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Project Vintage Final due diligence report

25 March 2009

TRANSACTION SERVICES

ADVISORY

KPMG LLP Transaction Services 1 The Embankment Neville Street LEEDS LS1 4DW

Tel +44 (0) 113 231 3000 Fax +44 (0) 113 231 3186

Private & Confidential The Directors Cooperative Financial Services 4th Floor Miller Street Manchester M60 0AL 25 March 2009

Dear Ladies and Gentlemen

Project Vintage

In accordance with the terms of reference set out in our engagement letter dated 18 September 2008 and the variation letter dated 23 October 2008, we enclose our report on Burgundy (Project Vintage). The scope of work as set out in our engagement letter dated 18 September 2008 and variation letter dated 23 October 2008 is detailed in Appendix 1 to this report and those terms of reference comprise the agreed scope of our enquiries, directed at those issues which you determined to be critical to your investment. You should note that our findings do not constitute recommendations to you as to whether or not you should proceed with the proposed transaction.

Our report is for information of the addressee only and should not be quoted or referred to, in whole or in part, without our prior written consent, except as specifically provided in our engagement letter. The terms of reference for this report are included in our engagement letter dated 9 March 2008 and have been agreed by the addressee and we will not accept responsibility to any other party to whom the report may be shown or who may acquire a copy of the report.

Yours faithfully

KPMG LLP

KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative

Registered in England No OC301540 Registered office: 8 Salisbury Square, London EC4Y 8BB

This document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2008 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

2

Important notice

Our work commenced on 4 August 2008 and this report reflects our fieldwork up to 18 December 2008.

This engagement is not an assurance engagement conducted in accordance with any generally accepted assurance standards and consequently no assurance opinion is expressed

Our report makes reference to ‘KPMG Analysis’; this indicates only that we have (where specified) undertaken certain analytical activities on the underlying data to arrive at the information presented; we do not accept responsibility for the underlying data

The numerical data presented in our report has been imported from Excel spreadsheets and may include minor rounding differences as a consequence

The contents of our report have not been reviewed in detail by the directors of Burgundy to confirm the factual accuracy of the report

We accept no responsibility or liability for the findings or reports of legal and other professional advisers even though we have referred to their findings and/or reports in our report

The prospective financial information set out within our report has been prepared by Burgundy; we do not accept responsibility for such information. We must emphasise that the realisation of the prospective financial information is dependent on the continuing validity of the assumptions on which it is based. The assumptions will need to be reviewed and revised to reflect any changes in trading patterns, cost structures or the direction of the business as they emerge. We accept no responsibility for the realisation of the prospective financial information. Actual results are likely to be different from those shown in the prospective financial information because events and circumstances frequently do not occur as expected, and the differences may be material

The analysis of ‘adjusted’ earnings is for indicative purposes only. We have sought to illustrate the effect on earnings of adjusting for those items identified in the course of our work that may be considered to be 'non-recurring' or 'exceptional' or otherwise unrepresentative of the trend in earnings using criteria established by Claret. However the selection and quantification of such adjustments is necessarily judgmental. Because there is no authoritative literature or common standard with respect to the calculation of ‘adjusted’ earnings, there is no basis to state whether all appropriate and comparable adjustments have been made. In addition, while the adjustments may indeed relate to items which are 'non-recurring' or 'exceptional' or otherwise unrepresentative of the trend, it is possible that earnings for future periods may be affected by such items, which may be different from the historical items

Limitations of scope We draw your attention to the significant limitations in the scope of our work. We have had very limited access to the premises of Burgundy. Access to the audit files has not been granted

at this stage. Management information available has been restricted to specified documents in a data room and supporting work papers have not be available in all instances. These restrictions have had a corresponding impact on the nature of comments we have been able to make on the financial information available

We do not accept responsibility for such information which remains the responsibility of management. We have satisfied ourselves, so far as possible, that the information presented in our report is consistent with other information which was made available to us in the course of our work in accordance with the terms of our engagement letter. We have not, however, sought to establish the reliability of the sources by reference to other evidence

In preparing this update, our only source of information has been the information contained in the Burgundy data room and various meetings with Burgundy management between 12 August and 18 December 2008

Information provided in the Burgundy data room has not been sufficient to address all areas of our scope. This report focuses on a number of key issues identified in discussion with you and reflects the information with which we have been provided and discussions we have held as noted above. We have also highlighted within this report recommendations for subsequent phases of work should further information be made available


3

Glossary of terms ABS Asset Backed Security

AFS Available For Sale

AHL Amber Homeloans Limited

ALCO Asset and Liability Committee

BCIG Burgundy Capital Investments Group

BI Burgundy International

BMR Burgundy Member Reward

BTL Buy-to-Let

BTS Burgundy Treasury Services

CDS Credit Default SWAP

CII Consumer Indebtedness Index (Experian product)

EIR Effective Interest Rate

EL Expected loss

ERC Early Redemption Charge

FTB First time buyer

FSA Financial Services Authority

FSCS Financial Services Compensation Scheme

FSD Forced Sale Discount

FRN Floating Rate Notes

FY06, FY07, FY08 Financial year ended 31 December 2006, 2007 and 2008

GCC Group Credit Committee

GEB Guaranteed Equity Bond

GEN PRU General Prudential Sourcebook

GIC Guaranteed Investment Contract

HY1 Period from 1 January to 30 June

HY2 Period from 1 July to 31 December

HMRC HM Customs and Revenue

HPI House price index

IBNR Incurred But Not Reported impairment

ICAAP Internal Capital Adequacy Assessment Process

ICG Individual Capital Guidance

IFRS International Financial Reporting Standards

LGD Loss given default

LIBOR London Inter Bank Offered Rate

LTV Loan to Value

MBS Mortgage backed security

MI Management information

MIG Mortgage Indemnity Guarantee

MTN Medium Term Note

NIM Net Interest Margin

PD Probability of default

PIBS Permanent interest bearing shares

RPI Retail Price Index

SIV Special Investment Vehicle

SLS Special Liquidity Scheme

SREP Supervisory review and evaluation process

SVR Standard Variable Rate

TOMS Tax scheme in relation to Foreign Exchange Translation

UTD Up to date

WMS Western Mortgage Services


4

The contacts at KPMG in connection with this report are:

Andrew Walker Financial Sector Group Partner, KPMG LLP Leeds

Tel: +44 113 231 3913 Fax: +44 113 231 3139 [email protected]

Kieran Cooper Financial Sector Group Senior Manager KPMG LLP Leeds


Andrew Nelson Transaction Services Associate Director KPMG LLP Manchester


Katie Clinton Financial Sector Group Senior Manager KPMG LLP Manchester Tel: +44 161 246 4480 Fax: +44 161 838 4040 [email protected]

Executive summary

Overview of business and key financials

Key issues

Residential mortgage lending

Commercial lending

Available for sale assets

Funding and liquidity

Securitisation

Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendices

Contents


5

Executive summary Introduction Scope of work This report summarises the findings of Phase 1 of due diligence. Phase 1 of due diligence focused on ten key areas, which were considered by Claret to be the areas of highest risk. The

key findings in each area are summarised over the following pages of the executive summary

Claret and Burgundy senior management agreed that Phase 1 of due diligence (in both directions) would draw upon information readily available in each business. As a result, certain scope items in connection with lower risk areas, or in respect of which information is not readily available, have been deferred to Phase 2. These items are outlined in Appendix 1. It is anticipated that Phase 2 of due diligence will be completed following approval by the respective Burgundy and Claret boards, most likely in early 2009

Interaction of workstreams We have been engaged to perform work with Claret in three different workstreams of Project Vintage. Our responsibilities, together with an explanation of how and when we will report under

each workstream, are summarised below

We have not been requested, at this stage, to perform any further attestation work on the business case for Project Vintage

Area Focus Status

Due diligence Focus on ten key areas of due diligence under Phase 1 Phase 1 complete and findings summarised in this report which includes responses to questions raised by the CFS RMC on 31 October 2008 and the Combined Claret/Group ARC on 3 November 2008. Where issues have been identified, these are summarised on page 10 and are being rolled forward into combined Vintage capital projections, which ultimately will form part of the business case for Vintage

Synergies Review of projected revenue and cost synergies and comment on ‘achievability’ Findings have been summarised in a separate report, dated 5 November 2008

Transaction structuring

Acquisition assistance, with a focus on deal structure, tax implications, accounting and fair value of assets and liabilities, and commenting on combined capital projections

Principal output will be to comment on combined capital projections, specifically to address approach, key assumptions, key uncertainties and sensitivities. This is anticipated to be completed following agreement of revised capital projections, expected to be completed 19 December 2008


6

Executive summary Headlines (1)

Area Comment

Residential mortgage credit quality

In common with the industry, arrears and losses in specialist lending have been on an increasing trend. The impairment charge for HY108 was £40 million, which was stated after the benefit of changes in impairment methodology and assumptions totalling £18 million (reducing the impairment charge). We understand the further charge for July to October of this year was £18 million (reduced since September due to a £4 million credit in October) bringing the YTD charge to £58 million. The run rate of the monthly charge before management actions is approximately £10 million per month

The forecast charge for the full FY08 remains at £75 million as management believes it will benefit from further changes in methodology, further benefits from Illius and enhancing the effectiveness of collections. In the light of declining house prices and continuing increases in arrears in parts of the portfolio, we consider that the charge may be understated. Burgundy’s forecast charge for FY09 is still being considered by Burgundy, but could also be in the region of £75 million. This will be equally, if not more challenging, as many of the 2008 adjustments are not sustainable

One of the key mitigants to a rising impairment charge in Burgundy is Illius, which acquires repossessed properties for rental. The planned volumes of properties in Illius are 800 by the end of 2008 (with a value of approximately £100 million), which represents 90% of the Group’s planned repossessions. This introduces a significant new economic risk in the form of maintaining rental income in difficult markets, the carrying value of the properties and possible legal / regulatory risk in the light of the Government’s emerging view on limiting repossession volumes

Analysis of data tapes for the Leek Finance 18 and 19 securitisation vehicles has corroborated the management information produced by Burgundy, particularly in connection with its ‘problem cohorts’ of lending originated in H2 06 and H1 07

Commercial lending quality

The fraud case reporting by Burgundy on the residential landlord portfolio identifies five lending cases on which estimated losses are £9.7 million, against which no provision has been booked

Burgundy has exposures to Woolworths as underlying tenants which total £16.4 million. A further exposure of £4.3 million exists in a property which is 1/3 let by MFI. Management has included a £4.8 million provision for these exposures

No other arrears are being experienced in either the housing association or pure commercial lending portfolios as at 31 October 2008

Arrears movements July 2007 to July 2008

Source: Arrears reporting underlying data

0

100

200

300

400

500

600

700

Jun-

07

Jul-0

7

Aug

-07

Sep-

07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep-

08

Res

iden

tial M

ortg

age

Arre

ars

£'m

Member Business BTS Platform

Source: Burgundy 2008 Interim Results / 2007 Annual Report

Composition of commercial book£ billion HY08 FY07 FY06Loans secured on commercial property 2.2 2.1 1.6Loans to Registered Social Landlords (RSLS) 0.8 1.0 1.2Loans secured on residential property 0.7 0.7 0.4

3.7 3.8 3.2


7


Area Comment

Liquidity book

At 30 September 2008, Burgundy had a liquidity base totalling £9.3 billion, which is designated as available for sale assets. The majority of the portfolio (98%) is either A rated or higher. Of the £140 million in BBB rated assets, none are considered impaired by Burgundy, and this remained the case as at 23 October 2008

The fair value adjustments on the AFS book at 30 November 2008 amounted to £648 million (30 June 2008: £139 million). The majority of the deficit arises on the ABS/MBS portfolio, on which the largest fair value adjustments are in respect of holdings issued by Granite (Northern Rock’s securitisation vehicles)

Management is in the process of discussing with the auditors the possibility of transferring a number of the AFS assets to loans and receivables and restating at a mark-to-model value. If agreed, this would be done at their fair value as at 1 July 2008

Burgundy management has identified high risk wholesale counterparty exposures to Lehmans, IKB, Kaupthing and Mazarin & Barion of £130 million, as set out opposite. The recoveries on these assets are highly uncertain, but we would currently suggest an additional provision of £40 million, reflecting the best evidence of possible recoveries at this stage. This has been reflected in the capital projections and Claret management are considering the IKB position further

Detailed analysis on the performance of the mortgage backed securities has identified 21 positions with a nominal value of £244.0 million and a MTM value of £188.4 million, for which there is a high risk of some impairment. Claret management has calculated a potential impairment provision of £65 million on these assets

Liquidity and funding

At 30 September 2008 the profile of Burgundy’s balance sheet was such that non-securitised mortgages were 88% funded by retail deposits

Over 2008 the Group has become increasingly reliant on repo and SLS funding in replacement of longer term commercial paper funding. The liquidity book at 30 September 2008 of £9.7 billion comprises ‘genuine’ liquid balances, (CDs, Gilts and cash) of £6.8 billion (70%) and less liquid balances (primarily ABS/MBS) of £2.9 billion (30%)

Short-term funding roll-over rates are reducing; however, this is partly through strategic choice as opposed to being all market related. A small number of counterparties were lost as a result of the downgrading earlier in the year; predominantly small parties with the exception of L&G and Morley (together £350 million). The rollover rate at 30 September 2008 was 84%

Burgundy performs regular stress testing of liquidity, with focus on the severe firm specific scenario in which both wholesale and retail funding lines are reduced, redemptions are slowed, wholesale funding rollovers are reduced and there is a one-notch credit rating downgrade. The testing shows that Burgundy retains positive liquidity headroom after management actions to curtail new lending

Within the warehouse line agreements, step up rates of between 75-100 bps exist where the funding lines are termed out. Additionally, triggers exist so that if the credit rating of Burgundy were to fall to BBB or below, the GIC accounts would need to be held externally

In the event of a further one notch downgrade of credit rating, Burgundy management believes that funding rollover rates would be reduced further, and has quantified this impact to be in the region of £150-200 million of unsecured and a further £250-500 million of repo over a 12 month period

Source: Counterparty exposures report September 2008

£25.5 £25.1

£10.2 £9.2

£1.1 £1.0

£17.6£19.2

£4.7

£4.3

£11.9£9.4

£0.5 £0.4£2.1 £2.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY07 assets FY07 liabilities H1 2008 assets H1 2008 liabilities

Mortgages Liquid assets Other assets Retail fundsNoteholder funds Wholesale funds Other Capital & reserves

Balance sheet assets and liabilities (December 2007 & June 2008)

Source: Annual Financial Statements December 2007; Half year announcement June 2008

High risk liquidity / banking exposures

£m Gross

Burgundy proposed provision Claret view

Lehmans 90 45 80IKB 25 - -Kaupthing 10 5 9Mazarin & Barion 5 2 4

130 52 93


8


Area Comment

Securitisation Over the history of the programme, Burgundy has issued £9.25 billion equivalent under the public Leek transactions of which £3.4 billion remains securitised (excluding Leek 20 which was used for the SLS programme)

Credit enhancement to protect investors is provided through a combination of subordinated note classes, a reserve fund requirement and excess spread earned within the structures. The capital required to be held against the structures is capped at the level of the first loss reserves (£130 million); however, we note that this is further reduced, to £42 million, as a result of the Dovedale structures

There is a significant amount of headroom between the current loss levels in each vehicle and the first loss recoveries. In the worst instance (Leek 19), the reserve fund is 5 times higher than the cumulative losses experienced to August 2008

The investor reports at 31 August 2008, in which cumulative losses are reported for each securitisation vehicle suggests that losses are increasing by 0.08% of the book per month in the worst instance, Leek 19. At that rate, it would take 31 months until the reserve fund is exhausted, even after the excess spread is exhausted

However, arrears in the later vehicles examined by us (Leek Finance 18 and 19) are increasing rapidly (30% between August and October) which suggests that these vehicles are most at risk of utilising their credit enhancement

The offering circulars made available contain no significant triggers within the securitisation vehicles The Leek 19 portfolio was downgraded in December due to the increasing arrears in the portfolio

Accounting policies

With the exception of GEBs there are no significant accounting policy differences between Burgundy and Claret. However, there are a number of subjective accounting estimates which may differ with those of Claret. These include impairment provisioning, the accounting for investment properties and amortisation of goodwill and intangible assets

Further information is required from Burgundy on the GEBs accounting treatment to fully understand the potential impact of this treatment. Based on information available to us, we believe that the GEBs adjustment of £8 million in HY108 is not acceptable. This benefit is projected to grow to £15 million for FY08; however, we note that this would be a timing adjustment only and all benefit would accrue over the medium term if Claret’s accounting policy was adopted

Taxation At the half year 2008, Burgundy held provisions of £32.3 million for tax uncertainties relating to transfer pricing and foreign exchange planning. Based on our high level assessment, there is a risk that these provisions are understated by £10.9 million (which included un-provided interest estimated at £8.3 million in relation to the foreign exchange planning

With the exception of the above items, there do not appear to be any material open issues The accounts include deferred tax assets of £15.3 million which could be lost on completion of Project

Vintage. This comprises £9.5 million in relation to trading losses which, under the current legislative framework, would be extinguished when Burgundy Society ceases to exist and £4.8 million in relation to IFRS transitional adjustments which would be a loss of the final period for Burgundy Society – this loss could also be extinguished if it cannot be utilised

0.48%

0.38%

0.34%

0.34%

0.25%

0.14%

0.17%

0.04%

Cumulative losses since

issue (% original

balance)

Issue name Outstanding note amount £ equivalent

Reserve fund as % of

outstanding amount

Leek Finance 11 44 19.35%








3,396

0.48%

0.38%

0.34%

0.34%

0.25%

0.14%

0.17%

0.04%


issue (% original

balance)

Issue name Outstanding note amount £ equivalent


outstanding amount









3,396

Burgundy assessment of risk exposure - half year£'m Max Weighting ProvisionForex planning (TOMS) 28.8 95% 27.4Transfer pricing enquiry 12.1 50% 6.1Estimated tax exposures 40.9 33.4

Amounts provided - Provisions in individual entites (26.8) - Provision on consolidation (5.5)Un-provided exposure on Burgundy assessment 1.1Add: Additional 5% provision on TOMS 1.4Add: Interest on unpaid tax re TOMS (net of tax relief) 8.3Un-provided exposure 10.9

Source: Half year memorandum to Burgundy audit committee and KPMG analysis


9


Area Comment

Adjusted earnings

The most significant adjustments relate to one-off profits recognised in H108 (£25.1 million) and subjective reductions in the impairment provision (£18.0 million). Burgundy has also benefitted from a change in accounting estimates in relation to GEBs of £8.0 million. Potential additional exposures relate to further deteriorations in the housing market increasing the impairment charge

In aggregate, adjustments to reported operating profit would create an adjusted loss, although some elements of these are subjective in nature

Some of the earnings adjustments, most significantly, the change in accounting policy on GEBs will have a further impact in H208

We note that any changes in the accounting policy of GEBS is only a change in timing of recognition of income (and is therefore neutral over the medium term) and that improvements realised due to Illius would be continuing, assuming the scheme continues to work

In addition to the adjusted earnings noted opposite, Claret management has estimated the potential impact of further SLS interest costs and FSCS costs going forward. These total £25 million and £22 million post tax respectively in both FY08 and FY09. As the final impact of these has not yet been calculated by Burgundy management, they have not been included in the adjusted earnings table opposite

Pensions The valuation of the Burgundy defined benefit scheme (“DB scheme”) as at 5 April 2008 disclosed an ongoing funding deficit of £28 million. Burgundy has agreed to clear the ongoing deficit with a single lump sum payment of £28 million before the end of 2008. In addition, Burgundy has agreed to pay around £8.5 million a year to the DB scheme in respect of future service benefits

The overall ongoing (cash funding) valuation basis adopted in April 2008 is generally reasonable although the salary growth assumption of price inflation less 0.5% p.a. is unusually low. Burgundy is obliged to fund the impact of higher salary increases should they be granted in the future

At 31 December 2007, the IAS19 disclosures revealed a Funded status of £58 million for the DB scheme although this was reduced to £45 million after allowing for the impact of the surplus cap under IAS19 and the impact of £4 million of unfunded pension liabilities

At 30 September 2008, we estimate that the ongoing funding deficit of £28 million has increased to around £67 million, using consistent assumptions. Moving to the funding assumptions adopted for Claret’s defined benefit scheme would result in a funding deficit of £148 million

At 30 September 2008, we estimate that the IAS19 balance sheet position would show a surplus of £71 million before the application of any surplus cap. Moving to the accounting assumptions adopted for Claret’s defined benefit scheme would result in a surplus of £19 million

Adjusted earnings £'m FY07 HY108 Reported operating profit 114.6 50.1 One-off profits: Gain on VocaLink shares (3.0) Basis book swap rip-ups (14.1) Sale of gilts (4.0) Profit on sale of fixed assets (4.0) (4.0) Total one off items (4.0) (25.1) Adjusted profit after one-off items 110.6 25.0 Total impairment adjustments (15.0) (25.9) Total income adjustments (4.8) (14.2) Total EIR/provision adjustments (10.0) (5.0) Adjusted operating profit/(loss) 80.2 (20.1)


10


Area Comment

Capital The FSA conducted a SREP on Burgundy in August 2008. Key findings were that the ICG will be at least 130.5% of pillar 1 requirement plus £164 million, an increase of approximately £30 million over the interim ICG. The FSA raised significant issues in the areas of capital planning, credit concentration risk, subordination of building society depositors, interest rate risk in the banking book and business risk

Burgundy’s most recent capital headroom at 31 August 2008 was £258 million. Outside of the combined capital work, which is subject to separate due diligence reporting, the latest formal projection of capital headroom at 31 December 2008 was £199 million on the consolidated basis (£53 million lower on the solo basis). Management has also confirmed that current capital burn rate is £15 million per month

As work continues on the capital forecasting, it is likely that the opening position of FY09 capital will change

Burgundy capital surplusActual Actual Forecast

31-Dec-07 30-Jun-08 31-Dec-08Capital requirement 1193 1304 1482Capital resources 1656 1646 1681Surplus 463 342 199


11

Executive summary Summary of differences

A number of differences have been noted as part of the KPMG due diligence process. Those that have not been reflected in the capital planning total £137.8 million of additional expense with a resultant impact on capital

Source: KPMG analysis

Previous issues now adjusted for We understand that the suggested provisions relating to the Lehman's and

Icelandic Bank exposures have now been fully reflected in the combined capital planning along with the de-recognition of the pension asset in the available capital

Capital adjustments have been tax effected (i.e. netted down) Adjustments following due diligence findings Differences in the treatment and quantum of certain assets and liabilities

have come about as part of the due diligence process. These have been captured here to show what impact they would have on the FY09 income statement and capital position (both base case and moderate stress) of Burgundy

1. The FY09 income statements and capital projections have been used as Burgundy management have stated that none of these issues would be reflected in the FY08 statutory accounts

2. Following the receipt of additional information on taxation, we have reduced our estimate of the additional tax provisions we believe are needed to £10.3 million. This consists of increasing the TOMS provision to 100% (from 95%) and including an element of fines and late payment interest

3. We believe the residential impairment provision is understated by circa £25.0 million in FY08 and again in FY09

4. Following a detailed analysis of the MBS and ABS portfolio, we highlighted a number of assets which could show signs of impairment. Claret management has reviewed our work and determined that they believe an impairment provision of £65.0 million is needed against these assets

Adjustments following due diligence findings (continued) 5. Following the nationalisation of Bradford & Bingley and the collapse of

Icelandic banks and London & Scottish Bank, all UK deposit takers are required to pay an element of the interest and capital on loans of circa £20.0 billion to the Financial Services Compensation Scheme (‘FSCS’). The FSCS are using the level of retail deposits to determine how much each entity must pay. Based on current expectations in the market, we believe that Burgundy’s element of this could be as high as £35.0 million in FY08 and at least £20 million per annum for Fy09 to FY11. There is also the potential risk to Burgundy’s share of the capital on these loans

6. In the projections, it is assumed that a further £1.5 billion of SLS funding is received. No additional interest cost has been accounted for on this funding. Claret management believe this would be in the region of £30.0 million per annum

There are three additional areas that have not been considered as part of the transaction to date, due to their timing, which will need to be considered in the strategic plans going forward;

- The impact of a low base rate environment has not been considered within the Strategic Plan Light. This could have a material impact on the margin assumed within the plan and leave the current plan looking optimistic

- The impact of government schemes of mortgage assistance to those in difficulties has also not been considered to date. This would be likely to impact the level of possessions going forward and would impact on income and losses

- Finally, the FSA consultation paper on liquidity has not yet been considered which would significantly impact the funding basis of the combined entity going forward if the plans were to be approved

Due diligence findingsFY08 FY09

£ million Closing reserves PBT Base case Moderate stress NoteOpening balance 1,109.0 47.1 693.9 662.6 1Tax provisions (10.3) - (7.4) (7.4) 2Residential impairment (25.0) (25.0) (36.0) (36.0) 3MBS / ABS impairment (65.0) - (46.8) (46.8) 4FSCS costs (35.0) (20.0) (39.6) (39.6) 5SLS interest costs (2.5) (30.0) (23.4) (23.4) 6Total adjustments (137.8) (75.0) (153.2) (153.2)Closing balance 971.2 (27.9) 540.7 509.3

Capital headroom (FY09)


12

Executive summary Continuing economic impact

The market turmoil continues to lead to areas of uncertainty and further considerations that need to be quantified as part of the due diligence process

Low base rate environment Since the last report, there have been further reductions in the Bank of

England base rate to its lowest point in recent history Many financial institutions are currently working to try and model what the

effect of a low base rate environment will have on their business, and with few examples to draw from across the world which mirror the current UK environment, this is proving difficult

The main areas that Burgundy management has been requested to look at are;

- The impact on any caps in the difference between SVR and base rate within the mortgage products;

- Any floors in the level of rates payable on the savings accounts; and - A more general view of the impact on the overall margin of the business As more information is released by Burgundy, we will analyse it and report

in subsequent papers Recent Government actions The Government had made a number of announcements over the past

month in an attempt to ‘kick-start’ the economy and prevent excessive possessions

In November, the Government announced a scheme whereby they will guarantee amounts of interest on people whose mortgages are in arrears for up to two years. The detail of this guarantee is yet to be seen; however, it appears that the Government will enforce the guarantee where a member of the household has suffered a loss or reduction in income which is preventing them from making their mortgage payments

This could have the impact of delaying the time to possession and also will have adverse consequences for banks as they will need to fund these non-performing assets, and the increased capital they will require if these remain classified as ‘non-performing’ for capital purposes

In December, the FSA released its consultation paper on liquidity. This discusses the possibility of regulated banks and building societies being required to maintain a certain amount of funding (up to 25%) direct from the government

The idea behind this is to prevent the issues faced by Northern Rock, and to a lesser degree by Bradford & Bingley, where the disappearance of the securitisation market and falling retail deposits put significant pressure on the banks to fund their operations

Neither of these scenarios have been modelled by Burgundy as yet

Bank of England base rate November 2007 to December 2008

Source: Bank of England web site

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Perc

ent


13

Executive summary


Key issues


Commercial lending



Securitisation

Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendices

Contents


14

Overview of business Group structure

Activities Group Funding

Key revenue streams Interest income

(wholesale)

Profit on sale of capital assets

Group structure The Burgundy Group comprises Member Business and Burgundy Capital Investment Group (‘BCIG’). Burgundy is owned by the 2.9 million customers who

have Member Business savings or mortgages

The Member Business consists primarily of deposit taking and secured lending activities typical of a traditional building society. As a mutual, the Member Business is not run to maximise profits – it generates only the profit needed to maintain financial strength and invest in the business

BCIG is a portfolio of specialist businesses in which Burgundy has invested members’ capital over the years. The BCIG companies – BTS, Platform and WMS – are run to maximise returns which are shared with members through the Burgundy Member Reward scheme (‘BMR’)

The BCIG businesses have grown significantly over the last few years, expanding Burgundy’s presence in markets such as intermediary lending, third-party mortgage servicing, securitisation and commercial lending. Over the last five years the BCIG businesses have generated almost £230 million in cash payments to the members of Burgundy

There are two key elements of the Burgundy Group: a traditional building society run in the interests of its members and a separate profit centre business (BCIG) which has sought to maximise returns to members through the BMR

The activities of BCIG are more exposed to fluctuations in the macro-economic environment than traditional building societies, which makes the long term reported profitability of the Burgundy Group open to potential significant volatility

Activities Deposit taking and

secured lending


Insurance commission

Mortgage fees

Source: 2008 Interim Results announcement

Burgundy Group

BCIG Member Business Treasury

BMR payment to members

BTS

Activities Funding of BCIG

businesses


Asset sale profits

Platform

Activities Intermediary and

commercial lending


Mortgage fees

WMS

Activities Mortgage servicing

Key revenue streams Servicing fees from

BTS asset acquisitions and external parties


15

Value proposition Remaining mutual and acting in

the membership’s best interest Being financially strong Being ethical, socially responsible

and a model of compliance Being a great place to work, grow

and develop Rewarding members through the

loyalty scheme; and Maintaining an extensive branch

network

Overview of business Products and customers

Savings

Easy access savings

Regular savings

Notice accounts

ISA’s

Savings bands

Investments

Customers

Prime borrowers (Society)

Near prime borrowers (conforming)

Subprime borrowers (Non-conforming)

Residential landlords (Buy-to-let)

Commercial borrowers

Retail and wholesale investors

Treasury Services & WMS

Time deposits

Call accounts

Funding programmes (MTN’s, securitisation and commercial paper)

Portfolio sales and purchases

Servicing of mortgage portfolios

Out of the top five Building Societies, Burgundy has the highest exposure to specialist lending

Mortgages

Fixed rate

Flexible

Offset

Tracker

Buy to let

Unsecured lending

Commercial lending


16

Overview of business Key drivers of financial performance, identified risks and opportunities Division Member Business BCIG

Current position and key drivers of financial performance

Operated on a member basis, not to maximise profit Reported operating profit H108 £42.2 million (FY07: £25.1 million) Decline in adjusted net interest margins (before GEB and EIR model adjustments)

over H108 driven by increased cost of retail funding Benefited from high redemption levels increasing fee income during FY07 and a

good quality loan book with low historical levels of impairment Key drivers are the quality of the loan book, activity and value of the residential

housing market and overhead cost of maintaining branch network

Operated as a profit centre to generate dividend income for the BMR Reported operating profit H108 £7.9 million (FY07: £89.5 million) Platform margin has been impacted by a change in product mix away from higher

margin products and the impact of new lending criteria Commercial income restricted due to cessation of new lending BTS has benefited from the premium of LIBOR over base rate during H108 and

the success of fixed rate swaps

Strategic plans

Increase lending criteria to maximise quality of loan book, maximise retail deposit levels and target a nil net cash outflow position in FY08

Maintain liquidity and capital position Focus on cost reduction and brand awareness

Maintain Platform business through economic downturn and grow WMS offering Avoid commercial lending until market conditions improve Hold assets in BTS until market has recovered

Key opportunities

Large and stable member base Established branch and distribution network which has been recently refurbished Brand investment across FY07 and FY08 through TV advertising Impact of government schemes on mortgage arrears

Platform has a strong market franchise and experienced staff Restricted lending criteria and arrears management processes may help restrict

exposure to future impairment levels Focus on loss recoveries Good experience in securitisations Lower forced sale discounts as a result of the Illius scheme

Key risks Lower redemption volume potentially restricting levels of fee income Increased funding costs in a competitive retail deposit market in order to maintain

liquidity, and due to entry into SLS Long term risk to savings margins as higher margin products are replaced by

lower margins IT systems due for upgrade which could result in significant capital expenditure Increasing arrears Reducing capital headroom Losses on wholesale assets, potential risk of “secondary” exposures Profitability has been increased through the upfront recognition of profit on GEBs

and other one-off adjustments Impact of low base rate environment Impact of FSA’s CP on liquidity Impact of FSCS costs

The sustainability of Platform given economic downturn and increasingly competitive market

Asset sales market not open to BTS Increasing arrears and exposure to further impairment as a result of HPI deflation

and changing nature of Platform book (i.e. Longer life) Exposure to mortgage fraud, especially within the residential investment

Commercial book WMS appears to require infrastructure investment in order to grow as expected Quality of asset purchases, in particular GMAC acquisitions Increased arrears and rating agency downgrades may put at risk early

amortisation of securitisation vehicles (in particular Leek 18 and 19) and require replacement funding at higher costs

The premium of LIBOR over base rate is not expected to continue in the long term which may result in increased hedging cost exposure

Risk on rental income in Illius investment properties


17

Overview of business Key issues summary

We outline below the key risks we have addressed as a priority in phase one, together with further areas of focus to pursue in phase two

Area Issues Earnings Capital Liquidity Recommendations for focus in phase 2

Impairment Adequacy of impairment provisions − asset mix, arrears profile, capital usage, impairment

methodology, key assumptions, Illius, payment arrangements, credit policies

n/a Get further information on roll-out rates, migration of PDs and LGDs by product/security type to understand the key drivers of future loss and possible scenarios

Commercial Quality of commercial loan book − top ten exposures, watch list

n/a In depth review of weak counterparties - watch list as number of new cases shows sign of increase

Securitisation Structure and associated risks − overview, credit enhancement, first loss, impact on capital Extent to which deferred consideration has already

been extracted from vehicles

Wholesale Risks associated with the fair value of the AFS book, ratings profiles

n/a Update on wholesale exposures

Funding/liquidity Understanding of available facilities − maturity analysis, stress testing

n/a

Responses to FSA SREP letter of 29 August 2008 Understand mitigating actions assumed in liability

stress testing

Accounting policies

Consistency of policies with Claret − impact of the application of subjective accounting policies

n/a Clarification of approach to GEBs

Adjusted earnings Impact of one-offs, accounting policies and key risks to earnings n/a Impact of aligning impairment calculation to Claret policies

Impact on FY08 outturn and FY09 forecast

Taxation Significant tax exposures n/a Detailed information is required to comment on Burgundy’s tax status

Further focus on the adequacy of the tax provision in respect of TOMS

Overview We note in the table below the 10 key areas that have been the focus of the Phase I due diligence exercise as agreed with Claret management

The table shows what the key issues have been in each of those areas, and the impact they could have on earnings, capital and liquidity. We also suggest where further work would be recommended as part of a Phase II to fully understand the position pre-completion


18

Overview of business Key issues summary We outline below the key risks we have addressed as a priority in phase one, together with further areas of focus to pursue in phase two

Area Issues Earnings Capital Liquidity Recommendations for focus in phase 2

Pensions Appropriateness of Burgundy’s funding and accounting assumptions compared to Claret’s assumptions, in particular the unusually optimistic low salary assumption

Capital requirements for pensions − Consider the additional capital requirement under GENPRU

1.2.82. Now that the deficit will have grown since 5 April 2008 Impact on Claret defined benefit plan Capital treatment of pensions surplus (£71 million error at 30

September 2008)

n/a

Consider Burgundy and Claret Trustees’ reaction Confirm treatment of pensions for capital adequacy

purposes (to be confirmed with the FSA) Consider mitigation strategies for DB scheme risk and

volatility Confirm treatment of sex equalisation reserve Clarify capital treatment with FSA of pensions surplus

under GEN PRU

Capital Understanding current position and headroom − key risks and subjectivities, sensitivities

n/a Understand further key drivers of capital resources In collaboration with Burgundy, address various capital

forecast scenarios


19

Key financials Financial summary and key ratios

Overview Burgundy is the second largest building society in the United Kingdom, ranking only behind Nationwide Building Society

Burgundy operates through a branch network of 254 branches. It also operates via a joint venture company, Mutual Plus, a branch sharing arrangement with Yorkshire Building Society, which operates a further 134 branches. Burgundy’s branch network increased significantly in 2006 following the acquisition of the Bristol & West branch network, which comprised 97 branches, 850,000 customers and deposits of £4.5 billion

Burgundy’s strategic priorities in the present market conditions are as follows (in order of priority):

1. Liquidity

2. Capital / profit

3. Key themes:

− cost reduction

− leadership

− brand

4. Growth

Source: KPMG Building Societies Database 2003-08

Key financial summary Year ended 31 December Group FY03 Group FY04 Group FY05 Group FY06 Group FY07 Group FY08 Total assets (£’m) 20,929 25,219 32,433 35,149 36,827 35,269 Profit/(loss) after tax (£’m) 65.3 70.2 51.2 57.0 49.3 36.2 Profit/(loss) after tax as a % of mean total assets (%) 0.33 0.30 0.18 0.17 0.14 0.10 Management expenses as a % of mean total assets (%) 0.86 0.78 0.73 0.82 0.74 0.71 Cost/income ratio (%) 53.62 55.73 61.92 67.01 67.40 61.43 Liquid assets (%) 31.08 31.37 40.30 40.55 34.78 31.8 Free capital including supplementary capital (%) 6.92 7.02 6.02 6.18 5.93 n/a Supplementary capital as a % of free capital (%) 26.93 37.37 49.78 50.52 49.68 n/a Deposits (%) 42.10 44.49 40.30 38.01 40.19 49.16 Deposits increase/ (decrease) over year (£’m) 1,581.1 1,382.3 (119.2) 1,171.7 1,296.3 305.8 Loans fully secured on residential property (%) 88.89 91.97 88.94 91.23 89.85 91.69

In line with the market and its peers, Burgundy demonstrated healthy growth during the five year period to FY06

Since the onset of market difficulties, however, growth slowed considerably in FY08 to date


20

Overview of business Market position

FY07 comparison

Liquid assets

ratio (%)

Rank (out of

21)

Gross capital

(%)

Rank (out of

21)

Free capita

l (%)

Rank (out of

21) Burgundy 34.80% 1 7.00% 7 5.90% 7

Average of Peer Group societies

23.98% n/a 6.63% n/a 5.86% n/a

HY108 comparison Liquid assets ratio

% Gross capital

% Free capital

% Burgundy 27.0 6.0 5.3 Skipton 27.1 7.9 5.3 Principality 23.4 7.8 n/a

In 2007, Burgundy ranked 12 in the UK market in terms of mortgage balances outstanding and 13 in relation to gross mortgage lending

Source: Half year announcements

Market position In 2007, Burgundy ranked 12 in the market in terms of mortgage balances

outstanding with £23.4 billion of loans representing a 2.0% market share. In comparison, Claret ranked 30 with £3.3 billion of mortgage balances outstanding

In terms of gross mortgage lending, Burgundy ranked 13 in 2007 (in comparison to 31 in 2006) with total advances of £6.2 billion representing an estimated market share of 0.3%

Strategic priorities Burgundy has reported that its key strategic priorities in the current market

circumstances, that is key areas of strategic focus are liquidity and capital

The table opposite shows Burgundy’s reported liquidity and capital ratios compared with the Societies peer group average for 2007 and those Societies who have declared results for HY108

Market positioning of the Building Society sector The tables on FY07 show extracts from the KPMG publication “Building

Societies Database 2008” which is based on reported results for 2007. Claret Bank has also been added for comparison purposes

Burgundy’s total assets growth was the weakest in its peer group in 2007. This is however in line with its reported strategic priorities

Of greater significance is the reducing trend of group profits (ranked 15th) in 2007, which has continued into 2008. Of the four societies which have reported results for the six months ended June 2008, Burgundy’s profit change compared with the same period in 2007 was ranked 15th. Claret’s profit change from HY108 versus HY107 was (34.6)%

Source: KPMG Building Societies Database 2008 and Claret Bank plc statutory accounts 2007

Market positioning in the Building Society sector

Name Group total assets £’bn

Group asset

growth % Rank (out

of 21)

Group profit for year £m

Group profit

change % Rank (out

of 21)

Group NIM/mean

assets Rank (out

of 20)

Group cost/ income

ratio Rank (out

of 21) Burgundy 36.8 4.8 21 44.9 (13.51) 15 0.87% 15 67.6% 12 Average of Peer Group Societies’ n/a 16.7 n/a n/a (3.81) n/a 0.98% n/a 64.4% n/a Claret Bank plc 13.1 2.4 n/a 49.1 (34.6) n/a 2.59% n/a 64.8% n/a Note: Based on top 21 societies by asset ranking

Source: KPMG Building Societies Database 2008


21

Summary income statement

£'m HY107 HY207 FY07 HY108FY08

(re-forecast)IncomeInterest receiveable 986.0 1,110.5 2,096.5 1,064.8Interest payable (826.0) (955.7) (1,781.7) (896.3)Net interest income 160.0 154.8 314.8 168.5 337.4Fee and commission income 35.4 33.9 69.3 30.5Fee and commission expense (3.3) (4.7) (8.0) (6.3)Net fee and commission income 32.1 29.2 61.3 24.2 73.4Other operating income 18.0 2.3 20.3 20.5Expenditure 210.1 186.3 396.4 213.2Administrative expenditure (114.3) (122.3) (236.6) (108.3) (241.8)Depreciation and amortisation (15.1) (16.1) (31.2) (14.4)Impairment: losses 0.7 (14.7) (14.0) (40.4) (75.0)Operating profit 81.4 33.2 114.6 50.1Share of post tax profits from joint ventures 0.3 0.3 0.6 0.4Profit before tax and BMR 81.7 33.5 115.2 50.5 94.0

18.5 13.6 19.2

13.315.5 3.9

3.9 4.7

(1.0 )

15.9

0.1

(26.2 )

3.2

(1.4 )

2.0

(40.0 )(30.0 )(20.0 )(10.0 )

-10.020.030.040.050.060.0

HY107 HY207 HY108

£'m

Commercial Lending BTS

WMS BCIG Central and provision adjustments

Platform

Key financials Income statement

Reported operating profit has declined from £81.4 million in HY107 to £50.1 million in HY108, driven by increased impairment charges associated with Platform’s residential mortgage book

Exposure to the housing market, volume declines and lower early redemption charge income at Platform pose a significant risk to BCIG ‘s future profitability and the future funding of the BMR

Operating profit within the Member Business increased in HY108 in comparison to HY107, although this has been driven by a number of non-recurring items and accounting adjustments (analysed further within adjusted earnings)

Income statement HY108 operating income is 1.5% higher than the corresponding period in

HY107, although a number of non-recurring positive adjustments have helped increase Membership income as highlighted in the adjusted earnings section of this report

BCIG’s profitability has in past years been key to funding the BMR (in FY07 this was £45.9 million). However, significantly reduced profitability from this division has been experienced in HY207 and HY108, due to significant increases in impairment charges, declining business volumes, lower early redemption charges (ERC), and lower income from asset sales

As a result in HY108 the Member Business contributed 84% of operating profit against 33% in HY107. The £15.3 million increase was principally due to margin increases, however the movement is before adjusting for non recurring items and accounting adjustments, which are significant (see adjusted earnings sections for detail)

Net fee and commission income represents mortgage fees, lending fees and insurance income including GEB income

Other income is driven by gains achieved on derivative instruments. Other income in HY207 also includes impairment charges associated with an investment in the Cullinan SIV Source: 1.1.8.2 Interim announcement H108, 2007 Statutory Accounts

Divisional operating profit BCIG operating profit by the business

Source: 1.1.8.2 Interim announcement H108, 2007 Statutory Accounts

Note: Chart excludes impact of Burgundy International and IoM as from April 2008 these are analysed within the membership results within the Board reports

Source: 1.1.5.2 BCIG Managing Director Board reports

Member Business operating profit shows a loss in

HY207 due to the allocation of

Treasury contribution for the

purposes of statutory reporting. The management accounts reflect

£20.7 million operating profit for Member Business

before this adjustment

Losses within Platform have been the key

driver of BCIG performance

54.535.0

7.9

26.9

42.2

(1.8 )(10.0 )

-10.020.030.040.050.060.070.080.090.0

HY107 HY207 HY108

£'m

BCIG Membership


22

Key financials Balance sheet

In HY108 Burgundy has experienced a reversal of historic growth in its residential mortgage book, which has resulted in loans to customers falling to £25.1 billion at 30 June 2008

There are £259 million of unrealised losses at 31 August 2008 on AFS securities that will potentially crystallise at acquisition (30 June 2008: £134 million)

Retail deposit balances have been maintained at 2007 levels, and significant warehouse funding has been drawn down from other banks so as to mitigate liquidity risk resulting from the decline in securitisation activity post credit crunch

Source: 1.1.2 Statutory accounts FY07, 1.1.8.2 Interim announcement HY108

£'m As at 31st December 2006 2007

AssetsLoans and advances to banks and the BoE 2,557 2,037 2,222Loans and advances to customers 23,129 25,480 25,091Investment securities - available-for-sale 8,653 8,178 7,026Fair value adjustments for hedged risk (35) 76 (129)Derivative financial instruments 374 441 600Goodwill and intangible assets 241 238 235Property, plant and equipment 83 84 81Deferred tax assets 29 8 6Prepayments, accrued income and other assets 118 241 97Retirement benefit asset - 45 42Total assets 35,149 36,827 35,269LiabilitiesRetirement benefit obligation 44 - -Shares 17,138 17,568 17,583Deposits from banks 884 5,058 5,349Other deposits 2,571 3,583 3,240Debt securities in issue 11,888 7,945 6,646Derivative financial instruments 329 335 202Accruals and deferred income 147 184 190Other liabilities and taxes 128 93 70Subordinated liabilities 562 561 546Subscribed capital 302 304 296Provisions for liabilities and charges 18 8 6Total liabilities 34,009 35,639 34,128General reserve 1,143 1,255 1,286Available-for-sale reserve (1) (68) (139)Cash flow hedging reserve (2) 1 (6)Total equity and liabilities 35,149 36,827 35,269

Summary Balance SheetAs at 30th June 2008

Assets Loans and advances (‘L&A’) to banks reduced by £0.5 billion in 2007 as

lending has been funded partially by the wind down in liquid funds acquired from the Bristol & West branch network and savings business

The growth achieved in 2007 on L&A to customers (residential mortgage balances) was driven by a £1.1 billion mortgage book purchase from GMAC (by BTS), and £0.6 billion growth on both the Commercial and Member Business lines. This growth has been aided by increased customer retention as a result of lower redemptions in HY207

Trends established in FY07 have continued into HY108, as restricted lending criteria (in response to the macro-economic environment) have reduced Platform’s residential mortgage book from £6.5 billion at 31 December 2007 to £6.1 billion at 30 June 2008

The AFS balance has declined between December 2006 and June 2008 as a result of Burgundy managing down its Balance Sheet, planned MBS reductions that arose from the Bristol & West acquisition, and fair value falls in AFS assets as a result of the credit crunch

The retirement benefit scheme has moved from a liability of £44 million at December 2006 to an asset of £41 million at June 2008. However, an actuarial review is currently in progress, with initial indications suggesting a potential actuarial deficit on the scheme of £28 million at 5 April 2008 which had increased to £67 million by 30 September 2008

Equity and Liabilities Retail deposits (‘shares’) have been maintained at 2007 levels, despite the

decline in assets, as Burgundy manages its liquidity and funding profile

The decline in securitisation activity associated with the credit crunch has resulted in the debt security balances declining by £5.3 billion over the last 18 months, with Burgundy drawing down £4.5 billion warehouse funding from other banks (‘deposits from banks’) and £0.6 billion of time deposits (‘other deposits’) to manage its liquidity

AFS unrealised losses are recognised through the AFS reserve, and will potentially crystallise on acquisition


23

Executive summary


Key issues


Commercial lending



Securitisation

Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendixes

Contents


24

Housing Association

Residential Landlord

Non-conforming

Intermediary prime (Platform)

Commercial investment

Self cert

BTL

Prime

Member Business Platform & BTS Commercial

Prime

Non-conforming

BTL

Self cert

Intermediary prime (Member)Intermediary

prime (Platform)

Housing Association

Commercial investment

Residential Landlord

Residential mortgage lending Overview of mortgage asset mix (1)

The asset mix has remained relatively stable in the period from FY06 to FY08 and is forecast to remain so up until the end of FY08

The capital required on the riskier business (i.e. that carried out within BCIG residential and commercial) is greater than the traditional Member prime lending business

Note: Supporting data presented in Appendix 1

Source: Presentation for rating agencies final June 2008

Asset mix overview Burgundy’s mortgage assets can be split into three distinct groups as follows:

- Member Business – this consists of the mortgage lending completed by the Society. This is all considered to be prime lending

- BCIG (Platform & BTS) – this includes the riskier elements of lending i.e. Non-conforming, self-certified and BTL businesses. There is also an element of prime lending completed through BCIG

- Commercial – the commercial book consists of pure commercial lending, larger scale residential landlord business and housing association business

The asset mix has remained relatively stable in the period from FY06 to FY08 and is forecast to remain so up until the end of FY08

The only notable change is the slight fall in commercial assets due to Burgundy effectively withdrawing from this sector at the end of FY07 due to the riskier nature of this lending in an economic downturn

13% of the book (for absolute figures see appendix 1) consists of non-conforming assets, an area of higher risk lending that Claret does not currently participate in

Further detail of the Commercial portfolio can be seen in the next section of the report

Capital usage As can be seen by the comparison opposite, the levels of capital required for

higher risk lending are significantly higher than that for the Member Business, prime lending portfolio

Overview of lending mix at 30 June 2008

Relative capital requirement

Note: Supporting data presented in Appendix 1

Source: Presentation for rating agencies final June 2008

Mortgage assets by type£bn HY108 FY07 FY06Member business 11.3 11.1 10.5BCIG (Platform & BTS) 10.0 10.7 9.5Commercial 3.8 3.7 3.2Total 25.1 25.5 23.2


25

Residential mortgage lending Overview of mortgage asset mix (2)

During phase 1 of due diligence, we have received limited data on the mortgage book. Detailed data tapes were provided for the Leek 18 and Leek 19 securitisation vehicles (most recent), the detailed analysis of which can be seen overleaf

As would be expected in a falling HPI environment, the LTV profile is deteriorating

LTV mix Monthly monitoring of the LTV mix by the Credit Committee, by both stock

position and new lending started in February 2008. Historic data for FY05, FY06 and FY07 year ends were also supplied

As can be seen from the chart opposite, the stock LTV has been deteriorating slightly since the start of the year despite the tightening of criteria earlier in the year

Whilst the level of 90% LTV + new lending gradually reduced, the other high LTV band new lending remained consistent. This coupled with higher LTV borrowers being unable to mortgage away has led to the deteriorating stock position as a percentage of the whole book

As at 30 June 2008, the indexed LTV showed 86.0% of stock balances were below 85%

Other areas A full, detailed breakdown of the loan portfolio has not been received in

Phase I of the project albeit this has been provided for the Leek 18 and Leek 19 securitisation vehicles. This, coupled with the developing nature of MI in this area, has prevented us from completing a full analysis of the asset mix

In more recent MI, management has stated that they are seeing deterioration in the book due to payment shock of borrowers moving from fixed to SVR interest rates

Detailed forecasts of reversionary rates to fully assess the potential size of this issue can be completed in Phase II when data tapes of the full loan portfolio can be provided

Of the portfolio, data has been provided showing the split between interest only and repayment on the platform and BTS books as shown opposite

As can be seen, there are relatively high levels of interest only lending, which reduces the effect of natural reduction in LTV’s due to repayment of capital on a regular basis

Leek 18 and Leek 19 Detailed data tapes have been provided for the Leek 18 and Leek 19

portfolios by Burgundy Analysis of these portfolios can be seen at the end of the residential

mortgage lending section of this report

Residential stock LTV FY05 to June 2008

Source: Credit Committee Arrears and Losses Reports January 2008 to July 2008

Source: Interest only stock

Interest only stock (Platform and BTS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY05

FY06

FY07

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

0 - 75% > 75% > 80% > 85% > 90%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Platform BTS Platform BTS Platform BTS

Buy to let Self cert Non-conforming

Interest only Repayment


26

Recognising a deterioration in the Platform portfolio and market in general, management has introduced a number of credit criteria changes since February 2007 to restrict the level of arrears and bad debt experienced in the portfolio

These changes appear to bring Burgundy closer to Claret’s current position

Source: Presentation for rating agencies final June 2008, Claret’s Mortgage policy summary and Claret’s summary changes 2007 to mid 2008

Criteria changes Lending in the second half of FY06 and first half of FY07 expanded due to

the level of new entrants into the market which had led to many businesses loosening credit criteria and tightening their margins

As management became aware of increasing arrears levels in this population of lending (as early as February 2007) they began to reign in the credit criteria, particularly in the heavy adverse areas, to effectively remove themselves from the market

Management continued to tighten the criteria, particularly in early FY08, as the credit crisis developed

The main changes focus around the tightening of the LTVs offered in the various products as management believes that this is the main driver of whether or not a loan will go into arrears (and subsequently default)

Credit criteria comparison Pre-August 2007 Current Claret

Conforming Maximum LTV 95% 85% 90% Maximum loan size £1,000,000 £750,000 1,000,000 Self certified maximum LTV 85% 75% 80% Buy-to-let maximum LTV 90% 75% 75% Minimum rental cover 110% 125% 125% FTB for BTL loans Allowed Not allowed n/a Non-continuing BTL Available Not available n/a Non-conforming Maximum almost prime LTV 85% 80% n/a Maximum minor adverse LTV 95% 80% n/a Maximum light adverse LTV 95% 80% n/a Maximum new build LTV 85% 75% n/a Maximum loan size £1,000,000 £750,000 n/a Minimum rental cover 110% 125% n/a Medium and heavy adverse products Available Not available n/a General Income assessment Income multiples Affordability Mix of income multiples

and affordability

Residential mortgage lending Credit policies and criteria changes

All BTS acquisitions made have followed the Platform credit criteria in force at the time of acquisition. However, it may not be appropriate to assume that the level of credit risk in these books is consistent with BCIG lending as lower levels of due diligence were carried out in the early acquisitions than the 100% due diligence carried out in the FY08 acquisitions

Comparison with Claret The table above highlights the relative credit policy positions between

Claret and Burgundy, which shows that Burgundy has moved closer to Claret’s current position

Claret does not offer non-conforming products


27

Arrears movements July 2007 to September 2008

Source: Arrears reporting underlying data

Key high risk lending cohorts with > 90 days arrears

0% 2% 4%

6% 8%

10% 12% 14%

16% 18% 20%

Pla

tform

ne

w b

uild

fla

ts

Pla

tform

fir

st ti

me

buye

rs

Pla

tform

no

n-

conf

orm

ing

BTS

non

- co

nfor

min

g

Com

mer

cial

re

side

ntia

l le

ndin

g

%

June July

Notes: All areas relate to assets of 85% LTV and greater

Source: Arrears and losses monthly M2 report end June 2008 and end July 2008

No comparative Platform non conforming June data

provided

0

100

200

300

400

500

600

700

Jun-

07

Jul-0

7

Aug

-07

Sep-

07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep-

08

Res

iden

tial M

ortg

age

Arre

ars

£'m

Member Business BTS Platform

Residential mortgage lending Arrears (1)

Arrears levels have been rising across the whole portfolio, with the largest increases seen in higher risk BCIG residential lending

Management has taken a number of actions to try and reduce arrears levels going forward; however, it is currently too early to assess the relative success of these initiatives

Overview The performance of the loan portfolio is monitored on a monthly basis by

the Group Credit Committee (‘GCC’) As the loan portfolio has come under greater arrears pressure, the GCC

has developed reporting and management information, using detailed tree diagrams, to help better understand the key risk arrears in the portfolio (included in a appendix 2 to this report)

As can be seen opposite, arrears levels have been rising across the whole portfolio, as has been seen in the market as a whole

The key risk areas identified by the tree diagrams have shown variable arrears performance over recent months

Management has introduced a number of measures to try and contain the arrears deterioration including: − moving arrears management resource from the performing Member

Business book to the Platform and BTS arrears of the business − new arrears management systems are being developed and are due to

be implemented imminently − working hours have been changed to ensure that resource is available

at the right time of day for making contact with customers − reviews of the purchased portfolios are being completed to ensure all

warranty cases are picked up and sent back to the originating organisation prior to warranties expiring

Restructuring of accounts Another way in which management is taking action to reduce possession

cases is through the restructuring of accounts. These now take two forms as follows

- Arrangements – this is where the monthly payment is reduced and the term of the loan extended. Nevertheless, interest is being serviced and principal repaid. Following a six month period of payment under arrangement, the account will be reclassified as no longer in arrears. Management has recognised a benefit of £5.0 million from this scheme in HY108 as explained later in this report

- Concessions – this is where Burgundy allow a lower payment to be made on an account; however, the debt continues to increase. These are only allowed for shorter periods of time and the accounts cannot be taken back out of arrears. This is not currently practised, but is under consideration for late 2008

Management is yet to decide how to treat the concessions cases in terms of arrears and provisioning


28

Arrears trends FY08 YTD

Total No % >3 No Total No % >3 No Total No % >3 No Total No % >3 No Total No % >3 NoPrime (Member) 145,898 0.3% 379 146,070 0.3% 486 145,192 0.3% 499 144,148 0.3% 481 143,475 0.3% 461Prime (BCIG) 9,677 1.7% 162 9,257 2.8% 256 9,153 2.8% 259 9,090 3.0% 269 9,018 3.5% 290Non Conforming 34,524 5.3% 1,833 32,759 7.4% 2,412 32,490 7.8% 2,519 32,197 8.4% 2,689 31,784 8.8% 2,926Conforming 44,871 1.2% 539 42,221 2.2% 926 41,585 2.3% 969 41,510 2.5% 1,031 40,983 2.8% 1,154Commercial Lending 469 1.1% 5 457 2.6% 12 453 2.0% 9 452 1.1% 5 453 0.9% 4Total book 235,439 1.2% 2,918 230,764 1.8% 4,092 228,873 1.9% 4,255 227,397 2.0% 4,475 225,713 2.1% 4,835

September FY08August FY08December FY07 June FY08 July FY08

Residential mortgage lending Arrears (2)

Arrears in the prime member book and the commercial lending book, have remained stable, but are increasing in all other areas

The arrears profile of the Burgundy group is worse than others in the building society sector predominantly due to the higher proportion of sub-prime lending

The arrears profile of Platform is also relatively poor compared to peer groups in specialist lending

Source: Losses and Arrears Report May 2008 to August 2008

Recent trends As can be seen in the table above, the most recent trends in arrears continue to show

a deterioration in the loan books across all of Burgundy’s lending To determine if the arrears being seen are typical of similar asset portfolios, public

data has been obtained on Bradford & Bingley loan portfolios to allow a comparison of the buy to let and self certified elements of the portfolio though we note that this comparison cannot be conclusive because of inconsistencies in the makeup of the ‘other’ category for both lenders

Whilst the buy to let and self certified books look slightly better within Burgundy (very similar if GMAC acquired assets are stripped out of the Bradford & Bingley arrears rates), the non-conforming book (£3.5 billion) has a significant impact on arrears

When considering the Platform side of the business against other sub-prime lenders in the market, Platform is again performing relatively badly compared with other lenders

Further benchmarking against the Building Society sector can be seen overleaf

Note: ( * ) Accounts UTD and < 1.25% in arrears

(**) Accounts > 1.25% in arrears

(A) All ratios are as at 31 Dec except for 2 lenders (March 2008)

(B) Data not provided in this form

Source: Bradford & Bingley Investor reports, Building Societies Database and financial statements

31-Dec-07 30-Jun-08Burgundy (Platform) 5.21% 5.51%Lender 1 1.98% 2.89%Lender 2 3.72% 4.43%Lender 3 1.85% 2.87%Lender 4 Unavailable 4.22%*Lender 5 2.29% Unavailable Lender 6 6.81% 8.46%Lender 7 9.13% 11.63%Lender 8 2.90% 5.80%

Sub-prime > 3 months arrears (by balance)

Arrears comparison to Bradford & Bingley

Dec-07 Jun-08 Mvmt (bps)Bradford & BingleyBuy-to-let 1.30% 2.28% 98Self certified 2.74% 3.85% 111Other 2.55% 3.64% 109Overall 1.85% 2.87% 102Burgundy (excl member)Buy-to-let* 1.01% 1.84% 83Self certified* 1.46% 2.67% 121Other 4.50% 6.30% 180Overall 2.80% 4.30% 150


29

Residential mortgage lending Arrears benchmarking

Burgundy’s arrears are higher than most in the top 10 building societies reflecting the high proportion of specialist lending in the Group compared with other societies

Building Society benchmarking The arrears profile of Burgundy is worse than others in the

building society sector predominantly due to the size of its higher risk, sub-prime lending

Other societies do have sub-prime operations (such as Skipton through its subsidiary AHL); however, the proportion of sub-prime versus prime leads to the overall arrears being higher in Burgundy

Arrears experience across the building society sector FY06 and FY072007 Group UTD < 3 months > 3 months > 12 months PossessionsNationwide 97.93% 1.71% 0.35% 0.04% 0.02%Britannia 92.22% 5.90% 1.88% Note B Note BYorkshire 98.06%* Note B 1.85%* * Note B 0.09%Coventry 94.87% 4.58% 0.49% Note B 0.07%Chelsea 96.50% 1.20% 2.23% Note B 0.07%Skipton 97.07% 2.28% 0.55% 0.03% 0.10%West Bromwich 96.17% 2.42% 1.10% 0.04% 0.32%Leeds 96.00% 3.24% 0.66% 0.01% 0.10%Derbyshire Note B Note B Note B 0.06% 0.06%Principality 96.2% 2.9% 0.8% 0.2% 0.1%2006Nationwide 98.05% 1.68% 0.28% 0.03% 0.01%Britannia 94.29% 4.22% 1.49% Note B Note BYorkshire 98.70* % Note B 1.25%* * Note B 0.05%Coventry 95.33% 4.23% 0.40% Note B 0.04%Chelsea 96.68% 0.99% 2.28% Note B 0.05%Skipton 97.61% 1.86% 0.44% 0.02% 0.09%West Bromwich 97.35% 1.99% 0.54% 0.04% 0.12%Leeds 96.31% 3.14% 0.47% 0.01% 0.08%Derbyshire Note B Note B Note B Note B Note BPrincipality 96.9% 2.6% 0.4% 0.0% 0.1%


30

The provisioning methodology is used by Burgundy to calculate ‘underlying’ impairment, but it is reduced by a number of management adjustments, is in line with others in the industry

There have, also been a number of changes to the provisioning methodology, which have resulted in a release of provisions of £20 million, £11 million of which was due to the change in the point at which an account is deemed to be impaired

Residential mortgage lending Residential lending provisioning methodology and assumptions

IBNR The IBNR element of the provision takes into account customers who are

not yet in arrears but are experiencing financial difficulty All accounts are updated monthly using the Experian Consumer

Indebtedness Index (CII), and where indications of financial distress are identified, the above provisioning methodology is applied

As discussed above, the definition of IBNR is to change in HY208

Source: Group Finance Director’s Report – 16 July Board Meeting and Group Policy: Loan Impairment Provisions

Provisioning methodology Burgundy provides for individually impaired loans (defined as those which

are 1p or more in arrears) and also on an incurred but not reported (‘IBNR’) or collective basis

Whilst the source of data and the IT systems used for calculating provisions for Member Services and BCIG differ, the underlying methodology remains consistent

In HY108 Burgundy changed its policy on the treatment of accounts in 1-30 days arrears. These are no longer taken into the impairment calculation (consistent with others in the industry) but are still subject to the IBNR calculation. The impact on provisions was minimal (£1.5 million)

In HY208, Burgundy has adjusted its definition of arrears to 3 months from 1 month. The impact of this is expected to be an £11 million release of the provisions in FY08

Two further changes to the impairment methodology are to be made for FY08, being a change in the definition of impaired but not reported (‘IBNR’) accounts (benefit of £2 million) and a new approach to calculation of expected losses of sale (benefit of £7 million)

Impaired loans A loan requires an impairment to be recognised where the net discounted

cash flow of loan is less than the period end balance on the account. Where this is the case, the probabilities of that case moving to default and through to possession are determined on past experience

Net sale proceeds are then determined by the following calculation: − the most recent valuation is indexed using Halifax HPI adjusted for

assumed house price movements during the period to sale. Management has assumed HPI falls in 2008 and 2009 of 7% and 5% respectively although the 2008 HPI projected fall was increased to 13% in October 2008, which increases the provision by £18 million

− a forced sale discount is applied based on experience over the last 12 months of 26%, noting that the FSD for the most recent three months is approximately 1% higher. The FSD has been adjusted to 17% for those properties expected to be purchased by Illius (90% of repossessions)

− associated possession and sale costs are taken off − recoveries under the MIG policy are allowed for

The difference between this calculation and the loan amount at the date of sale is then taken as a provision

Key provisioning assumptionsArea Assumption KPMG commentTime to default/saleTime to default 8.6 monthsTime to sale 21.7 monthsProbability of defaultSociety 10.4%BTS 18.9% to 58.0%Platform 25.5% to 77.3%Probability of possessionSociety 8.3% to 43.4%BTS 4.5% to 27.2%Platform 5.6% to 29.0%Forced sale discountSociety 19.6%BTS 22.6%Platform 25.2%HPI2008 13% reduction2009 5% reduction

Based on 12 month average which includes a period of lower deterioration compared to recent experience

Probabilities change based on LTV band as would be expected

Revised recently

Based on historic experience but will be likely to incrase


31

Illius – overview of the scheme The Illius property management scheme is a scheme whereby Burgundy

repossession cases are purchased by a separate legal entity within the Group and managed as an investment property until property values recover

The Board has currently approved financing of £70.0 million for the initial pilot of Illius, made up of £50 million secured financing, a £13.5 million inter-company loan and £6.5 million of equity. It is anticipated that the pilot is to be extended, such that approximately 90% of repossessed properties will be acquired by Illius. This equates to some 800 properties by the end of 2008. It should be noted that management’s previous forecasts were 50% of properties and 1,000 properties, which suggests that fewer properties are planned to hit repossession in FY08. We are investigating why this is the case

The business case also assumes costs for fees, stamp duty, revenue repairs etc of 2.85% of purchase price. The immediate benefit to Burgundy is a reduction in the FSD which has a direct impact on the losses recognised through the profit and loss account. This occurs as the rental income multiple leads to a higher valuation being attached to the individual properties, therefore leading to a positive crystallisation of the losses position

Currently, FSDs on Illius purchased properties are 17% compared to 26% in the rest of the portfolio in HY108. The latest indications from management (and the assumption built into the provisioning models) is that the effect of Illius will be to push average FSDs in Platform down from 25.2% to 22.5% and in BTS from 22.6% to 21.3%

To date this has had a positive impact on the bad debt write-off and balance sheet provisions of £6 million and management expects to recognise a further £6 million benefit in H2 FY08 based on the October re-forecasts

Residential mortgage lending Illius scheme

Key risks to the scheme The key risks involved with the Illius scheme include:

− the normal risks associated with the setting up of a new business venture

− the reputational and financial risk associated with potential future claims against Burgundy for unfairly profiting from repossessed properties bought at under value now

− acquiring inappropriate properties that are not rentable − acquiring properties at an inappropriate value − not achieving the rental income or re-sale value needed to meet the

business plan − rental voids higher than planned − whether the FSD on the repossessed properties not acquired by Illius

increases if they prove to be lower quality properties If any of these risks were to materialise then the forecast benefits from the

scheme could be eroded

Based on updated information received on 23 October 2008, we understand 30 lettings have been secured. Management’s expectation is that properties should be let by about two months following repossession. Because of this time lag, Burgundy expects approximately 300 of the 841 properties expected to be acquired in FY08 to be let by the end of 2008

Burgundy management has informed us that repossessing properties is a last resort option for the Group. No impact on this policy is anticipated as a result of the Government’s recent stance on repossession

As Illius will only take effect following a repossession, this is not expected to have any impact on the Group’s stance to repossession

To date the Illius scheme has had a positive impact on the bad debt write-off and balance sheet provisions of £60 million and management expects to recognise a further £6 million benefit in HY208

We believe the HPI assumptions and the achievement of the appropriate rental income are the key risks to the success of the scheme

Source: Arrears and losses pack for October

Source: Illius Board presentation

Illius property value forecastFY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

£m 109 265 383 478 553 612 659 693 719 737

Illius positionEnd October positionLettings secured 33Completions 244Offers accepted 254Outstanding offers made 115Properties under assessment 355Properties available for purchase 1,394


32

Residential mortgage lending Illius impacts on capital

Current Illius balances The table below demonstrates the capital requirement for the mortgage

exposure that has been purchased by Illius and how this changes as a result of the transfer

Capital impacts The exposure includes purchased properties up to and including December

2008. The pre-Illius capital cost is based on the month prior to sale (EL+UL) and includes any adjustment for ICG. An outstanding balance (after sale) of £4.6 million represents a loss and this is posted against the loss provision

The solo position assumes 12.5% equity funding which will reduce in proportion once the £50 million cap has been reached. Illius purchases are currently funded as 75% BCL funding, 12.5% Treasury funding and 12.5% equity funding. Once the equity funding has been exhausted, the proportions will be 75% BCL funding £50 million equity funding, and the rest as Treasury funding

Illius in the capital forecasts The impact of Illius in the current capital forecasts can be seen in the table

opposite Cumulative Illius property asset balances are given in the second line of each

table. As can be seen the balance does not increase significantly across the scenarios as whilst the volume of properties increases, the value at which they are purchased reduces

The capital impact with and without solo waiver is shown in the last two lines. The capital impact includes ICG scalar. Risk weights are not relevant for this calculation as the Illius assets are 100% risk weighted

Valuation assumptions The valuations of the Illius properties are based on yield rates of 5.3% and

void rates of 5.0% respectively If either of these assumptions are incorrect then the value of the properties

would change. If this were to lead to impairment of the Illius properties, this would have a direct impact on the capital resources by reducing them by the same amount of the impairment

Illius capital illustration£ million %

Balance of purchased properties 109.6Pre-Illius capital cost 32.5 29.7%Illius capital cost (Group basis) 11.5 10.4%Illius capital cost (Solo basis) 13.7 12.5%

Base case scenario(£ million) FY08 FY09 FY10 FY11Property assets 112 385 616 831Cash 3 12 18 26

115 397 634 857Intercompany loan 25 87 146 202Commercial loan 75 260 438 605Equity 15 50 50 50Capital 115 397 634 857Group 12 40 64 87Solo 14 50 50 50

Moderate stress scenario

(£ million) FY08 FY09 FY10 FY11Property assets 116 387 635 884Cash 3 12 19 27


Severe stress scenario

(£ million) FY08 FY09 FY10 FY11Property assets 115 378 634 951Cash 3 11 19 29


Following a request from the RMC, further detail of the capital impact of the Illius scheme has been included in this slide


33

Source: KPMG analysis

Underlying impairment £'m HY108 Reported HY108 Impairment charge 40.4 Benefits reducing impairment charge Arrangements 5.0 Illius property company 6.0 Loss recovery unit 7.0 Total benefits 18.0 Other Forecasting risk provisions 4.4 Potential provision on commercial loan (Panchoo) 2.0 Change in accounting policy for 1-30 days arrears 1.5 Total other 7.9 Underlying impairment 66.3

Source: Burgundy 2008 Group Credit Losses Forecast

Whilst management’s forecast charge for the full FY08 remains at £75 million, in light of declining house prices and continuing increases in arrears in parts of the portfolio, we consider the forecast charge is challenging

The provision would be higher by approximately £20 million, without the benefit of the policy changes in HY208

Residential mortgage lending Further management actions and outturn

Further management actions Beyond the Illius scheme and the management actions as arrears,

management have also set up a loss recovery unit

This unit has been set up to review all loss cases where warranties may allow them to be put back to the originator (for instance with purchased loan portfolios) and also review all loss cases for potential recovery through personal covenants

An assumption has been made in the provisioning that 5% of losses will be recovered through personal covenants. This amount has not been discounted; however, management have informed us that the Loss Recoveries Unit is expected to exceed the original projections used in the provisioning

The Group has also reduced sales costs, which is expected to have a positive impact of £6 million for FY08

The Group has also implemented other management actions, including new products to mitigate payment shock, warranty claims on acquired mortgages and more pre-arrears contact with customers

Outturn position The impairment charge for HY108 was £40 million, which was stated

after the benefit of changes in impairment methodology and benefits totalling £18 million. We understand the further charge for July to September of this year was £22 million bringing the YTD charge to £62 million

Management’s forecast charge for FY08 remains at £75 million as management believes it will benefit from further changes in methodology as described opposite, further benefits from Illius and enhancing the effectiveness of collections

In light of declining house prices and continuing increases in arrears in parts of the portfolio, we consider the forecast charge is challenging

FY08£m

June forecast 75Improvements to provisioning approachUpdated assumptions within the provisioning model (2)Changes to impairment and IBNR definition (13)Decrease due to new approach to calculating expected losses on sale (7)Update on management actionsUpdate on the impact of flexible arrangements actions -Reduction due to impact of extending Illius (6)Update on the impact of loss recoveries -Reduction due to renegotiation of sales costs on repossessed properties (6)Worsening economic conditionsIncrease on forecast arrears volumes 14Increase in forecast due to higher decline in HPI from -7% to -13% 18Increase in commercial provision forecast 2Revised forecast credit loss provisions charge 75

Summary of changes to June forecast loss provisions charge in calculation of the revised forecast


34

Source: Burgundy fraud loss analysis 20 November 2008

Burgundy’s fraud losses are most prevalent in Platform and BTS as would be expected. These have shown an increasing trend since 2006 as seen across the industry

Residential mortgage lending Fraud

Fraud losses Burgundy’s fraud losses are most prevalent in Platform and BTS as

would be expected. These have shown an increasing trend since 2006 as seen across the industry

The analysis suggests that the provision adequately covers the estimated fraud losses

Fraud losses by portfolioEstimated loss Provision Actual losses

Year identified Number of cases £'000 £'000 £'000Member book2008 1 - - -Platform/BTS2006 51 666 1,589 1,4012007 179 4,369 5,814 4,4092008 255 4,943 8,414 5,009Other2007 6 150 - 1712008 27 503 57 125


35

Burgundy has quantified the impact of sensitivities for judgemental areas in provisions

Residential mortgage lending Impact of sensitivities

Source: Burgundy 2008 Group Credit Losses Forecast

Forecast element Area of judgement Potential impact

Changes to IBNR and impairment definitions

Burgundy's proposed changes are more predictive of losses and in line with industry practice but have yet to be approved by the auditors

If Burgundy decide to take a more conservative approach our forecast would increase by £7-13m.

New approach to calculating expected losses on sale

Burgundy are proposing to use a more accurate valuation of properties in possession to remove the need for a deflation factor applied to valuations until time of sale

Burgundy do not anticipate any challenge to this proposal from the auditors but if Burgundy decide not to proceed with this approach the forecast would increase by up to £7m.

Arrears volumes Forecast of future volumes of arrears and speed at which arrears cases deteriorate

A variation of 5% in arrears levels from the forecast would change arrears by £4m.

House Price deflation House prices decline by more than the current forecast projection

Each 1% variation in the House Price Inflation forecast changes the provisions forecast by £3m

Forced sale discountThe forecast level of the forced sale discount in the remaining months does not reflect the experience in the last 12 months

A change in the forced sale discount of 5% would lead to a change in the forecast provision of £18m

Arrangements Borrowers agreeing arrangements and keeping to them vary from the forecast

Each 10% change in borrowers keeping to their arrangement changes the full year provision charge by £1.2m

Illius Prices paid by Illius deliver a different expected forced sale benefit than expected

Each 1% variance in the forced sale discount on properties purchased by Illius changes the provisions charge by £1m

Illius Illius acquires a lower percentage of properties than forecast Each 5% reduction in the percentage of properties acquired by Illius reduces the benefit to the provisions charge by £0.9m

Warranty claimsBurgundy may be able to make further warranty claims on assets we have purchased and conversely may receive claims from buyers of Platform’s mortgage books.

The forecast includes all advised claims against us (impact in 2008 £0.5m) and our best estimate of successful claims Burgundy will be able to make in 2008 (estimate £1.6m)


36

Residential mortgage lending Leek 18 and Leek 19 mortgage asset mix (1)

At 31 October 2008, mortgages balances in the Leek 18 and 19 portfolios totaled £1.4 billion, approximately 6% of the total residential mortgage assets

Further analysis has been performed on data tapes of mortgage assets in Leek 18 and 19, principally to assess:

whether the information already provided to us by Burgundy on ‘problem cohorts ‘ is reasonable and complete

if the arrears level and pace of deterioration suggests that the credit enhancement in the securitisation vehicles will be utilised

Balance outstanding The mix of balances outstanding by remaining loan size within the two

pools is similar with the majority of loans having a balance outstanding of £50k-£150k at 31 October 2008

At 31 October 2008 the Leek 18 portfolio comprised 5,988 loans with a balance outstanding of £715.0 million. The number of accounts in the pool has reduced by 1,189 since 31 March 2008 and the balance outstanding has reduced by £142.5 million (17%)

At 31 October 2008 the Leek 19 portfolio comprised 5,404 loans with a balance outstanding of £683.0 million. The number of accounts in the pool has reduced by 439 since 31 March 2008 and the balance outstanding has reduced by £53.5 million (7%)

The average loan balances for the Leek 18 and 19 portfolios at 31 October 2008 are £119.4k and £126.4k respectively. This compares to the latest CML index which shows the average loan size of £123.0k

Across the two pools there are 10 loans which have balances outstanding of £750k+. At 31 October 2008 two of these loans are in arrears, both loans are less than three months in arrears

Mortgage lenders throughout the market including Burgundy have tightened their lending criteria through 2007 and 2008 and higher risk customers may find it harder to secure a new mortgage deal

Portfolio analysis The following section gives an analysis of the mortgage assets held

within the Leek 18 and Leek 19 portfolios from the data tapes supplied by Burgundy management

The analysis firstly covers the split of the book into key features such as LTV, product, balance outstanding and then overlays this analysis against the arrears profile within the portfolios

Analysis of data tapes for the Leek Finance 18 and 19 securitisation vehicles has corroborated the management information produced by Burgundy, particularly in connection with its ‘problem cohorts’ of lending originated in H2 06 and H1 07

Balance outstanding at 31 October – Leek 19

Balance outstanding at 31 October – Leek 18

Source: Leek 18 data tape


-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

< £50k £50k-£100k

£100k-£150k

£150k-£200k

£200k-£250k

£250k-£500k

£500k-£1m

> £1m

£m's

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

Num

ber of accounts

Balance outstanding

Account volume

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

< £50k £50k-£100k

£100k-£150k

£150k-£200k

£200k-£250k

£250k-£500k

£500k-£1m

> £1m

£m's

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Num

ber of accounts

Balance outstanding

Account volume


37


The majority of the loans in the Leek 18 portfolio were originated in 2005/06

The majority of loans in the Leek 19 portfolio were originated in 2006

Balance outstanding by date of origination The majority of loans in Leek 18 were written in 2005/06. The majority of loans in the Leek

19 portfolio were originated in 2006 The loans remaining in the Leek 18 portfolio were written in the period between H2 04 and

H2 08. 85.9% of loans by balance outstanding were originated in the 12 month period from 1 July 2005

Within the Leek 19 portfolio, 97.8% of the loans remaining on the portfolio were written in the period from H1 05 to H2 08. The remaining 2.2% of loans were written in 2002

80.6% of the loans in the Leek 19 portfolio by balance outstanding were written in H2 2006, 97.5% of the loans were written in 2006

As can be seen by the graphic, the majority of the loans were written in the period from H2 05 to Q4 06. When considering this against the performance of the portfolio as a whole, the H2 06 and H1 07 vintage is the worst performing of all the lending

Balance outstanding by date of origination

0

50

100

150

200

250

300

350

400

450

H1

02

H1

03

H1

04

H1

05

Q1

06

Q3

06

H1

07

H1

08

£m's

Leek 18 Leek 19

Source: Leek 18 and Leek 19 data tapes


38

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Leek 18 - Mar 08 Leek 18 - Oct 08 Leek 19 - Mar 08 Leek 19 - Oct 08Buy to let Prime Self Cert Sub prime Sub prime BTL


Lending within the two pools comprises buy to let, self cert and subprime mortgages. The Leek 19 portfolio also includes a small proportion of prime accounts

The asset mix is broadly similar to the overall asset mix for specialist lending in Appendix 2

The geographical mix of the portfolios is also similar, both portfolios exhibit a concentration of lending in Greater London and the South East

Portfolio mix overview – Product type The asset mix for each of the pools principally comprises buy to let, self cert

and subprime mortgages The asset mix is broadly similar to the overall asset mix for specialist lending,

in Appendix 2 The Leek 19 pool also contains a small number of sub prime buy to let and

prime accounts, these represent 2.6% of the pool at 31 October 2008 The movement in the mix of the pools between the two periods suggests that

the attrition rate of the self cert and sub prime accounts across the pools is considerably higher than that of the buy to let loans which has driven the change in the mix in the portfolios between the two dates

Overview of pools by product type

Overview of pools by geographic region Portfolio mix overview – Geographic region The regional mix of accounts for each of the pools is spread across the

United Kingdom with a concentration of accounts in Greater London and the Southeast. 46.8% of the Leek 18 and 49.6% of the Leek 19 pools comprise accounts from these these two regions

The Q3 2008 House Price Index data issued by HBOS plc shows that the annual fall in house prices in Greater London and the South East was 16.5% and 12.4% compared to a UK average of 12.4%

This suggests that Burgundy has a high level of exposure to geographic regions which are currently experiencing high levels of house price deflation

The mix of accounts across the two periods is broadly static

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Leek 18 Mar 08 Leek 18 Oct 08 Leek 19 Mar 08 Leek 19 Oct 08East Anglia East Midlands Greater LondonNorth North West Northern IrelandScotland South East South WestWales West Midlands Yorkshire and Humberside




39


At 31 March 2008 the majority of accounts were on a fixed rate but this proportion reduced by 31 October 2008 as borrowers migrated onto base discount and Libor linked products

Customers who move from a fixed rate deal to SVR may experience payment shock if the SVR is considerably higher than the fixed rate. Whilst there has recently been a cut in the base rate, this has not yet been passed onto borrowers by Burgundy

The majority of accounts have either reverted, or will revert prior to the end of 2009

Portfolio mix overview – Product rate The majority of accounts in the Leek 18 and Leek 19 pools were on a fixed

rate product at the 31 March 2008 (67.9% and 54.9% respectively by balance outstanding)

At 31 October 2008 the mix has changed and the proportion of customers on fixed rate products in the Leek 18 and Leek 19 pools has fallen to 41.0% and 40.5% respectively

The reduction in the value of accounts on fixed rate loans is considerably higher than the balance attrition seen within the two pools in the six month period to 31 October 2008. This suggests that the fixed interest term has ended for a proportion of the accounts and these have migrated onto the base and LIBOR products as would be expected

When the agreed term of a borrowers mortgage ends the customer will usually move onto to the lender’s Standard Variable Rate (SVR) which is likely to be higher than the rate applicable in their lock in period. This can lead to a sharp increase, or ‘payment shock’, in the amount of the borrowers monthly repayment which may in turn lead to an increase in arrears

Customers on fixed rate mortgages are likely to experience the greatest payment shock when the term of their mortgage ends. Borrowers would historically have been able to obtain a new mortgage deal at a rate below SVR to reduce their payments; however, under current market conditions many borrowers are finding it harder to secure a new mortgage at the end of the initial lock in period

If this trend continues then the proportion of mortgages which are on base rate linked products is likely to continue to increase as fixed and tracker product terms come to an end within the pools

Portfolio mix overview – Reversion rate The reversion date for the majority of the accounts in both pools has either

occurred, or will occur in prior to the end of 2009 54.0% of the balances outstanding in the Leek 18 pool and 50.4% of those in

the Leek 19 pool have a reversion date in the period to 31 December 2009. The UK base rate stands at 3.0% following a 1.5% cut in November 2008 but this cut may not have been reflected by Burgundy in the interest rate applied to its base rate products. As a result, those customers who revert to this rate in 2009 may still experience some payment shock, unless UK base rate falls further or there is a cap on the difference between base rate and SVR included in Burgundy’s terms and conditions

0%

10%

20%

30%

40%

50%

60%

70%

80%

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100%

Leek 18 - Mar 08 Leek 18 - Oct 08 Leek 19 - Mar 08 Leek 19 - Oct 08

Base Base discount Fixed Libor Libor discount

Overview of pools by product rate

Overview of pools by reversion date

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Leek 18 - Oct 08 Leek 19 - Oct 08

Q4 2008 2009 2010 2011 2012 Already reverted




40

0%

20%

40%

60%

80%

100%

Leek 18 Oct 08 Leek 19 Oct 08

0-25% 25-50% 50-75% 75-85% 85-100% 100+


The majority of accounts are secured on terraced or semi detached houses though significant volumes are also secured on flats

All of the properties used as security in the Leek 18 and 19 portfolios were built in, or prior to, 2006

The majority of accounts in each portfolio have an LTV of 85-100% at their last valuation date

65 accounts in the Leek 18 and 89 accounts in the Leek 19 portfolio have an LTV of over 100% at 31 October 2007

Portfolio mix overview – Nature of security The asset mix of the two portfolios is similar with the majority of the portfolio

comprising terraced houses but also with significant volumes of semi-detached and flat/maisonette properties

All of the accounts in the Leek 18 and Leek 19 portfolios are secured on properties which were built in or before 2006. Properties built in 2006 make up 2.7% of the Leek 18 portfolio and 6.8% of the Leek 19 portfolio. 12.0% of the properties in the Leek 18 and 12.7% of properties in the Leek 19 portfolio were built prior to 2000

At 31 October 2008 301 (5.0%) accounts from the Leek 18 portfolio were secured on flats/maisonettes built in 2005/06, the balance outstanding on these was £46.7m (6.5%). 283 (5.2%) accounts in the Leek 19 portfolio were built on flats/maisonettes built in this period, the balance outstanding on these was £43.5m (6.4%)

This is in line with the GCC management information summarised in Appendix 2 We note that no build date was provided for five of the properties across the two

portfolios The asset mix of the two portfolios remains broadly unchanged across the six month

period to 31 October 2008 though we note that the proportion of flat/maisonettes within the Leek 18 property increased by 2.0% in the period with a similar decrease seen in the proportion of detached properties

Portfolio mix overview – LTV banding (on last valuation) The majority of accounts in each of the portfolios have an LTV of 85-100% at 31

October 2008 (Leek 18: 49.8%; Leek 19: 54.2%) Within the Leek 18 portfolio 51.3% of accounts by account balance have an LTV of

over 85%. The balance outstanding on these 2,712 accounts at 31 October 2008 is £361.9 million. 65 accounts have an LTV of over 100%, the arrears position of these accounts is considered within the arrears section of this report

Within the Leek 19 portfolio 56.6% of accounts have an LTV of over 85% by account balance. The balance outstanding on these 2,684 accounts at 31 October 2008 is £383.9 million. 89 of these accounts have an LTV of over 100%

The proportion of accounts with an LTV greater than 85% is significantly higher than the blended average of 35% across the whole portfolio, which would be expected given the more recent nature of this lending

The LTV data is based on the most recent valuation performed, no adjustment has been made for HPI movements since the date of the valuations. Valuation dates range from September 2004 to October 2008 for the Leek 19 portfolio and from August 2001 to September 2008 for the Leek 19 accounts

97.2% of the valuations undertaken on the Leek 18 properties occurred in 2005/06, 91.7% of the valuations undertaken for the Leek 19 portfolio occurred in this period

Overview of pools by nature of security

Overview of pools by LTV banding (on last valuation)

0%

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Leek 18 Mar 08 Leek 18 Oct 08 Leek 19 Mar 08 Leek 19 Mar 08

Bungalow Detached house Flat/maisonette Semi-detached house Terraced house




41

0%

20%

40%

60%

80%

100%

Latest valuation Indexed valuation Indexed valuation-10% haircut

Indexed valuation-30% haircut

0-25% 25-50% 50-75% 75-85% 85-100% 100-125% 125-150% 150%+


We have adjusted the valuations used in the LTV calculations to reflect HPI movements since the date of the valuation

The average LTVs (using indexed valuations) of the Leek 18 and Leek 19 portfolios are 74.6% and 77.6% respectively. This is a reduction on the un-indexed LTV for both portfolios

Applying a 10% haircut to the indexed valuation of the Leek 18 and 19 portfolios increases the average LTVs to 82.9% and 86.2% respectively

Indexed LTV We have adjusted the latest valuations provided by Burgundy to reflect the

movements in the house price index in the period since their last valuation. In doing this we have used the Halifax house price index

The average LTV of the indexed Leek 18 portfolio at 31 Oct 2008 is 74.6%, a reduction on the un-indexed average of 78.3% at the same date. The reduction is evident in the LTV mix of the portfolio which shows an increase in the proportion of accounts with an LTV of 50-75% which is matched by a reduction in the proportion of accounts with and LTV of 85%+

The average LTV of the indexed Leek 19 portfolio at 31 October 2008 is 77.6%, a slight reduction on the LTV of the un-indexed portfolio of 79.5% at the same date

30 accounts within the Leek 18 and 33 within the Leek 19 portfolio have an LTV of over 100% using the indexed LTVs

Stressed LTV We have also stressed the indexed LTVs of the Leek 18 and Leek 19

portfolios, applying a ‘haircut’ of 10% and 30% to the indexed LTV at 31 October 2008

Under the 10% stress test the average LTV of the Leek 18 portfolio increases to 82.9% and the Leek 19 to 86.2%. Under the 10% stress scenario 436 accounts (7.3% of the portfolio) within the Leek 18 portfolio and 1,205 (22.2%) of the Leek 19 portfolio would have an LTV of over 100%

Under the 30% stress test the average LTVs of the Leek 18 and Leek 19 portfolios are 106.6% and 110.8% respectively

Assuming a forced sale discount of 25% (2008 actual, up to introduction of Illius), in a base case 77% would be in ‘negative’ equity, which rises to 86% and 96% in the 10% and 30% stress scenario’s respectively

Indexed and stressed LTV – Leek 18 31 Oct 08

Indexed and stressed LTV – Leek 19 31 Oct 08



0%

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Latest valuation Indexed valuation Indexed valuation-10% haircut

Indexed valuation-30% haircut

0-25% 25-50% 50-75% 75-85 85-100 100-125% 125-150% 150%+


42

0%

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Leek 18 - Mar 08 Leek 18 - Oct 08 Leek 19 - Mar 08 Leek 19 - Oct 08Up to date in arrears


At 31 October 2008 20% of Leek 18 and Leek 19 accounts were classed as non-performing (i.e. one month in arrears)

This proportion had increased from the position at 31 March 2008 when 14% of Leek 18 and 15.9% of Leek 19 accounts were classed as non-performing

At 31 October 2008 8.6% of the Leek 18 and Leek 19 portfolios were three or more months in arrears

The average age of an account in arrears has increased in the six months since 31 March 2008 from 3.4 to 4.0 months for the Leek 18 portfolio and 3.7 to 4.1 months for the Leek 19 pool

Performing and non-performing accounts At 31 October 2008 1,198 (20.0%) of accounts in the Leek 18 portfolio and

1,094 (20.2%) of those in the Leek 19 portfolio were in arrears Both portfolios have worsened from their arrears positions at 31 March 2008

when 14.0% (1,007 accounts) and 15.9% (931 accounts) of accounts were in arrears in the Leek 18 and Leek 19 portfolios respectively

A high level extrapolation of the data provided suggests that the arrears balance of the Leek 18 and Leek 19 portfolios at 31 October 2008 was £2.7 million. This is 0.38% and 0.39% of the balance outstanding on the two portfolios at this date

An increase in the volume of accounts in arrears is being seen throughout the market with larger increase being seen in riskier lending portfolios

The blended three months plus arrears ratio of 8.6% compares with 5.7% for Platform and 4.8% for BTS as shown in the GCC management information in Appendix 2. The higher rate is explained by the more recent nature of this lending

Arrears ageing At 31 March 2008 36.5% of accounts which were in arrears in the Leek 18

portfolio and 37.8% of those in the Leek 19 portfolio were three or more months in arrears. At 31 October 2008 this proportion increased to 43.16% and 42.9% across the Leek 18 and Leek 19 portfolios

For accounts in arrears, over the six month period to 31 October 2008, the average arrears age increased from 3.4 to 4.0 months for the Leek 18 pool and from 3.7 to 4.1 months for the Leek 19 pool

At 31 October 2008, the average arrears age for accounts which are three or more months in arrears was 7.4 months for the Leek 18 portfolio and 7.8 months for Leek 19. These averages are broadly unchanged from the position at 31 March 2008 (Leek 18: 7.1 months; Leek 19: 7.6 months)

74 accounts within the Leek 18 portfolio and 85 accounts within the Leek 19 portfolio were 12 or more months in arrears at 31 October 2008 with an outstanding balance of £11.9 million and £16.0 million respectively

Portfolio split by performing and non-performing accounts

0%

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Leek 18 - Mar 08 Leek 18 - Oct 08 Leek 19 - Mar 08 Leek 19 - Oct 08

0-1 months 1-2 months 2-3 months 3-4 months 4-6 months6-12 months 12 -24 months 24+ months

Non performing accounts split by age of arrears




43


The proportion of accounts in arrears which are on a LIBOR linked product rate is disproportionately higher than the mix of these products within the portfolio for both the Leek 18 and Leek 19 pools

The proportion of accounts in arrears which are on a LIBOR linked rate has also increased in the six month period to 31 October 2008

Accounts in arrears by product rate – Leek 18 The graph opposite considers the split of accounts, by their product

rate, which are three or more months in arrears at 31 March and 31 October 2008 and also the mix of the total portfolio at these dates

At 31 March 2008 the largest proportion of accounts three or more months in arrears are on a fixed rate product (63.0%) which is broadly in line with the mix of the portfolio

At 31 March 2008 9.7% of the total portfolio balance comprised products with a LIBOR rate but 18.2% of accounts three or more months in arrears at this date arose on these products

At 31 October 2008 the proportion of accounts three or more months in arrears on a LIBOR rate increased to 41.6% whilst the mix of these accounts within the total book increased to just 21.2%

Accounts three or more months in arrears split by product rate – Leek 18

Accounts three or more months in arrears split by product rate – Leek 19

0%

10%

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Total portfolio - Mar 08 Accounts in arrears -Mar 08

Total portfolio - Oct 08 Accounts in arrears -Oct 08


54.4%

8.8%

25.0%

6.5%

16.5% 5.4%

50.9% 38.2%

13.0%

27.7%

11.5%

14.5% 9.6%

5.4%

14.2%

15.8%

16.9%

20.4%

41.5%

4.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

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100%

Leek 18 Mar book Leek 18 Mar Arrears Leek 18 Oct book Leek 18 Oct Arrears


69.7%

9.7%

7.3%

10.2%

6.0% 3.1%

63.0%

30.6%

3.1%

41.6%

4.3%

6% 20.5%

3.4%

18.2% 21.2%

26.6%

5.6%

43.3%

6.8%

Accounts in arrears by product rate – Leek 19 The mix by product rate of accounts that are three or more months in

arrears within the Leek 19 portfolio is similar to that of Leek 18 At 31 October 2008, 38.2% of accounts that are three or more months

in arrears are on fixed rate products however these products make up 41.6% of the total pool

Accounts with a LIBOR rate make up 15.8% of the total pool at 31 October 2008, however, 27.7% of accounts three or more months in areas are on these products

Within the Leek 19 pool the LIBOR discount products exhibit a similar trend to the LIBOR products. 11.5% of accounts three or more months in arrears are on a discounted LIBOR rate but these products only comprise 5.4% of the total pool

This suggests that accounts within the portfolio with a LIBOR or discount LIBOR rate may have a higher propensity for entering arrears than the rest of the portfolio




44

0%

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40%

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Total portfolio Mar 08 Accounts in arrearsMar 08

Total portfolio Oct 08 Accounts in arrears Oct08

Buy to let Prime Self cert Sub prime

0%

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70%

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100%

Total portfolio Mar 08 Accounts in arrearsMar 08

Total portfolio Oct 08 Accounts in arrearsOct 08

Buy to let Self cert Sub prime


The majority of accounts which are in arrears are sub prime in nature

A slight reduction in the proportion of accounts in arrears on sub prime products is seen in the six months to 31 October 2008 driven by an increase in the proportion of arrears cases on buy to let accounts and self cert accounts

Accounts in arrears by product rate At 31 March 2008 68.8% (253 accounts) of the accounts which are

three or more months in arrears are sub-prime. At this date 42.5% (3,050 accounts) of the total mortgage pool comprises sub-prime accounts which indicates that there is a higher propensity for these accounts to enter arrears, this is in line with our expectations

The arrears performance of the self cert and sub prime accounts has worsened in the six month period to 31 October 2008 whilst a slight improvement has been seen in the buy to let accounts. At 31 October 2008 there were 336 sub prime accounts three or more months in arrears, total sub prime accounts in the pool at this date numbered 2,376

At 31 October 2008 the proportion of self cert accounts three or more months in arrears had increased to 16.4% from 13.9% (85 accounts from 51 accounts) at 31 March 2008 whilst the proportion of self cert accounts in the total portfolio had reduced to 18.1% from 20.5% (1,083 from 1,471 accounts)

The arrears performance of the buy to let portfolio has improved slightly in the period relative to the change in the proportion of buy to let accounts within the total pool

Accounts in arrears split by product type – Leek 18

Accounts in arrears split by product type – Leek 19

42.5%

20.5%

37.0%

68.8%

13.9%

17.4%

18.1%

39.6%

42.3%

18.6%

16.4%

65.0%

40.2%

2.2%

37.0%

2.2%

38.7%

20.0%

38.8%

20.9%

1.7%

9.8%

67.4%

1.1%

8.8%

18.5%

71.3%

20.3%

Accounts in arrears by product rate As with the Leek 18 portfolio, the majority of accounts which are three

or more months in arrears are sub-prime There are indications that the performance of accounts in the other

portfolios has worsened in the six month period to 31 October 2008. At 31 October 2008 the proportion of accounts which are three or more months in arrears across the prime, buy to let and self cert products has increased from 28.4% at 31 March 2008 to 32.4% at 31 October 2008 (100 accounts to 152 accounts)




45


57.0% of accounts within the Leek 18 portfolio which are in arrears have an LTV of 85-100%, 1.4% have an LTV of over 100%

62.9% of the accounts in arrears within the Leek 19 portfolio have an LTV of 85-100% and 2.3% have an LTV of over 100%

These LTVs are prior to any adjustment for indexing

Arrears status and LTV At 31 October 2008 1,198 accounts in the Leek 18 and 1,094 accounts

in the Leek 19 portfolios were in arrears Within the Leek 18 portfolio 57.0% of the accounts in arrears (by

balance outstanding) have an LTV of 85-100% at 31 October 2008 and within the Leek 19 portfolio 62.9% of accounts in arrears have an LTV in this range

1.4% of accounts by balance outstanding in the Leek 18 and 2.3% of accounts in the Leek 19 portfolio have an LTV of over 100%, the balance outstanding on these loans at 31 October 2008 is £10.2 million and £15.4 million respectively

As previously noted, the account LTVs provided by Burgundy are based on the most recent valuation, no indexing has been performed to adjust for movements in property values since the date of the valuation

Balances outstanding split by LTV and arrears status – Leek 18 Oct 08

Balances outstanding split by LTV and arrears status – Leek 19 Oct 08



0%

10%

20%

30%

40%

50%

60%

70%

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90%

100%

0-30 30-50 50-75 75-85 85-100 100+

LTV %

UTD >0-3 months 3-6 months 6-12 months 12-24 months 24+ months

0%

10%

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0-30 30-50 50-75 75-85 85-100 100+

LTV %



46

Executive summary


Key issues


Commercial lending



Securitisation

Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendixes

Contents


47

Source: BCL tenant exposures

Commercial lending Asset mix and impairment

Whilst the pure commercial and housing association lending has no arrears or provisioning, the residential landlord shows some sign of distress

Overview The commercial lending team of BCIG was established in 1989 and is

currently made up of 43 people managing total assets of £3.7 billion The lending is predominantly in the UK and consists of ‘pure’ commercial

lending, residential landlord and housing association as shown in the table opposite

We understand that the tenants of loan agreements are structured so as to not exceed the minimum guaranteed lease terms

Commercial (£2.2 billion: 59%) The top ten exposures in the commercial book (as at July 2008) can be

seen in the table opposite None of the commercial book loans are in arrears and therefore no

provisions have been made against this book Management review the portfolio on a regular basis and compile a watch list

(utilising and traffic light system) as detailed below: Red Usually one of the following

− A key tenant is entered into administration, receivership or liquidation − When serious concern regarding a tenant is raised with real potential for

individual company default or a concern that the tenant will fail Amber Ongoing concern regarding tenant performance that may lead to tenant

failure usually highlighted by one of the following: − Poor financial performance e.g. Losses reported, deterioration in profits

or deterioration in Net Worth − Concerns relating to strategic factors which could potentially lead to

losses and then default or tenant failure Green Usually one of the following

− Concerns are raised in relation to a tenant usually following a downturn in performance although not necessarily resulting in losses

− Concerns regarding the sector in which a tenant operates − When a tenant has previously been experiencing difficulties and is now

in the recovery stage The graphic opposite shows the level of corporate accounts on the watch list

from September 2007 to July 2008. As can be seen the level of accounts on the list has been increasing over that period, a trend seen elsewhere in the industry

Top ten commercial exposures Rank Tenant Balance (£m)

% of total book

1 Government 112.9 9% 2 National Westminster Bank Public Limited Company 71.2 6% 3 DSBG Retail Limited 65.8 5% 4 National Car Parks Limited 47.4 4% 5 Tesco Stores Limited 46.8 4% 6 J Sainsbury plc 44.9 3% 7 PricewaterhouseCoopers LLP 44.7 3% 8 The Prudential Assurance Company Limited 35.9 3% 9 B&Q plc 35.6 3% 10 Hilton Hotels Corporation 30.0 2% Total 71.2 42%

Commercial lending watch list – value of cases on list

-

50.0

100.0

150.0

200.0

250.0

300.0

Sep-

07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

£ m

illio

n

Red Amber GreenSource: Arrears and Losses Report July 2008

Source: Burgundy 2008 Interim Results / 2007 Annual Report

Composition of commercial book£bn HY08 FY07 FY06Loans secured on commercial property 2.2 2.1 1.6Loans to Registered Social Landlords (RSLS) 0.8 1 1.2Loans secured on residential property 0.7 0.7 0.4

3.7 3.8 3.2


48

Commercial lending Asset mix and impairment (2)

In two cases where loans are in possession, no impairment has been taken as management has assumed that the properties will be taken into the Illius scheme

We believe that additional provisions of at least £9.7 million are necessary for these accounts

Burgundy has exposure to Woolworths totaling £16.4 million and a further £4.3 million exposure to MFI. Currently, provisions of £4.8 million are in place for these exposures

Residential landlords (£0.7 billion: 19%) The residential landlords book consists of BTL properties where individuals

or companies have ten or more properties There are nine fraud cases in the residential landlord book As at the end of August 2008, four of the loans are in the hands of

receivers, as detailed in the table opposite, with a further five cases in arrears where no provision has been made. A further two loans have been placed in the hands of receivers as at the end of September 2008

As can be seen from the table opposite, one of the management actions taken to reduce arrears and bad debt losses has been to manage residential properties going into possession through the Illius scheme. Further detail on this scheme can be seen earlier in the report

No further data on the five arrears cases has been provided by Burgundy to date

Housing association (£0.8 billion: 22%) Management has confirmed to us that the housing association book has

no arrears and is considered very low risk. At this stage no further detail has been provided about this lending

Exposure to Woolworths Following the administration of Woolworths on 28 November, Burgundy

management has provided details of the exposures they had within the commercial portfolio to the company. These can be seen in the table opposite

The largest of the exposures is a £12.7 million loan to Keyscrest Property Holdings Limited which is secured on a distribution centre 100% let to Woolworths Group Plc

Burgundy management has calculated a provision for these exposures using a similar methodology to that used in the residential mortgage portfolio. This results in a provision of £4.2 million

Exposures to MFI Burgundy have one exposure to MFI as detailed opposite As with Woolworths, Burgundy management has applied a provision of

£550k on this loan Further work is being carried out on these exposures and the Top 40

commercial loans to determine if any additional provisions are required

Residential landlord outstanding fraud/receiver cases

Name No of properties

Amount outstanding Detail

Provision £ million

Sanderston 68 £5,540,673 Properties in South East 2 properties still to be sold

1.27

Brentwood 72 £6,549,388 Properties in Lincolnshire 4 sales still to complete

3.98

Panchoo 100 £6,254,000 Properties in North West Planned to retain and manage properties Possible under-provision by £2 million

1.17

McGuiness 31 £12,000,000 New build properties in Woolwich Planned to retain and manage properties Properties valued at £9 million, leaving an exposure of £2.9 million

2.92

Grace tbc tbc Properties from the three Grace transactions have been sold in auction generating a loss of £0.65m

-

Ibrahim tbc tbc Receivers recently appointed who are taking action to gain control of the rental income

0.40

Source: Fraud loss report received 20 November 2008

Woolworths and MFI exposuresDeal name Property type % of rent Loan (£)WoolworthsLandmaster Properties Retail (multiple unit) 2.5% 651,363Denstar Retail (single unit) 25.5% 348,151Luxury Properties Retail (single unit) 42.7% 785,413Primrose / Primetone Retail (multiple unit) 3.3% 901,657Luxury Properties Retail (single unit) 57.3% 1,052,435Keyscrest Property Holdings Storage/distribution 100.0% 12,695,621

16,434,640MFIPeerstand Retail (multiple unit) 31.8% 4,277,361

20,712,001Source: Burgundy information


49

Executive summary


Key issues


Commercial lending



Securitisation

Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendices

Contents


50

Available for sale asset mix As can be seen in the charts opposite, the majority of the liquid asset book is

in “vanilla” instruments of a high grade

Management has informed us that the assets in grade BBB of £140 million have been reviewed for impairment and all were considered un-impaired

The Cullinan SIV was further impaired at the half year by £0.75 million (in addition to the £1.6 million taken in FY07) bring the net exposure to £2.65 million. The valuation is higher than that used by Claret (who we understand have provided the asset down to 20%), but is in line with the net asset valuations by HSBC of the Mazarin and Barion components of 22% and 34% respectively

Available for sale loss reserves The fair value adjustments on the AFS book at 30 November 2008 amounted

to £648 million (30 June 2008: £139 million). This is based on current market prices for the instruments and would reverse where instruments were held to maturity and did not default

The reversionary profile of the AFS losses can be seen in the chart opposite and shows that circa 23% of losses per year would reverse (from FY09) were none of the assets to default

A detailed review of the assets has been completed which identified a number of assets that could be at risk of permanent impairment. These include Lehmans, IKB, Kaupthing, Mazarin & Barion which have exposures of approximately £130m

Underlying performance Following receipt of more detailed information on the MBS and ABS portfolio,

further analysis has been carried out on the higher risk assets to help management determine where permanent impairment may occur. This analysis is shown on the following pages

Available for sale assets Available for sale asset mix

The AFS loss reserves have moved from £139 million in June 2008 to £259 million in August 2008

Whilst the majority of the AFS portfolio consists of high quality “vanilla” assets, there are a number of assets which may have become impaired due to the recent market turmoil. With the exception of the Lehmans exposure of £90 million, management believe this is not the case, however, we have found evidence of other impaired loans with a carrying value of £40 million

Additionally, we have identified a further 21 MBS positions with a nominal value of £244.0 million and a MTM value of £188.2 million on which we consider the risk of some impairment to be high, on which Claret has calculated a provision of £65 million would be needed

AFS assets by type and rating (June 2008)

Reversion timing of AFS fair value adjustments

Source: Half year announcement June 2008

Source: AFS reserves detail

£3.6

£4.2

£1.2

£0.2

£1.8

£3.2

£0.2

£2.8

£0.3£0.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Asset type Asset rating

£ bi

llion

CD's

Gilts

FRN

Reverse repo

ABS/MBS

Deposits

BBB

A

AA

AAA

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY08 FY09 FY10 FY11 FY12 +

Perc

enta

ge

FRN's MBS / ABS MBS / ABS (BTS)


51

Wholesale counterparty exposures Burgundy management has identified high risk wholesale counterparty exposures to Lehmans, IKB, Kaupthing and Mazarin & Barion of £130 million.

Analysis is set out below:

Available for sale assets Wholesale counterparty exposures

Burgundy management has identified high risk wholesale counterparty exposures to Lehmans, IKB, Kaupthing and Mazarin & Barion of £130 million

Source: Counterparty exposures report September 2008

High risk liquidity / banking exposures

£m Gross

Burgundy proposed provision Claret view

Lehmans 90 45 80IKB 25 - -Kaupthing 10 5 9Mazarin & Barion 5 2 4

130 52 93


52

Available for sale assets Mortgage and asset backed securities (1)

Introduction Further analysis of the underlying performance of the riskier AFS assets

has been performed

To complete this work, we have segmented the AFS assets into those that contain the highest inherent risk and hence the lowest current market values, namely the MBS and ABS assets. These have been further segmented to concentrate our work on where the higher risk of loss exists. In the case of the MBS and ABS, as agreed with Claret management, we have focused on the following areas;

- Any asset where the MTM adjustment has reduced the assets volume to below 70% of the original book value;

- MBS’s with assets originated by Northern Rock (Granite);

- MBS’s with assets originated by Bradford and Bingley (Aire Valley); and

- All other MBS/ABS with Fitch origination grades (or equivalent) of ‘A’ or below

In total, this has led to us analysing 80 AFS assets with a nominal book value of £613 million and MTM value of £492 million

Method of analysis Our analysis has been based on publically available information on the

individual securitisation vehicles or their master trusts

The data supplied by each varies and therefore, the analysis completed is not uniform across each of the identified high risk areas

Typically, information available has included;

- rating on issuance;

- most recent rating;

- rating outlook;

- certain data on the credit enhancement within the vehicle; and in certain instances

- arrears and losses data

Our analysis uses this information to highlight where the key indications of impairment exist within the selected assets

Using publically available information, we have analysed the performance of the underlying assets of 80 of the higher risk MBS/ABS assets

In total, these account for £613 million of the MBS/ABS book, which is 19% of the total MBS/ABS portfolio


53


MTM Asset value of 70% or less Excluding the Granite securities, which are covered overleaf, there are 19

securities with a MTM value of 70% or below. These total £79.0 million (£42.4 million MTM value)

Full details of the securities can be seen in Appendix 4 which includes the originator (the entity that originally lent to the borrower)

Individual securities of note The securities in this population relate to 9 different securitisation

programmes, each of which is considered in more detail below RMAC securities Two securities with a face value of £13.3 million and MTM reductions of

52.1% and 78.1% are held within this population. They relate to mortgages originated by GMAC

The arrears on the underlying assets are 7.3% and the credit enhancement within the vehicle is below that at origination and currently required (£4.95 million compared to £5.78 million). The securities, however, retain their original grading of A and AA with a stable outlook

Given the significant MTM losses being experienced on these securities, poor performance of the underlying assets and credit enhancement is below target, we would recommend management considers impairing these assets as part of the fair value exercise.

Resloc UK Resloc UK is Morgan Stanley’s securitisation programme and Burgundy

hold three securities within this population ranging from A to AA in rating (face value £22.0 million; MTM £12.0 million)

The MTM losses range from 35% to 55% and whilst the arrears are currently 4.1%, the credit enhancement across all three securities is higher than at inception

Brunel Brunel is the Bank of Ireland’s securitisation programme and Burgundy

hold four securities in Brunel RMS within this population which are all BBB rated with a face value of £10.5 million (MTM £5.1 million)

Arrears on this vehicle are low at 1.0% and the credit enhancement above that at inception (2.5% compared to 1.5%)

Newgate Funding Newgate is the securitisation programme for Mortgages Plc (a subsidiary

of Merrill Lynch) for which we have not been able to find any data The one security in this population has a face value of £4.3 million with a

50.8% MTM discount leaving a MTM value of £2.1 million

1st Flexible / Paragon 1st Flexible and Paragon are both securitisation programmes run by Paragon.

Burgundy hold 6 securities across these two vehicles within this population with a face value of £19.9 million and MTM value of £12.8 million (blended MTM of 64.3%)

Limited data is available on the 1st Flexible securities, however, the data that is available shows very low arrears levels and credit enhancements higher than inception and in line with latest required

The low MTM values on these securities could be linked to market sentiment surrounding the large US investment banks

Residential Mortgages Securities (RMS) RMS is the securitisation programme of Kensington Mortgages plc Burgundy hold two securities in RMS in this population with a face value of

£4.0 million and MTM value of £2.2 million (55%) both of which are ‘A’ rated with a stable outlook

Whilst the credit enhancement on these securities is above that at inception (10.1% compared to 6.5%), the arrears are high at 23.1%. This, and the general market sentiment surrounding Kensington Mortgages, is believed to have driven down the MTM value

Arkle Arkle is the securitisation programme of Lloyds TSB and Burgundy holds one

security in Arkle in this population Whilst this is BBB rated and has MTM losses of 30.7% (£5.0 million to £1.5

million), the underlying arrears in the vehicle are good at 0.6% and credit enhancement is at required levels

Overall Within this population, whilst all assets could be impaired to a lesser or

greater degree, the key risks lie within the RMAC, RMS and Newgate securities, which collectively have a nominal value of £21.6 million and a fair value of £9.0 million

Within the population of MBS with a fair value of less than 70%, key risks of some impairment loss lie within the RMAC, RMS and Newgate securities, which collectively have a nominal value of £21.6 million and a fair value of £9.0 million

Overview of populationNumber of securties 19Total face value £79,045,636Total MTM value £42,365,182Average MTM loss (46.4%)AA 2A 10BBB 6No data on rating 1

Source: Various securitisation reports


54


Granite securities Given the nationalisation of Northern Rock earlier in the year and

continued deterioration in the economic environment since that time, the securities in the market originated by Granite (Northern Rock’s securitisation programme) have seen significant losses. As such, analysis of all the Granite securities was considered appropriate

In total Burgundy holds 31 Granite securities which total £ 379.5 million (£319.3 million MTM value). These range from BBB to AAA in credit rating and are experiencing MTM losses of between 1.4% to 65.4%

Data was available by individual securitisation up until 2005; however, following that date, data is pooled for to the overall master trust agreement covering all of the securitisations

As can be seen in the table opposite, the largest MTM losses are experienced on the BBB securities as would be expected. In all cases, these securities currently have a credit enhancement of 1.65% compared to a required enhancement of 2.22%. This is the case for all securities issued after 2004. This means that the first loss reserves and other credit enhancement tools are not up to the levels that are required

All securities pre 2005 have credit enhancements in line with that required and six show a positive outlook on their rating

Full details of the securities can be seen in Appendix 5

Overview of securities purchased Since 2003, £54.7 billion of Granite securities have been issued to the

market of which Burgundy has purchased £408.3 million (75 bps). Full details of the securities issued and purchased by series can be seen in Appendix 6

The relative proportions of credit rating of the securities can be seen in the graph opposite which shows that, proportionately to securities issues, Burgundy have taken a higher relative proportion of more junior notes

Of the £408.3 million purchased, £141.6 million relate to securities issued in H2 06 and H1 07. Given the flow of securitisations performed by Granite at this time, it is likely that these underlying mortgage assets would have been predominantly written around this time, at which time the market competition was at its most aggressive point

Similar to Burgundy’s own experience, we would expect the highest losses to emerge from these more recent issues. Therefore, we conclude that these notes, with a book value of £141.6 million and a fair value of £113.3 million represent a high risk of impairment

Burgundy has an exposure to Granite notes of £379.5 million of these notes, we consider that the notes issued in H2 06 and H1 07, which have a nominal value of £141.6 million and a fair value of £113.3 million represent a high risk of some impairment loss

It has been reported in the press this morning (21 November) that Northern Rock has decided not to continue supporting the Granite programme and that it will now go into run-off. This could lead to longer pay-off periods and increased risk of loss to lower tier note holders. We will give a verbal update to the Committee on this issue as more details will come to light over the next few days

Overview of Granite portfolios by gradeNumber Value MTM MTM loss

AAA 14 302,151,968 264,202,282 (12.6%)AA 8 32,318,838 26,624,189 (17.6%)A 3 21,500,000 15,723,300 (26.9%)BBB 6 23,503,080 12,778,561 (45.6%)Total 31 £379,473,886 £319,328,332 (15.8%)

Overview of Granite portfolios by year

Number Value MTM MTM loss2003 3 19,282,245 18,980,887 (1.6%)2004 9 71,175,393 64,243,957 (9.7%)2005 6 60,439,167 54,264,077 (10.2%)2006 6 162,000,000 134,197,250 (17.2%)2007 7 66,577,080 47,642,161 (28.4%)Total 31 £379,473,886 £319,328,332 (15.8%)

Source: Granite Master Trust and AFS reserves detail



90.9%73.6%

3.1%

6.3%7.3%12.8%2.5%3.5%

0%10%20%30%40%50%60%70%80%90%

100%

Issued by Granite Mix of Burgundy portfolio

A notes B notes M Notes C Notes

Granite securities and Burgundy’s portfolio mix


55

Remaining BBB rated securities

Face value MTM Arrears requirement currentAbbey National 12,358,240 11,117,977 0.76 1.68 1.68Clydesdale Bank 5,000,000 3,649,500 no data 1.50 no dataHBOS 10,947,765 9,849,124 1.07 2.26 2.26Permanent 2,372,655 1,682,687 1.07 1.86 1.86Lloyds TSB 3,000,000 2,520,000 0.63 1.65 1.65Arran Residential 1,977,213 1,588,295 4.78 1.65 1.65Alliance & Leicester 1,250,000 873,750 0.22 1.65 1.65

36,905,873 31,281,333

Credit enhancement


Aire Valley securities Burgundy hold one security issued by Aire Valley (the

securitisation programme of Bradford and Bingley plc) with an original value of £1.6 million and MTM value of £1.3 million (15.3% MTM reduction). Full details can be seen in Appendix 7

The security was rated BBB on issuance and remains at this rating with a stable outlook

The arrears in the underlying portfolio are at 2.64% below that disclosed in June across their whole portfolio of 2.87%

The latest credit enhancement with the vehicle (and for these rates) is at the required rate

Other lower rated securities Excluding the Aire Valley security detailed above,

there are a further 14 ‘BBB’ rated securities and 14 ‘A’ rated securities totalling £36.9 million (MTM £31.3 million) and £114.0 million (MTM £96.3 million) respectively

BBB securities The BBB securities are detailed in the table opposite.

As can be seen, all of the securities underlying assets have low arrears, credit enhancement in line with requirement and have rating outlooks of stable

The MTM movements on these securities do not suggest significant negative sentiment in the market (in comparison with certain securities) with the exception of Clydesdale (where we have little data) and Permanent

Within the ‘A’ rated securities (as detailed opposite) little data has been found on Paragon, Clydesdale and Bank of Ireland

Of the remaining securities, two (Alliance and Leicester and Lloyds TSB) have credit enhancements below the required level

From the population of other low rated securities, including Aire Valley, the securities at highest risk of some impairment are Clydesdale, Permanent, Paragon, Bank of Ireland and the ‘A’ rated Alliance and Leicester and Lloyds TSB securities. These have nominal value of £80.8 million and a fair value of £65.9 million

We note that following the decision by Northern Rock to allow Granite to go into run-off, there is a risk that other lenders will do the same, with commentators naming Bradford & Bingley as the most likely to follow suit

Source: Securitisation reports and AFS reserves detail

Source: Securitisation reports and AFS reserves detail

Remaining A rated securities

Face value MTM Arrears requirement currentLloyds TSB 19,600,000 15,407,560 0.63 4.45 1.77Arran Residential 4,000,000 3,517,200 4.78 100.00 100.00Royal Bank of Scotland 11,000,000 9,212,500 4.05 100.00 100.00Bank of Ireland 17,000,000 12,821,400 no data no data no dataParagon 8,840,223 8,000,402 7.13 no data no dataAlliance & Leicester 4,000,000 3,055,600 0.22 3.40 3.63Alliance & Leicester 16,000,000 14,656,000 0.22 9.25 9.21Abbey National 16,800,000 15,453,460 0.76 4.55 4.57Clydesdale Bank 8,000,000 6,619,200 no data 4.80 no dataHBOS 8,719,348 7,601,077 1.07 no data 5.09

113,959,571 96,344,399

Credit enhancement


56

Overview RMC requested that an analysis of the potential credit losses on the

AFS portfolio in a moderate and severe stress scenario was completed

The c.£8bn portfolio of AFS securities (prior to any reclassifications between AFS and loans and receivables permitted by the recent amendment to IAS 39) comprises a mixture of Gilts, CDs, FRNs and ABS/MBSs. Burgundy currently has an unrealised mark-to-market loss on its AFS securities of around £600m at 30 November 2008, the majority of which relates to their FRNs (£82m or 3% of notional) and ABS/MBS portfolios (£510m or 15% of notional)

Market sentiment has moved against these instruments thus significantly depressing their fair values; however, it is debatable as to what extent these fair value losses will actually result in credit losses.

For regulatory capital purposes, unrealised mark-to-market losses on debt securities are ignored for capital purposes until realised through sale or impairment; however, on acquisition, any unrealised market-to-mark loss on the AFS securities will effectively be realised/provided for capital purposes. Therefore, as long as future impairment losses are less than £600m on the AFS securities (prior to any reclassification), then regulatory capital would not be impacted

However, it should be noted, that under current accounting rules for AFS assets, impairment losses are not limited to expected credit losses. The existence of any credit losses on an individual security results in the full mark-to-market loss being taken to the income statement as an impairment loss, thereby increasing the hit to capital resources. Thus, the capital resources of the combined entity will be also be subject to future fair value movements on impaired securities (which may be in excess of expected credit losses in the short term) – this risk has not been modelled

For assets classified as loans and receivables, the impairment charge is limited to incurred credit losses (not full mark-to-market movements as for AFS). Burgundy are in the process of reclassifying significant elements of its ABS/MBS portfolio from AFS to loans and receivables. We await information as to the extent to which assets have been reclassified out of AFS to loans and receivables (permitted based on certain criteria) which would mitigate the exposure to future fair value movements on impaired AFS securities

Composition of Burgundy’s ABS/MBS portfolio At 30 Nov 2008 (Book value)

Credit ratings:

AAA %

AA/A %

BBB %

Total £bn

Asset class: MBS – Retail, Prime 84 12 4 2.47 MBS – Commercial 75 25 - 0.13 MBS – Retail, Buy-to-Let 46 46 8 0.04 MBS – Retail, Non-conforming 55 42 3 0.25 ABS – Auto loans 97 3 - 0.08 ABS – credit cards 78 22 - 0.09 Collateralised loan obligations 95 5 - 0.06 Other - - 100 0.01 Total 81 15 4 3.13

FRN portfolio The FRN portfolio is virtually entirely comprised of UK (vast majority), Euro zon

and International financial institutions. There is reasonable historic data on defaurates on corporate debt (including experience of previous recessions). Virtually aof Burgundy’s FRN portfolio is of investment grade quality, the worst default raton such instruments in the last 35 years was 3.7% in 2001

Assuming loss given defaults of around 85% in line with recent Lehman Brotherand Icelandic experience (albeit it is likely that a number of the names woulattract national government support in the case of a collapse), this would givstressed losses of up to £75m (lower than the proposed fair value adjustments)

ABS/MBS portfolio Modelling of impairment losses on the £3.1bn ABS/MBS portfolio is more difficu

as there is no meaningful historic experience of the performance of such portfoliothrough the economic cycle. We have considered a number of methods to derivthe potential credit losses which give a range of defaults from £13m-£110m in moderate stress and £325m-£525m in a severe stress (lower than the proposefair value adjustments), these include:

- Burgundy analysis applying uplifted historic corporate default rates to ABS/MBS £2m (current) to £13m (stressed);

- Claret analysis of potential losses on the current high risk securities is £65m;


Following a request from the RMC, additional work was completed to show the range of the possible falls in RMBS values across the Burgundy portfolio

This analysis took a number of forms to achieve a view that was balanced across a number of third party sources and assumptions


57

ABS/MBS portfolio

- Fitch analysis of the UK non-conforming sector MBSs in a 30% peak-to-trough house price decline suggest that (when applied to Burgundy’s portfolio), £110m of its ABS/MBS investments could reach ‘junk’ status (BB rating or below). These are assumed to be worthless; and

- KPMG high level analysis of the forced sale value of security on the underlying assets (less collateral/credit enhancements held) assuming a 27% and 40% peak-to-trough fall in house/asset prices - £90m and £325m-£525m respectively

However, It should be noted that mark-to-market losses may be much higher than the projected credit losses

Further explanation of the analysis of the ABS/MBS portfolio Burgundy analysis - £2m (current), 13m (moderate)

Burgundy management has completed analysis of the potential losses on the MBS/ ABS book by applying probabilities of default and recovery rates from Moody’s studies of corporate debt (February 2008) to the portfolio as at the end of November 2008. This used default and recovery rates from corporate debt as no meaningful historic experience exists for ABS/MBS debt

Using this information, Burgundy management estimate losses following defaults within the portfolio of £2m currently and if this was stressed (assume that all bonds are downgraded one full rating band) the loss would increase to £13m

Claret analysis - £65m (current)

Claret management has considered the potential losses on high risk ABS/MBS, being the following:

- Any asset where the current market value is less than 70% of the original book value;

- MBS with assets originated by Northern Rock (Granite);

- MBS with assets originated by Bradford and Bingley (Aire Valley); and

- All other MBS/ABS with Fitch origination grades (or equivalent) of ‘A’ or below

Claret consider the level of arrears and credit enhancement in the vehicle to inform a judgmental loss assessment

Fitch analysis (applied to Burgundy by KPMG) - £110m (moderate) Fitch Ratings report ‘Impact of Declining House Prices on UK Non-

conforming ratings’ (dated November 2008), considered the impact of a 30% peak-to-trough credit ratings decline on UK non-conforming MBS notes

Fitch suggested that it expected a 3% default on such notes, biased towards BBB, BB and B rated tranches (no defaults were expected on AAA and AA). Fitch also mapped the migration of notes from their current credit rating to ‘junk’ status (BB rating or below), approximately 18% of A rated notes and 60% of BBB rated notes are expected to migrate to ‘junk’ status as a result of falling house prices

Only 11% of Burgundy’s A and BBB rated notes are in non-conforming MBSs; however, if in a pessimistic case this was applied to all Burgundy’s A and BBB rated notes and no recoveries were assumed from ‘junk’ bonds this would generate a loss of £110m

KPMG analysis - £90m (moderate), £325m-£525m (severe) KPMG has completed additional analysis to further stress of the ABS/MBS

portfolio using a methodology based on stressing the underlying security value of the loan portfolios

The analysis uses the latest investor reports for the securitisation vehicles that have issued the debt to determine the latest average weighted LTV of the underlying assets and the seniority of the loan notes held by Burgundy (i.e. whether the losses would burn through the more junior notes)

Additional HPI falls and forced sale discounts are then applied to the LTV to simulate different stress scenarios. This indicates the potential losses based on a security value of the underlying assets. This is likely to be a prudent estimate of the loss as it assumes a 100% default of the underlying loan portfolio. The analysis is very sensitive to assumed forced sales discounts in a severe fall in HPI, as shown below:

- 27% peak-to-trough fall in HPI, 30% forced sale discount factor = £90m; - 40% peak-to-trough fall in HPI, 25% forced sale discount factor = £325m; - 40% peak-to-trough fall in HPI, 30% forced sale discount factor = £525m Where this is the case, the seniority of the note holders is used to

determine whether the notes that Burgundy holds could expect to see losses

Where up to date investor reports have not been able to be obtained due to the timing of this piece of work, the losses have been extrapolated by asset type and loan credit rating. Investor reports have been obtained for 136 of the 297 instruments held at 30 November 2008.


Following a request from the RMC, additional work was completed to show the range of the possible falls in RMBS values across the Burgundy portfolio

This analysis took a number of forms to achieve a view that was balanced across a number of third party sources and assumptions


58

Executive summary


Key issues


Commercial lending



Securitisation

Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendices

Contents


59

Funding and liquidity Balance sheet funding

The balance sheet is funded via retail funds, securitisation and wholesale funding

Broadly speaking, the retail funds and securitisation match off against the mortgage assets with wholesale funding matching off against the liquid assets

Retail funds These comprise deposits from individual retail customers. Burgundy do not have

current accounts Maturity analysis of retail deposits as at 8 October 2008 is set out below, although

we have noted that the balance of £nil in the 0-8 day bucket is incorrect (most of Burgundy’s deposits are instant access)

Noteholder funds The noteholder funds comprise funding via Burgundy’s securitisation structures

(Leek 11 to 19) and also funding obtained via the Government’s Special Liquidity Scheme (SLS). The amounts are broadly split £3.1 billion to £1.2 billion respectively

Further detail around the Securitisation structures can be seen later in the report Wholesale funds Wholesale funds include the MTN programme, PIBS and subordinated debt as well

as shorter term funding from counterparties such as local government, fund managers, pension schemes and lines from other financial institutions

Burgundy also have warehouse lines (via their Meerbrook facilities) totalling £1.2 billion of which £580 million is currently drawn down

A small number of counterparties were lost as a result of the downgrading earlier in the year; predominantly small parties with the exception of L&G (£300 million) and Morley (£50 million). The cumulative rollover rate of funding declined from 93% to 87% after the down grade. Whilst numbers of counterparties reduced, the overall balances remained stable. The rollover rate at 30 September 2008 has reduced further to 84%

Management have informed us that the consequences of a further downgrade would be as follows

- As seen previously, certain counterparties would be expected not to roll over their funding lines. Treasury management believe this would be possible to replace but just at a higher cost. Management’s estimates of the value of wholesale flight are £150-200 million of unsecured and a further £250-500 million of repo over a 12 month period;

- If the grading were to fall to BBB or below, the GIC account associated with the Meerbrook warehouse funding lines would have to be held externally. Given the warehouse lines are renegotiated on an annual basis, there could be a risk that these lines were withdrawn. Where the lines have already been drawn, these amounts are guaranteed; however, a step-up rate of interest would be applied (which is 75 to 100 bps above the current drawn margin); and

- Management are not aware of any other significant triggers that would be breached albeit they could exist in agreements such as repos etc

Further detail on the wholesale funding can be seen overleaf

£25.5 £25.1

£10.2 £9.2

£1.1 £1.0

£17.6£19.2

£4.7

£4.3

£11.9£9.4

£0.5 £0.4£2.1 £2.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY07 assets FY07 liabilities H1 2008 assets H1 2008 liabilities

Mortgages Liquid assets Other assets Retail fundsNoteholder funds Wholesale funds Other Capital & reserves

Balance sheet assets and liabilities (December 2007 & June 2008)

Source: Annual Financial Statements December 2007; Half year announcement June 2008

Deposit balances£m

Up to 8 days -8 days - 1 month 11,7661 month - 3 months 1,7483 months - 6 months 7086 months - 12 months 3,4391 year - 2 years 6332 years - 3 years 3693 years - 4 years 2384 years - 5 years 466> 5 years 2Total 19,369

Maturity analysis of retail deposits

Source: Burgundy Maturity Profile 8 October 2008


60

Funding and liquidity Retail funding (1)

Of total accounts of 4,517,511, we have identified 4,178,302 accounts with balances of £22.3 billion where retail deposit investors do not appear to overlap. 253,390 accounts indicate evidence of crossover; balances on these accounts total £1.76 billion

Source: Burgundy maturity profile 8 October 2008

Comparison of Burgundy and Claret retail deposit portfolios We have performed high level analysis on data provided by Burgundy and Claret to assess the extent of ‘overlap’ of retail deposit customers across the two portfolios Our analysis sought to ‘match’ those individuals considered to be customers of both entities based on commonality of gender, age and full postcode Findings are summarised below:

Note 1: No matching can be performed since no valid postcode is present - must assume that these customers are all standalone

Note 2: Having eliminated items in 1 above, identify postcodes which occur in Burgundy and not Claret, and vice versa - all customers with these postcodes are definitely standalone

Note 3: Having eliminated items in 1 and 2 above, identify matches between Burgundy and Claret where PC, age and gender (where "M" or "F") are present and agree, and there is only 1 record at the PC for each entity - assume that these relate to the same person

Note 4: Having eliminated items in 1 to 3 above, identify items where PC, age and gender (where "M" or "F") are present and agree, but only occur in Burgundy and not Claret, and vice versa nd there is only 1 record at the PC for each entity - all customers with these postcodes are definitely standalone

Note 5: Having eliminated items in 1 to 4 above, identify postcodes which occur in Burgundy and not Claret, and vice versa - all customers with these postcodes are definitely standalone

Note 6: Having eliminated items in 1 to 5 above, identify matches between Burgundy and Claret where PC, age and gender (where "M" or "F") are present and agree, and there is more than 1 record at the PC for each entity, but the same number of records for each entity - assume that these relate to the same person

Note 7: Having eliminated items in 1 to 6 above, identify items where PC, age and gender (where "M" or "F") are present and agree, but only occur in Burgundy and not Claret, and vice versa and there is more than 1 record at the PC for each entity - all customers with these postcodes are definitely standalone


Note 9: Having eliminated items in 1 to 8 above, identify matches between Burgundy and Claret where PC, age and gender (where "U") are present and agree, and there is only 1 record at the PC for each entity - assume that these relate to the same person

Note 10: Having eliminated items in 1 to 9 above, identify items where PC, age and gender (where "U") are present and agree, but only occur in Burgundy and not Claret, and vice versa – all customers with these postcodes are definitely standalone

Note 11: Having eliminated items in 1 to 10 above, identify postcodes which occur in Burgundy and not Claret, and vice versa - these are definitely standalone


Note 13: Postcodes agree but insufficient other detail to positively match - must assume that these customers are all standalone

Note No Bal £ No Bal £

No valid postcode present 1 23,961 80,369,158 45,480 169,758,182 Assumed to be standalone

No matching postcode for other entity (1) 2 976,000 6,075,805,593 518,841 1,905,899,059 Definitely standaloneSingle "M" or "F" with age matched across entities 3 124,951 1,147,690,500 124,951 589,269,138 Cross entity matches

Single "M" or "F" with age not matched across entities 4 1,358,936 9,451,819,492 846,937 3,575,180,418 Definitely standalone

No matching postcode for other entity (2) 5 310,562 728,781,724 53,461 193,776,486 Definitely standaloneMultiple "M" or "F" with age matched across entities 6 1,741 19,562,077 1,741 6,543,096 Cross entity matches

Multiple "M" or "F" with age not matched across entities 7 25,129 179,622,040 25,704 111,341,666 Definitely standalone

No matching postcode for other entity (3) 8 3,815 18,650,109 72 381,037 Definitely standaloneSingle "U" with age matched across entities 9 3 8,994 3 20,860 Cross entity matchesSingle "U" with age not matched across entities 10 250 1,237,010 11,769 25,874,278 Definitely standaloneNo matching postcode for other entity (4) 11 25,203 64,959,785 136 681,723 Definitely standaloneNo matching postcode for other entity (5) 12 20,804 4,811,807 683 1,503,337 Definitely standalone

Remainder 13 11005 9,190,627 5373 12,952,691 Assumed to be standalone

Total number of customers 2,882,360 17,782,508,916 1,635,151 6,593,181,972

CLARETBURGUNDY


61

Funding and liquidity Retail funding (2)

Following on from the comparison of the retail deposit portfolios, comparison of the members of Claret has been completed using the same methodology

Comparison of Burgundy and Claret members Following on from the comparison of the retail deposit portfolios, comparison of the members of Claret has been completed using the same methodology.

The results are summarised below:

Additionally, where cross entity matches have definitely been identified, these have been split by account balance. The results are summarised below;

Note 1: No matching can be performed since no valid postcode is present or no age is present – must assume that these customers are all stand alone

Note 2: Having eliminated items in 1 above, identify postcodes which occur in Burgundy and not Claret, and vice versa - all customers with these postcodes are definitely standalone

Note 3: Having eliminated items in 1 and 2 above, identify matches between Burgandy and Claret where PC, age and gender are present and agree, and there are the same number of records at the PC for each entity - assume that these correlate to the same persons

Note 4: Having eliminated items in 1 to 3 above, identify items where PC, age and gender are present, but the combination only occurs in Burgundy and not Claret, and vice versa

Note 5: Having eliminated items in 1 to 4 above, identify matches between Burgandy and Claret where PC, age and gender are present and agree, but the number of records at the PC for each entity differs. Assume that these correlate across the entities as follows:

- where number of records in Burgundy exceeds number of records in Claret - match Burgundy records to the available Claret records on ‘first come, first served’ basis

- assume remaining unmatched Burgundy records are stand alone

- where number of records in Claret exceeds number of records in Burgundy

- match Claret records to the available Burgundy records giving priority first to Claret records with Payout-CFS flag, then to Claret records with Payout flag, then to other Claret records

- assume remaining unmatched Claret records are stand alone

Cross entity matches by balanceNo Balances (£)

Aged under 18Balance < £500 125 12,662Balance >= £500 95 350,066

220 362,729Aged 18 and overBalance < £100 31,792 497,862Balance >= £100 and < £2,500 46,581 35,210,199Balance >= £2,500 71,338 1,373,277,621

149,711 1,408,985,681Total 149,931 1,409,348,410

BURGUNDY CLARETNote No No

Insufficient details to match 1 446,089 665,469 Assumed to be standaloneNo matching postcode for other entity 2 912,905 1,244,448 Definitely standalonePostcode, age and gender matched across entities (same number of customers within postcode for each entity) 3 130,006 130,006 Cross entity matchesNo match on postcode, age and gender for other entity 4 1,365,210 1,270,427 Definitely standalonePostcode, age and gender matched across entities (different number of customers within postcode for each entity) 5 19,925 19,925 Cross entity matchesStandalones 5 8,225 13,594 Definitely standaloneTotal number of customers 2,882,360 3,343,869


62

Funding and liquidity Wholesale funding

Commercial paper Burgundy also has a US$3,500,000,000 commercial paper programme in

place

These are debt securities with a maturity of 1 to 364 days and are not listed on any stock exchange

As with the market, Burgundy’s access to term funding has been severely limited; as a result it has entered the Bank of England’s SLS and has increased its reliance on term funding

Overview The wholesale funding liabilities are made up of a number of different

liabilities as detailed below

Burgundy is considering taking support from the UK Government credit guarantee scheme. Term funding up to three years will be made available under agreed conditions. Initial investigations are that the cost to Burgundy would be in the region of Libor + 220 for 1 to 3 year funding

Permanent Interest Bearing Shares (PIBS) PIBS take their legal form from the Building Societies Act and are deeply

subordinated debt instruments which pay high interest and are permanent in nature. These are treated as Tier 1 capital for regulatory purposes due to them having significant ‘equity’ like features

Burgundy have two tranches of PIBS, the details of which can be seen opposite

Given the unprecedented turmoil in the financial markets, Burgundy PIBs have recently been subject to volatility. From a price of 117p (yield 11%) at the beginning of September, the shares fell sharply down to a price of 70p (approx 17%) during early October

Subordinated debt The subordinated debt is listed on the London stock exchange via the

Euro Medium Term Note Programme (EMTN) detailed below

This debt is subordinated to all wholesale funding with exception of the PIBS. Further details can be seen in the table opposite

EMTN’s Burgundy has a US$6,500,000,000 EMTN programme in place which

allows it to issue listed debt to the market (but there is currently no market)

Each time a new issue is made under the programme, terms are agreed at that time

There are also three other term note programmes in place as follows:

− Australian dollar $1,000,000,000 short term and medium term note programme

− French €3,000,000,000 Certificats de Dépôt programme; and

− Short term promissory notes

PIBS summary£110m PIBS £200m PIBS

Issued 1992 2005Permanent Yes YesCallable No 10 years after issue and every

6 months thereafterInterest step up No, interest fixed at 13%

in perpetuityStep up 10 year and 3 months after issue at LIBOR +205bps

Subordinated debt summaryIssue date Currency

value

value

date Maturity

18-May-06 Euro 300 200 18-May-11 18-May-1628-May-02 GBP 150 150 None 28-Mar-33

02-Mar-04 GBP 200 200 02-Dec-19 02-Dec-24

Source: Detailed paper on subordinated debt

Source: Detailed paper on PIBS


63

Funding and liquidity Wholesale funding

Warehouse funding Drawings Burgundy’s existing warehouse facilities operate on an identical basis in

respect of notice period and term extensions should a lender wish to withdraw their support. In summary, at not less than 60 days prior to the 364 day termination date, Burgundy may approach the lender to gain an indication of whether or not the lender intends to provide a new facility. Not less than 10 days prior to the termination date, if such a notice has not been received, Meerbrook companies are permitted to draw a term advance for a period of 25 years for the entire facility. In this way there is no liquidity risk to Meerbrook

Where a drawn facility is not renegotiated and the drawings become a 25 year term advance as detailed above, a step-up rate of between 75 to 100 bps is charged above the drawing margin noted opposite

Burgundy has no obligation to fund any Meerbrook facility other than for the subordinated loan provided at the inception of the scheme. The exception to this is the Meerbrook 4 facility, guaranteed by Burgundy, which is repayable by Meerbrook or Burgundy after seven years

Warehouse financing capital requirements Burgundy has committed funding lines in place with its main relationship

banks, RBS and JPM, to ensure contingency funding for Platform originations which are funded through normal Burgundy group resources. In summary Burgundy currently has four committed warehouse facilities in place with additional uncommitted lines of £450 million to fund third party acquisitions

Burgundy’s strategy is there to ensure that there is an alignment of interest on securitisation and funding with the key banks

Forecast usage Burgundy has not budgeted for any securitisations to be transacted other

than in respect of Leek 20 for the Bank of England Special Liquidity Scheme. If the market permitted, Burgundy may consider bringing a securitisation on a traditional or private/bilateral basis. Should the markets allow for an alternative transaction or Covered Bond to be created from the existing mortgages in warehouse facilities or from other on balance sheet mortgages, this is not expected to have a significant impact on capital as these will again be on balance sheet

Drawing on warehouse lines and recent activity Burgundy sold £226 million of loans to the Meerbrook 3 warehouse company

in August 2007. Following this, RBS and JPM funded £226 million of cash to Burgundy

Burgundy acquired £1.2 billion of mortgage loans from a third party at the end of September 2007. Burgundy funded approximately £600 million from the uncommitted warehouse lines from Meerbrook 2 with JPMorgan and the remaining funding from general Burgundy resources

Burgundy renewed the Meerbrook 3 warehouse facility in December 2007 and refinanced the £226 million of loans from August 2007

Burgundy refinanced the £600 million borrowings under the Meerbrook 2 facility into a new scheme, Meerbrook 4. Additionally, this facility receives the benefit of a guarantee from Burgundy

Current position is summarised as follows:

Burgundy has committed funding lines in place with its main relationship banks, RBS and JPM, to ensure contingency funding for Platform originations. Burgundy has not budgeted for any securitisations to be transacted other than in respect of Leek 20 for the Bank of England Special Liquidity Scheme

Meerbrook 1 - (Remains Undrawn)

Meerbrook 2 - (Remains Undrawn)

Meerbrook 3 - (Part Drawn)

Meerbrook 4 (Fully Drawn)

Capital Treatment OFF BALANCE SHEET

OFF BALANCE SHEET

ON BALANCE SHEET

ON BALANCE SHEET

Committed Lines (£m) 400 400 500 600Uncommitted Lines (£m) 150 300 - -Lender RBS JPM RBS/JPM JPM

Term 364 day revolving 364 day revolving 364 day revolving

364 day revolving

Repayment 25 years 25 years 25 years 7 yearsRenewal May-08 Sep-08 Dec-08 Mar-09Drawing Margin 20 bpts 75 bpts 75 bpts 75 bptsSubordinated Loans

£8.6m £24m £30m(not deducted) (not deducted) (not deducted)£2.4m £35.73 £5m £58.38m(not deducted) (not deducted) (not deducted) (not deducted)£0.25m expense loan

£1.76m discount reserve top up £0.5m

(deducted) (not deducted) expense loan(deducted)

£1.3m £0.85m

expense loan discount reserve

(not deducted) (not deducted)

Tranche E n.a n.a n.a £0.3m (deducted)£738m

(MB2 refinance + £150m MAS5)

Funding Treatment Securitisation Securitisation Securitisation Wholesale

Tranche A £0m

Tranche B

Tranche C£153.2m (MAS 5 loans not deducted)

Tranche D n.a n.a

Current Drawings Nil Nil £226m


64

Funding and liquidity Liquidity mismatch

Burgundy has a significant mismatch in the 8 days to 12 months, with liquid assets falling short of wholesale funding in that time bracket

(2,900)

(1,900)

(900)

100

1,100

2,100

3,100

> 8

days

8 da

ys -

1 m

onth

1 - 3

mon

ths

3 - 6

mon

ths

6 - 1

2 m

onth

s

1 - 2

yea

rs

2 - 3

yea

rs

3 - 4

yea

rs

4 - 5

yea

rs

> 5

year

s

£ m

illion

MMR reserves Bank deposits CDs Reverse repo

FRNs Gilts MBS/ABS Issued CDs

Time deposits Repo EMTN Sub debt

ZCP PIBS

Balance sheet assets and liabilities maturity

Source: Management asset and liability maturity analysis

Overview The chart opposite shows the mismatch between the Treasury

liquid assets and the wholesale funding

As can be seen, there is a mismatch in the first eight days with a positive balance. This is then offset by the large liability maturities in the eight days to three months time brackets and does not even out again until the one to two years brackets

The significant asset balances in the five years plus bracket relate to the MBS and ABS asset maturities


65

Wholesale funding and liquidity stress assumptions

Current Moderate Severe Extreme Moderate SeverePrepayment assumptions Member 12% Member 12% Member 2%

Platform 22% Platform 17% Platform 12%BTS 41% BTS 36% BTS 31%Commercial 7% Commercial 2% Commercial 0%

Conversions Member 84%Platform 51%BTS 92%Commercial 78%

Credit agencies ratings S&P downgraded to

A-2/term

Short term rating

downgrade by S&P,

Moody's & Fitch

Downgraded to BAA1

by any one of the major

rating agencies

Data not available Data not available Data not available

Retail flows £463 million inflows over 12 months

£213 million inflows over 12 months

£2.4bn outflows over 90 days

£3.4bn outflows over 90 days

Same as current Same as current

Wholesale funding 65% rollover over 12 months

41% rollover over 12 months

22% rollover over 12 months

Same as severe Same as moderate Same as severe

Bank deposits At maturity At maturity At maturity At maturity Same as current Same as currentCDs and Gilts Realisable day one Realisable day one Realisable day one Realisable day one Same as current Same as currentFRNs and MBSs At maturity At maturity At maturity At maturity Same as current Same as current

Firm specific Market wide

Same as severe Same as current Same as current

Same as currentAll existing apps honoured and BCIG halve lending

All existing apps honoured and new lending ceases

All existing apps honoured and new lending ceases

Same as current

Funding and liquidity Liquidity stress testing

Liquidity stress testing is completed on a two weekly basis with a paper being submitted to the ALCO on a monthly basis

Funding roll rates of 93% in June have reduced to 87% in September, equivalent to £600 million of funding. This is due to market conditions and management action to reduce the balance sheet

Management currently focuses more on the Burgundy specific, severe stress scenario at the 90 day level given the current funding environment, which as at the August ALCO, showed a positive position of £974 million

We note that this was analysed prior to the Burgundy downgrade

Liquidity stress testing Liquidity stress testing is completed on a two weekly basis with a paper being

submitted to the ALCO on a monthly basis Given the current environment management assessed the market conditions

as D (weak) and current liquidity as C (slightly weak) out of a scale of A to E The liquidity stress testing looks at five different scenarios, as detailed above,

including three Burgundy specific scenarios and two market wide scenarios The assumptions used in the scenario testing have been based on the

experience following the last downgrade, actual mortgage redemption behaviour and actual roll rates on funding. The assumptions are generally less stringent than those applied by Claret

Rollover rates have been falling in the last twelve months as a consequence of the markets and management action to reduce the balance sheet. Rates of 93% in June have reduced to 87% in September, equivalent to £600 million of funding, following the ratings downgrade

Source: July 2008 ALCO

The results at the > 12 month stress show the following available liquidity: − £3.5 billion under the current scenario − £1.4 billion under the moderate stress − £0.8 billion under the severe stress

Management currently focuses more on the Burgundy specific, severe stress scenario at the 90 day level given the current funding environment, which as at the July ALCO, showed liquidity headroom of £974 million

The eight day retail deposits inflow/outflow are as follows − Current conditions £21 million (0.1%) inflow − Moderate firm stress £30 million (0.2%) outflow − Severe firm stress, £(1,497) million (8.5%) outflow

All the above tests assume management action of a reduction in lending although we have not yet seen by how much


66

Interest rate sensitivity gapTerm Yield

curveNet asset/ (net

liability)Sensitivity to

+1bpPolicy limit Running

P/ L% £m

0-1 years 5.86 209 (24,463) +/-£75,000 +ve1-2 years 5.35 (256) 20,113 +/-£75,000 -ve2-3 years 5.24 (213) 30,280 +/-£75,000 -ve3-4 years 5.21 (18) (2,723) +/-£75,000 -ve4-5 years 5.18 128 (52,290) +/-£75,000 +ve5-6 years 5.13 (57) 26,073 +/-£75,000 -ve6-7 years 5.09 (22) 10,800 +/-£75,000 -ve7-8 years 5.05 (29) 18,406 +/-£75,000 -ve8-9 years 5.01 31 (22,056) +/-£75,000 +ve9-10 years 4.98 5 (4,713) +/-£75,000 +ve10 years + 4.69 (32) 25,853 +/-£75,000 -veTotal 25,280

Funding and liquidity Interest rate sensitivity gap and hedging

Burgundy monitors interest rate sensitivity to parallel shifts in the yield curve

Interest rate sensitivity At 30 June 2008, Burgundy had a relatively high level of interest rate

sensitivity in the 0-1 year and 1-2 year brackets, albeit still within limits. The latest ALCO shows that this sensitivity as fallen in 0-2 year brackets but further volatility has been introduced in the medium term markets

As can be seen in the table opposite, Burgundy spread their non-sensitive internal rate of return (‘IRR’) out to 10 years

We note that when interest rate hedges are taken out against pipeline products, Burgundy recognise the SWAP and the pipeline, thus distorting their IRR until the pipeline products are taken up. This could have a significant impact on the reported IRR

Based on the August gap position, the recent increases in LIBOR would have been income generative

Hedging Burgundy currently run both fair value and cash flow hedges against

their balance sheet exposures

We are expecting to have more detailed information from Burgundy management to consider hedging strategy

Management has informed us that they have not experienced any significant hedge ineffectiveness since introducing IFRS

After the designated hedges and the other ‘natural’ hedges of the balance sheet, management have confirmed that only two small areas of fair value risk remain unhedged including:

− circa £80 million of unhedged RPI linked savings accounts

− an insignificant book of mortgage assets with floors and caps

Source: August 2008 ALCO

Source: August 2008 ALCO

-300

-200

-100

0

100

200

300

0-1

year

s

1-2

year

s

2-3

year

s

3-4

year

s

4-5

year

s

5-6

year

s

6-7

year

s

7-8

year

s

8-9

year

s

9-10

yea

rs

10 y

ears

+

£ m

illio

n

4.60

4.80

5.00

5.20

5.40

5.60

5.80

6.00

%

Net asset/ (net liability) Yield curve

Interest rate sensitivity gap


67

Executive summary


Key issues


Commercial lending



Securitisation

Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendices

Contents


68

Key features Burgundy established the Leek programme in 1996 and has issued 18 public residential mortgage backed securitisations through the separate entities Leek

Finance 1 -19 (no Leek Finance 13), with two further issuing entities Leek Finance 20 and 21 established to issue securities under the Bank of England Special Liquidity Scheme

Over the history of the programme, Burgundy has issued £9.25 billion equivalent under the public Leek transactions. The security in the structures comes from Platform and BTS books. A number of the earlier securitisation transactions have already matured and been called such that no outstanding notes remain in issue, with remaining collateral from these previous deals put into later transactions

At 31 August 2008 the transactions with notes still outstanding are summarised below:

The Leek programme provides a key component of Burgundy’s funding and at 30 June represents 30% of total wholesale funding and 14% of total funding at 30 June 2008

Whilst the securitisation programme is designed to be bankruptcy remote from Burgundy it remains exposed to and interested in the performance of the securitised assets through its various roles and interests in the structure

For this reason, in Burgundy’s group financial statements, the securitised mortgages remain on balance sheet and the recording of income, costs and losses is not affected by the existence of securitisations until reserve funds are fully expired

The Burgundy and related Dovedale programmes are a complex series of structured funding transactions, with extensive detailed documentation and legal agreements associated with each of the individual issues. This report seeks only to summarise certain key aspects to provide an understanding of the main areas of risk associated with the programme based on the limited data which has been made available to us and does not represent an extensive consideration of the detailed documentation relating to the programmes

Securitisation Overview of Leek securitisation programmes

Issue name Issue date Issue amount £ million equivalent

Outstanding note amount £ equivalent

Deferred consideration paid in 2007 and in 2006 £k

Leek Finance 11 Oct 2003 375 65 896 3,573

Leek Finance 12 Mar 2004 704 92 5,662 15,932

Leek Finance 14 Oct 2004 1,046 211 9,792 18,406

Leek Finance 15 Apr 2005 1,080 410 9,996 6,565

Leek Finance 16 Oct 2005 961 492 13,111 611

Leek Finance 17 Apr 2006 1,168 750 1,256 nil

Leek Finance 18 Oct 2006 1,048 881 nil nil

Leek Finance 19 Apr 2007 833 738 nil nil

7,215 3,639

Burgundy made subordinated loans to the structures to provide the required reserve funds on start up (known as the ‘first loss reserves’) and, subject to the impact of Dovedale, it remains effectively at risk for these potential amounts should the performance of the programmes not generate the required income to meet the required payments for scheme expenses, bond interest and principal payments (see further details below)

Burgundy receives interest from the excess spread earned in the structure in the period (provided sufficient is earned); and at final maturity of the structure these subordinated loans would be repaid from the reserve fund balances. The right to any remaining excess spread remains and is paid to Burgundy as deferred consideration. The table above sets out the deferred consideration that has recently been extracted from the structures which have not yet reached maturity, however we have been unable to determine the extent of any deferred consideration earned from those fully matured programmes)

Burgundy has traditionally been the Guaranteed Investment Contract (‘GIC’) account provider to the programme, though the extent of this activity has recently been restricted due to the ratings downgrade of Burgundy

Burgundy also retains other involvement in the structure through its administration and servicing of the securitised loans by WMS Interest rate swap arrangements hedge the risk that arises between the interest rates charged on the mortgages (SVR and fixed) and those paid on the

notes (linked to LIBOR and other interbank rates) – these SWAP arrangements are provided by external, third party banking counterparties


69

Securitisation Overview of Leek securitisation programmes

Credit enhancement structures Credit enhancement to protect investors within the structures is provided through a combination of

subordinated note classes, a reserve fund requirement and excess spread earned within the structures. Any excess spread within the structures and the reserve funds exist to absorb any losses and meet requirements to pay interest before any loan or note holders would be impacted. The transactions are constructed such that losses are intended to be absorbed within and through this credit enhancement structure

The reserve funds do not amortise over the life of the programme and any unconsumed amounts will only be available for release or repayment of loans as the programmes mature and all other priority obligations and notes have been repaid

Substantial reserve fund balances have been accumulated within the various structures. The position of the reserve funds at issue, and their levels at 31 August 2008 are summarised below

The June board sub-committee minutes state that: − provisions already made should be sufficient to cover losses incurred − it is unlikely there will be any need to draw on reserve funds during the remainder of 2008 − the possibility of a draw on reserves being made in 2009 would require quarterly losses to exceed £2.5

million, compared to current running rates of approximately £1.5 million − The investor reports at 31 August 2008, in which cumulative losses are reported for each securitisation

vehicle suggests that losses are increasing by 0.08% of the book per month in the worst instance, Leek 19. At that rate, it would take 31 months until the reserve fund is exhausted, and that is only after excess spread has been exhausted

Reserve funds exist within the structures which provide credit support in the event that losses should arise

In the worst instance (Leek 17) provisions would have to increase by 3.5 times until it equates to the reserve fund. The position is more prudent when cumulative losses are considered; however, we draw your attention to the later developments outlined at the end of this section

BB notes

Excess Spread

Reserve Fund

BBB notes

A notes

AA notes

AAA notes

Losses

Issue name Issue amount

£ million equivalent

Outstanding note amount £ equivalent

Reserve fund at closing

Reserve fund as %

of initial amount

Reserve fund at

31 August


outstanding amount

Provisions as % of

outstanding amount


issue (% original

balance)

Possessions %

Three months+

arrears %

Leek Finance 11 375 44 5.3 1.42% 8.4 19.35% 0.62% 0.04% 1.29% 3.70%

Leek Finance 12 704 88 9.4 1.33% 15.4 17.56% 1.91% 0.17% 1.39% 10.56%

Leek Finance 14 1,046 194 17.6 1.68% 22.3 11.46% 1.46% 0.14% 2.82% 9.17%

Leek Finance 15 1,080 335 18.7 1.73% 24.8 7.42% 1.37% 0.25% 2.39% 8.92%

Leek Finance 16 961 416 14.8 1.54% 20.8 4.99% 1.27% 0.34% 2.74% 9.76%

Leek Finance 17 1,168 723 23.4 2.00% 27.7 3.83% 1.10% 0.34% 2.20% 7.26%

Leek Finance 18 1,048 843 23.3 2.22% 26.9 3.20% 0.75% 0.38% 1.81% 6.87%

Leek Finance 19 833 753 17.9 2.15% 17.9 2.38% 0.38% 0.48% 2.80% 6.16%

7,215 3,396 130.4 164.2


70

Securitisation Illustrative Leek 19 transaction structure diagram

The typical Leek securitisation structure is shown here (in this case Leek 19). The structure also shows the relationship with the Meerbrook warehouse vehicles

Burgundy Building Society

Platform Funding Limited

Originator, Administrator and

Legal Owner)

Meerbrook Finance Number Three Limited (a warehouse vehicle)

Leek Finance Number Nineteen PLC

(Issuer)

Noteholders

Correspondent Lenders

Trustee

Liquidity Facility

Sub-Loan

Expenses Loan

GIC Agreements and GIC Guarantee

Interest Rate Swaps and Basis Swaps

Cross Currency Swaps

WMS (Sub Administrator)

Principal & Interest on Class A1, Class A2, Class M, Class B,

Class C and Class D notes

Administration and Servicing Guaranteed by Burgundy

Beneficial Sale of PFL Mortgages



Guarantee of Administration and Buy Back Guarantee

Buy Back Guarantee

Security


71

Securitisation Simplified Leek payment distribution summary

Income:

Mortgage interest and fee income

Income under a swap arrangement

Income arising form GIC accounts

Allocation / calculation

process

Principal receipts

Interest receipts

Application / payment process

Make up liquidity shortfalls in place

Make good any losses of principal suffered

(e.g. Previous reserve draws)

Fund any mandatory partial redemption

requirements (e.g. In pay down situation)

Issuer expenses and costs

Interest payments on bonds

Specified reserves

Deferred consideration

Residual / surplus income

distribution

The operation of the securitisation accounts is conducted on a quarterly cycle

Further details on the requirements in connection with the operation of the accounts will be contained in the cash management legal agreements, to which we have not yet had access


72

Securitisation Dovedale structure

The Role of Dovedale The Dovedale transaction is structured to enable Burgundy to sell on a

share of its exposure to the reserve funds held in certain Leek Issues to other investors. This gives protection to Burgundy’s risk exposure and provides capital relief. The remainder of the reserve fund is the first loss portion which is retained by Burgundy

Dovedale is a funded synthetic securitisation transaction. In effect Burgundy buys credit protection from Dovedale on a portion of a portfolio of Leek reserve funds (the Leek issues 10 – 17, totalling £119 million at 21 August 2008) in exchange for a premium under a credit default swap. The reserve funds for these issues remain outstanding until each issue is redeemed

Dovedale funds its obligations under the credit default swap by issuing credit linked notes into the capital markets. Burgundy pays Dovedale a premium for the credit default swap and this, together with interest earned, is used to fund payments on the Dovedale notes

Dovedale issue notes initially with a principal balance equal to a portion of the amount held in the Leek reserve funds at the issue date, for which Burgundy is seeking to buy protection, an amount equal to approximately £100 million at issue on July 2006, and now standing at approximately £88 million at 30 June 2008

Payments would be made to Burgundy by Dovedale, to offset losses incurred in the transaction pools referenced by the credit default swaps, when a defined 'Credit Event' occurs – effectively when there is a shortfall on the reserve funds greater than a specified threshold amount

Dovedale notes are profiled to the final legal maturity of the Leek notes and the weighted average lives assume Leek call all notes at their respective step up and call date

With regards to the residual counterparty risk associated with the Dovedale structure, the obligations of Dovedale Finance under the credit default swap were matched by Dovedale putting cash on deposit with Burgundy. The cash was raised through the issuance of bonds to third party investors. As such, the Burgundy’s exposure to Dovedale is cash collateralised by Dovedale’s deposit with Burgundy

The Dovedale structure has effectively transferred a portion of Burgundy’s risk exposure in the Leek reserve funds associated with the transaction

The extent to which loss coverage is provided through Dovedale will only become clear as the underlying Leek transactions reach maturity and loss experience has crystallised

BURGUNDY BUILDING SOCIETY

(CDS Counterparty)

DOVEDALE FINANCE

No.1 PLC

NOTEHOLDERS

Reference Pool

Class A1 £2,500,000

Class A2 £14,000,000

Class B1 £4,000,000

Class B2 £47,500,000

Class C1 £14,500,000

Class C2 £55,500,000

CDS Counterparty

payments Notes

Interest payments (Quarterly)

Issuer CDS payments

(if any)

(Quarterly)

Net proceeds

(Closing date)

Currency Swap

Counterparty

Cash deposit

With Account

Bank

Deposit

GBP Funds EUR

Principal and Interest

Interest income


73

Securitisation Key risks associated with the Leek securitisation programme

We have not yet been provided or had access to details of the specific triggers applicable within the Leek structures and all the transaction documentation in which these may be contained

However, within typical securitisation structures, a range of triggers are generally in place which are intended to come into effect prior to any event of actual default on a note, which are designed to provide additional credit support within the structure. Breaching of these may not in themselves directly lead immediately to early repayment of the notes or impact on the funding, depending on their severity and the degree to which they can be remedied. The matters considered further below are not an exhaustive description of the full range of criteria and their potential impact, merely a summary of the principal types of trigger events and other criteria breaches which are key to understanding the risks associated with any programme

Under normal circumstances, notes will be paid down through a controlled amortisation payment profile from cash flows generated from the pool of mortgage assets held in the structure

However, if certain criteria are not met and triggers are breached, then the payment profile may change to a 'pass-through' mechanism which will accelerate and change payment priorities within the structure in favour of the senior bond holders

Under such circumstances the principal payments through to Burgundy will be deferred as its subordinated loan and any deferred consideration rank further down the priority order for payment

The information we have seen does not suggest any arrears triggers or requirements within the structures, other than a restriction on acquiring further advances into the structured portfolios if interest arrears exceed 3% of total gross interest. We have seen no evidence of the extent of interest arrears levels and whether this currently creates any restrictions on the Leek structures, or the implications on pool performance were this situation to arise

There is no substitution risk in the portfolios, as per the offering circulars

Key risks – Triggers and other criteria

Asset triggers

An asset trigger event may occur if sufficient losses associated with the mortgage assets were to arise to such an extent that a deficiency in principal arises to the account of the senior note holders. This situation would only arise if the extent of losses in the structure was very severe and could not be met by the credit enhancements in place in the structure: excess spread, reserve funds and junior note holders. In such circumstances, principal would be repaid pro-rata and all notes outstanding become pass through. We have not been able to confirm if such a trigger exists within the Leek structures, nor have we been able to ascertain the loss experience to date. The information we have seen suggests such a level of losses is not anticipated (see reserve funds above), and Burgundy management has confirmed this

Non asset triggers

A non asset trigger might typically occur in the event of insolvency – this trigger should be a remote consideration in normal circumstances, but could result in the requirement for Leek to transfer the administration and servicing of the portfolios to another service provider

Ratings criteria

A complex range of rating triggers typically apply within securitisation structures which can significantly impact on the structure - in the Leek transactions, the implications of the recent downgrade have included the requirement to limit the extent of the GIC account which can be held to 20%, and the transfer of the remaining proportion of the GIC accounts to another financial institution

Non call of issues

At the step and call date (the maturity date expected within the structure) Leek has the option to repurchase the outstanding loan notes, which it has always taken. If not called, interest rates increase on the notes in question, and notes may move to a pay through payment mechanism; with draws made on made on reserve funds and excess spread to pay down notes in specified orders of priority


74

For accounting purposes, the securitisation structures remain on balance sheet and in effect the securitisation cash flows are dealt with as memorandum accounts, with no impact on the group accounts other than where the structure could not repay the subordinated loan and the first loss exposure of Burgundy is called upon

For regulatory capital purposes, however, it is recognised that the structure provides effective risk transfer and accordingly it is treated as ‘off balance sheet’. Under this approach, Burgundy is required to make a deduction from capital equal to the value of the subordinated loans made to the Leek entities to fund the initial reserve fund requirements. The deduction from capital is capped however such that Burgundy is in no worse a position that it would have been had the securitisation been treated as on balance sheet. Under an ‘on balance sheet approach’, the Pillar 1 capital requirements would be the ‘KIRB’ calculated capital requirements – based on risk weighted assets and expected losses on the portfolio. If required, a further Pillar 2 component would be applied were this to be considered necessary

The deduction from capital is then further limited in respect of Leek for the protection obtained under the Dovedale structure which achieves the transfer on the first loss piece of the transaction covered by the structures Leek 11-17

The required capital calculation approach can therefore be summarised as:

The Leek programme is treated as ‘off balance sheet’ for regulatory capital purposes – where it is deemed effective transfer of risk has been achieved under the structure

The deduction from capital which would otherwise be required has been restricted by the Dovedale structure – which has achieved further risk transfer of the first loss exposure retained by Burgundy in the relevant Leek programmes to which it is referenced

Securitisation Capital approach and losses

Determine if ‘on’ or ‘off’ balance sheet capital treatment

appropriate – based on effective risk transfer under

structures

Quantify deduction from capital – first loss exposure (i.e.

Subordinated loans), but capped at KIRB calculated amount if

lower

Assess impact of risk transfer of first loss exposures under

Dovedale structure – for Leek 10-17- and reduce the capital deduction for this

amount

Resultant deduction from capital in

respect of securitisation

structures

Off balance sheet approach

Subordinated loans – approximately £130

million at 30 June 2008 (less than

KIRB)

Dove risk transfer – approximately £88 million at 30 June

2008

Capital deduction required in respect of

net approximately £42 million at 30

June 2008

Accounting loss exposures Burgundy continues to book impairment losses as if no securitisation structures exist (as, for the purposes of accounting, derecognition of the mortgage loans

has not occurred), until the first loss reserve is exhausted. Beyond the net first loss exposure, further losses will be trapped within the securitisation structures, in effect to be borne by the remaining note tranches, in specified priority orders from junior notes through to more senior ones. There is still headroom until the first loss reserve is expired, as shown above

Should the programmes not perform in the manner anticipated, the potential exposures to Burgundy follow a similar rationale and are as follows: − ‘loss’ of income arising from the ultimate deferred considerations excess spread which would otherwise be anticipated to be generated – we have not seen

any quantification of these potential forecast amounts to be received from the securitisation structures but there appears to be approximately £34 million reserve fund balances in excess of the minimum required amounts within the existing structures

− crystallisation of the potential first loss exposure – in effect through non recovery of subordinated loans. This is avoided to the extent that the Dovedale structure will kick in to cover those losses relation to the referenced Leek programmes estimated at approximately £88 million at 30 June 2008

− until the first loss reserve is used, the continuing impairment charges against securitised loans will continue to be capital consumptive

Approach

How Burgundy has applied this approach


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Overview Leek 19, the most recent of the external securitisation vehicles was downgraded by Moody’s on 8 December 2008 The reason for the downgrade was the increasing losses being experienced in the portfolio of mortgages backing the securitisation vehicle increasing to a

point above that originally envisaged by the rating agencies in their original assessment of the vehicle The impact of such a downgrade on Burgundy is limited due to the degree of separation built into the securitisation vehicle from its inception. The vehicle

is completely stand alone from Burgundy and there is no requirement for Burgundy to inject further capital or substitute any assets into the vehicle Supporting the vehicle If management chose, they could decide to put additional support into the structure via the first loss reserve of by suspending the removal of any excess

spread; however, this could have financial consequences for the Society in the following way; - Financial impact – naturally, there would be a financial impact on Burgundy if they were to put additional support into the vehicle; - Capital – the capital treatment of the vehicles is only allowed as they are considered to be completely stand alone from the Society. Were Burgundy to

decide to support the vehicle, this could lead the capital advantages experienced from such a structure being lost and increasing the capital required within Burgundy

If the capital treatment were to be removed, it would be difficult at this stage to determine the exact impact on the required capital. Claret management has calculated the potential impact under the base case scenario by showing the difference between the capital requirement based on agreed risk weights (as if the mortgage assets were on balance sheet) and the capital treatment afforded by the securitisation structure. This leads to an advantage of circa £162 million under the securitisation structures (as at August 2008)

Allowing the loan note holders to experience default If Burgundy were to continue to allow the vehicle to experience losses and stand alone from the Society then there is an associated moral hazard risk.

The reputational risk incurred could lead to the following negative actions; - Wholesale funding - wholesale funders may assume the quality of asset in the vehicles is similar to that on the balance sheet and therefore loss of

wholesale funding could be experienced; - Retail flight – if the event were to come to the attention of the general public, the association could also lead to an amount of retail flight as well; - Credit rating - this type of event would also put pressure on the rating agencies to look harder at the core originator rating and therefore could indirectly

lead to negative outlook / downgrade in the originating entity; - FSA – it could also lead to additional pressure from the FSA, again due to a perception that balance sheet assets are similar to those in the securitisation; - Covered bonds / other wholesale structures – finally, this could lead to flight in the market not just from general banking lines but from ability to

successfully complete future wholesale funding structures Not stepping in could be reputationally damaging, however, there is precedent (within the market of large Banks which could have been supported being

set free into rapid amortisation e.g., Northern Rock)

On 8 December Moody’s downgraded the Leek 19 securitisation vehicle due to the increasing losses being experienced in the portfolio of mortgages backing the vehicle

Securitisation Recent downgrade of Leek 19


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Key issues


Commercial lending



Securitisation

Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendices

Contents


77

Issue Key findings KPMG comment and next steps

Impairment calculations

When assessing impairment of its assets, Burgundy considers whether there is objective evidence of impairment. In making this assessment, the following evidence is considered: − late or missed repayments of principal or interest − other evidence that borrowers are experiencing financial difficulties, or − national or local economic conditions that indicate an increased

likelihood that borrowers will default In the FY08 interim period there have been a number of changes in

estimates in impairment calculations discussed in the FY08 interim audit report to the audit committee. These changes relate to for example recoveries, accounts in the early stage of delinquency and flexible arrangements. The effect of the changes in estimation approach reduce the level of provision required

The accounting policy does not differ to Claret, however the assumptions used do differ, and these are considered in more detail in the impairments section above

The accounting policy as stated appears consistent with IFRS

There is significant judgement within the estimation of provisions and there have been a number of changes in those estimates. Changes in estimates are not adjusted retrospectively

Next steps for Phase 2 Confirm, within the detailed impairment model, the

evidence used to justify the changes in estimates on impairments made and confirm whether the judgements appear reasonable based on the Claret view

Goodwill There is an existing balance for goodwill on Burgundy’s 31 December 2007 balance sheet of £157.9 million in respect of Platform and Bristol & West deposit book/branch network

It is noted by the Burgundy Finance Director in a board report that "The high level of integration of Bristol & West into the Member Business means it was not possible to identify separately its trade and contribution but it was noted that due to the continued strong performance of the core Member Business there were no indicators of impairment“

Burgundy management has conducted an impairment review of goodwill, and has concluded that no impairment is necessary given the projected profit for the Member Business and Platform

The accounting policy is consistent with that of Claret

The accounting policy appears consistent with IFRS

Where businesses are integrated the goodwill can be tested as part of a larger cash generating unit including existing assets of Burgundy

It should be noted that on acquisition the existing goodwill of Burgundy will have no fair value, and will effectively be subsumed within the goodwill on the acquisition of Burgundy

Goodwill is currently deducted from Burgundy’s capital resources

Next steps for Phase 2 Confirm how the impairment testing was carried out

and seek information on the headroom within impairment tests

Accounting policies Burgundy accounting policies (1)

The application of accounting policies in relation to impairment, goodwill, intangible assets, GEBs, investment properties and hedging have been commented on opposite

Impairment charges are subject to significant levels of judgment which may differ from Claret’s view

Burgundy has concluded that no impairment is required in relation to goodwill although this is reliant on the ongoing profitability of the Member Business and Platform


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Guaranteed equity bond (GEB’s)

The guaranteed equity bond is reflected as a liability and measured at fair value through profit and loss. Other financial liabilities of Burgundy are measured at amortised cost

The justification for measurement at fair value through profit and loss is that this measurement removes an inconsistency due to the bond being commercially hedged with swaps. If measured at amortised cost changes in the swap value would impact earnings but changes in the bond value would not be recognised. Please note that hedge accounting is not used for GEBs and the related swaps

In FY08 the accounting policy for GEBs was changed. Previously payments received on entering into the swaps were incorporated into the effective yield on the GEB and spread over the life of the GEB. From FY08 payments received are recognised immediately on entering into the swap. The justification appears to be that the embedded derivative element of the swap was previously not recognised and that the receipt on the swap provides evidence of the fair value of this element of the GEB

This change of approach to recognition has not been recognised as a change in accounting policy on the grounds that both the GEB and the swap continue to be recognised at fair value through profit and loss

Claret use an accounting policy more consistent with Burgundy prior to its change of policy. However it should also be noted that Claret do not use the same hedging instruments as Burgundy and therefore do not receive premiums on entering into the swaps and therefore the accounting may not be directly comparable

The accounting policy stated for GEBs and the related swaps is consistent with IFRS and it is acceptable to hold financial liabilities at fair value through profit and loss to remove a measurement inconsistency

The GEBs do contain an embedded derivative which should be fair valued along with the rest of the instrument if the policy is to recognise at fair value through profit and loss. The change in policy therefore may be acceptable however, it should be considered that usually the consideration given at initial recognition reflects fair value of financial assets and liabilities and going against that is unusual

Next steps for Phase 2 Careful consideration needs to be given to the

justification for the change and the terms of the swap should be investigated to confirm that they do match with the GEB terms and justify changing the fair value of the GEB

To complete this, access to the detailed terms and conditions of the swap is needed

Intangible assets

Burgundy capitalises the cost of internally generated software as an intangible asset amortised over seven years

Claret accounting policy is consistent with Burgundy however, the judgement and estimates used may differ

This policy is consistent with IFRS however it involves judgement on which costs to capitalise and materiality. An amortisation period of seven years for systems is longer than the period used by many companies however, does not seem excessive


Further information is required to conclude fully on the application of accounting policies in relation to GEBs which we believe to be inappropriate


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Investment properties

The FY08 interim audit report indicates that Burgundy have set up a new company to hold and rent out repossessed property, Illius

Currently Burgundy have not determined an accounting policy for investment properties and Claret do not hold investment properties

If it is held as an investment property IFRS allows the property to be measured at fair value with gains and losses in profit and loss, or alternatively allows the properties to be held at cost less depreciation. The more common policy for companies holding investment property is to recognise at fair value with gains and losses recognised in profit and loss

Next steps for Phase 2 Claret should consider what their policy will be

towards these properties and assess the potential future impact on earnings

Hedge accounting

Burgundy use derivative instruments and in some case apply hedge accounting whilst in other cases derivative instruments are not recognised using hedge accounting

The policies stated for derivatives appear in accordance with IFRS however, the circumstances where hedge accounting is used can be a matter of judgement

Burgundy uses different hedge accounting strategies and the accounting policies appear consistent with Claret

Whilst the accounting policies appear consistent with IFRS there may be differences in the hedge accounting approach the Burgundy and Claret adopt which would have an impact on earnings

In particular, Burgundy has made significant use of basis swap hedges, which have had a key impact on reported earnings

Next steps for Phase 2 Determine the detailed policies that Burgundy have

towards hedge accounting and the situations and instruments for which it is used. Claret will then need to determine whether their policies align with those of Burgundy


There do not appear to be significant issues in relation to the accounting treatment of hedge accounting

The accounting treatment for investment properties is yet to be determined by Burgundy


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Key issues


Commercial lending



Securitisation

Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendices

Contents


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Taxation Overall tax compliance summary

In FY07 there are significant movements taken to equity in the financial statements that affect taxable profits – this needs to be taken into account when considering forecast taxable profits

Summary of tax creditor movements£'m FY05 FY06 FY07Opening balance 25.0 29.0 38.3Profit and loss account: Current year 18.3 22.2 17.7 Prior periods (1.5) 2.2 (1.2)Tax paid (12.8) (12.6) (24.0)Movement through cashflow hedging reserve (1.0) 1.2Movement through available for sale reserve (1.6) (20.9)Other unreconciled difference - 0.1 -Closing creditor 29.0 38.3 11.1

Source: Burgundy group accounts

Tax provision per accounts In FY07, there is a significant reduction in the corporation tax creditor

arising from losses taken to equity on assets available for sale. The losses arising have been utilised to reduce taxable profits across the group to £nil

The remaining tax creditor is composed of a number of provisions for tax uncertainties, net of tax paid on account for FY07 (which is potentially repayable due to the losses mentioned above)

Next steps for Phase 2 No detailed information has been provided to date in relation to VAT nor to

tax compliance status generally

Consideration will also need to be given to how future expected movements through equity (e.g. On assets available for sale) may affect Burgundy’s taxable profit profile and its ability to shelter bonus payments in FY08 to FY10

Basis of information All comments in relation to taxation are based on high level information

provided and follow up discussions with Burgundy management and Burgundy’s advisers


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Taxation Provision for known tax exposures

Tax provisions There are no material provisions in the accounts for tax, other than

corporation tax and deferred tax The key open issues are in relation to TOMS and transfer pricing Burgundy has calculated its provisions based on a risk-weighted

approach. During the current year, Burgundy has re-assessed the risk weighting applied to the two key exposures, increasing the provision in relation to TOMS to 95% of the maximum potential liability (excluding any penalties or interest) and reducing the exposure in relation to transfer pricing to 50% of the maximum potential liability (which includes interest but not penalties)

The overall provision increase in relation to these items in the period is £3.2 million. This has not been charged to the income and expense account, rather existing provisions which were found to be surplus have not been released

There is an additional provision of £5.5 million which arises only on consolidation. If this is added to the existing provisions, there is a shortfall of £1.1 million between the provision and Burgundy’s probability weighted estimate of the overall exposure

Assuming full provision is made for the TOMS exposure and the transfer pricing enquiry can be settled at 50% of the potential exposure, taking into account interest on late paid tax, we estimate the under-provision as at 30 June 2006 at £10.9 million – see opposite

No specific provision has been made for other exposures (see current compliance status summary)

Deferred tax The closing deferred tax asset in the group accounts includes tax losses of

£9.8 million. The amount recognised in Burgundy Society is £9.5 million but if Burgundy Society’s surplus losses are not utilised prior to completion of the transaction, they will no longer be available to carry forward

As at the end of FY07, tax relief of £20.6m (gross) in respect of adjustments arising on transition to IFRS remains deferred in Burgundy Society. This amount is being spread over 10 years and any remaining amount is expected to crystallise in full on completion of the transaction as a loss of the final period for Burgundy Society – this loss cannot be carried forward into the enlarged Society and will need to be fully utilised in the final period

Adjusting for both of the above items, the revised deferred tax liabilities are £17.9 million for Burgundy Society and £7.7 million for Burgundy Group

The current tax balance includes provisions for exposures related to foreign exchange planning and transfer pricing

The total provisions were £29.1 million at the end of FY07 and £32.3 million at the end of June 2008 (both figures include £5.5 million of additional provision held at group level)

Assuming that Burgundy is required to settle TOMS in full and agrees a settlement at 50% of the exposure on transfer pricing, we estimate that the group is currently under-provided by £10.9 million

The deferred tax provision in Burgundy Society is net of assets of £15.3 million which could be lost on completion of Project Vintage

Burgundy assessment of risk exposure - half year£'m Max Weighting ProvisionForex planning (TOMS) 28.8 95% 27.4Transfer pricing enquiry 12.1 50% 6.1Estimated tax exposures 40.9 33.4

Amounts provided - Provisions in individual entites (26.8) - Provision on consolidation (5.5)Un-provided exposure on Burgundy assessment 1.1Add: Additional 5% provision on TOMS 1.4Add: Interest on unpaid tax re TOMS (net of tax relief) 8.3Un-provided exposure 10.9

Source: Half year memorandum to Burgundy audit committee and KPMG analysis

Deferred tax liability / (asset) - 31 December 2007£'m Society GroupAccelerated tax depreciation 5.3 6.4Pensions and other post retirement benefits 12.6 12.6Allowances for losses on loans and advances (5.9) (7.1)Capital gains 1.5 1.7Tax losses carried forward (9.5) (9.8)Other temporary differences (1.4) (11.4)Sub-total per accounts 2.6 (7.6)Adjust for tax losses which may expire on completion 9.5 9.5Adjust for IFRS transitional adjustments 5.8 5.8Adjusted deferred tax liability on a fair value basis 17.9 7.7

Source: FY07 group accounts and KPMG analysis

Current tax balance - 31 December 2007£'m Society GroupProvision for forex planning (TOMS) 14.4 14.4Transfer pricing enquiry 9.2 9.2Provision for known exposures 23.6 23.6Additional provision in consolidated accounts 5.5Group relief / tax refunds due (53.6) (18.0)Closinng corporation tax creditor (30.0) 11.1

Source: Information provided by Burgundy and analysis of Burgundy group audit committee presentation


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Taxation Tax return / HMRC enquiry status

Status of tax returns Management was not aware of any overdue returns for any taxes

A number of corporation tax returns for FY07 remain outstanding (approximately 25%) and management has agreed with HMRC an extension of the normal filing deadline to 31 January 2009 – this is on account of key staff absence due to sickness

The following tax returns remain open:

FY06 and FY07

All returns – the statutory enquiry windows remain open (and some returns have yet to be submitted)

FY01-FY05

Burgundy Society – returns subject to HMRC enquiry

Open enquiry issues TOMS (foreign exchange planning)

During FY02 Burgundy Society implemented planning which resulted in an additional tax deduction of £95.6 million (tax saving of £28.8 million)

There has been follow up correspondence with HMRC and significant documentation has been provided by Burgundy. No discussion of technical issues has taken place and we understand that a similar approach has been taken with other businesses which have implemented the planning

HMRC is currently litigating a similar planning scheme implemented by Prudential Plc. The case has been heard by both the Special Commissioners and the High Court, with both hearings decided in favour of HMRC

Whilst Burgundy believes there are distinguishing factors between its case and that of Prudential, we consider that there is a high risk that HMRC could be successful if they were to litigate Burgundy’s case and accordingly a significant provision would be required – we understand other affected business have made full provision. Therefore we believe that the 95% risk rating should remain as a minimum at the year end FY08 and arguably should be increased to 100%

We have not seen detailed computations or documents relating to the planning but it may be the case that it has only served to increase the losses that would otherwise have been incurred by Burgundy Society

There are a number of outstanding returns but they are all still within the extended filing deadline agreed with HMRC

The key exposures are in relation to TOMS and transfer pricing

Both issues are likely to remain unresolved for several years and significant provisions have been made

There are sundry other open issues which are subject to correspondence with HMRC. Burgundy is confident that these issues can be resolved with minimal (if any) adjustment to the returns. Based on our discussions with Burgundy, this appears reasonable

If this is the case, it may be possible to avoid any tax-related penalty on technical grounds since it is arguable that the penalty provisions applying to FY02 do not allow for penalties where the company itself is not tax-paying

However, there would be interest to pay on any late-paid tax Transfer pricing There are on-going enquiries into the interest rate that ought to be charged

on the balance with Burgundy International, the group’s offshore deposit taker

The group has historically levied interest at 3 month LIBOR plus 30 basis points, and HMRC considers that LIBID should be used. The maximum tax exposure to the end of FY07, including interest but excluding penalties, was estimated at £12.1 million

Burgundy has provided all of the requested information to HMRC and the enquiries remain open. As this is an issue which is common across the industry, HMRC expects to proceed with a test case to determine the issue and the timescale for resolution of the enquiry remains uncertain

At present, Burgundy has provided for 50% of the maximum potential liability. Since the question to be determined is an economic one, it is possible that the issue will be decided at a rate somewhere between HMRC’s proposal of LIBID and Burgundy’s current rate, and a provision of 50% of the maximum exposure does not appear unreasonable

Other open issues HMRC has challenged a claim for tax relief for £1.7 million of expenditure

on refurbishment of former Bristol and West branches on the grounds that the assets had not been used in the business (HMRC has asserted that the branches were not re-opened following the refurbishment, but Burgundy disputes this)

HMRC has challenged a claim for relief of £3.4 million in respect of unmatched derivative losses taken to reserves. Burgundy contends that as the losses were not matched with any profits (they were intended to hedge products that were not ultimately sold) it is not necessary to apply the hedging rules and a deduction should be available under basic principles

We have not seen underlying documentation but provided the facts are as stated by Burgundy, there would appear to be good grounds for claiming relief for each of the above items


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Taxation Other tax matters

Overseas entities Burgundy’s key overseas operations are the deposit taker and the

Guernsey-based captive

The captive is treated as a controlled foreign company and pays dividends so as to satisfy an acceptable distribution policy. The broad impact of this is that 10% of the captive’s annual profits remain outside the scope of UK taxation (and they are not taxed in Guernsey). It appears that no deferred tax has been provided on unremitted profits, which is in accordance with IAS 12. The overseas structures saved tax of £2.4 million in FY07)

HMRC has not raised any enquiries into transfer pricing with the captive but as 90% of its profits are currently taxed the additional tax that might be raised through a successful challenge to transfer pricing is likely to be immaterial

Captive share buy-back £15.1 million was returned to the UK group via a share buy back in FY07.

Burgundy has treated this amount as non-taxable on the grounds that any gain element should qualify for the substantial shareholdings exemption (“SSE”)

The availability of SSE is not beyond doubt since the captive earns significant income from investments and HMRC might seek to argue it is non-trading

However, the investment income has only arisen as the regulator has refused permission to make an early return of funds to the UK and there is therefore no investment intention in retaining the funds in the captive

In the event that SSE is not available, the share buy-back is likely to be seen as a part disposal of the overall shareholding in the captive and as a result a gain could arise. We are unable to quantify this but we note that there are surplus tax losses in FY07 in Burgundy Society which could shelter the gain (and since there is a risk that these losses would be lost on completion of the transaction, any utilisation might not result in an overall tax loss to the group)

£15.1 million was returned to the UK group from the Guernsey captive by way of a share buy back. There is a small risk that a capital gain could arise in FY07 in this respect (although we understand there are surplus tax losses in that period)

There are no material open issues in relation to VAT or payroll taxes

Some minor compliance errors were noted during HMRC’s ISA audit and a small settlement was agreed

VAT The group has not reached agreement with HMRC over a partial

exemption method for VAT recovery, but we understand that the amounts at stake are not material (the current recovery rate is less than 1% and the group incurs limited overheads which are subject to VAT)

Management is not aware of any material issues arising from recent inspections

In FY05 the group made a disclosure to HMRC of an arrangement which it was considered might carry the hallmarks of avoidance. The group had used a subsidiary company, outside the VAT group, to construct a new head office in the early 1990s. The group opted to tax the property and recovered VAT in connection with its construction. VAT was charged on annual rent to the Society, with minimal VAT recovery in the Society

In FY01, a new lease was entered into at an annual rental of £620,000. The new lease is not subject to VAT and accordingly there is no loss of VAT on rental payments, resulting in an annual saving of approximately £92,000 – the impact on VAT recovery in the property holding company is negligible

HMRC has not queried these arrangements and provided the fact pattern supports the technical analysis we would not expect a successful challenge to arise

Payroll taxes The group sent a detailed report to HMRC in January 2008. A small

settlement (£12,000) arose and a further exposure of £10,000 is expected to be disclosed on a separate issue before the end of the calendar year

ISAs HMRC carried out an audit into the tax treatment of ISAs and a settlement

of £147,000 was agreed in March 2008 in relation to sundry compliance failures – new procedures have been implemented to prevent recurrence

Group reorganisations Subject to the outcome of discussions with HMRC, there is a risk that tax

charges could arise on any assets transferred by Burgundy Society to subsidiary entities. Management was not aware of any such transfers but we recommend that this is considered in more detail in phase II if HMRC will not agree to exempt any such transfers from the charging provisions that could apply on completion of the transaction


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Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendices

Contents


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Adjusted earnings Adjusted earnings

Source: KPMG analysis, Burgundy audit committee meeting 12 August 2008, PwC auditor management report FY07 and HY108

The most significant adjustments relate to one-off profits recognised in HY108 (£25.1 million) and subjective reductions in the impairment provision (£18.0 million)

Burgundy has also benefitted from a change in accounting estimates in relation to GEBs of £8.5 million

Potential additional exposure relates to further deteriorations in the housing market increasing the impairment charge

In aggregate, adjustments to reported operating profit would create an adjusted loss, although some elements of these are subjective in nature

Adjusted earnings £'m FY07 HY108 Description Reported operating profit 114.6 50.1 One-off profits: Gain on VocaLink shares (3.0) One-off profit on revaluation of VocaLink shares Basis book swap rip-ups (14.1) One-off profit on basis book swap rip-ups in HY108 Sale of gilts (4.0) One-off profit on sale of gilts in HY108 Profit on sale of fixed assets (4.0) (4.0) Primarily sale and leaseback of branch properties Total one off items (4.0) (25.1) Adjusted profit after one-off items 110.6 25.0 Impairment assumptions: Arrangements (5.0) £5 million benefit taken in HY108 based on management expectations. Further benefit expected in HY208 Loss recovery benefit (7.0) Assessed on case by case basis. £7 million recognised in comparison to expected benefit of £11.6 million

Illius (6.0) £6 million benefit taken based on 50% of expected benefit. Little track record to date. Further benefit expected in HY208

Total benefits (18.0)

1-30 days impairment change (1.5) Accounting estimate changed in H108 resulting in one-off benefit of £1.5 million. Further benefit expected in HY208

Potential loss on Commercial lending (2.0) Potential loss in relation to "Panchoo" case. Not provided as property taken to balance sheet to rent out Release of forecasting risk provisions (15.0) (4.4) Provisions released on basis of "more sophisticated" arrears models leading to one-off releases Total impairment adjustments (15.0) (25.9) Income: GEB change in accounting policy (8.5) Change in accounting treatment resulted in one-off earnings impact, only sustainable if current volumes continue Member business other income (4.8) Release of provisions to Member Business fee income Benefit of LIBOR premium over base (5.7) Benefit enjoyed in BTS, potentially unsustainable Total income adjustments (4.8) (14.2) EIR/provision adjustments Platform EIR models changed (3.6) Lower redemptions in Platform indicate full year adjustment of £7.2 million in FY08. Only half taken at HY108 Fixed rate product EIR models changed (1.1) One-off benefit resulting from spreading of discount not consistent with market approach Release of warranty claims (0.3) Provision created in relation to warranty claims from purchasers of mortgage books no longer deemed necessary General provision release (10.0) Endowment misselling provision no longer deemed necessary creating one-off earnings impact Total EIR/provision adjustments (10.0) (5.0) Adjusted operating profit/(loss) 80.2 (20.1)


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Adjusted earnings Adjusted earnings

Reconciliation of YTD08 and HY08 budgeted profit to actual / reforecast profit Burgundy’s reconciliation of budgeted to actual / forecast PBT for the year to September and FY08 is set out below:

Burgundy management has not yet adjusted their forecast outturn for the impact of additional SLS funding and impact of the FSCS costs being levied on all entities with a depositing taking FSA permission. These have been estimated by Claret management to cost £25 million and £22 million respectively (post tax)

As the final numbers have not been confirmed by Burgundy management, we have not included them in the reconciliation opposite

Reconciliation of YTD08 and HY 08 budgeted profit to actual/reforecast profitYTD 08 FY08

£m £mBudgeted profit before tax andBMR 60.4 100

IncomeGEB income - accounting method 11.4 15.2Core MB Bonds/ISA pricing -8.1 -14.3Profit on gilts & basis book swaps 14.6 9.7Platform ERC remodelling/mix -9.6 -15.8Interest rate impact 18.3 26.8Other -4.9 0.8

21.7 22.4CostsMarketing costs 2.9 2.8IS costs - lower staff/higher recharges 1.6 1.8MB - projects/excpetional costs 1 1.5Platform - higher restructuring costs -0.8 3WMS - recruitment control 1Other 3.4 2.7

9.1 11.8

Loan loss provisionsPHL/BTS higher arrears/possessions -29.3 -22.8HPI decline -23.8 -41Commercial Lending 5.2 3.9Management action 12.8 16.5Other 2.3 3.2

-32.8 -40.2Total movement -2 -6Actual profit before tax and BMR 58.4 94

Source: Burgundy Monthly Performance Report, September 2008


88

Executive summary


Key issues


Commercial lending



Securitisation

Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendices

Contents


89

Commentary on 2008 funding assumption - Ongoing cash funding basis We have reviewed the main assumptions used and have the following

comments (with strong assumptions resulting in a higher assessed deficit):

The overall ongoing (cash funding) valuation basis adopted in 2008 was generally reasonable

However, the salary inflation assumption (price inflation less 0.5%) is unusually low. This is much lower than the salary inflation assumption of price inflation plus 1.5% assumed for the Claret DB scheme

Pensions Funding position – current position

Summary of main assumptions for the 2008 ongoing valuation Strength Comment

Pre-retirement discount rate 6.15% p.a MID-

STRENGTH

1.75% additional return above Government Bond

yields

Post-retirement discount rate 4.5% p.a STRONG

Based on swap yields and similar to Government

Bond yields

Price inflation 3.45% p.a WEAK

Equals the difference between the yields on

Government fixed-interest and index-linked bonds

less an allowance of 0.15% for “inflation-risk

premium” incorporated in index-linked bond yields

Salary inflation 2.95% p.a VERY WEAK * Equals price inflation less 0.5%

Pension increases – RPI (min 3%, max 5%) 3.75% p.a MID to

STRONG* Equals price inflation plus

0.3% Pension increases – RPI (min 0%, max 5%) 3.45% p.a MID to

STRONG* Equals price inflation

Post retirement mortality (pensioners and non-pensioners)

PA92 (Year of Birth) Medium Cohort, plus a

minimum improvement

underpin of 1% p.a

MID to STRONG

In line with current (prudent) mortality

expectations and allows for future improvements in

mortality

* relative to the price inflation assumption

Background Burgundy operates a defined benefit (DB) pension scheme which is closed

to new entrants but has around 1,350 members currently accruing benefits, and a defined contribution (DC) scheme which is open to new members and has around 2,100 active members. This report focuses on the DB scheme, which is the main area of risk for Burgundy

Results of the 5 April 2008 valuation of the DB scheme The following table set outs the results of the 5 April 2008 actuarial

valuation of the DB scheme

Burgundy has agreed with the Trustees of the DB scheme to remove the

ongoing deficit by a single lump sum payment of £28 million In addition, Burgundy will contribute 23% of pensionable salaries (or around

£8.5 million p.a.) towards the future cost of benefits, expenses and life assurance

Description of funding bases Ongoing: the basis recommended by the Scheme Actuary to determine the

rate of contributions to be paid by the Company Pension Protection Fund (“PPF”): the Government introduced the PPF in

April 2005 to ensure pension scheme members receive a minimum level of benefit if a scheme sponsor becomes insolvent. If the trustees were to seek assistance from the PPF, then a valuation under Section 143 of the Pensions Act 2004 would need to be carried out. This would then determine whether the scheme had sufficient funds to pay at least PPF levels of compensation and whether the PPF should assume responsibility for the scheme

Buy-out: the assessed cost of securing all liabilities by the purchase of immediate and deferred annuities with an insurance company. This amount is only relevant where a scheme is being wound up in this way

The valuation of the DB scheme as at 5 April 2008 disclosed an ongoing funding deficit of £28 million

Burgundy has agreed to clear this deficit with a single lump sum. In addition, Burgundy has agreed to pay around £8.5 million a year to the DB scheme in respect of future benefit accrual

The DB scheme was overfunded on statutory PPF assumptions, but had a significant buy-out deficit of around £164 million

The overall ongoing (cash funding) valuation basis adopted in 2008 was generally reasonable although the salary inflation assumption of price inflation less 0.5% is unusually optimistic

Summary of results of the actuarial valuation as at 5 April 2008

Funding basis Ongoing basis “PPF” Buyout basis

£m - Active members 159 n/a n/a - Deferred pensioners 140 n/a n/a - Current pensioners 118 n/a n/a - Sex equalisation reserve 5 n/a n/a Total Liabilities 422 345 558 Total Assets 394 394 394 Surplus / (Deficit) (28) 49 (164) Funding level (%) 93% 114% 71% Source: Mercer draft actuarial valuation as at 5 April 2008


90

Accounting position as at 31 December 2007 Burgundy reports DB Scheme pension costs under IAS19. The balance sheet

positions and P&L charges as at 31 December 2007 and 2006 are as follows:

PwC have estimated the net asset position as at 30 June to be £41 million

Updated position

In order to illustrate the current level of the funding and accounting deficit, we set out below the estimated funding and IAS19 accounting position as at 30 September 2008 using financial assumptions consistent (relative to market conditions) with those used by Burgundy as at 5 April 2008 and 31 December 2007 respectively. We have then shown the effect of moving to the funding and accounting assumptions adopted in respect of the Claret DB scheme

It should be noted that the surplus and deficit figures quoted below are very sensitive to small movements in interest rates and asset movements because they represent the difference between two large and volatile figures

Pensions Accounting position and updated positions

At 31 December 2007, the IAS19 disclosures revealed a Funded status of £58 million which resulted in a net asset of £45 million in the balance sheet

At 30 September 2008, we estimate that the ongoing funding deficit of £28 million has increased to around £67 million on a consistent basis

Moving to the funding assumptions consistent with those adopted for Claret’s DB scheme would result in a funding deficit of £148 million at 30 September 2008

At 30 September 2008, we estimate that the IAS19 balance sheet position would show a surplus of £71 million

Moving to the accounting assumptions consistent with those adopted for Claret’s DB scheme would result in a surplus of £19 million

Estimated funding and IAS19 funded status position as at 30 September 2008

Basis Burgundy AVR

Claret AVR

Burgundy IAS19

Claret IAS19

£m Assets 367 367 367 367 Liabilities (434) (515) (296) (348) Funded status surplus/(deficit) (67) (148) 71 19

Funding level (%) 85% 71% 124% 105% Assumptions Pre-retirement discount rate 6.15% 5.2% 7.05% 6.9% Post-retirement discount rate 4.5% 4.7% 7.05% 6.9% Price inflation 3.45% 3.65% 3.6% 3.95% Salary inflation 2.95% 5.15% 3.6% 3.95%

Mortality PA00(YoB)

MC, 1% underpin

PA92(YoB) MC, rated up

2 years

PA92(YoB) MC

PA92(YoB) MC, rated up

2 years Sources: KPMG estimates

The ongoing funding position at 30 September 2008 on consistent Burgundy assumptions shows a deficit of £67 million. The worsening in the funding position is a result of poor asset returns over the period to 30 September 2008

Moving to funding assumptions consistent with those used for Claret’s main DB scheme shows a deficit of £148 million. This is largely as a result of:

− stronger salary inflation assumption; which increase the level of the assessed liability by around £61 million

− stronger pre-retirement discount rate assumption; increase of £42 million

− stronger price inflation assumption; increase of £23 million − these are offset by a weaker post-retirement discount rate (reducing the

liabilities by around £15 million) and weaker mortality assumptions (reducing the liabilities by around £30 million)

If full allowance is made for the increase in real (corporate) bond yields but the mortality assumption is not updated to reflect the Burgundy funding valuation assumptions, then the IAS19 accounting position at 30 September 2008 on consistent Burgundy accounting assumptions shows a surplus of £71 million

Moving to IAS19 accounting assumptions consistent with those used for Claret’s main DB scheme shows a surplus of £19 million. This is largely as a result of a more prudent discount rate, more prudent price inflation assumption, both of which are offset slightly by a weaker mortality assumption

IAS19 position of DB Scheme as at 31 December 2007 31 December

2007 31 December

2006 Balance Sheet £m Assets 408 365 Liabilities (350) (405) Funded status 58 (40) Funding level (%) 117% 90% Impact of IAS19 surplus cap (9) Unfunded obligations (4) (4) Net asset / (liability) in the balance sheet 45 (44)

Profit & Loss charges £m 12 months to 31 December

2007

12 months to 31 December

2006 Employer service cost 7.7 7.7 Interest cost 21.0 19.3 Expected return on assets (23.4) (20.3) Total P&L charge 5.3 6.7 Group (Society) DC contributions over year 3.6 (2.9) 3.2 (2.3) Assumptions Discount rate 5.8% 5.1% Salary increase 3.3% 4.6% Mortality PA92(YoB) MC PA92(YoB) MC Sources: Burgundy Annual Report as at 31 December 2007


91

Executive summary


Key issues


Commercial lending



Securitisation

Accounting policies

Taxation

Adjusted earnings

Pensions

Capital

Appendices

Contents


92

There is currently significant uncertainty over the projected level of capital headroom in 2008 and 2009

The potential risks to capital could be in the region of £98 million to £130 million. When viewed in the context of Burgundy’s ‘adverse’ scenario, this would leave the business with insufficient capital

There are a number of areas of discussion still to be agreed for the combined Claret and Burgundy capital projections

Capital Capital adequacy forecasts and sensitivities (1)

Overview of Burgundy stand alone position This section of the report covers the Burgundy stand alone position under

their ICAAP submitted earlier in 2005. Further work is being completed on Burgundy’s forecast stand alone position and the forecast combined capital position which is subject to a separate report by KPMG

In May 2008 the surplus capital under Basel II was £319 million with a solvency ratio of 14.2%

Under the forecasts submitted to the Board (via ALCO in July) the forecast outturn for FY08 was a capital surplus position of £230 million; however, it noted that given the current monthly capital burn rate of £15 million a month, this would result in a capital surplus just above the lower Board limit of £150 million by December 2008

There have been adjustments made which mitigate this, the principal one being an adjustment for the double counting of HPI falls when considering the full peak to trough scenarios

We understand that the reason for the current burn rate is the worsening PDs and LTVs seen on the loan portfolios as apposed to an increasing balance sheet

We have received the FSA’s final ICG letter which highlights a number of key areas they wish management to address as follows: − a more conservative approach should be taken in the stress testing

and capital planning − revising the methodology used in calculating the operational risk

capital requirement − revisiting the contingency funding plan to make it consistent with their

stress scenarios − reassessing their interest rate risk capital requirement

Further work is being carried out on the capital projections to the end of FY08 and into FY09 in response to the SREP letter from the FSA 29 August 2008 and further requests from the FSA for stress test in the week commencing 13 October 2008, the latter of which is not yet complete

The latest formal projection of capital headroom at 31 December 2008 (performed in July) was £188 million. This project also includes ‘adverse’ and ‘severe’ stress scenarios. Management has informed us that this forecast was only high level and its expectation is that the outturn will be higher (in excess of £200 million). A more rigorous process is underway with a view to updating the capital forecasts for 2008 and 2009 for submission to the FSA by the end of October 2008

The final capital requirement as a result of the FSA letter has increased by £30 million

Combined Claret and Burgundy position Claret and Burgundy have been working together to develop a combined

capital base case and stress scenario which is subject to a separate report As work continues on the capital forecasting, it is likely that the opening

position of FY09 capital will change

Burgundy capital surplusActual

31 Dec 07Actual

30 Jun 08Forecast

31 Dec 08Capital requirement 1,193 1,304 1,482Capital resources 1,656 1,646 1,681Surplus 463 342 199


93

Executive summary


Key issues

Appendices

Scope of work

Key residential lending exposures

Further arrears analysis

MBS / ABS with MTM losses of 30% or more

Granite MBS

Granite issues and Burgundy holdings

Aire Valley MBS

Other MBS / ABS with BBB or A rating

Contents


94

Appendix 1 Scope of work (1) Scope

Scope area CommentCustomers and productsSet out the key products offered by BurgundySet out customer groups of Burgundy and comment on key products targeted to respective customer groupsComment on the level of customer numbers by loan portfolio over the period from 1 January 2007 to 30 June 2008 (the ‘historical period’) To be covered at phase 2 with full accessStatic loan portfolio dataComment on the composition of the static loan portfolio as at 30 June 2007, 31 December 2007 and 30 June 2008 (e.g. Society, Platform, Commercial etc)

Comment on the key risks to each loan portfolio (where applicable) covering: Leek 18/19 completed, to update at Phase 2 - loan type Leek 18/19 completed, to update at Phase 2 - LTV Leek 18/19 completed, to update at Phase 2 - reversionary date (on fixed and discounted products) Leek 18/19 completed, to update at Phase 2 - nature of security held Leek 18/19 completed, to update at Phase 2 - geographic spread Leek 18/19 completed, to update at Phase 3- broker / introducer relationship Leek 18/19 completed, to update at Phase 4Comment on changes in the profile of the static loan portfolio over the historical period Leek 18/19 completed, to update at Phase 5Comment on concentration risk within the Commercial loan portfolio, including a summary of significant advances in excess of materiality (defined as £2 million), covering:

To be covered at phase 2 with full access

- principal contractual terms To be covered at phase 2 with full access- details of security To be covered at phase 2 with full accesscurrent credit grading, including details of arrears To be covered at phase 2 with full accessNew lending and redemptions Where key risks have been identified through the course of our work in loan portfolios through the static loan portfolio data, comment on trends in monthly new lending over the historical period


Comment on changes in the lending criteria by loan portfolio over the historical periodComment on new business advances in the historical period by source (ie broker; internally generated; other)Comment on trends in redemptions by loan portfolio over the historical periodArrears and loss analysisComment on the procedures for monitoring existing accounts and identifying and managing arrears, and how arrears are calculated and accounts are classified as being in arrears


Set out the provisioning policy and consider whether it has been consistently applied over the historical period, including the policy of capitalisation of arrears

Comment on any changes to basis of impairment provisioning in the last 12 months and estimate impactComment on the arrears and bad debts experience by loan portfolio for the historical period To be covered at phase 2 with full accessComment on arrears and loss experience as compared with peer organisations (to the extent that information is available)Comment on trends in arrears and post-default repayments by month of initial advance (i.e. as a percentage of total advances in that month) To be covered at phase 2 with full accessComment on issues raised by management, credit committee, internal and external auditors on the current credit grading and security rating policy


95

Appendix 1 Scope of work (2)

Scope

Scope area Comment

Broker relationships (where data is available)Comment on the level of reliance on top 10 brokers, and summarise: To be covered at phase 2 with full access- value of advances in the historical period; To be covered at phase 2 with full access- whether a contract is in place; To be covered at phase 2 with full access- key contractual commitments (start and end date and details of volume commitments); To be covered at phase 2 with full access- commission arrangements; and To be covered at phase 2 with full access- override arrangements To be covered at phase 2 with full accessComment on trends in commission rates and levels as a percentage of new advances over the historical period To be covered at phase 2 with full accessLiquidity, funding & securitisationComment on the current funding (both wholesale/retail) structure (excluding securitisation structures covered below), including a summary of associated off balance sheet treasury and trading positions, split by:- product type- value- maturity and re-pricing profileSummarise Burgundy’s current and forecast position in connection with the Bank of England’s Special Liquidity Scheme (“SLS”) and potential implications for Burgundy’s stress testing of liquidity

Summarise details of significant tranches of deposits or other funding, in particular pricing and maturityComment on average funding costs by funding typeCompare average external funding costs to internal recharges by division and/or key product type To be covered at phase 2 with full access

Comment on liquidity stress testing undertaken by management (retail run, closure of wholesale markets, credit rating downgrade)Securitisation structureSummarise securitisation structures in place, covering level and maturity profile of funding raised as at 30 June 2008, rating agency grades, and waterfall arrangementsComment on residual income paid from securitisation vehicles to Burgundy over the historical periodComment on servicing fee arrangements payable to WMS, and on servicer ratings of WMSFor each vehicle consider first loss reserve requirement, covering the potential impact of further securitisation of first loss reserves through the Dovedale structures

Comment on excess spread versus losses and provisioning in the period from 1 July 2007 to 30 June 2008Summarise the key triggers contained in the securitisation structures, covering drawdowns on the first loss reserve, minimum seller share, swap collateral requirements, asset replacement (if any), and early amortisationComment upon monitoring performed by Burgundy over the performance of each securitisation vehicle including key triggers noted aboveComment upon losses reported by each vehicle and compare with peer data (to the extent that information is available)Comment on the potential impact on securitisations from liquidity and capital stress testing undertaken by Burgundy


96

Appendix 1 Scope of work (3) Scope

Scope area CommentCapital structureComment on the current structure of Burgundy split by:- capital type (including tier)- value- maturity and re-pricing profileComment on the interim capital assessment prepared by Burgundy Comment on the regulatory capital position of Burgundy over the historical period (including the excess held over the regulatory thresholds) covering;

- Gross Capital- Free Capital- Liquid Assets- Lending Limits- Funding limitsComment on the factors which determine the regulatory capital requirement and on stress testing undertaken by managementComment on the ICAAP and IRB waiver applications submitted to the FSA, and correspondence with the FSA in respect of theseTreasury assets - Treasury procedures and controlsComment on treasury operations, covering resources, strategy and responsibilities of the Society’s Treasury function, Burgundy Treasury Services and the asset and liability committee


Comment on dealing policies, including limits To be covered at phase 2 with full accessSet out breaches of dealing policies or limits noted by internal or external auditorsTreasury assets - Current treasury positionsComment on maximum and current trading assets in the ‘liquidity portfolio’Comment on treasury assets held within the Society by product type and by client ratingComment on valuation services used by Burgundy, covering details of assets which have been valued using internal pricing modelsDetail which Treasury assets were subject to or were considered by management for write down as at 31 December 2007 and 30 June 2008Summarise Treasury assets which have been subject to credit rating down-grades or watch lists in the market that have not been impaired by Burgundy

Comment on Burgundy’s hedging policies during the historical period covering: To be covered at phase 2 with full access- Fair value hedging (including income statement impact) To be covered at phase 2 with full access- Cash flow hedging (including SORIE impact) To be covered at phase 2 with full access- Other derivative portfolios To be covered at phase 2 with full accessDetail fair value volatility and hedge effectiveness reported by Burgundy in the historical period To be covered at phase 2 with full accessCurrent trading and earningsCompare’s Burgundy’s accounting policies with those of Claret and highlight major differences and comment on potential implications for adjusted earnings of BurgundyComment on trading results for the historical period


97

Scope

Scope area CommentIncome driversComment on the key trends in net interest margin, non-interest income and profitability, by preparing bridges as applicableComment on revenue seasonality over the historical periodComment on income recognition policies adopted by Burgundy during the historical periodComment on trends in the key drivers of performance by revenue stream (interest receivable, redemption income, PPP commission and arrangement fees) over the historical periodComment on the yield earned on loans over the historical period and comment on trends notedAdministration cost driversComment on trends in business overhead costs by category over the historical period To be covered at phase 2 with full accessComment on the level of fixed and variable costs for the historical period To be covered at phase 2 with full accessComment on the employee profile and costs by function/location/business To be covered at phase 2 with full accessComment upon one-off and potentially non-recurring items (defined by Claret as income/costs exceeding £0.5 million which impacts a single financial year) and comment on the movement in adjusted earnings for the historical periodBalance sheet overviewComment on the balance sheets at each year-end for the historical period and 30 June 2008, including commentary on principal components and significant movementsComment on material investments held split between category (e.g. available for sale, held to maturity) including the methodology employed to value material investmentsProperty, plant and equipment and intangible assetsComment on the components of property, plant and equipment and intangible assets and set out the depreciation/amortisation policies employed in the historical period


Comment on significant operating and finance lease contracts held during the historical period To be covered at phase 2 with full accessComment on significant capital commitments identified by Burgundy To be covered at phase 2 with full accessComment on capitalised development costs To be covered at phase 2 with full accessComment on goodwill and reported impairment of goodwill per the statutory accounts To be covered at phase 2 with full accessOther material assets and liabilitiesComment on other assets and liabilities in the historical periodComment on contingent assets and liabilities To be covered at phase 2 with full accessComment on assets held in trust for clients To be covered at phase 2 with full accessComment on other debtors as at 31 December 2007 and 30 June 2008, highlighting key components To be covered at phase 2 with full access

Comment on other creditors as at 31 December 2007 and 30 June 2008, highlighting key components To be covered at phase 2 with full access



98


Scope

Scope area CommentTaxationSummarise the status of the Burgundy’s tax returns and comment on the potential impact of open enquiries and the potential outcome of material HMRC investigations


Comment on the historical tax treatment of the Membership Reward Scheme for both Burgundy and the members, including details of agreements reached with HMRC or correspondence on the Scheme


Comment on the cancellation of shares in 2007 in respect of one of the off-shore entities To be covered at phase 2 with full accessComment on the collective impairment provision as disclosed in statutory accounts for 31 December 2007 To be covered at phase 2 with full accessComment on the VAT partial exemption methodology adopted by the Group To be covered at phase 2 with full accessComment on the tax attributes (including losses) and their potential availability following a change in ownership To be covered at phase 2 with full accessComment on the presence of overseas companies (including captive insurance company in Channel Islands and offshore deposit taker in the Isle of Man), transfer pricing policy and Controlled Foreign Company risk


PensionsAnalyse the funding basis and results of the recent Burgundy actuarial valuation, commenting on the assumptions used relative to market practice and, specifically, to Group's assumptionsConsider the impact of the proposed deal on the cash funding of pensions (including an indication of updated figures)Comment on the accounting and capital adequacy requirements of pensions


99

Appendix 2 Key residential lending exposures – total book as at the end of September 2008

Source: Arrears and Losses MI pack July 2008

Total -1.97%Lending Member -0.33%

£bn £m No. % Prime24.46 664 4835 2.14% £bn £m No. %

Provision Possessions 10.9 28 461 0.32%£m £m No. % Provision Possessions

105.91 136 1195 3.53% £m £m No. %0.56 3 34 0.02%

£m No. % Self -2.98%35 8 1.77% Intermediary -2.96% Cert

Prime £bn £m No. %£bn £m No. % 2.72 108 594 3.49%

1 44 290 3.52% Provision PossessionsProvision Possessions £m £m No. %

£m £m No. % 13.68 32 160 0.90%9.51 16 92 1.02%

-5.06% BTL -2.12%Specialist Cert

£bn £m No. % £bn £m No. %8.81 564 4080 5.61% 2.61 80 560 2.46%

Provision Possessions Provision Possessions£m £m No. % £m £m No. %

90.14 117 1069 1.47% 12.86 30 181 0.78%

-0.88%Commercial Non -8.35%

£bn £m No. % Conf3.75 28 4 0.88% £bn £m No. %

Provision LPA Receiver Cases 3.48 376 2926 8.78%£m £m No. % Provision Possessions5.7 35 8 1.77% £m £m No. %

63 115 728 2.29%

>90 Day Arrears

LPA Receiver Cases

>90 Day Arrears

>90 Day Arrears

>90 Day Arrears

>90 Day Arrears

>90 Day Arrears

>90 Day Arrears

>90 Day Arrears

Stock position at end September 2008


100

Appendix 2 Key residential lending exposures – Platform as at the end of September 2008

15.5

230

Non conf Provisions £m 7.4

£bn > 90 Day arrears 8.26% 1.3 No. Of Possessions 153

BTL Provisions £m 4.1 £bn > 90 Day arrears 2.24%

1.6 No. Of Possessions 39

Self Cert Provisions £m 3.3 £bn > 90 Day arrears 3.10%


Int Prime Provisions £m 0.8 £bn > 90 Day arrears 2.69%

0.2 No. Of Possessions 4 More detailed breakdown of < and > 85% LTV

categories added in July 2008


Burgundy known issue area

No change since last month

Arrears higher than last month

Arrears lower than last month

Platform Lending £bn

6.2 Provision £m

76.0 >90 Day Arrears

£m No. % 408 2935 5.66%

Possessions £m No. %

142 838 1.62%

< 85% LTV (indexed) Provisions £m £bn > 90 Day arrears 4.39%

4.2 No. Of Possessions

> 85% LTV (indexed) Provisions £m 56.1 £bn > 90 Day arrears 7.39%


NB Flats Provisions £m 15.1 £bn > 90 Day arrears 16.77%


FTB Provisions £m 17.9 £bn > 90 Day arrears 7.41%


Non Conf Provisions £m 18.0 £bn > 90 Day arrears 14.45%









101

Non conf Provisions £m 1.4 £bn > 90 Day arrears 6.11%








NB Flats Provisions £m 0.0 £bn > 90 Day arrears 5.66%


FTB Provisions £m 0.2 £bn > 90 Day arrears 5.66%


Non Conf Provisions £m 12.0 £bn > 90 Day arrears 12.51%








Appendix 2 Key residential lending exposures – BTS as at the end of September 2008

More detailed breakdown of < and > 85% LTV

categories added in July 2008


Burgundy known issue area




BTS Lending £bn

3.6 Provision £m

23.6 >90 Day Arrears

£m No. % 3.55 1435 4.79% Possessions £m No. % 51 323 1.08%

< 85% LTV (indexed) Provisions £m £bn > 90 Day arrears

2.1 No. Of Possessions

> 85% LTV (indexed) Provisions £m 20.0 £bn > 90 Day arrears 8.12%


3.6 3.20%

85


102

Appendix 2 Key commercial lending exposures as at the end of September 2008

Commercial

£bn £m No. % 3.75 28.43 4 0.88% Provision

£m £m No. % 5.70 35.28 8 1.77%

> 90 Day Arrears

LPA Receiver Cases


Issue area




Housing Association

£bn £m No % 0.83 0 0 Provision

£m £m No % 0 0 0

Commercial Investment

£bn £m No % 2.21 18.39 1 0.38 Provision

£m £m No % 0.45 0 0

> 90 Day Arrears

LPA Receiver Cases

> 90 Day Arrears

LPA Receiver Cases

Residential Investment

£bn £m No. % 0.70 9.93 1 1.35% Provision

£m £m No. % 5.26 35.28 8 10.81%

Owner Occupied £bn £m No. % 0 0.11 2 3.45% Provision

£m £m No. % 0 0 0 -

> 90 Day Arrears

LPA Receiver Cases

> 90 Day Arrears

LPA Receiver Cases


103

Appendix 3 Further arrears analysis

Balances outstanding split by LTV and arrears status – Leek 18 Mar 08 Balances outstanding split by LTV and arrears status – Leek 19 Mar 08

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0-30 30-50 50-75 75-90 90-100 100+LTV %


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0-30 30-50 50-75 75-90 90-100 100+LTV %

UTD >0-3 months 3-6 months 6-12 months 12-24 months

Source: Leek 18 data tape Source: Leek 19 data tape


104

Appendix 4 MBS / ABS with MTM losses of 30% or more

MTM Rate on issuance Most recent Rating > 3monthsmovement (S&P/Moody/Fitch) Fitch grading movement arrears Inception (£) Inception (%) Latest (£) Latest (%) Required (£) Required (%)

XS0307511591 RMAC SECURITIES NO.1 PLC - Series 2007-NS1 M2c GMAC RFC Jun-07 6,327,080 (4,942,715) (78.1%) A/A1/A A stable 7.3% 5,775,000 1.1% 4,951,468 1.1% 5,775,000 no data Sep 08 update-Jun figuresXS0300475083 RESLOC UK 2007-1 PLC - Class C1b Morgan Stanley 6,600,000 (3,630,000) (55.0%) A (Fitch) A stable 4.1% no data 6.5% no data 7.4% no data no data Sep-08XS0307496264 RMAC SECURITIES NO.1 PLC - Series 2007-NS1 M1a GMAC RFC Jun-07 7,000,000 (3,648,400) (52.1%) AA/Aa3/AA AA stable 7.3% 5,775,000 1.1% 4,951,468 1.1% 5,775,000 no data Sep 08 update-Jun figures

XS0289327826 2,000,000 (1,040,400) (52.0%) BBB stable 1.0%

XS0289327826 3,001,500 (1,561,380) (52.0%) BBB stable 1.0%

XS0289327313 1,583,194 (823,419) (52.0%) BBB stable 1.0%

XS0289327313 3,957,984 (2,058,547) (52.0%) BBB stable 1.0%

XS0248222225 NEWGATE FUNDING PLC - Mortgages Backed Securities Programme Series 2006-1 Class Cc Mortage backed floating rate notes due Dec 2050

Mortgages PLC (subsid of Merrill Lynch)

no data 4,296,719 (2,183,592) (50.8%) no data no data no data no data no data no data no data no data no data no data no data

XS0149246711 1st Flexible no 5 plc. Class B due 01/06/34 Paragon Jun-02 1,000,000 (500,000) (50.0%) BBB/Baa2/Not rated BBB+/watch possible (S&P-Jun 06)

no data 0.0% 7,000,000 no data 8,500,000 7.1% 8,500,000 no data 01-Oct-08

XS0213178709 RESIDENTIAL MORTGAGES SECURITIES 20 PLC Class M2a mortgage backed floating rate notes due 2038

Kensington no data 1,551,600 (698,220) (45.0%) A (Fitch) A stable 23.1% no data 6.5% no data 10.1% no data no data Sep-08

XS0213178709 RESIDENTIAL MORTGAGES SECURITIES 20 PLC Class M2a mortgage backed floating rate notes due 2038

Kensington no data 2,413,117 (1,085,903) (45.0%) A (Fitch) A stable 23.1% no data 6.5% no data 10.1% no data no data Sep-08

XS0300474607 RESLOC UK 2007-1 PLC - Class C1a Mortgage Backed Floating Rate Notes due 2043

Morgan Stanley no data 9,375,000 (4,218,750) (45.0%) A A stable 4.1% no data 6.5% no data 7.4% no data no data Sep-08

XS0193406435 Paragon No.7 plc CLASS B1A MORTGAGE BACKED FLOATING RATE NOTES DUE 15/05/2043

Paragon May-04 3,931,123 (1,729,694) (44.0%) A/A2/A A positive 0.2% no data no data 19,815,000 19,815,000 no data Jul-08

XS0149246554 1st Flexible no.5 PLC CLASS M MORTGAGE BACKED FLOATING RATE NOTES DUE 01/06/2034;

Paragon Jun-02 1,004,000 (366,058) (36.5%) A/A1/not rated no data no data 0.0% 7,000,000 no data 8,500,000 7.1% 8,500,000 no data 01-Oct-08


Paragon Jun-02 2,000,000 (729,200) (36.5%) A/A1/not rated no data no data 0.0% 7,000,000 no data 8,500,001 7.1% 8,500,001 no data 01-Oct-08


Paragon Jun-02 3,004,320 (1,095,375) (36.5%) A/A1/not rated no data no data 0.0% 7,000,000 no data 8,500,002 7.1% 8,500,002 no data 01-Oct-08

XS0300473542 RESLOC UK 2007-1 PLC Class B1a Mortgage Backed Floa Morgan Stanley 6,000,000 (2,100,000) (35.0%) AA (Fitch) AA stable 4.1% no data 9.8% no data 11.0% no data no data Sep-08XS0273286368 Arkle 2006-1 SERIES 5 CLASS C2 FLOATING RATE

NOTES DUE 17/02/2052Lloyds TSB Nov-06 5,000,000 (1,535,500) (30.7%) BBB/Baa2/BBB BBB stable 0.6% no data no data 493,300,000 1.3% 493,300,000 1.3% Sep-08

XS0203411730 Paragon No.8 PLC CLASS B1A MORTGAGE BACKED FLOATING RATE NOTES DUE 15/04/2044

Paragon Oct-04 9,000,000 (2,733,300) (30.4%) A/A2/A A positive 0.2% no data no data 19,000,000 no data 19,000,000 no data 30-Sep-08

Book Value (£) MTM %ISIN number Note type Originator Origination

date

77,053,308 1.5% 77,053,308

Date of update

2.3% 77,053,308 no data Sep-08

Credit enhancement

BRUNEL RESIDENTIAL MORTGAGE SECURITISATION NO.1 PLC D4B Reg S notesD4A reg S notes

Bank of Ireland Mar-07 no data


105

Appendix 5 Granite MBS

MTM Rate on issuance Most recent Ratingmovement (S&P/Moody/Fitch) Fitch grading movement Latest Required

XS0298980813 CLASS 3B3 FLOATING RATE NOTES DUE 17/12/2054 07-2 23-May-07 14,000,000 (3,715,600) (26.5%) AA/Aa3/AA AA stable 1.65 2.22 Sep-08

XS0240607480 CLASS M3 FLOATING RATE NOTES DUE 25/12/2054 06-1 25-Jan-06 3,500,000 (756,700) (21.6%) A/A2/A A stable 1.65 2.22 Sep-08

XS0252427009 CLASS A6 FLOATING RATE NOTES DUE 24/12/2054 06-2 24-May-06 47,500,000 (10,065,250) (21.2%) AAA/Aaa/AAA AAA stable 1.65 2.22 Sep-08

XS0210926571 CLASS C3 NOTES DUE 20/12/2054 05-1 26-Jan-05 4,976,000 (995,200) (20.0%) BBB/Baa2/BBB BBB stable 1.65 2.22 Sep-08

XS0240603653 CLASS A8 FLOATING RATE NOTES DUE 25/12/2054 06-1 25-Jan-06 32,000,000 (6,300,800) (19.7%) AAA/Aaa/AAA AAA stable 1.65 2.22 Sep-08

XS0267968658 CLASS A6 FLOATING RATE NOTES DUE 19/12/2054 06-3 19-Sep-06 50,000,000 (6,750,000) (13.5%) AAA/Aaa/AAA AAA stable 1.65 2.22 Sep-08

XS0220174972 CLASS M3 FLOATING RATE NOTES DUE 20/12/2054 05-2 25-May-05 8,000,000 (1,020,000) (12.8%) A/A2/A A stable 1.65 2.22 Sep-08

XS0276823167 CLASS A8 FLOATING RATE NOTES DUE 20/12/2054 06-4 29-Nov-06 25,000,000 (2,630,000) (10.5%) AAA/Aaa/AAA AAA stable 1.65 2.22 Sep-08

XS0298980060 CLASS 4A2 FLOATING RATE NOTES DUE 17/12/2054 07-2 23-May-07 28,050,000 (2,790,000) (9.9%) AAA/Aaa/AAA AAA stable 1.65 2.22 Sep-08

XS0220172257 CLASS A7 FLOATING RATE NOTES DUE 20/12/2054 05-2 25-May-05 28,000,000 (2,702,000) (9.7%) AAA/Aaa/AAA AAA stable 1.65 2.22 Sep-08

XS0220175862 CLASS B3 FLOATING RATE NOTES DUE 20/12/2054 05-2 25-May-05 10,000,000 (953,000) (9.5%) AA/Aa3/AA AA stable 1.65 2.22 Sep-08

XS0210925847 CLASS A6 NOTES DUE 20/12/2054 05-1 26-Jan-05 4,411,500 (246,750) (5.6%) AAA/Aaa/AAA AAA stable 1.65 2.22 Sep-08XS0210929161 CLASS A5 NOTES DUE 20/12/2054 05-1 26-Jan-05 5,051,667 (258,140) (5.1%) AAA/Aaa/AAA AAA stable 1.65 2.22 Sep-08

XS0176410776 SERIES 3 CLASS B FLOATING RATE NOTES DUE 20/01/2044 03-3 24-Sep-03 684,024 (13,475) (2.0%) AA/Aa3/AA AAA stable 4.40 4.40 Sep-08

XS0176410693 SERIES 3 CLASS A FLOATING RATE NOTES DUE 20/01/2044 03-3 24-Sep-03 17,563,000 (250,097) (1.4%) AAA/Aaa/AAA AAA stable 4.40 4.40 Sep-08

XS0184563541 SERIES 2 CLASS M FLOATING RATE NOTES DUE 20/03/2044 04-1 28-Jan-04 399,001 (16,930) (4.2%) A/A2/A AA Positive 4.71 4.71 Sep-08

XS0184563541 SERIES 2 CLASS M FLOATING RATE NOTES DUE 20/03/2044 04-1 28-Jan-04 1,581,770 (67,115) (4.2%) A/A2/A AA Positive 4.71 4.71 Sep-08

XS0184566569 SERIES 3 CLASS M FLOATING RATE NOTES DUE 20/03/2044 04-1 28-Jan-04 1,000,000 (41,710) (4.2%) A/A2/A AA Positive 4.71 4.71 Sep-08

XS0184565249 SERIES 3 CLASS A FLOATING RATE NOTES DUE 20/03/2044 04-1 28-Jan-04 2,856,555 (61,387) (2.1%) AAA/Aaa/AAA AAA stable 4.71 4.71 Sep-08

XS0193219754 SERIES 3 CLASS M FLOATING RATE NOTES DUE 20/06/2044 04-2 26-May-04 2,500,000 (593,500) (23.7%) A/A2/A AA Positive 3.23 3.23 Sep-08

XS0193216578 SERIES 2 CLASS M FLOATING RATE NOTES DUE 20/06/2044; FULLY PAID 04-2 26-May-04 1,260,943 (136,308) (10.8%) A/A2/A AA Positive 3.23 3.23 Sep-08

XS0193216578 SERIES 2 CLASS M FLOATING RATE NOTES DUE 20/06/2044; FULLY PAID 04-2 26-May-04 1,577,124 (170,487) (10.8%) A/A2/A AA Positive 3.23 3.23 Sep-08

XS0193218350 SERIES 3 CLASS A FLOATING RATE NOTES DUE 20/06/2044; FULLY PAID 04-2 26-May-04 20,000,000 (1,948,000) (9.7%) AAA/Aaa/AAA AAA stable 3.23 3.23 Sep-08

XS0193218350 SERIES 3 CLASS A FLOATING RATE NOTES DUE 20/06/2044; FULLY PAID 04-2 26-May-04 40,000,000 (3,896,000) (9.7%) AAA/Aaa/AAA AAA stable 3.23 3.23 Sep-08

XS0201483657 SERIES 2 CLASS B FLOATING RATE NOTES DUE 20/09/2044 04-3 22-Sep-03 1,035,221 (37,786) (3.7%) AA/Aa3/AA AAA stable 2.93 2.93 Sep-08

XS0298984641 May-07 5,000,000 (3,273,500) (65.5%) BBB/Baa2/BBB BBB stable 1.65 2.22XS0298978320 May-07 3,954,425 (2,587,776) (65.4%) BBB/Baa2/BBB BBB stable 1.65 2.22XS0284075560 Granite Master Issuer plc - Class 3c2

floating rate notes due 24/12/54 07-1Jan-07 3,200,000 (1,600,000) (50.0%) BBB/Baa2/BBB BBB stable

1.65 2.22Sep-08

XS0298977512 CLASS 2C2 FLOATING RATE NOTES DUE 17/12/2054 07-2

May-07 2,372,655 (968,043) (40.8%) BBB/Baa2/BBB BBB stable 1.65 2.22

Sep-08

XS0284074167 CLASS 3M2 FLOATING RATE NOTES DUE 24/12/2054 07-1

Jan-07 10,000,000 (4,000,000) (40.0%) A/A2/A A stable 1.65 2.22

Sep-08

XS0240608371 CLASS C3 FLOATING RATE NOTES DUE 25/12/2054 06-1

Jan-06 4,000,000 (1,300,000) (32.5%) BBB/Baa2/BBB BBB stable 1.65 2.22

Sep-08

Granite Master Issuer plc - Class 3c3 floating rate notes due 17/12/2054 07-02Granite Master Issuer plc Class 3c2

Sep-08

ISIN number Note type Origination date

Date of update

Book Value (£) MTM % Credit enhancement (%)


106

Appendix 6 Granite issues and Burgundy holdings

Amounts issued by Granite (value)Issue 2003-3 2004-1 2004-2 2004-3 2005-1 2005-2 2005-3 2005-4 2006-1 2006-2 2006-3 2006-4 2007-1 2007-2 TotalA notes 846,169,600 1,311,801,000 2,055,892,600 1,401,949,660 4,411,995,000 3,833,709,150 1,000,000,000 1,304,517,411 1,550,000,000 3,053,792,550 5,461,875,700 3,100,996,187 16,231,395,500 4,198,183,400 49,762,277,758B notes 46,690,470 94,970,990 111,661,880 113,192,216 152,247,395 134,678,280 - 62,336,490 198,185,832 66,161,725 165,247,380 83,462,979 249,179,390 219,135,450 1,697,150,477M Notes 17,431,675 45,590,050 68,812,615 88,042,531 154,774,550 136,813,350 - 56,720,590 33,500,000 65,760,650 153,873,930 99,211,018 235,707,350 213,268,620 1,369,506,929C Notes 50,998,950 67,453,400 118,889,210 209,423,255 169,933,710 154,703,313 - 70,198,750 220,579,326 97,618,200 142,047,330 76,399,576 339,286,664 196,035,985 1,913,567,669Total 961,290,695 1,519,815,440 2,355,256,305 1,812,607,662 4,888,950,655 4,259,904,093 1,000,000,000 1,493,773,241 2,002,265,158 3,283,333,125 5,923,044,340 3,360,069,760 17,055,568,904 4,826,623,455 54,742,502,833

Amounts purchased by Burgundy (value)Issue 2003-3 2004-1 2004-2 2004-3 2005-1 2005-2 2005-3 2005-4 2006-1 2006-2 2006-3 2006-4 2007-1 2007-2 TotalA notes 17,563,000 2,856,555 60,000,000 - 9,463,167 28,000,000 - - 32,000,000 47,500,000 50,000,000 25,000,000 - 28,050,000 300,432,722B notes 684,024 - - 1,035,221 - 10,000,000 - - - - - - - 14,000,000 25,719,245M Notes - 2,980,771 5,338,067 - 8,000,000 - - 3,500,000 - - - 10,000,000 - 29,818,838C Notes - - - - 4,976,000 - - - 4,000,000 - - - 32,000,000 11,327,080 52,303,080Total 18,247,024 5,837,326 65,338,067 1,035,221 14,439,167 46,000,000 - - 39,500,000 47,500,000 50,000,000 25,000,000 42,000,000 53,377,080 408,273,885

Amounts issued by Granite (%)Issue 2003-3 2004-1 2004-2 2004-3 2005-1 2005-2 2005-3 2005-4 2006-1 2006-2 2006-3 2006-4 2007-1 2007-2 TotalA notes 88.0% 86.3% 87.3% 77.3% 90.2% 90.0% 100.0% 87.3% 77.4% 93.0% 92.2% 92.3% 95.2% 87.0% 90.9%B notes 4.9% 6.2% 4.7% 6.2% 3.1% 3.2% - 4.2% 9.9% 2.0% 2.8% 2.5% 1.5% 4.5% 3.1%M Notes 1.8% 3.0% 2.9% 4.9% 3.2% 3.2% - 3.8% 1.7% 2.0% 2.6% 3.0% 1.4% 4.4% 2.5%C Notes 5.3% 4.4% 5.0% 11.6% 3.5% 3.6% - 4.7% 11.0% 3.0% 2.4% 2.3% 2.0% 4.1% 3.5%Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Amounts purchased by Burgundy (%)Issue 2003-3 2004-1 2004-2 2004-3 2005-1 2005-2 2005-3 2005-4 2006-1 2006-2 2006-3 2006-4 2007-1 2007-2 TotalA notes 96.3% 48.9% 91.8% - 65.5% 60.9% 0.0% 0.0% 81.0% 100.0% 100.0% 100.0% - 52.6% 73.6%B notes 3.7% - - 100.0% - 21.7% 0.0% 0.0% - - - - - 26.2% 6.3%M Notes - 51.1% 8.2% - - 17.4% 0.0% 0.0% 8.9% - - - 23.8% - 7.3%C Notes - - - - 34.5% - 0.0% 0.0% 10.1% - - - 76.2% 21.2% 12.8%Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0.0% 0.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


107

Appendix 7 Aire Valley MBS

MTM Rate on issuance Most recent Rating > 3monthsmovement (S&P/Moody/Fitch) Fitch grading movement arrears Latest (£) Latest (%) Required (£) Required (%)

XS0264192716SERIES 1 CLASS C2 ASSET BACKED FLOATING RATE NOTES DUE 20/09/2066

Bradford and Bingley Aug-06 1,585,250 (243,019) (15.3%) BBB/Baa2/BBB BBB stable 2.64% 380,000,000 2.96% 380,000,000 2.96% Oct-08

Date of update

Book Value (£) MTM %ISIN number Note type Originator Origination

date


108

Appendix 8 Other MBS / ABS with BBB or A rating

MTM Ratings Most recent Gradingmovement (S&P/Mo

ody/Fitch Fitch grading stability required current

XS0114780421 Series 4 Class C floating asset backed due 15/7/2040 Oct-00 2,376,840 (298,531) (12.6%) BBB/Baa2/BAbbey/Holmes Fin No 1 0.76 BBB stable 1.68 1.68

XS0188150527 Series 4 Class C floating asset backed due 15/7/2040 15-Jul-04 4,000,000 (111,600) (2.8%) BBB/Baa2/BAbbey/Holmes Fin No 8 0.76 BBB stable 1.68 1.68

XS0292759635 Series 3 Class C3 mortgage backed floating 28-Mar-07 1,000,000 (169,100) (16.9%) BBB/Baa2/BAbbey Holmes Fin Master Issuer 07-1 0.76 BBB stable 1.68 1.68

XS0305306598 Series 2 Class C3 mortgage backed floating 20-Jun-07 2,000,000 (265,400) (13.3%) BBB/Baa2/BAbbey/Holmes Fin Master Issuer 07-2 0.76 BBB stable 1.68 1.68

XS0305306598 Series 2 Class C3 mortgage backed floating 20-Jun-07 2,981,400 (395,632) (13.3%) BBB/Baa2/BAbbey/Holmes Fin Master Issuer 07-2 0.76 BBB stable 1.68 1.68

XS0312955304 Series 2007-1 Class 4D3 mortgage backed floating 06-Aug-07 5,000,000 (1,350,500) (27.0%) BBB/Baa2/BClydesdale Bank no data BBB stable 1.5 no data

XS0163980476 Series 5 Class C Floating due 30/6/2042 06-Mar-03 4,044,800 (67,346) (1.7%) BBB/Baa2/BHBOS 1.07 BBB stable 2.26 2.26

XS0179403257 Series 5 Class C Floating due 30/6/2042 25-Nov-03 1,581,770 (309,394) (19.6%) BBB/Baa2/BHBOS 1.07 BBB stable 2.26 2.26

XS0187602403 Series 5 Class C Floating due 30/6/2042 Jun-04 2,513,250 (572,518) (22.8%) BBB/Baa2/BHBOS 1.07 BBB stable 2.26 2.26

US71419QAK40 Series 3 Class C floating due 30/6/2042 Jun-04 2,807,945 (149,383) (5.3%) BBB/Baa2/BHBOS 1.07 BBB stable 2.26 2.26

XS0270511115 Series 4 Class C asset backed floating 17-Oct-06 2,372,655 (689,968) (29.1%) BBB/Baa2/BPermanent Master Issuer 1.07 BBB stable 1.86 1.86

XS0277530274 SERIES 3 CLASS C3 FLOATING RATE NOTES DUE 17/02/2052 14-Dec-06 3,000,000 (480,000) (16.0%) BBB/Baa2/BLloyds TSB 0.63 BBB stable 1.65

(1.77combined)1.65

(1.77combined)

XS0256211318CLASS DC ASSET BACKED FLOATING RATE NOTES DUE 12/04/2056

12-Oct-06 1,977,213 (388,918) (19.7%) BBB/Baa1/BARRAN RESIDENTIAL MORTGAGES FUNDING NO.1 PLC 4.78 BBB stable 100 100

XS0274294916CLASS C4 ASSET BACKED FLOATING RATE NOTES DUE 18/10/2054

28-Nov-06 1,250,000 (376,250) (30.1%) BBB/Baa2/BAlliance & Leicester/Fosse Master Issuer 0.22 BBB stable 1.7 1.81

XS0273285048 SERIES 5 CLASS M2 FLOATING RATE NOTES DUE 17/02/2052 06-Nov-06 19,600,000 (4,192,440) (21.4%) A/A2/A Lloyds TSB 0.63 A stable 4.45 1.77

XS0256206235CLASS CA ASSET BACKED FLOATING RATE NOTES DUE 12/04/2056; FULLY PAID

12-Oct-06 4,000,000 (482,800) (12.1%) A/A2/A ARRAN RESIDENTIAL MORTGAGES FUNDING NO.1 PLC 4.78 A stable 100 100

XS0267352200CLASS CA ASSET BACKED FLOATING RATE NOTES DUE 20/09/2056

20-Dec-06 11,000,000 (1,787,500) (16.3%) A/A2/A Royal Bank of Scotland plc (Arran 2) 4.05 A stable 100 100

XS0289326935Class C4c Mortgage Backed Floating Rate Notes due January 2039

13-Jul-07 17,000,000 (4,178,600) (24.6%) A/A2/A Bank of Ireland no data A stable no data no data

XS0282470797CLASS A MORTGAGE BACKED FLOATING RATE NOTES DUE 15/09/2033

25-Jan-07 8,840,223 (839,821) (9.5%) AAA/none/AParagon Mortgages Ltd 7.13 A stable no data no data

XS0274294759CLASS M4 ASSET BACKED FLOATING RATE NOTES DUE 18/10/2054

28-Nov-06 4,000,000 (944,400) (23.6%) A/A2/A Alliance & Leicester 0.22 A stable 3.4 3.63

XS0274293785CLASS A4 ASSET BACKED FLOATING RATE NOTES DUE 18/10/2054

28-Nov-06 16,000,000 (1,344,000) (8.4%) AAA/Aaa/AAAlliance & Leicester 0.22 A stable 9.25 9.21

XS0305305863

SERIES 2 CLASS M3 RESIDENTIAL MORTGAGE-BACKED FLOATING RATE NOTES DUE 15/07/2040

20-Jun-07 5,000,000 (487,500) (9.8%) A/A2/A Abbey National plc 0.76 A stable 4.55 4.57

XS0292755138

SERIES 3 CLASS M3 RESIDENTIAL MORTGAGE-BACKED FLOATING RATE NOTES DUE 28/07/2040

28-Mar-07 11,800,000 (859,040) (7.3%) A/A2/A Abbey National plc 0.76 A stable 4.55 4.57

XS0312955056SERIES 2007-1 CLASS 4C2 MORTGAGE BACKED FLOATING RATE NOTES DUE 22/12/2054

06-Aug-07 8,000,000 (1,380,800) (17.3%) A/A2/A Clydesdale Bank no data A stable 4.8 no data

XS0187602155 SERIES 5 CLASS M FLOATING RATE NOTES DUE 30/06/2042 Jun-04 3,000,000 (472,800) (15.8%) A/A2/A HBOS PLC (Perm Fin 4) 1.07 A stable no data 5.09



US71419QAL23 SERIES 3 CLASS M FLOATING RATE NOTES DUE 30/06/2042 Jun-04 1,123,178 (34,369) (3.1%) A/A2/A HBOS PLC (Perm Fin 4) 1.07 A stable no data 5.09

Credit enhancement (%)ISIN number Note type Origination

date Book value (£) MTM % arrears losses (%)Originator

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