Report:
Jih Sun Securities Co. Ltd. 2007-1 Collateralized Bond Obligation Special Purpose Trust

This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in rating changes.

RATING DETAILS

Profile

Issue: Jih Sun Securities Co. Ltd. 2007-1 Collateralized Bond Obligation Special Purpose Trust NT$10,137,333,300 Beneficial Certificates

Issuer: First Commercial Bank Ltd. (twAA-/Stable/twA-1+) as Trustee for Jih Sun Securities Co. Ltd. 2007-1 Collateralized Bond Obligation Special Purpose Trust (the SPT)

Collateral: New Taiwan Dollar (NT$) denominated corporate bonds (NT$ Bonds) and USD denominated credit linked notes (USD Notes)

Closing date: July 10, 2007

Seller/Originator: Jih Sun Securities Co. Ltd.

Trustee/Servicer: First Commercial Bank Ltd.

Hedge Counterparty: Deutsche Bank AG (rated A+/Stable/A-1 by Standard & Poor¡¦s Ratings Services), Taipei Branch (Deutsche Bank Taipei) for the swaps; Deutsche Bank AG, London Branch, Deutsche Bank AG, Hong Kong Branch, and Deutsche Bank Taipei (together the ¡§USD Notes Buyers¡¨) for USD Notes purchase

Rationale

Taiwan Ratings Corp. today assigned its 'twAAA' rating to the Class B certificates issued by the SPT through the Trustee. The rating reflects the likelihood of timely interest payment and the ultimate principal repayment by the legal final maturity of the Class B certificates.

The rating reflects:

• The credit quality of the NT$ Bonds and the principal repayment of the USD Notes by the transaction¡¦s legal final maturity;
• The adequate cash reserve to cover transaction tax, fees/expenses and Class B interest payments throughout the transaction life;
• The agreement between the Trustee and the USD Notes Buyers to have the USD Notes sold by the transaction¡¦s legal final maturity at a price no lower than the then-current principal amounts;
• The foreign exchange swap (FX swap) to hedge currency risk associated with the proceeds from the USD Notes;
• The credit quality of the supporting parties in the transaction, including the swap counterparty, the account bank, and the USD Notes Buyers; and
• The structural and legal provisions of the transaction.

Strengths, Concerns and Mitigating Factors:

Strengths:

• The FX swap transaction adequately hedges foreign currency risk associated with the principal payment from the USD Notes.
• The transaction has a cash reserve to help cover taxes, senior fees/expenses, and interest payments on rated certificates throughout the transaction life.

Concerns:

• The portfolio is highly concentrated with a limited number of obligors.
• The interest payment from the USD Notes is uncertain as it will come from the income notes or equity tranches of other collateralized debt obligation (CDO) transactions that collateralize the USD Notes.
• The USD Notes encompass an installment mechanism whose proper execution will affect the principal collection from the USD Notes.
• The USD Notes have much longer maturities than the legal final maturity of the certificates. When the Trustee liquidates the USD Notes in the market upon the certificates¡¦ legal final maturity, there could be market value risks.

Mitigating Factors:

• We take account of the concentration and small-pool features of the portfolio in our rating analysis, and conduct a variety of credit risk evaluations using the CDO Evaluator Version 5.0 model of Standard & Poor¡¦s and other stress-scenario tests.
• When conducting the principal repayment and interest inflow analysis, we do not consider any interest payment from the USD Notes unless it has been received.
• The transaction documents clearly specify the conditions for such installments operation and the detailed procedure for the Trustee.
• The transaction is structured such that the USD Bonds Buyers will purchase the outstanding USD Notes before the legal final maturity of the issued certificates, at a price no lower than the outstanding principal amounts of the USD Notes.

Transaction Overview

Deal Closing

This is a NT$ denominated collateralized bond obligation (CBO) transaction issued under Taiwan's Financial Assets Securitization Law. The transaction adopts the true sale structure and uses the SPT as the intermediate entity. It was closed on 10 July 2007.

At closing, the Originator transferred 23 NT$ Bonds and 5 USD Notes to the SPT, which at the same time issued three classes of beneficiary certificates to fund the transfer. Class A and Class B certificates are rated and publicly issued, while Class C certificates are unrated and represent the residual value of the transaction. Part of the proceeds raised from investors was converted into USD with Deutsche Bank Taipei to buy the USD Notes. The remaining proceeds (net of the initial reserve amount) were paid to the Originator. The diagram below outlines the transaction structure.

All three certificate classes are NT$ denominated, and each has its specified coupon rate:

Upon the deal closing, the Trustee entered into several NT$ interest rate swap (IRS) transactions and a NT$/USD FX swap transaction with Deutsche Bank Taipei. The Trustee also has an agreement with the USD Notes Buyers to have the USD Notes sold after 7 years, at a price no lower than then-current principal amounts of the USD Notes.

The IRS transactions will convert the variable coupon payment from some NT$ Bonds into fixed interest payments, and the FX swap is used to convert the USD proceeds from the USD Notes into NT$ primarily for the redemption of certificates.

Interest collections (after hedge transactions) are used to satisfy transaction tax, fees/expenses, and notes interest payment on each payment date. Principal collections are passed through to redeem issued certificates in a sequential order.

A NT$ cash reserve was set aside at closing in a trust account and had an initial amount of NT$ 1,033,992,673, which would amortize according to a preset schedule. The cash reserve could be used to cover any shortage in tax and senior fees/expenses payment, and notes interest payment on Class A and Class B certificates.

Current Assets and Liabilities

Most of the NT$ Bonds collateralizing the transaction have matured since the deal closed, and the transaction now has two NT$ Bonds remaining. The principal amounts on the USD Notes were also reduced after installments during the period.

The principal repayment from NT$ Bonds and some proceeds related to USD Notes installments were used to repay the issued certificates. Class A has been fully redeemed and the outstanding amount of Class B has decreased to NT$2,941,307,578 as at January 15, 2010.

payments from USD Notes

The five USD Notes in the asset pool are credit-linked notes issued by an Irish special purpose vehicle, Eirles Two Limited. Each of them is collateralized by one CDO Collateral (income notes or equity tranches of some collateralized debt obligation transactions), and one Treasury Strip Collateral (US Treasury zero-coupon securities due in 2020 ~ 2022) that will accrue to 100% of the USD Notes principal amount upon maturities of the US Treasury zero-coupon securities (also the maturities of the USD Notes).

The Trustee can sell all remaining USD Notes in the asset pools to the USD Notes Buyers about two to three weeks before the legal final maturity of the certificates, at a price no lower than the USD Notes' outstanding principal amount. The USD proceeds equal to the principal amount will then be converted into NT$ by the FX swap transaction, and deemed as principal collection of the USD Notes.

The USD Notes pay interest equal to the CDO Distribution Amount, which is the cash paid in respect of distributions under the CDO Collateral of the USD Notes and actually received by the USD Notes issuer.

Deutsche Bank Taipei will provide firm quotations of the following items to the Trustee upon each CDO Collateral payment.

(1) Treasury Strip Price, which is the current market price of the Treasury Strip Collateral;

(2) Principal Amortization Amount of the USD Notes, which is the CDO Collateral payment amount divided by (1 minus the Percentage of Treasury Strip Price), floored at USD 100,000 and rounded down to the nearest USD 100,000;

(3) Treasury Strip Notional Amount, which is the Treasury Strip Collateral notional amount to be sold. This amount equals the Principal Amortization Amount in (2);

(4) NT$/USD Spot price; and

(5) The Early Unwinding Charges of the FX swap, which is the unwind cost for the partial termination on the FX swap.

With the aforementioned quotations, the Trustee can instruct to sell a notional amount of the Treasury Strip Collateral (¡§installment¡¨) equal to the Principal Amortization Amount at the Treasury Strip Price, if the following Condition to Treasury Strip Liquidation is met.

(1) [(Treasury Strip Collateral sale proceeds plus CDO Distribution Amount, minus related business tax) multiplied by NT$/USD Spot, minus Early Unwinding Charges of the FX swap] is larger than [the Principal Amortization Amount of the USD Notes multiplied by the NT$/USD exchange rate agreed on the FX swap], and;

(2) The notional amount of the USD Notes after such Treasury Strip Collateral sale is not less than one US dollar.

The USD Notes would be partially redeemed after such an installment, with the outstanding principal amount reduced by the Principal Amortization Amount.

The Trustee will divide the net NT$ proceeds from the installment and follow-on foreign currency exchange in two parts: (1) the Principal Amortization Amount-equivalent NT$ amount at the agreed-upon exchange rate on the FX swap and (2) all residuals. Part (1) is defined as the principal collection from the USD Notes per transaction documents, and Part (2) as the interest collection from the USD Notes.

If the Trustee does not instruct such installments, all USD Notes interest payments will be converted into NT$ at the spot market, and classified as interest collections.

Notes TERMS

Interest Payment

The rated certificates were issued at par at deal closing, and carry fixed-rate coupons payable every three months in arrears.

Certificates' interest payments are supported by the money in the interest collection account after related tax items and senior fees/expenses are satisfied. According to the transaction documents, interest collection includes coupon payments from the NT$ Bonds, interest collections from the USD Notes, amortization of the cash reserve, and other reimbursements or payments of an interest nature. For any shortage of certificate interest payments on payment dates, the principal collection and cash reserve are available to be drawn.

Principal Payment

The transaction employs a pass-through arrangement with principal collections from the NT$ Bonds and the USD Notes being used to repay the principal of the issued certificates on relevant payment dates. The most senior certificate class must be fully redeemed before the next senior certificate class principal can be repaid. The legal final maturity for principal repayment is July 11, 2014.

Hedge arrangement

The Trustee entered into a series of NT$ IRS transactions with Deutsche Bank Taipei to convert the variable interest payments from some NT$ bonds into fixed interests. IRS terms have followed the underlying NT$ Bonds payment, and most of the IRS have terminated following the maturities of NT$ Bonds.

The Trustee will use the FX swap with Deutsche Bank Taipei to convert the principals of the USD Notes from their sale proceeds into NT$ one day before the certificates¡¦ legal final maturity. By designating the final exchange amount, which is the outstanding principal amount of the USD Notes, and a specific NT$/USD exchange rate, the FX swap helps mitigate the foreign exchange uncertainty for the principal collection of the USD Notes.

Upon installment operations, the proceeds from CDO Collateral payment and the US Treasury Strips sale will be converted into NT$ with Deutsche Bank Taipei. The final exchange notional amount in the FX swap will be reduced by the Principal Amortization Amount for each USD Notes installment.

Should the interest from the USD Notes be paid without the installment operations, the payment will be converted into NT$ in the spot market.

In a side agreement between the Trustee and the USD Notes Buyers and Deutsche Bank Taipei, the USD Notes Buyers have agreed to purchase the USD Notes at a price not less than the outstanding principal amount of the USD Notes. This arrangement will mitigate the market value risk associated with liquidating the USD Notes by the certificates¡¦ legal final maturity.

Collateral Characteristics

The collateral portfolio now consists of two NT$ Bonds, five USD Notes, and NT$95,571,000 cash in the principal collection account. The aggregate par of the two NT$ bonds is NT$150,000,000, and the total outstanding principal amount of the USD Notes is USD 108,679,000, equivalent to NT$2,807,178,570 at the agreed-upon exchange rate in the FX swap agreement.

Features of the current portfolio include:

• It is a static portfolio and asset substitution or new asset acquisition is not allowed;
• The five USD Notes account for 95% of the portfolio amount, calculated at the agreed-upon exchange rate in the FX swap upon final exchange;
• The USD Notes' maturities dates range from 2020 to 2022, and will be liquidated by the Trustee in 2014 for notes redemption; the USD Notes Buyers, via the commitment to purchase remaining USD Notes in 2014, thus support 95% of the underlying asset;
• One of the NT$ Bonds is a senior unsecured bond issued by a domestic corporate entity, and the other is a subordinated financial debenture from a local bank;
• Both NT$ Bonds have specified coupon rates, and will mature between August 2010 and November 2010;
• Neither Taiwan Ratings nor Standard & Poor¡¦s maintain ratings on the five USD Notes, but each of the Treasury Strip Collateral collateralizing the USD Notes carry Standard & Poor¡¦s ratings; and
• Both issuers of the NT$ Bonds are rated by Taiwan Ratings.

Credit AND CASH FLOW Analysis

Consideration on the Obligors and Credit Enhancement Levels

The two NT$ Bonds in the asset pool are straight bonds with designated maturities in 2010. For credit risk analysis, we use their issuer¡¦s ratings to represent the creditworthiness of the bonds.

For USD Notes, when conducting the credit risk and cash flow analysis, we take into account the proceeds from USD Notes at the notional principal amount, and neglect possible income from the USD Notes interest. These notional principal amounts are considered at their NT$ equivalent calculated at the agreed-upon exchange rate in the FX swap agreement.

Related obligors in the USD Notes for the aforementioned principal repayment include the United States sovereign and the Deutsche Bank AG, whose three branches agree to purchase the USD Notes before certificates¡¦ legal final maturity.

Under the Condition to Treasury Strip Liquidation, the proceeds from selling the Treasury Strip Collateral in the installment, together with other payments from the USD Notes, could bring the NT$ principal collection equivalent to the Principal Amortization Amount of the USD Notes, calculated at the agreed-upon exchange rate in the FX swap. As a result, when US Treasury strips are sold in this way, the sale will not change the total NT$ principal collection the SPT is entitled to from the USD Notes, in comparison with the amount if there were no such installments. The NT$ principal collection received represents some prepayment of the USD Notes, and is used to pay down CBO certificates.

The credit enhancement to Class B certificates considered in our rating analysis is the difference between total principal collections from the bonds (the principal amount of the NT$ Bonds and the principal amount of the USD Notes calculated at the exchange rate in the FX swap) and the outstanding amount of Class B certificates. We noted the transaction has excess interest after satisfying tax, senior fees/expense and rated interests, but we do not consider this to be a further credit enhancement to the Class B certificates. This is because according to the trust agreement, the excess interest will not be used to redeem certificates except on the certificates¡¦ legal final maturity.

Credit Risk Analysis

We employed several credit risk analysis approaches on the underlying portfolio with respect to the credit enhancement level of Class B certificates. These include Monte Carlo simulation via the Standard & Poor¡¦s CDO Evaluator Version 5.0 model for portfolio scenario default rate analysis and small-basket risk evaluation, as well as credit enhancement level evaluation under stressed asset default scenarios.

The credit enhancement level evaluation under stressed default scenarios provides insight to the potential credit risk of Class B certificates, as the underlying pool have four obligors only, and we see more concentration and discrete defaults risk. In such an evaluation, Taiwan Ratings first considered the obligors¡¦ credit quality, relative strength in their respective industries, bonds¡¦ maturities, and their default correlation. We then evaluated whether the credit enhancement could withstand severe defaults of the bonds with stressed defaulting timing and very low recoveries.

Cash Flow Analysis

We conduct cash flow analysis based on the credit risk evaluation result and transaction structure. The cash flow analysis evaluates the possibility of timely payment of certificates' interests, and the repayment of certificates' principal by the legal final maturity.

In cash flow analysis, Taiwan Ratings considers the interest payment from the NT$ bonds and the cash reserve amount, but not the possible interest collection from the USD Notes. To evaluate the sufficiency of transaction cash flow to satisfy rated interest obligations, we assume stressed cash inflow scenarios such as much reduced interest collection from the bonds and no re-investment yields, and heavy dependency on the cash reserve for senior fees¡¦/expenses¡¦ and rated interests¡¦ payment.

On cash outflow items, transaction tax and fees/expenses are sized at the values per the tax opinion, transaction documents, and general practices. We also assume limited principal redemption on the certificates to evaluate the impact of the high interest payment burden.

Taiwan Ratings found the cash reserve, currently deposited at First Commercial Bank Ltd., is critical in providing cash flow for the certificates' interest payment throughout the transaction life. With the size of the reserve and its periodical amortization to the interest collection account, it becomes the most important source of cash inflow to cover senior fees/expense and rated interests under stressed cash flow assumptions commensurate with the certificates¡¦ rating.

Structural Analysis

Servicer Transition

The NT$ Bonds are in bearer form and deposited in the Trustee¡¦s safe, and the USD Notes are deposited in Clearstream Banking, societe anonyme in the name of the SPT. During servicer transition, cash flow from the assets could be temporarily interrupted if there is no servicer presenting NT$ Bonds for interest and principal payments, or managing the USD Notes clearing and foreign currency exchange.

The liquidity risk arising from such possible interruption is mitigated by the sufficient cash reserve of the transaction.

Commingling

The commingling risk in this transaction is remote as payments from the underlying bonds will be remitted directly to the SPT's trust accounts.

Set-off

According to related legal opinions, set-off risk will arise if the Originator has payment obligations to the underlying bond issuers and such payment obligations exist before the transfer of the bonds on deal closing.

Potential set-off risk in this transaction is remote in Taiwan Ratings¡¦ opinion, as the Originator is not a deposit-taking institution. The current credit enhancement to Class B also provides some protection to possible set-off obligations.

Counterparty analysis

Account Bank

First Commercial Bank Ltd. acts as the trust's accounts deposit bank. Its rating satisfies our minimum rating requirement for a ¡¥twAAA¡¦ transaction and transaction documents have replacement languages upon the account bank¡¦s rating downgrade below particular levels.

IRS and FX Swap Counterparty

The current rating on the swap counterparty, Deutsche Bank Taipei, is sufficient to support a ¡¥twAAA¡¦ transaction per Taiwan Ratings' criteria. However, the swap counterparty replacement arrangement in related hedge documents is not in line with Taiwan Ratings¡¦ criteria, and we thus view the credit quality of the swaps to essentially rely on Deutsche Bank Taipei¡¦s performance. With this viewpoint and considering the importance of the swap transactions for Class B certificates payment, our rating on Class B certificates will be linked to Deutsche Bank Taipei¡¦s creditworthiness.

USD Notes Buyers

If the USD Notes Buyers fail to purchase the USD Notes by the certificates¡¦ legal final maturity, the Trustee will need to liquidate the USD Notes at market prices. In Taiwan Rating¡¦s perspective, such a market price will most likely be lower than the USD Notes¡¦ principal amount, and therefore hurt the principal redemption of Class B certificates. It is our opinion that the purchase commitment on the remaining USD Notes before Class B¡¦s legal final maturity is instrumental in supporting the rating on Class B certificates.

The current rating on USD Note Buyers can support a ¡¥twAAA¡¦ transaction under the arrangement. Due to the critical nature of such commitment and the difficulty to find new replacements for the role, the transaction rating will largely relate to the ratings on the USD Notes Buyers.

Legal analysis

The entrustment and separation of the bonds backing the issued certificates are structured on the Financial Assets Securitization Law and related regulations of the Republic of China.

Taiwan Ratings have reviewed related legal opinions on the transaction, hedge documents, and USD Notes issuance. These opinions addressed issues such as legal formality of the securitization, the true sale of the bonds to the SPT, the effectiveness and enforceability of related documents under respective jurisdictions, and tax treatment related to the USD Notes.

Tax Analysis

The Trustee provided a tax treatment opinion from a local accounting firm, addressing tax issues related to the SPT. We also consulted with the Trustee and reviewed relevant tax legislation and rulings for the tax obligations of the SPT.

According to the tax treatment opinion, the taxation basis for interest payments from the USD Notes and whether the installment/sale of the USD Notes is subject to business tax remain unclear. To tackle this, the transaction has set aside a USD tax reserve for the potential obligations.

Related Research

• ¡§Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs,¡¨ published on www.globalcreditportal.com on Sept. 17, 2009
• ¡§Principles-Based Rating Methodology For Global Structured Finance Securities,¡¨ published on www.globalcreditportal.com on May 29, 2007
• ¡§Update To General Cash Flow Analytics Criteria For CDO Securitizations," published on www.globalcreditportal.com on Oct. 17, 2006
• ¡§General Cash Flow Analytics for CDO Securitizations," published on www.globalcreditportal.com on Aug. 25, 2004