect in any jurisdiction or with respect to any party or parties, such invalidity, illegality or unenforceability in such jurisdiction or with respect<br />

to such party or parties shall not, to the fullest extent permitted by applicable law, render invalid, illegal or unenforceable such provision or<br />

provisions in any other jurisdiction or with respect to any other party or parties hereto. Such invalid, illegal or unenforceable provision shall be<br />

replaced by the parties with a provision which comes as close as reasonably possible to the commercial intentions of the invalid, illegal or<br />

unenforceable provision.<br />

32. LIMITED RECOURSE AND NO PETITION<br />

32.1 In the event that the Transaction Security Interests are enforced and the proceeds of such enforcement are insufficient (after payment<br />

of all other claims ranking in priority to the claims hereunder (if any)) to pay in full any amounts whatsoever due hereunder, the<br />

Transaction Secured Creditors shall have no further claim against the Security Trustee and the Security Trustee shall have no further<br />

claim against the Issuer in respect of any such unpaid amounts.<br />

32.2 Without prejudice to the right of the Security Trustee to enforce the Transaction Security Interests, the Security Trustee agrees that it will<br />

not, until the expiration of a period of one year plus one day (or, if longer, such other preference period under applicable law plus one<br />

day) after payment in full of the aggregate Note Principal Payments and interest and all other amounts (if any) payable in respect of the<br />

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Notes (and not extinguished in accordance with the Conditions of the Notes), institute against the Issuer, or join any other person in instituting<br />

against the Issuer, any bankruptcy, reorganisation, arrangement, insolvency or liquidation proceedings or similar proceedings<br />

under applicable law. This Clause 32.2 shall not be construed to limit the right of the Security Trustee to file any claim in or otherwise<br />

take any action with respect to any bankruptcy, reorganisation, arrangement, insolvency or liquidation proceeding or similar proceeding<br />

under applicable law that was instituted against or with respect to the Issuer other than by the Security Trustee.<br />

33. LAW AND JURISDICTION<br />

33.1 This Agreement shall be governed by, and construed in accordance with, German law.<br />

33.2 Each of the parties hereto irrevocably agrees that the courts of Frankfurt am Main shall have exclusive jurisdiction to hear and determine<br />

any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with this Agreement and, for such<br />

purposes, irrevocably submits to the jurisdiction of such courts.<br />

33.3 The Issuer hereby appoints PriceWaterhouseCoopers Veltins Rechtsanwaltsgesellschaft mbH, Im Trutz Frankfurt 55, 60322 Frankfurt am<br />

Main, Federal Republic of Germany as its agent for service of process with respect to any legal proceedings brought before any German<br />

court. The Issuer undertakes to maintain an agent for the service of process in the Federal Republic of Germany as long as any Note<br />

remains outstanding.<br />

33.4 The Security Trustee hereby appoints Chase Manhattan Bank AG, Grüneburgweg 2, 60322 Frankfurt am Main, Federal Republic of<br />

Germany as its agent for service of process with respect to any legal proceedings brought before any German court. The Security<br />

Trustee undertakes to maintain an agent for the service of process in the Federal Republic of Germany as long as any Note remains outstanding.<br />

The parties hereto have executed this Agreement the day and year first before or hereafter written.<br />

BAUHAUS SECURITIES LIMITED<br />

as Issuer<br />

By:<br />

THE CHASE MANHATTAN BANK<br />

as Security Trustee<br />

By:<br />

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THIS ENGLISH DEED OF ASSIGNMENT is made on 26th October, 2000<br />

BETWEEN:<br />

SCHEDULE 2<br />

English Deed of Assignment<br />

(1) BAUHAUS SECURITIES LIMITED, whose registered office is at Whiteley Chambers, Don Street, St. Helier, Jersey, Channel Islands (the "Issuer");<br />

and<br />

(2) THE CHASE MANHATTAN BANK, acting through its office at Trinity Tower 9, Thomas More Street, London E1W 9YT (the "Security Trustee" which<br />

expression shall include such company and all other persons or companies for the time being acting under this deed in the capacity of trustee<br />

or trustees under German law (Treuhänder)).<br />

WHEREAS:<br />

(A) The Issuer has agreed to grant security over certain of its assets to the Transaction Secured Creditors pursuant to the German Security<br />

Documents.<br />

(B) In addition to the security granted by the Issuer pursuant to the German Security Documents, the Issuer has agreed to grant security over the<br />

English Security Assets to the Transaction Secured Creditors subject to the terms of this Deed and the German Trust Agreement.<br />

NOW THIS DEED WITNESSES AND IT IS HEREBY AGREED AND DECLARED as follows:<br />

1. DEFINITIONS<br />

Terms defined in the Conditions and in the German Trust Agreement of even date herewith shall bear the same meanings in this Deed as if herein<br />

set out in full and are incorporated into this Deed.<br />

2. SECURITY<br />

2.1 The Issuer, by way of security for the discharge of all of the Transaction Secured Creditors Secured Obligations (but subject to reassignment<br />

on redemption), hereby irrevocably and unconditionally assigns to the Security Trustee:<br />

(a) all of its right, title, interest and benefit, present and future, in, to and under:<br />

(i) the Credit Default Swap Agreement;<br />

(ii) the Repurchase Agreement;<br />

(iii) the Transaction Account Bank Agreement; and<br />

(iv) the Corporate Administration Agreement,<br />

including without limitation all rights to receive payment of any amounts which may become payable to the Issuer thereunder, all payments<br />

received by the Issuer thereunder, all rights to serve notices and/or make demands thereunder and/or the right to take such<br />

steps as are required to cause payments to become due and payable thereunder and all rights of action in respect of any breach<br />

thereof and all rights to receive damages or obtain other relief in respect thereof; and<br />

(b) all cash from time to time representing or deriving from any of the assets or rights assigned under sub-clause (a) above, including all<br />

cash from time to time standing to the credit of the Transaction Accounts, including the interest accruing from time to time thereon<br />

and the debts represented thereby.<br />

2.2 The Security Trustee accepts the assignment pursuant to Clause 2.1.<br />

2.3 Without prejudice to the generality of the foregoing, the security constituted by and pursuant to and the covenants, undertakings and other<br />

provisions contained in this Deed shall remain in force as continuing security to the Security Trustee (for itself and on trust (treuhänderisch)<br />

pursuant to Clause 4 for the various other persons to whom the Transaction Secured Creditors Secured Obligations from time to time<br />

become due, owing or payable) notwithstanding any intermediate payment, settlement of account or any other act, event or matter<br />

whatsoever, except only the release of the English Security Assets by the Security Trustee pursuant to Clause 2.4 which release the<br />

Security Trustee is hereby authorised to execute on behalf of all other persons to whom any of the Transaction Secured Creditors Secured<br />

Obligations are due, owing or payable. The Issuer shall take whatever action the Security Trustee may require for the purpose of perfec-<br />

182


ting or protecting the security intended to be created by this Deed or any part thereof.<br />

2.4 The Security Trustee shall take whatever action is necessary to release the English Security Assets from the security created by this Deed<br />

upon receipt of evidence to the satisfaction of the Security Trustee of the full and complete satisfaction of all Transaction Secured Creditors<br />

Secured Obligations.<br />

3. COVENANTS FOR TITLE<br />

Each assignment created under or pursuant to this Deed is made by the Issuer with (as the case may be) full title guarantee in accordance with<br />

the Law of Property (Miscellaneous Provisions) Act 1994.<br />

4. APPLICATION OF THE GERMAN TRUST AGREEMENT0<br />

This Deed has been entered into by the Issuer and the Security Trustee pursuant to the German Trust Agreement for the purpose of creating the<br />

security created pursuant to Clauses 2.1 to 2.3 and stipulating the conditions for release thereof pursuant to Clause 2.4 in each case under<br />

English law. Subject to the foregoing, each of the provisions of the German Trust Agreement shall apply in respect of the Issuer and the English<br />

Security Assets, mutatis mutandis, as set forth in the German Trust Agreement, and, for the avoidance of doubt and without limiting the generality<br />

of the foregoing:<br />

(a) the Security Trustee shall hold the security created pursuant to Clause 2.1 as trustee under German law (Treuhänder) for the benefit of the<br />

Transaction Secured Creditors, pursuant to the terms and conditions of the German Trust Agreement; and<br />

(b) the security constituted by this Deed shall be enforceable and exercisable at the time and in the manner set forth in the German Trust<br />

Agreement, and all proceeds received by the Security Trustee shall be applied in the manner provided for in the German Trust Agreement.<br />

5. SUCCESSORS<br />

The terms and provisions of this Deed shall be binding upon and inure for the benefit of the parties hereto and their respective successors and<br />

assigns. The Issuer may not assign or transfer all or any of its rights or obligations hereunder.<br />

6. GOVERNING LAW AND JURISDICTION<br />

6.1 This Deed is governed by, and shall be construed in accordance with, English law; provided, however, that all of the provisions of the<br />

German Trust Agreement which are applied to this Deed pursuant to the operation of Clause 4 hereof shall be governed by, and construed<br />

in accordance with, the laws of the Federal Republic of Germany. Each of the parties hereto irrevocably agrees that the courts of England<br />

shall have jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection<br />

with this Deed and, for such purposes, irrevocably submits to the jurisdiction of such courts. Each of the parties hereto irrevocably<br />

waives any objection which it might now or hereafter have to the courts referred to in this Clause 6.1 being nominated as the forum to<br />

hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with this Deed and<br />

agrees not to claim that any such court is not a convenient or appropriate forum. The submission to the jurisdiction of the courts referred<br />

to in this Clause 6.1 shall not (and shall not be construed so as to) limit the right of any party to take proceedings against another in any<br />

other court of competent jurisdiction nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings<br />

in any other jurisdiction, whether concurrently or not if and to the extent permitted by applicable law.<br />

6.2 The Issuer hereby appoints Fleetside Legal Representative Services <strong>Limited</strong>, 9 Cheapside, London EC2V 6AD, United Kingdom to accept<br />

service of any proceedings on its behalf.<br />

7. THIRD PARTY RIGHTS<br />

A person who is not a party to this Deed has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Deed,<br />

but this does not affect any right or remedy of a third party which exists or is available apart from that Act.<br />

Executed as a deed by<br />

BAUHAUS SECURITIES LIMITED<br />

By:<br />

Executed as a deed by<br />

THE CHASE MANHATTAN BANK<br />

By:<br />

acting under the authority of that company,<br />

in the presence of:<br />

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CURRENCY INFORMATION<br />

On 1st January, 1999, the euro replaced the Deutsche Mark as legal tender in the Federal Republic of Germany. The<br />

Deutsche Mark will continue to exist as a sub-unit of the euro until 31st December, 2001, when it will be replaced for<br />

all purposes by the euro (subject to a possible extension). The official euro/DEM conversion rate, which was invariably<br />

determined by the Council of European Union on 31st December, 1998, is DEM 1.95583 to euro 1.00.<br />

184


TAXATION<br />

The information contained in this section "Taxation" is not intended as tax advice and does not purport to describe<br />

all of the tax considerations that may be relevant to a prospective purchaser of the Notes. It should be read in conjunction<br />

with the section entitled " Investor Considerations – Taxation". Potential purchasers of the Notes are urged<br />

to consult their own tax advisors as to the overall tax consequences of purchasing, holding and/or selling the Notes.<br />

TAXATION IN GERMANY<br />

Taxation of a Noteholder<br />

General<br />

The Notes should not be qualified as an equity instrument. Therefore, German legislation regarding controlled foreign<br />

corporations (Außensteuergesetz) and other provisions dealing with equity investments in foreign companies should<br />

not be applied. Under the provisions of the German Act on Foreign Mutual Funds (Auslandinvestment-Gesetz), the<br />

Notes may also not be qualified as shares in a foreign mutual fund.<br />

Taxation of German Resident Holders of the Notes<br />

German Resident Corporate Noteholders<br />

Notes held as business assets of a German domestic corporation or any other German-based enterprise will generate<br />

interest income that is subject to income tax, trade tax on income and solidarity surcharge. If such Notes are<br />

sold, any capital gain and any accrued interest will be subject to such taxes.<br />

Where the Notes are kept in custodial accounts maintained with a German bank, 30% withholding tax (Zinsabschlag)<br />

(plus solidarity tax thereon at a rate of 5.5%) will be levied. Interest which has accrued until the sale of the Notes<br />

(Stückzinsen) will also be subject to withholding tax on interest. As no clear guidance from the tax authorities is available<br />

a Noteholder should expect a withholding tax (Zinsabschlag) plus solidarity surcharge also on any excess of proceeds<br />

from a sale or redemption of the Notes over the acquisition cost.<br />

Any withholding tax levied may be credited against the Noteholder's final liability for income tax. If the holder of the<br />

Notes is a German-based bank or insurance company, such holder may apply for a withholding tax exemption.<br />

German Resident Individual Noteholders<br />

Notes held by German resident individuals will generate interest income that is subject to individual income tax (plus<br />

solidarity tax thereon at a rate of 5.5%). Interest accrued until the sale of the Notes (Stückzinsen) is also subject to<br />

income tax and solidarity tax. It is to be expected that a German resident individual will be taxed on any excess of<br />

proceeds from a sale or redemption of the Notes over the acquisition cost. A negative balance will also be considered.<br />

Resident individual Noteholders will face the same withholding tax treatment as corporate investors.<br />

Taxation Of Non-Resident Noteholders<br />

Non-German resident investors of the Notes will not be taxed regarding the interest income received because the<br />

Notes are not covered by any of the explicit examples as set out in § 49 (5) (c) German Income Tax Act (Einkommensteuergesetz).<br />

However, if these Notes have to be allocated to a German permanent establishment (branch) of the<br />

Noteholder, interest income will be subject to corporation income tax, trade tax on income and solidarity surcharge.<br />

Where the Notes are kept in a custodian account maintained at a German bank, the non-resident Noteholder should<br />

provide the bank with information regarding his tax status in order to avoid German withholding tax on interest.<br />

185


Gift or Inheritance Tax<br />

The gratuitous transfer of a Note by a Noteholder as a gift or by reason of the death of the Noteholder is subject to<br />

German gift or inheritance tax if the Noteholder or the recipient is resident or deemed to be resident in Germany under<br />

German law at the time of the transfer. If neither the Noteholder nor the recipient is resident, or deemed to be resident,<br />

in Germany at the time of the transfer no German gift or inheritance tax is levied unless the Notes form part of<br />

the business property of a permanent establishment or fixed base maintained in Germany by the Noteholder. Tax treaties<br />

concluded by the Federal Republic of Germany generally permit Germany to tax the transfer in this situation.<br />

Taxation of the Issuer<br />

Corporate Income Tax<br />

A corporation incorporated under non-German law is subject to unlimited tax liability according to § 1 (1) of the<br />

German Corporate Income Tax Code (Körperschaftsteuergesetz, KStG) if its place of effective management is in<br />

Germany. Under the rulings of the German Federal Fiscal Court ("BFH") the place of effective management shall be<br />

determined based on the location where a legal representative of a corporation is active. Typically this place is where<br />

the management has its office or its habitual seat and the company is effectively managing its day-to-day business.<br />

However, the effective management of the company as per § 10 of the German General Tax Act (Abgabenordnung)<br />

may also be outsourced to a third party.<br />

As the corporate administrator of the Issuer is active in Jersey, Channel Islands, a German place of management<br />

regarding the corporate administration within the meaning of § 10 German General Tax Act (Abgabenordnung) is not<br />

given as a result of such activities.<br />

According to the very broad approach of the BFH when defining day-to-day business, the activities of a cash administrator<br />

could qualify as management activities within the meaning of § 10 German General Tax Act (Abgabenordnung).<br />

However, as such activities are executed by the Cash Administrator (being a UK branch of a foreign credit<br />

institution), no link to Germany can be identified. This also applies with regard to the activity of the Security Trustee.<br />

The activities of <strong>DG</strong> HYP as Swap Counterparty are based on the Credit Default Swap Agreement, which is itself<br />

based on the ISDA Master Swap Agreement. Therefore all activities of <strong>DG</strong> HYP could be qualified as own activities<br />

and not as management activities on behalf of the Issuer.<br />

The other services provided by <strong>DG</strong> HYP, <strong>DG</strong> BANK, Arthur Andersen Wirtschaftsprüfungsgesellschaft<br />

Steuerberatungsgesellschaft mbH and PwC Deutsche Revision Wirtschaftsprüfungsgesellschaft Aktiengesellschaft<br />

may not be qualified as management activities within the meaning of § 10 German General Tax Act (Abgabenordnung).<br />

The activities of Chase Manhattan Bank AG as Principal Paying Agent and of <strong>DG</strong> BANK as listing agent are<br />

services rendered not only to Issuer but in the same manner to any other market participant. Furthermore, the services of<br />

<strong>DG</strong> HYP with regard to the Principal Collection Account and the Custody Account of the Issuer are services provided<br />

not only for the Issuer, but also for other market participants. The services of the accounting firm Arthur Andersen<br />

Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft mbH under the Data Protection Agreement and<br />

PwC Deutsche Revision Wirtschaftsprüfungsgesellschaft Aktiengesellschaft as Independent Auditor will also not be<br />

treated as management services on behalf of the Issuer; it is a mere service function.<br />

As the Issuer in this case, as discussed above, neither has its effective management in the hands of a German resident<br />

individual, nor is it outsourced to a German corporate entity, the Issuer is not subject to unlimited tax liability.<br />

According to the KStG, the Issuer could be subject to limited tax liability if its business income was earned through<br />

186


a German permanent establishment or a permanent representative. <strong>Limited</strong> tax liability may also arise from interest<br />

income of German origin or other services provided for German customers.<br />

In order to be subject to German limited tax liability regarding income from trade and business the activity itself has<br />

to qualify as trade or business. Once this condition is met, such activity has to be executed through a German permanent<br />

establishment (branch) or permanent representative.<br />

With regard to cash flow asset backed structures the German tax authorities take the view that the activities of an<br />

Issuer, such as purchasing receivables from a German based originator qualify as trading activities. However there is<br />

no indication of applying this view in the case of synthetic structures. As the activities of the Issuer are business activities<br />

on the Issuer's own behalf and are executed with the intention to achieve at least a marginal profit, the basic<br />

criteria of § 15 German General Income Tax Act (Einkommensteuergesetz) for treating income as income from trade<br />

and business are met.<br />

According to § 12 German General Tax Act (Abgabenordnung) the term permanent establishment means a fixed place<br />

of business through which the business of the Issuer is wholly or partly carried out. If management activities as described<br />

above are executed within Germany, this would also generate a permanent establishment according to § 12<br />

German General Tax Act (Abgabenordnung). As in this case the place of management is not within Germany, a permanent<br />

establishment would require the Issuer to have control over office space located in Germany. The Issuer has<br />

no control over such office space.<br />

As far as the existence or non-existence of a permanent representative is concerned, the analysis conducted, showed<br />

the following results.<br />

To make a foreign corporation subject to limited German tax liability, as mentioned above, it is sufficient that such<br />

corporation acts through a permanent representative in Germany acting on behalf of the corporation (§ 13 German<br />

General Tax Act (Abgabenordnung)). According to the law such a person does not necessarily have to have the power<br />

to conclude contracts on behalf of the foreign corporation. It is sufficient that the activities may be qualified as activities<br />

that are necessary for supporting the core business of the foreign corporation in Germany. This requires that<br />

the activities of the representative fall within the typical business activities of the principal. They have to be qualified<br />

as core activities and not only activities that are of preparatory or auxiliary nature. In addition to this, the permanent<br />

representative should pursue its qualifying activity on a regular basis. However, § 222 of the German Income Tax<br />

Rulings states that an enterprise is not deemed to have a permanent representative in Germany merely because it<br />

carries out business in Germany through a broker, general commission agent or any other agent of an independent<br />

status, if these parties are acting in the ordinary course of their business.<br />

As far as the underwriting and listing activities are concerned, any activity of a credit institution in supporting the<br />

Issuer should not be treated as activities of a permanent representative as these activities are carried out in the ordinary<br />

course of business of independent enterprises. Thus under § 222 of the German Income Tax Rulings they do not<br />

qualify as activities of a permanent representative. The same applies to the activities of the Security Trustee as well.<br />

The above analysis also applies to the activities of <strong>DG</strong> HYP as Account Bank and Custodian.<br />

With regard to the activities of PwC Deutsche Revision Wirtschaftsprüfungsgesellschaft Aktiengesellschaft as<br />

Independent Auditors, there might be some concerns that such activities may be deemed to create a status of a permanent<br />

representative of the Issuer. As the Independent Auditor has to review and control the data provided by <strong>DG</strong><br />

HYP, it is an activity that forms part of the business pursued by the Issuer as counterparty of <strong>DG</strong> HYP under the Credit<br />

Default Swap Agreement. Even if the activities of PwC Deutsche Revision Wirtschaftsprüfungsgesellschaft<br />

Aktiengesellschaft qualifies as activities of a permanent representative, this should not create too much taxable income<br />

187


at the level of the Issuer. Only part of the income of the Issuer attributable to the activities of the additional auditor<br />

will be subjected to taxation in Germany. Based on the functions executed in Germany and the costs allocated to<br />

Germany, only a marginal amount of the overall profit of the Issuer (which profit itself is an insignificant amount)<br />

should be allocated to Germany. This proportion allocated to Germany should not exceed DM 1000 and therefore provide<br />

for the tax exemption set out in § 104 of the German Corporate Income Tax Regulations.<br />

The function of Arthur Andersen Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft mbH as Data Trustee<br />

is a supporting function to <strong>DG</strong> HYP rather than to the Issuer and therefore is not likely to qualify as activities of a permanent<br />

representative.<br />

As set out above, the Issuer may also be subject to limited tax liability in Germany based on interest payments received<br />

from German sources. Therefore it is necessary to analyse the payment streams received by the Issuer in order to<br />

determine whether the Issuer could be in this basis subjected to German taxation or not.<br />

Pursuant to the Credit Default Swap Agreement, <strong>DG</strong> HYP will pay continuously the Swap Premium to the Issuer.<br />

Correspondingly, the Issuer has to make Credit Protection Payments under the Credit Default Swap Agreement.<br />

From the taxation point of view, swap agreements are treated as margin businesses which do not result in interest<br />

payments within the meaning of § 20 (1) No. 7 German Income Tax Act (Einkommensteuergesetz). Swap payments<br />

are neither treated as interest income, nor as any other income making a non-resident subject to limited tax liability.<br />

There is a slight likelihood that the Credit Default Swap Agreement is reclassified as an option agreement for tax purposes.<br />

However in the case of a non-resident recipient an option premium is not taxed, as under § 49 (1) German<br />

Income Tax Act (Einkommensteuergesetz), only other income from the use of goods makes the recipient subject to<br />

limited tax liability and not income from option contracts.<br />

Therefore payments under the Credit Default Swap Agreement are not likely to cause a limited tax liability in Germany<br />

for the Issuer.<br />

Under the Repurchase Agreement which is based on the PSA/ISMA Master Agreement, the Issuer will purchase floating<br />

rate Pfandbriefe issued by <strong>DG</strong> HYP and receive Repo Interest. According to German General Tax Principles and<br />

based on the rulings of the German Federal Fiscal Court (Bundesfinanzhof), the income from the purchased<br />

Pfandbriefe will be taxed in the hands of the counterparty holding the assets transferred.<br />

There is no clear guidance available currently regarding the tax treatment of repurchase contracts. There are arguments<br />

to qualify repo interest as interest income within the meaning of § 20 (1) No. 7 German Income Tax Act<br />

(Einkommensteuergesetz). At the same time it may also be argued that the interest should be treated as other income<br />

within the meaning of § 22 No. 3 German Income Tax Act (Einkommensteuergesetz). In both cases, repo interest<br />

would not be taxed at the level of the non-resident counterparty. Thus repo interest paid to a non-German counterparty<br />

will not be subject to German withholding tax.<br />

As mentioned above, for tax purposes, securities transferred under a repurchase agreement will be allocated to the<br />

purchaser. The German Federal Fiscal Court (Bundesfinanzhof) has ruled in 1982 that the interest received from the<br />

securities transferred should be taxed on the level of the purchaser. According to § 49 (1) No. 5 (c/aa) (2) German<br />

Income Tax Act (Einkommensteuergesetz), interest payments on Pfandbriefe will not generate taxable income on a<br />

non-resident's level.<br />

Interest income earned from the current bank accounts held at <strong>DG</strong> HYP will not generate income which would subject<br />

<strong>DG</strong> HYP to limited tax liability under § 49 (1) No. 5 (c) German Income Tax Act (Einkommensteuergesetz).<br />

188


Trade Tax on Income<br />

A non-resident is subject to German trade tax on income only if it has established a German permanent establishment<br />

(branch) within the meaning of § 12 German General Tax Act (Abgabenordnung). As discussed above, none of<br />

the preconditions for permanent establishments as set out in § 12 German General Tax Act (Abgabenordnung) are<br />

met in the case of the Issuer: neither is the place of management of the Issuer is in Germany, nor has the Issuer a<br />

fixed place of business within Germany.<br />

According to § 22 (6) of Trade Income Tax Regulations, having a permanent representative (§ 13 German General Tax<br />

Act (Abgabenordnung)) in Germany is not sufficient to make a non-resident subject to trade tax on income. Thus even<br />

if any of the service providers qualify as permanent representatives, that would not subject the Issuer to trade tax.<br />

Net Assets Tax / Trade Tax on Capital<br />

Net assets tax ceased to be effective 1st January, 1997. Trade tax on capital was eliminated effective 1st January,<br />

1998.<br />

TAXATION IN JERSEY<br />

The Issuer will have "exempt company" status within the meaning of Article 123A of the Income Tax (Jersey) Law,<br />

1961, as amended, for the calendar year ending 31st December, 2000. The Issuer will be required to pay an annual<br />

exempt company charge which is currently £600 in respect of each subsequent calendar year during which it wishes<br />

to continue to have "exempt company" status. The retention of "exempt company" status is conditional on the<br />

Comptroller of Income Tax in Jersey being satisfied that no Jersey resident has a beneficial interest in the Issuer,<br />

except as permitted by concessions granted by the Comptroller of Income Tax.<br />

As an "exempt company", the Issuer will not be liable to Jersey income tax other than on Jersey source income<br />

(except by concession bank deposit interest on Jersey bank accounts). For so long as the Issuer is an "exempt company",<br />

payments in respect of the Notes will not be subject to taxation in Jersey (unless the Noteholder is resident in<br />

Jersey) and no withholding in respect of taxation will be required on any such payment made to a holder of the Notes.<br />

Under current Jersey law there are no death or estate duties, capital gains, gift, wealth, inheritance or capital transfer<br />

taxes. No stamp duty is levied in Jersey on the issue or transfer of Notes. In the event of the death of an individual<br />

sole Noteholder, duty at rates of up to 0.75% of the value of the Notes held may be charged on the registration of<br />

Jersey probate or letters of administration on the estate of the relevant deceased sole Noteholder.<br />

EUROPEAN UNION WITHHOLDING TAX<br />

In June 1998 the European Commission presented to the Council of Ministers of the European Union a proposed<br />

Directive (which may or may not be adopted) to ensure a minimum of effective taxation of savings income in the form<br />

of interest payments within the European Community.<br />

The proposed Directive would require each Member State to adopt either a "withholding tax system" or "an information<br />

reporting system" in relation to payments of interest, defined to include income similar to interest, such as<br />

discounts. The withholding tax system would, subject to certain exemptions, require a "paying agent" established in<br />

an EU Member State to withhold tax at a minimum rate of 20 per cent. from the interest paid to an individual who is<br />

resident (for tax purposes) in a different EU Member State and who is beneficially entitled to the interest. The infor-<br />

189


mation reporting system will require an EU Member State to provide the tax authorities of another Member State certain<br />

information concerning individuals who are beneficially entitled to interest paid by a paying agent within its jurisdiction.<br />

A Member State would be free to choose which of these two systems to adopt.<br />

If adopted by the Council of Ministers these proposals would come into effect on 1st January, 2001. It appears, however,<br />

from a report by the ECOFIN Council to the European Council dated 20th June, 2000 (and which has been<br />

endorsed by the European Council) that the proposals will not be adopted in their current form and that the ECOFIN<br />

Council has agreed (and the European Council has endorsed) that the ultimate objective of any EU Directive shall be<br />

the exchange of information between EU Member States (although if an EU Member State so wishes it would be permitted<br />

temporarily to operate a withholding tax system provided that an appropriate share of the tax collected is<br />

transferred to the EU Member State in which the relevant payee is resident).<br />

190


SUBSCRIPTION AND SALE<br />

Pursuant to a subscription agreement (the "Subscription Agreement") dated 26th October, 2000, between <strong>DG</strong> BANK<br />

(in such capacity, the "Manager") and the Issuer, the Manager has agreed to purchase the Notes at a price equal to<br />

the issue price of 100 per cent. of the principal amount of the Notes. The Manager is entitled to be released and<br />

discharged from its obligations under the Subscription Agreement in certain circumstances prior to payment to the<br />

Issuer. The Issuer has agreed to indemnify the Manager against certain liabilities in connection with the purchase of<br />

the Notes as more particularly described in the Subscription Agreement.<br />

Germany<br />

The Manager has confirmed and agreed that, according to § 2 No. 4 of the German <strong>Securities</strong> Prospectus Act<br />

(Verkaufsprospektgesetz), a sales prospectus for the Notes does not have to be deposited or published.<br />

United Kingdom<br />

The Manager has represented and agreed that:<br />

(a) it has not offered or sold and, prior to the expiry of the period of six months from the issue date of the Notes, will<br />

not offer or sell any Notes to persons in the United Kingdom except to persons whose ordinary activities involve<br />

them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their<br />

business or otherwise in circumstances which have not resulted and will not result in an offer to the public in the<br />

United Kingdom within the meaning of the Public Offers of <strong>Securities</strong> Regulations 1995 (as amended);<br />

(b) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to<br />

anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom; and<br />

(c) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by<br />

it in connection with the issue of the Notes to a person who is of a kind described in Article 11(3) of the Financial<br />

Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a person to whom<br />

such document may otherwise lawfully be issued or passed on.<br />

United States of America<br />

1. The Notes have not been and will not be registered under the United States <strong>Securities</strong> Act of 1933, as amended<br />

(the "<strong>Securities</strong> Act" ) and may not be offered or sold within the United States or to, or for the account or benefit<br />

of, U.S. persons except in accordance with Regulation S under the <strong>Securities</strong> Act ("Regulation S" ) or pursuant to<br />

an exemption from, or in a transaction not subject to, the registration requirements of the <strong>Securities</strong> Act.<br />

The Manager represents and agrees that it has not offered or sold, and will not offer or sell, the Notes, (i) as part<br />

of their distribution at any time and (ii) otherwise until at least 40 days after the later of the commencement of the<br />

offering of the Notes and the Closing Date, except in accordance with Rule 903 of Regulation S under the<br />

<strong>Securities</strong> Act and, accordingly, neither the Manager nor any of its affiliates (including any person acting on behalf<br />

of the Manager or any of its affiliates) has engaged or will engage in any directed selling efforts with respect to the<br />

Notes and the Manager, its affiliates and all persons acting on its or their behalf have complied and will comply<br />

with the offering restrictions requirement of Regulation S.<br />

191


The Manager agrees that, at or prior to confirmation of sale of the Notes, the Manager will have sent to each distributor,<br />

dealer or person receiving a selling concession, fee or other remuneration that purchases the Notes from it<br />

during the distribution compliance period a confirmation or notice to substantially the following effect:<br />

"The <strong>Securities</strong> covered hereby have not been registered under the U.S. <strong>Securities</strong> Act of 1933 (the "<strong>Securities</strong><br />

Act" ) and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons<br />

(i) as part of their distribution at any time or (ii) otherwise until at least 40 days after the Closing Date,<br />

except in accordance with Regulation S under the <strong>Securities</strong> Act. Terms used above have the meanings given<br />

to them by Regulation S."<br />

Terms used in this Section 1 have the meanings given to them by Regulation S under the <strong>Securities</strong> Act.<br />

2. In addition:<br />

(a) the Manager represents and agrees that, except to the extent permitted under United States Treasury<br />

Regulation Section 1.163-5(c)(2)(i)(D) (the "D Rules"), (a) it has not offered or sold, and during the restricted<br />

period will not offer or sell, any Notes to a person who is within the United States or its possessions or to a<br />

United States person, and (b) it has not delivered and will not deliver in definitive form within the United<br />

States or its possessions any Notes that are sold during the restricted period;<br />

(b) the Manager further represents and agrees that it has and, throughout the restricted period will have, in effect<br />

procedures reasonably designed to ensure that its employees or agents who are directly engaged in selling<br />

Notes are aware that the Notes may not be offered or sold during the restricted period to a person who is<br />

within the United States or its possessions or to a United States person, except as permitted by the D Rules;<br />

(c) if it is a United States person, the Manager represents that it is acquiring the Notes for purposes of resale in<br />

connection with their original issuance and if it retains Notes for its own account, it will only do so in accordance<br />

with the requirements of United States Treasury Regulation Section 1.163-5(c)(2)(i)(D)(6);<br />

(d) with respect to each affiliate of the Manager that acquires from it Notes for the purpose of offering or selling<br />

such Notes during the restricted period, the Manager either (a) repeats and confirms the representations and<br />

agreements contained in Section 2(a), (b) and (c) on its behalf or (b) agrees that it will obtain from such affiliate<br />

for the benefit of the Issuer the representations and agreements contained in Sections 2(a), (b) and (c);<br />

(e) the Manager represents and agrees that it will obtain from any distributor (within the meaning of United<br />

States Treas. Reg. §1.163-5(c)(2)(i)(D)(ii)) that purchases any of the Notes from the Manager (except a distributor<br />

who is an affiliate of the Manager), for the benefit of the Issuer and the Manager, an agreement to comply<br />

with the provisions, representations and agreements contained in this sub-paragraph, as if such distributor<br />

were the Manager under the Subscription Agreement; and<br />

(f) terms used in this Section 2 have the meanings given to them by Regulation S and by the United States<br />

Internal Revenue Code and regulations thereunder, including the D Rules.<br />

Jersey<br />

The Notes may not be offered to, sold to or purchased or held by, or for the account of, persons (other than financial<br />

institutions in the ordinary course of business) resident for income tax purposes in the Island of Jersey.<br />

192


General<br />

No action has been taken by the Issuer or the Manager which would or is intended to permit a public offer of Notes<br />

in any country or jurisdiction where action for that purpose is required. Accordingly, the Manager has undertaken that<br />

it will not, directly or indirectly, offer or sell any Notes or distribute or publish any offering <strong>circular</strong>, prospectus, form<br />

of application, advertisement or other document or information in any country or jurisdiction, except under circumstances<br />

which will, to the best of its knowledge and belief, result in compliance with any applicable laws and regulations<br />

and all offers and sales of Notes by it will be made on the same terms.<br />

193


GLOSSARY<br />

€ .............................................................................................................................................................................. A2, 145<br />

Acceleration Event ............................................................................................................................................ 30, 127, 140<br />

Account Bank ..................................................................................................................................................................140<br />

Account Bank Agreement ........................................................................................................................................ 32, 140<br />

Additional Termination Event.............................................................................................................................. 24, 93, 140<br />

Additional Work Out Amount.................................................................................................................................... 22, 140<br />

Agency Agreement ..........................................................................................................................................................140<br />

Aggregate Evaluated Work Out Proceeds .............................................................................................................. 22, 140<br />

Aggregate Evaluated Write-off Amount .................................................................................................................. 22, 140<br />

APR .................................................................................................................................................................................... 80<br />

automatically approved loans ........................................................................................................................................114<br />

Available Distribution Funds......................................................................................................................................14, 140<br />

BFH ..................................................................................................................................................................................186<br />

Bridge Telerate Page........................................................................................................................................................149<br />

Business Day .............................................................................................................................................................. 4, 141<br />

Calculation Date ..............................................................................................................................................................141<br />

Cash Administration Agreement ........................................................................................................................ 31, 99, 141<br />

Cash Administrator .............................................................................................................................................. 3, 99, 141<br />

Class ..............................................................................................................................................................C1, 4, 141, 152<br />

Class A Notes ....................................................................................................................................................C1, 141, 151<br />

Class A1 Notes ..................................................................................................................................................C1, 141, 151<br />

Class A1 Notes Final Maturity Date .................................................................................................................................. 8<br />

Class A2 Notes ..................................................................................................................................................C1, 141, 151<br />

Class B Notes ....................................................................................................................................................C1, 141, 151<br />

Class C Notes ....................................................................................................................................................C1, 141, 151<br />

Class D Notes ....................................................................................................................................................C1, 141, 151<br />

Clean-Up Call ....................................................................................................................................................11, 141, 162<br />

Clearing System ..............................................................................................................................................................141<br />

Clearstream Germany............................................................................................................................................C2, 5, 141<br />

Clearstream Luxembourg......................................................................................................................................C2, 5, 141<br />

Closing Date ....................................................................................................................................................................141<br />

Collateral........................................................................................................................................................C2, 6, 136, 141<br />

Collateral Deposit Account ...................................................................................................................................... 32, 130<br />

Collateral Interest Account .............................................................................................................................. 32, 131, 142<br />

Collateral Value.......................................................................................................................................................... 29, 126<br />

Collection Period ........................................................................................................................................................ 8, 142<br />

Conditions..........................................................................................................................................................C1, 142, 168<br />

Corporate Administration Agreement ...................................................................................................................... 43, 142<br />

Corporate Administrator ..................................................................................................................................................142<br />

Credit Default Swap Agreement ........................................................................................................................C1, 88, 142<br />

Credit Event..........................................................................................................................................................19, 89, 142<br />

Credit Protection Payment............................................................................................................................C2, 18, 88, 142<br />

Custodian..........................................................................................................................................................................142<br />

Custody Agreement .................................................................................................................................................. 32, 142<br />

Cut-off Date ......................................................................................................................................................................143<br />

D Rules..............................................................................................................................................................................192<br />

194


Data Protection Agreement ...................................................................................................................................... 23, 143<br />

Data Provider .................................................................................................................................................. 3, 23, 98, 143<br />

Data Trustee ....................................................................................................................................................................143<br />

Delayed Payment Amount ........................................................................................................................................14, 143<br />

Determination Date .................................................................................................................................................... 8, 143<br />

Determination Period .................................................................................................................................................. 8, 143<br />

<strong>DG</strong> BANK ..................................................................................................................................................................C2, 124<br />

<strong>DG</strong> HYP ................................................................................................................................................................C1, 45, 143<br />

<strong>DG</strong> HYP Mortgage Pfandbrief Cover Register ................................................................................................ 25, 102, 143<br />

<strong>DG</strong> HYP Pfandbriefe .......................................................................................................................................... 6, 136, 143<br />

<strong>DG</strong> HYP Secured Obligations..................................................................................................................................129, 172<br />

<strong>DG</strong>RI .................................................................................................................................................................................. 71<br />

Distribution Date ........................................................................................................................................................ 8, 143<br />

Early Redemption ......................................................................................................................................................11, 143<br />

Early Redemption Event ....................................................................................................................................11, 143, 162<br />

EC Treaty ..........................................................................................................................................................................143<br />

Eligibility Criteria .............................................................................................................................................. 26, 102, 143<br />

Eligibility Criterion .................................................................................................................................................... 26, 102<br />

Eligible Investments.......................................................................................................................................... 31, 138, 144<br />

Enforcement Notice ............................................................................................................................13, 34, 145, 153, 173<br />

English Deed of Assignment ..........................................................................................................................................145<br />

English Security Assets ..................................................................................................................................................145<br />

EURIBOR ..................................................................................................................................................................145, 158<br />

euro............................................................................................................................................................................ A2, 145<br />

Euroclear ................................................................................................................................................................C2, 5, 145<br />

Euro-Zone ........................................................................................................................................................................145<br />

Evaluated Amounts .......................................................................................................................................... 94, 145, 164<br />

Evaluated Work Out Proceeds ................................................................................................................................ 22, 145<br />

Evaluated Write-off Amount .................................................................................................................................... 22, 145<br />

Event of Default..................................................................................................................................................12, 146, 163<br />

Exchange Date ........................................................................................................................................................146, 152<br />

Expense Payments ..............................................................................................................................................15, 96, 146<br />

Final Determination Date ............................................................................................................................................ 8, 146<br />

Final Distribution Date ................................................................................................................................................ 9, 146<br />

Final Maturity Date...................................................................................................................................................... 9, 146<br />

Final Reporting Date ........................................................................................................................................................ 21<br />

Fitch ...................................................................................................................................................................... A1, 5, 146<br />

Fixing Date........................................................................................................................................................................146<br />

German Banking Supervisory Authority..........................................................................................................................136<br />

German Repo Counterparty Pledge Agreement ............................................................................................................146<br />

German Security Documents ..........................................................................................................................................146<br />

German Subordinated Pledge and Security Agreement................................................................................................146<br />

German Swap Counterparty Pledge Agreement ............................................................................................................146<br />

German Trust Agreement ................................................................................................................................................146<br />

Global Notes ................................................................................................................................................ A1, 5, 146, 152<br />

Independent Auditor ........................................................................................................................................................146<br />

Independent Auditor Confirmation ............................................................................................................ 21, 92, 146, 156<br />

195


Independent Valuation Expert.................................................................................................................... 21, 94, 146, 164<br />

individually approved loans ............................................................................................................................................114<br />

Initial Principal Balance ........................................................................................................................................C1, 4, 146<br />

Interest Amount........................................................................................................................................................146, 159<br />

Interest Payment Date ........................................................................................................................................7, 146, 158<br />

Interest Period......................................................................................................................................................7, 146, 158<br />

Interest Rate........................................................................................................................................................ 6, 146, 158<br />

Interest Transaction Account .......................................................................................................................... 33, 131, 147<br />

Issuer......................................................................................................................................................C1, 3, 147, 168, 182<br />

Kreditwerk.......................................................................................................................................................................... 55<br />

lending value ............................................................................................................................................................ 25, 102<br />

LTV .................................................................................................................................................................... 25, 102, 115<br />

Luxembourg Paying Agent ..........................................................................................................................................3, 147<br />

Manager ............................................................................................................................................................C2, 147, 191<br />

Margin Deficit ............................................................................................................................................................ 29, 126<br />

Margin Surplus .......................................................................................................................................................... 30, 127<br />

mortgage ..........................................................................................................................................................................147<br />

Mortgage Banking Act...................................................................................................................................... 26, 102, 136<br />

Mortgage Loans........................................................................................................................................ 24, 101, 147, 155<br />

Note...................................................................................................................................................................................... 4<br />

Note Calculation Agent ........................................................................................................................................ 3, 99, 147<br />

Note Principal Amount ..........................................................................................................................................C1, 4, 147<br />

Note Principal Payment ..................................................................................................................................................147<br />

Noteholder ........................................................................................................................................................................147<br />

Notes......................................................................................................................................................C1, 4, 147, 151, 168<br />

Notional Repo Amount .............................................................................................................................. 28, 88, 125, 147<br />

Notional Swap Amount ................................................................................................................................................18, 88<br />

<strong>Offering</strong> Circular ..............................................................................................................................................................168<br />

Order of Seniority ..............................................................................................................................................10, 147, 160<br />

Pay-Down Amount........................................................................................................................................ 9, 93, 147, 160<br />

Pay-Down Event .......................................................................................................................................... 9, 92, 147, 160<br />

Paying Agents ..................................................................................................................................................................147<br />

Permanent Global Note................................................................................................................................ A1, 5, 147, 152<br />

Pool Factor ..............................................................................................................................................................147, 161<br />

Post Enforcement Priority of Payments............................................................................................................................16<br />

Pre-Enforcement Priority of Interest Payments................................................................................................................15<br />

Pre-Enforcement Priority of Principal Payments..............................................................................................................16<br />

prepayment curve ............................................................................................................................................................ 80<br />

Principal Amount Outstanding .................................................................................................................................. 5, 147<br />

Principal Balance ........................................................................................................................................................ 4, 147<br />

Principal Collection Account ............................................................................................................................ 32, 131, 148<br />

Principal Paying Agent................................................................................................................................................ 3, 148<br />

Principal Transaction Account ........................................................................................................................ 33, 131, 148<br />

Purchase Date .......................................................................................................................................................... 28, 148<br />

Purchase Price .......................................................................................................................................................... 29, 148<br />

Quarterly Write-off Amount................................................................................................................................10, 148, 161<br />

Rabobank............................................................................................................................................................................71<br />

196


Rating Agencies.................................................................................................................................................... A1, 5, 148<br />

Rating Agency .............................................................................................................................................................. A1, 5<br />

Reference Banks ..............................................................................................................................................................148<br />

Reference Entities ..............................................................................................................................................C1, 25, 101<br />

Reference Entity ..............................................................................................................................................................155<br />

Reference List ............................................................................................................................................ 23, 98, 148, 155<br />

Reference Obligation Reduction Amount.................................................................................................... 9, 92, 148, 160<br />

Reference Obligations ................................................................................................................................C1, 25, 101, 198<br />

Reference Portfolio ............................................................................................................................C1, 24, 101, 148, 155<br />

Reference Register .................................................................................................................................... 23, 98, 148, 155<br />

Regulation S.............................................................................................................................................................. A2, 191<br />

Relevant Margin .................................................................................................................................................. 6, 148, 158<br />

Repo Calculation Agent........................................................................................................................................ 3, 99, 148<br />

Repo Counterparty........................................................................................................................................C2, 3, 124, 148<br />

Repo Interest....................................................................................................................................................125, 148, 158<br />

Repo Rate.......................................................................................................................................................... 29, 125, 148<br />

Reporting Date .................................................................................................................................................................. 21<br />

Repo-Transaction...................................................................................................................................... 28, 125, 148, 157<br />

Repo-Transaction Period.................................................................................................................................. 28, 125, 149<br />

Repurchase Agreement ..........................................................................................................................C2, 6, 28, 124, 149<br />

Repurchase Date ...................................................................................................................................................... 28, 149<br />

Repurchase Price...................................................................................................................................................... 29, 149<br />

Required Collateral Value ........................................................................................................................................ 29, 126<br />

residential properties ......................................................................................................................................................101<br />

residential property .......................................................................................................................................... 25, 101, 149<br />

Reverse Order of Seniority ................................................................................................................................10, 149, 161<br />

RTGS ................................................................................................................................................................................126<br />

Screen Rate ......................................................................................................................................................................149<br />

Secured Creditors ............................................................................................................................................................129<br />

<strong>Securities</strong> Act................................................................................................................................................ A1, 3, 191, 192<br />

Security Assets ........................................................................................................................................ 33, 130, 149, 171<br />

Security Documents.................................................................................................................................................. 33, 149<br />

Security Interests ...................................................................................................................................................... 33, 149<br />

Security Trustee........................................................................................................................................ A1, 149, 168, 182<br />

Service Providers ..............................................................................................................................................15, 129, 174<br />

Standard & Poor's ................................................................................................................................................ A1, 5, 149<br />

Subscription Agreement ................................................................................................................................................ 191<br />

substitute repo counterparty ..........................................................................................................................................157<br />

substitute repurchase agreement....................................................................................................................................157<br />

Swap Calculation Agent ...................................................................................................................................... 3, 99, 149<br />

Swap Confirmation............................................................................................................................................................ 88<br />

Swap Counterparty ........................................................................................................................................C1, 3, 88, 149<br />

Swap Counterparty Report ........................................................................................................................................ 20, 92<br />

Swap Payment Date .................................................................................................................................................. 9, 149<br />

Swap Premium ............................................................................................................................................ 23, 96, 149, 156<br />

TARGET Business Day................................................................................................................................................ 4, 149<br />

TARGET System .......................................................................................................................................................... 4, 149<br />

Tax, Taxes ........................................................................................................................................................................150<br />

197


Tax Event ..........................................................................................................................................................................127<br />

Tax Gross-Up Amounts..............................................................................................................................................12, 150<br />

Tax Redemption Event ......................................................................................................................................11, 150, 162<br />

Temporary Global Note ................................................................................................................................ A1, 5, 150, 152<br />

Termination Event .............................................................................................................................................. 24, 93, 150<br />

Termination Fee .......................................................................................................................................................... 24, 97<br />

Third Party Rights ............................................................................................................................................................ 25<br />

Transaction Account Bank.......................................................................................................................................... 3, 150<br />

Transaction Account Bank Agreement ............................................................................................................ 33, 131, 150<br />

Transaction Accounts ...................................................................................................................................... 33, 131, 150<br />

Transaction Documents ..................................................................................................................................................150<br />

Transaction Secured Creditors ................................................................................................................ 33, 129, 150, 169<br />

Transaction Secured Creditors Secured Obligations ............................................................................................129, 171<br />

Transaction Security Interests.......................................................................................................................... 33, 132, 150<br />

Trustee Claim....................................................................................................................................................................171<br />

Valuation Criteria ...................................................................................................................................................... 94, 150<br />

Valuation Date ............................................................................................................................................................ 9, 150<br />

Valuation Report.......................................................................................................................................... 21, 94, 150, 164<br />

VR Kreditwerk AG .................................................................................................................................................... 45, 114<br />

WAL .......................................................................................................................................................... 83, 84, 85, 86, 87<br />

Weighted Average Life...................................................................................................................................................... 80<br />

Work Out ............................................................................................................................................................19, 121, 150<br />

Work Out Amount...................................................................................................................................................... 20, 151<br />

Work Out Expenses ............................................................................................................................................ 20, 91, 151<br />

Work Out Proceeds ............................................................................................................................................ 20, 91, 151<br />

Write-off Amount ................................................................................................................................................ 20, 91, 151<br />

Write-off Event ............................................................................................................................................10, 93, 151, 161<br />

198


GENERAL INFORMATION<br />

1. The issue of the Notes was authorised by resolutions dated 20th October, 2000, of the Board of Directors of the<br />

Issuer.<br />

2. In connection with the application to list the Notes on the Luxembourg Stock Exchange, copies of the<br />

Memorandum and Articles of Association of the Issuer and a legal notice relating to the issue of the Notes will be<br />

deposited prior to listing with the Chief Registrar of the District Court of Luxembourg (Greffier en Chef du Tribunal<br />

d'Arrondissement de et à Luxembourg) where such documents may be examined and copies obtained upon<br />

request.<br />

3. Payments and transfers of the Notes will be settled through Clearstream Germany, Euroclear and Clearstream<br />

Luxembourg. The Notes have been accepted for clearing by Clearstream Germany, Euroclear and Clearstream<br />

Luxembourg.<br />

4. All notices regarding the Notes will be published: (a) so long as the Notes are listed on the Luxembourg Stock<br />

Exchange, in a newspaper with general circulation in Luxembourg or in such other manner as conforms to the<br />

rules of the Luxembourg Stock Exchange or (b) so long as the Notes are listed on the Frankfurt Stock Exchange,<br />

in a newspaper with general circulation in Germany or in such other manner as conforms to the rules of the<br />

Frankfurt Stock Exchange.<br />

5. According to Chapter VI, Article 3, point A/II/2 of the Rules and Regulations of the Luxembourg Stock Exchange<br />

the Notes of each Class shall be freely transferable and therefore no transaction made on the Luxembourg Stock<br />

Exchange shall be cancelled.<br />

6. Clearing Codes:<br />

Class A1 Notes<br />

Wertpapier-Kenn-Nummer 571 230<br />

ISIN DE000 571 230 1<br />

Common Code 11975321<br />

Class A2 Notes<br />

Wertpapier-Kenn-Nummer 571 231<br />

ISIN DE000 571 231 9<br />

Common Code 11975348<br />

Class B Notes<br />

Wertpapier-Kenn-Nummer 571 232<br />

ISIN DE000 571 232 7<br />

Common Code 11975364<br />

Class C Notes<br />

Wertpapier-Kenn-Nummer 571 233<br />

ISIN DE000 571 233 5<br />

Common Code 11975372<br />

199


Class D Notes<br />

Wertpapier-Kenn-Nummer 571 234<br />

ISIN DE000 571 234 3<br />

Common Code 11975399<br />

7. Since 25th August, 2000 (being the date of incorporation of the Issuer) and save as disclosed in this document,<br />

there has been no material adverse change in the financial position or prospects of the Issuer and no significant<br />

change in the trading or financial position of the Issuer.<br />

8. The Issuer is not involved in any legal or arbitration proceedings which may have, or have had since the date of<br />

incorporation of the Issuer, a significant effect on the Issuer's financial position nor, so far as the Issuer is aware,<br />

are any such proceedings pending or threatened.<br />

9. Save as disclosed in "The Issuer" above, as at the date of this document, the Issuer has no outstanding loan capital,<br />

borrowings, indebtedness or contingent liabilities, nor has the Issuer created any mortgages or charges or given<br />

any guarantees.<br />

10.Copies of the following documents may be inspected during normal business hours on any weekday (excluding<br />

Saturdays, Sundays and public holidays) from the date hereof and so long as any of the Notes remain outstanding<br />

at the specified offices of the Security Trustee in London, the Principal Paying Agent for the time being in Frankfurt<br />

am Main and the Luxembourg Paying Agent for the time being in Luxembourg:<br />

(A) the Memorandum and Articles of Association of the Issuer:<br />

(B) the Master Definitions and Interpretation Schedule, the Conditions of the Notes and the Agency Agreement;<br />

(C) the Credit Default Swap Agreement, the Data Protection Agreement, the Repurchase Agreement, the Cash<br />

Administration Agreement, the Account Bank Agreement, the Custody Agreement, the Transaction Account<br />

Bank Agreement, the German Swap Counterparty Pledge Agreement, the German Repo Counterparty Pledge<br />

Agreement, the German Subordinated Pledge and Security Agreement, the German Trust Agreement, the<br />

English Deed of Assignment and the Corporate Administration Agreement;<br />

(D) the annual financial statements of the Issuer;<br />

(E) the Investor Report prepared by the Cash Administrator on an quarterly basis, which will reflect the composition<br />

of the Reference Portfolio; and<br />

(F) the consolidated and non-consolidated audited annual financial statements of the Swap Counterparty and the<br />

Repo Counterparty and any interim reports.<br />

Copies of this <strong>Offering</strong> Circular may be obtained during the times referred to above at the specified offices of the<br />

Security Trustee in London, the Principal Paying Agent for the time being in Frankfurt am Main and the Luxembourg<br />

Paying Agent for the time being in Luxembourg.<br />

200


UPDATE IN CONNECTION WITH THE LISTING OF THE NOTES ON THE<br />

FRANKFURT STOCK EXCHANGE AND ON THE LUXEMBOURG STOCK EXCHANGE<br />

1. Application has been made for the Notes to be traded and officially quoted on the Frankfurt Stock Exchange and<br />

on the Luxembourg Stock Exchange.<br />

2. <strong>DG</strong> BANK and Rabobank decided in the beginning of November 2000 to halt their project aimed at creating a joint<br />

investment and international corporate finance bank. This decision was taken after both institutions realised that<br />

they had substantial difficulties in positioning and business strategy. Both parties saw no possibility to come up<br />

with a joint business strategy within the given time frame.<br />

Both partners choose instead to focus on joining forces in the investment banking business. Accordingly,<br />

<strong>DG</strong> BANK will recommend to its supervisory board to acquire a 50 per cent stake in Rabo <strong>Securities</strong> N.V., the professional<br />

equity arm of the Rabobank Group, by year-end. <strong>DG</strong>-Rabo <strong>Securities</strong>, as this joint platform will be<br />

named, is intended to be the base from which both institutions will grow their investment banking activities with<br />

regard to initial public offerings, institutional sales and trading and mergers and acquisitions. This will be for the<br />

benefit of issuers and investors and will also strengthen the mutual border services to the customers of the local<br />

cooperative banks.<br />

3. a) Copies of the Issuer’s annual financial statements as well as the Investor Report may be obtained during<br />

normal business hours on any weekday (excluding Saturdays, Sundays and public holidays) at the specified<br />

offices of the Security Trustee in London, the Principal Paying Agent for the time being in Frankfurt am Main<br />

and the Luxembourg Paying Agent for the time being in Luxembourg.<br />

The Issuer does not publish any interim reports.<br />

b) Copies of any unaudited semi-annual interim reports of the Repo Counterparty and copies of any available<br />

unaudited quarterly or semi-annual interim reports of the Swap Counterparty may be obtained during normal<br />

business hours on any weekday (excluding Saturdays, Sundays and public holidays) at the specified<br />

offices of the Security Trustee in London, the Principal Paying Agent for the time being in Frankfurt am Main<br />

and the Luxembourg Paying Agent for the time being in Luxembourg.<br />

201


BAUHAUS SECURITIES LIMITED<br />

Whiteley Chambers<br />

Don Street<br />

St. Helier, Jersey, JE4 9WG<br />

SECURITY TRUSTEE<br />

The Chase Manhattan Bank<br />

9 Thomas More Street<br />

London E1 9YT<br />

LUXEMBOURG LISTING AGENT<br />

Kredietbank S.A. Luxembourgeoise<br />

43 Boulevard Royal<br />

29 55 Luxembourg<br />

PRINCIPAL PAYING AGENT LUXEMBOURG PAYING AGENT<br />

Chase Manhattan Bank AG Chase Manhattan Bank Luxembourg S.A.<br />

Grüneburgweg 2 5 rue Plaetis<br />

60322 Frankfurt am Main 22 38 Luxembourg Grund<br />

LEGAL ADVISERS<br />

To the Manager<br />

as to German law and English law<br />

Allen & Overy<br />

Taunustor 2<br />

60311 Frankfurt am Main<br />

To the Manager<br />

as to Jersey law<br />

Ogier & Le Masurier<br />

Whiteley Chambers<br />

Don Street<br />

St. Helier, Jersey JE4 9WG<br />

202

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