Chailease 2010 Securitization 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

Issuer: Land Bank of Taiwan (Land Bank; twAA/Stable/twA-1+) as trustee for Chailease 2010

Securitization Special Purpose Trust (the SPT)

Cut-off Date: July 31, 2010

Closing Date: Aug 13, 2010

Expected Maturity Date: Aug 26, 2015

Legal Final Maturity Date: Aug 26, 2017

Seller/Servicer: Chailease Finance Co. Ltd. (Chailease; twA/Negative/twA-2)

Trustee/Back-up Servicer/Account Bank: Land Bank of Taiwan

Arranger: Chinatrust Commercial Bank (twAA/Stable/twA-1+)

Issue: NT$5.275 billion trust beneficial certificates due 2017

Rating Dependents: Account Bank, Eligible Investment

RATIONALE

Taiwan Ratings Corp. (TRC) today assigned its 'twAAA' and 'twA' ratings to the Class A and Class B trust beneficial certificates issued through Chailease 2010 Securitization Special Purpose Trust (the SPT). The certificates will be backed by a pool of NT$ lease and installment receivables (receivables) originated by Chailease Finance Co. Ltd. The ratings assigned to the certificates reflect our opinion of:

• The credit quality of underlying receivables observed from the originator's historical performance.
  
• The underwriting policy of the originator reviewed in the servicer evaluation and the Eligibility Criteria of Receivable stipulated in the trust agreement.
  
• Liquidity reserve set aside at closing to cover servicer/trustee transition risk and the shortfall of senior fee/expense, and interest payment of rated tranches, if any.
  
• The embedded amortization triggers that will accelerate the repayment of rated tranches if the performance of underlying receivables deteriorates.
  
• The size of the reserve for interest on margin principal to cover any shortfall on interest to be paid to an obligor on its margin principal.
  
• The payment structure that provides timely monthly interest payment and ultimate principal payments to rated note holders by the legal final maturity date, and
  
• The rating requirement on the account bank and eligible investment.
  
• The structural and legal provisions of the transaction.

STRENGTHS, CONCERNS, AND MITIGATING FACTORS

Strengths:

• If there is any shortfall in senior fees/expense and interest of rated certificates, such shortfall can first be covered by the principal draw and then by the liquidity reserve.
  
• The transaction will reserve certain fixed amounts at closing in order to cover senior fees and expenses once any amortization triggers are hit.
  
• The interest for margin principal and reserve of the interest for margin principal will be funded by the originator each time the margin deposits on new receivables are transferred to the SPT.
  
• The servicer, Chailease, is experienced with more than three decades working in the lease/installment field.

Concerns

• The credit quality of the underlying pool may be adversely affected by new receivables transferred from the originator during the revolving period.
  
• Non-standard features of collaterals / funding targets as well as complex legal issues on collaterals transfer may cause recovery periods and recovery rates of defaulted receivables more uncertain.
  
• The initial pool may concentrate on certain industries or certain groups.
  
• There could be a payment mismatch between the asset side and liability side of the SPT, as the pool allows up to 20% of the receivables not to be paid on a monthly basis but the payment frequency on the rated certificates is every month.
  
• Commingling risk will arise if the servicer fails to remit the payment received from obligors to the SPT.

Mitigating Factors:

• The transaction has the predetermined Eligibility Criteria of Receivable stipulated, which we take into consideration to reflect the credit enhancements under different rating levels. In addition, the deterioration of underlying receivables could result in a breach of the amortization triggers, which will effectively shut off investing in new receivables from the originator, and all collection from the receivables would be used to repay rated tranches.
  
• The possible recovery on non-cash equivalent collateral or underlying assets (including insurance claims) of the defaulted receivables is not taken into consideration in our rating analysis.
  
• The potential concentration issue is mitigated by the stress multiples and specific maximum percentage of the obligor after being congregated as stipulated in the trust agreement.
  
• The potential payment mismatch is mitigated by the relatively high interest payment of underlying receivables, principal draw mechanism, and liquidity reserve, and
  
• Commingling risk is largely prevented as the obligors will commit their debt service through issuing a set of post checks when the lease/installment receivables are initially launched. The post check will be transferred to the SPT along with the transfer of receivables.

TRANSACTION STRUCTURE

This is the second lease/installment receivables securitization transaction originated by Chailease. At closing, the Originator will transfer receivables (leases and installments), including related rights, titles, and interests, valued as of the cut-off date at an amount of NT$ 5.275 billion to the SPT. At the same time the SPT will issue three classes of trust certificates to fund the transfer. Class A and Class B are rated at 'twAAA' and 'twA', respectively, while Class C is unrated and represents the residual value of the transaction. The structure will have a revolving period up to about three years after the closing followed by a two-year amortization period. During the revolving period, principal repayment from the receivables will be used to buy additional eligible lease/ installment receivables every month. Upon the occurrence of any early amortization triggers stipulated in the trust agreement or after Aug. 26, 2013 (whichever happens earlier), payments from the receivables will be used to redeem issued certificates instead of buying new receivables from the originator. The early amortization triggers include the default rate trigger, delinquency ratio trigger, excess spread ratio trigger, and non-performance of the servicer and trustee trigger.

The ORIGINATOR/SERVICER

Chailease, the originator and servicer, was established in 1977 and has been the largest leasing company in terms of asset size in Taiwan for many years. The company reported net worth of NT$ 12.1 billion and EPS of NT$1.59 as of Dec. 31, 2009. The company has about 724 employees. In terms of contract amount, Chailease has about 29% market share in lease transactions and about 42% market share in installment transactions. Chailease mainly provides lease, installment, and local factoring financing to small-to-midsize companies.

TRC conducted a review of the origination, underwriting, collection, and overdue management procedures. As servicer, Chailease is responsible for the day-to-day administration and ongoing servicing of the lease/installment receivables and for producing all reports and calculations in connection with the performance of the receivables.

SUBJECT OF FUNDING AND COLLATERALS ON THE RECEIVABLES

The receivables consist of payments made by obligors in relation to lease/installment contracts. The receivables are classified into lease or installment categories depending on the underlying funding targets. Lease receivables are mainly backed by equipment or machinery, while installments are backed by raw materials. The lease/ installment contract provides for the payment on a monthly basis or other payment terms as agreed between an obligor and Chailease. All obligors make the scheduled lease/installment payment in the form of post-dated checks. The obligors are required to issue a set of post-dated checks for the life of the lease/installment to Chailease before the lease/installment is extended. All the post-dated checks will be transferred under the title of the trust and will be collected when due. For certain lease /installment transactions, obligors may be requested to provide additional collaterals to enhance their credit quality. Collaterals may constitute several forms including margin principal, share pledge, Negotiable Certificate of Deposit (NCD) pledge, real estate and chattel that most of them will be transferred to the SPT.

In addition to the payments made under the lease/installment contract, the issuer is entitled to receive money from several other sources, including prepayments, proceeds from the disposal of the underlying funding targets, proceeds obtained under insurance policies and proceeds from the disposal of additional collaterals.

The receivables to be transferred to the portfolio have to comply with the Eligibility Criteria of Receivables stipulated in the trust agreement such as payment frequency, minimum-required yield, weighted average remaining tenor, and the concentration limit of the receivables.

TERMS AND CONDITIONS OF THE CERTIFICATES

Interest Payment

The rated certificates will be issued at par at closing and carry fixed-rate coupons payable every month in arrears.

Certificates' interest payments are supported by the money in the interest collection account after related tax items and senior fees/expense are satisfied. According to the transaction documents, interest collection mainly includes interest payment from underlying receivables, and interest received from eligible investment. For any shortage of rated certificate interest payments on payment dates, the principal collection and liquidity reserve are available to be sequentially drawn. The interest payment of notes is based on a sequential basis.

Principal Payment

In the revolving period, the trustee will use the principal collection to purchase the new eligible receivable from Chailease and no principal payment will be distributed to the certificates until the deal enters an amortization period. In the amortization period, the transaction employs a pass-through arrangement with principal collection from the underlying receivables being used to repay the principal of the issued certificates on the payment date every month. 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 Aug 26, 2017.

Liquidation

Trust asset will be liquidated in certain predetermined events such as following a failure of the SPT to make timely interest payment on the most senior trust certificates and not remedied within five business days, or the principals of rated trust certificates not fully redeemed by the legal final maturity. After liquidation, all proceeds from the trust (other than liquidity reserve and deposit margin related reserve) will be distributed with payments made to principal and interest of Class A certificates followed by payments made to the principal and interest of Class B certificates. Liquidity reserve will be drawn if there is any shortage from such payments.

CREDIT AND CASH FLOW ANALYSIS

Credit Risk Analysis

Taiwan Ratings conducted a review of historical receivables performance data, an originator and servicer evaluation, and structure risk analysis as the basis for its credit risk analysis.

The historical performance data was analyzed to gauge the general default and delinquency trend, with consideration of changes in the macroeconomic environment as well as any adjustment of underwriting polices. Based on this historical data, we observed that the performance of lease receivables is more uncertain in terms of the average default rate and volatility than that of installment receivables, and we have taken this into consideration during our credit risk analysis. We also consider the embedded triggers that lead to the amortization period from the revolving period, stressed analysis commensurate with respective rating scenarios, and commingling risk for the credit risk analysis.

Cash Flow Analysis

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

For cash inflow analysis, Taiwan Ratings considers the payments from the obligors by assumed loss ratios under different rating scenarios. To evaluate the sufficiency of transaction cash flow to satisfy rated interest obligations, we assume a cash inflow scenario in which the underlying receivables generate 4% annual yield. Such yield comes from one of the Eligibility Criteria of Receivables stipulating that the minimum yield of any receivable should be higher than 4%.

For cash outflow analysis, transaction tax and fees/expenses are sized at the values according to the tax opinion, transaction document, and general practices. We also assume some fees and expense items to be the capped amount stipulated in the transaction documents.

STRUCTURE ANALYSIS

Servicer Transition

The originator will set aside an amount of money as a liquidity reserve at transaction closing in order to mitigate the event of a servicer transition, if any. The purpose of this reserve is mainly for the servicer transition period, but it also can cover some shortfalls, from taxes to the coupons of rated notes, in the interest waterfall.

Liquidity Risk

There may be a payment mismatch on the asset side and liability side as the pool allows up to 20% of the receivables not to be paid on a monthly basis but the payment frequency on the rated certificates is monthly. However, the liquidity risk is controllable in our viewpoint given the following reasons.

Monthly interest payment with at least 4% yield from the obligors should be able to cover the possible expense in the payment dates. The annual payment fee/expense, such as the Gretai Securities Market listing fee, will be reserved in the paid-in advance ledger in the Interest Account upon each payment. As a result, the possibility is limited that the expense can not be paid during the collection period.

Secondly, monthly principal payment from the obligors can also cover the shortfall up to interest of Class B, i.e. principal draw, if there is insufficient interest inflow.

Also, at the closing, the transaction will set aside a liquidity reserve to cover the possible expenses during the collection period.

Finally, once the amortization trigger is hit, the paid-in advance ledger is set aside based on predetermined formulas to prevent lower inflow (due to gradually amortized underlying receivables) being not able to pay the fixed senior fee/expense. The amount will be assessed based on the duration between the longest maturity of underlying receivables and the beginning date of the amortization date.

Interest Rate Risk

Interest rate risk should be remote in this transaction as the interest rates in the asset side and liability side are both fixed.

Currency Risk

There is no currency risk in this deal as the repayment of interest and principal of both asset and liability side are denominated in NT$.

Commingling Risk

All the scheduled lease/installment payments due are made by post-dated checks. When a receivable is first extended to the borrower, the borrower will issue a set of post-dated checks to cover all payments during the life of the receivable. The trust will be entitled to these checks after the right on the receivable is transferred to the SPT. The checks will be sent out for collection from the trust account when due.

In some exceptional cases, the servicer may receive payments from the obligors. The servicer is required to remit the proceeds to the trust account within one business day after the receipt of the proceeds. However, the servicer may not be able to remit the proceeds to the trust account on time if it needs to reconcile the payments with the receivables. As a result, a credit enhancement is assessed to mitigate the commingling risk caused by the delay of remittance of proceeds to the trust.

Set-off Risk

Set-off risk is remote as the originator is a lease company and does not take deposits.

Prepayment Risk

Prepayment risk is remote as the prepayment rate of underlying receivables is low. This is mainly due to the relatively high penalty to end the receivables contract earlier than scheduled. In addition, the minimum-required yield of the underlying receivables is 4%, which is higher than the coupon rates of rated tranches, and may further offset the negative carry issue.

In the revolving period, the principal repayment from the receivables will be used to purchase new receivables to generate interest to satisfy coupons of rated tranches. In order to avoid idle funds in the trust (when there are less eligible receivables to acquire), the pool will enter into the amortization period if the three-month moving average of excess spread is lower than the specific figure stipulated in the trust agreement. In the amortization period, the principal repayment from the receivables is allocated on a sequential basis to pay down the rated liabilities.

The Reserve of Margin Principal

When Chailease extends credits to the obligors, obligors may be required to deposit a margin amount to Chailease, as further payment protection on the receivables. If the obligors comply with the receivable contracts and make all scheduled payments, Chailease has to return the margin principal to the obligors, together with an interest as agreed between obligors and Chailease when the receivables mature. If the obligors do not comply with the receivable contracts or fail to make payments, Chailease is entitled to use the margin principals to offset the receivables payment the obligors owe.

When lease and installment receivables are transferred to the SPT, the respective margin principal will also be entrusted to the SPT. The trustee will then follow the trust agreement to use the time deposit as the investment tool for the margin principals, so that they can get deposit interest for the interest obligations on the aforementioned margin principal.

In addition, the transaction also sets aside some reserves to mitigate possible shortfalls if the deposit interest is insufficient to cover the agreed interest obligations. If there is still a shortfall in the agreed interest obligations, it can be covered by the interest waterfall.

COUNTERPARTY ANALYSIS

The counterparty risk considered in this transaction includes the creditworthiness of the account bank, Land Bank of Taiwan, and the eligible investment in which the trustee places unused cash. Their ratings both satisfy our minimum rating requirement for a 'twAAA' transaction. Additionally, transaction documents have replacement languages upon the account bank's rating downgrade below particular levels, and the required rating levels for eligible investment.

LEGAL AND TAX ANALYSIS

The transaction is structured in accordance with the Financial Asset Securitization Law of Taiwan, which provides for the establishment of the SPT, the legally perfected transfer of assets from the originator to the SPT and the protection from other creditors' and third parties' claims.

Prior to assigning the final ratings, Taiwan Ratings has received related legal and tax opinions.

SURVEILLANCE

After the closing date, continuous surveillance will be maintained on the transaction until all rated beneficial certificates have been fully redeemed. The credit quality of lease/installment receivables as well as all supporting ratings will be monitored to make sure that the ratings on the certificates reflect the credit risk of the notes.

RELATED CRITERIA AND RESEARCH

• Servicer Evaluation Criteria: Australia and New Zealand, published on www.globalcreditportal.com on Aug. 7, 2008. Principles-Based Rating
• Methodology For Global Structured Finance Securities, published on www.globalcreditportal.com on May 29, 2007. Equipment Leasing Criteria: The
• Rating Process For Lease-Backed Transactions, published on www.globalcreditportal.com on Sept. 1, 2004. Equipment Leasing Criteria:
• Credit Risks Evaluated In Lease-Backed Securitizations, published on www.globalcreditportal.com on Sept. 1, 2004. Equipment Leasing Criteria:
• Structural Considerations In Rating Lease-Backed Transactions, published on www.globalcreditportal.com on Sept. 1, 2004. Equipment Leasing Criteria:
• Legal Considerations In Rating Lease-Backed Transactions, published on www.globalcreditportal.com on Sept. 1, 2004.