Chailease 2011 Securitization Special Purpose Trust
NT$ 5,000,229,118 Trust Beneficiary Certificates

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

Rationale
Taiwan Ratings Corp. (TRC) today assigned its 'twAAA (sf)' and 'twA (sf)' ratings to the Class A and Class B trust beneficiary certificates (together the notes) issued through Chailease 2011 Securitization Special Purpose Trust. The certificates will be backed by a pool of Taiwan dollar (NT$) denominated lease and installment receivables (receivables) originated by Chailease. The ratings assigned to the notes reflect our opinions of:

• The credit quality of underlying receivables observed from the originator's historical performance and Eligibility Criteria of Receivables stipulated in the transaction documents;
  
• The underwriting policy of the originator;
  
• The liquidity reserve set aside at closing to mitigate servicer/trustee transition risk and to cover the shortfall of senior fees/expenses and notes interest payments, if any;
  
• The embedded amortization triggers that will accelerate the repayment of rated notes on a sequential basis if the performance of underlying receivables deteriorates to certain levels;
  
• The size of the cash 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 rated interests payment every month and ultimate principal payments to rated notes by the legal final maturity date;
  
• The rating requirement on the account bank and eligible investment in transaction documents; and
  
• The legal framework of the transaction and provisions under related Taiwan laws.
  

Strengths, Concerns, And Mitigating Factors
Strengths:

• The asset pool comprises receivables with clean payment records and a certain level of creditworthiness under Chailease's internal scoring system.
  
• Chailease is an experienced servicer, in our opinion, and has been in the lease/installment industry for more than three decades.

Concerns And Mitigating Factors:

• The credit quality of the underlying receivables may be adversely affected by new receivables transferred from the originator during the revolving period. In consideration of this, the transaction has the predetermined Eligibility Criteria of Receivables stipulated in the transaction documents, which aim to keep the pool's credit quality from deteriorating immediately. In addition, the deterioration of underlying receivables could result in a breach of the amortization triggers, which in turn will effectively shut off investing in new receivables, and all collection from the receivables would be used to repay rated notes on a sequential basis.
• Non-standard features of collaterals and funding targets as well as complex legal issues on collaterals transfer may result in uncertainty in the recovery periods and recovery levels of defaulted receivables in the longer term. Our rating analysis excludes the potential recoveries for receivables that are over 90 days in arrears.
  
• The underlying pool may be concentrated on certain industries or certain groups, raising its vulnerability to event risk or industry deterioration risk. This risk is reflected in the credit loss and stress multiple under respective rating scenarios.
  
• There could be a payment mismatch between the asset side and liability side of the SPT, as the underlying pool allows up to 20% of the receivables not to be paid on a monthly basis but the payment frequency on the rated notes is monthly. The potential payment mismatch is mitigated by the relatively high yields of underlying receivables, principal collections to meet expense and interest payment mechanism, as well as the liquidity reserve coverage.
  
• Commingling risk will arise if the servicer fails to remit any payments received from obligors to the SPT. However, we believe this transaction largely prevents the occurrence of commingling risk because the obligors will commit their debt service through issuing a set of post-dated checks when the lease/installment receivables are originated. The post-dated check will be transferred to the SPT along with the transfer of receivables. If the servicer receives the payment or recovery amount from an obligor and fails to transfer such amounts to the SPT up to a certain level, this would constitute an amortization trigger, which the credit enhancement evaluation considers.

Transaction Structure
This is the third asset-backed securitization transaction collateralized by lease/installment receivables that Chailease has originated. At closing, the originator will transfer assets, composed of lease and installments receivables along with their related legal rights and interests valued as of the cut-off date at an amount of NT$ 5.00 billion to the SPT. At the same time the SPT will issue three classes of trust certificates to fund the transfer. TRC will assign ratings on Class A and Class B certificates, while Class C will be unrated and represents the residual value of the transaction.

The transaction has a revolving period up to three years after the closing, followed by an amortization period of about two years. During the revolving period, principal repayments from the receivables will be used to purchase additional eligible lease and installment receivables every month. Upon the occurrence of any early amortization triggers or after the scheduled end of the revolving period (whichever happens earlier), repayments from the receivables will be used to redeem issued notes on a sequential basis. The early amortization triggers include some general performance measures such as cumulative default rate, delinquency ratio, excess spread ratio, and performance of the servicer and trustee, according to the transaction documents.

The Seller/Originator/Servicer
Chailease, the seller, originator and servicer in this transaction, was established in 1977. It provides lease, installment, factoring financing and other financial services mainly to small-to-midsize companies, and has been the largest leasing company in terms of asset size in Taiwan for many years. The company reported total assets of NT$ 40.24 billion as of Dec. 31, 2010. In 2010, Chailease held about 40.6% of Taiwan's lease and installment financing sectors in terms of contract amount in 2010.

As the servicer in this transaction, 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 payment commitments made by obligors in relation to lease/installment contracts, based on the underlying funding targets as equipment, machinery, and raw materials that Chailease helps fund. To be more specific, lease receivables are generally backed by equipment or machinery, while installments receivables are collateralized by raw materials or inventories. A lease/installment contract will govern the payment on a monthly basis or other payment terms as agreed between an obligor and Chailease.

All obligors have to make the scheduled payment in the form of post-dated checks and are required to issue a set of post-dated checks for the life of the receivable to Chailease when entering into the contract. All the post-dated checks will be transferred to the SPT under the title of the trust and will be collected when due. For certain receivables, obligors may be requested to provide additional collaterals to provide more protection to the creditor. In these cases, collaterals may constitute several forms including but not limited to margin principal, real estate, and chattel, which will be transferred to the SPT.

In addition to the payments made under the receivable contract, the SPT is also entitled to receive money from prepayments and proceeds from the disposal of the underlying funding targets as well as collaterals.

The receivables transferred to the SPT must comply with the Eligibility Criteria of Receivables, including but not limited to specific payment frequency, minimum-required yield, weighted average remaining tenor, and highest concentration of obligors, stipulated in the transaction documents. If a receivable does not comply with the criteria but is transferred due to administrative errors, the originator has the obligation to buy it back from the SPT.

Terms And Conditions Of The Notes
Interest Payment
The rated notes will be issued at par at closing and carry fixed-rate coupons payable every month in arrears.

The interest payments of notes are supported by the money in the interest collection account after related tax items, senior fees and expenses are satisfied or considered. According to the transaction documents, the interest collection is composed of interest payments from underlying receivables, and interests received from eligible investment of the idle cash of the SPT. The principal collection and liquidity reserve are available to cover any shortage of rated interest payments when due.

Principal Payment
During the revolving period, the trustee will use the principal collection from receivables to purchase new eligible receivable from Chailease and no principal payment will be made to the note holders. During the amortization period, the transaction employs a pass-through arrangement with principal collection from the underlying receivables being used to repay the rated principal every month on a sequential basis. The legal final maturity for principal repayment in this transaction is Nov. 24, 2018.

Credit And Cash Flow Analysis
Credit Risk Analysis
TRC uses the actuarial approach in analyzing the credit risk of this transaction. To this end, we conducted a review of historical performances of lease and installment receivables from Chailease, met with the originator to understand the credit policies and underwriting process, and considered the related structure risk in the transaction arrangement to form our view of the credit risk.

We analyzed historical performance data to gauge the general default and delinquency trend, with consideration of changes in the macroeconomic environment as well as any adjustment of underwriting polices. Our results show that the performance of lease receivables is more volatile than that of installment receivables, and we have factored this into our decision of the pool base-case default rate. We then employed the early-period recovery of receivables in delinquency and respective stress multiples for rating scenarios for the loss assumption in each different class of notes. In addition, we considered the embedded triggers that will lead the transaction into the amortization period from the revolving period and the commingling risk in the 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 interest, and the repayment of rated principal by the legal final maturity.

For cash inflow analysis, we consider the payments from the obligors by assumed loss ratios under the respective rating scenarios. To evaluate whether the transaction has sufficient cash flows to satisfy the rated interest obligations, we assume the underlying receivables to provide an annual yield of 4%, which is the minimum yield requirement of Eligibility Criteria of Receivables.

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

Structural Analysis
Servicer/Trustee Transition
The originator will set aside an amount as a liquidity reserve at closing to mitigate the liquidity risk upon a servicer or trustee transition event, if any. The purpose of this reserve is mainly for the coverage of expenses and interest payments during the servicer or trustee transition period, but it also can be used for the same items in the interest waterfall during ordinary periods.

Liquidity Risk
There may be a payment mismatch on 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 notes is monthly. However, the liquidity risk is manageable in our viewpoint given the following.

• Monthly interest payment from the receivables, with an annual yield of at least 4%, should be able to cover the possible expenses in the payment dates. As for annual expenses items, such as the Gretai Securities Market listing fee, the monthly share will be reserved in the paid-in advance ledger in the interest collection account upon each scheduled payment. As a result, it is unlikely that theses expenses can not be satisfied during the collection period.
  
• Monthly principal payment from the receivables can also be used to cover the interest waterfall shortfall up to the interest of Class B if there is insufficient interest inflow.
  
• At closing, the transaction will set aside a liquidity reserve to cover the expenses and interest payments if needed.
  
• Once the amortization period kicks in, an additional reserve amount will be set aside based on predetermined formulas to prevent lower inflow (due to gradually amortized underlying receivables) failing to meet the fixed amount of senior fees/expenses. These additional reserved amounts will be assessed based on the duration between the maturity of last matured underlying receivables then and the beginning date of the amortization period.

Interest Rate Risk
The interest rate risk is remote in this transaction as the interest rates in the asset side and liability side are both fixed rates.

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

Commingling Risk
When a receivable is initially extended to an obligor, it 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 receivable is transferred to the SPT, and the checks will be sent out for collection from the trust account when due.

In some exceptional cases, the servicer may still receive receivables payments from the obligors. Transaction documents require the servicer to remit the proceeds such received to the respective trust accounts within three business day. Considering that the servicer may not be able to remit the proceeds to the respective trust accounts on time for some reasons, the credit enhancement level are assessed to mitigate such commingling risk caused by the delay of remittance of proceeds to the trust.

Set-off Risk
The set-off risk is remote as the originator is a leasing company without taking any deposits.

Prepayment Risk
The prepayment risk is remote as the prepayment rate of underlying receivables is low primarily due to the relatively high penalty to close out the receivables contract earlier than scheduled.

During the revolving period, the principal repayment from the receivables, no matter the scheduled ones or prepayments, will be used to purchase new receivables that generate interest collections. In order to avoid that too much idle funds in the trust (when there are less eligible receivables to acquire) brings in negative carry concern, 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 transaction documents. During the amortization period, the principal repayment from the receivables is distributed to pay down the rated liabilities on a sequential basis every month. Such high payment frequency could also diminish the negative carry risk.

The Reserve Of Margin Principal
When Chailease extends credits to obligors, they may be required to deposit margin amounts to Chailease as the further payment protection on the receivables. If the obligors comply with the receivable contracts and make all scheduled payments on time, Chailease has to return the margin principals to the obligors, together with interests as agreed between obligors and Chailease, when the receivables mature.

When receivables are transferred to the SPT, the respective margin principals will also be entrusted to the SPT. The trustee will then follow the transaction documents to put the margin principals into consecutive bank time deposits, so that the SPT can have sufficient deposit interest for the interest obligations on the aforementioned margin principals when receivables are fully repaid.

In addition, the transaction also sets aside some reserves to mitigate potential shortfalls if the deposit interest is insufficient to cover the agreed interest obligations on the margin principals. If there is still a shortfall in the agreed interest obligations after exhausting these reserves, the shortage can be covered by the interest waterfall ranked junior to the rated interests.

Counterparty Analysis
The counterparty risk in this transaction includes the reliance on the account bank, Land Bank of Taiwan, for cash holding and distribution, and the performance of eligible investments in which the trustee places unused cash. The current ratings of Land Bank of Taiwan, conditioned on the replacement arrangement upon the account bank's rating downgrade and the required rating levels for eligible investments, can support a 'twAAA (sf)' rated deal.

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.

Standard & Poor's 17g-7 Disclosure Report
SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security as defined in the Rule, to include a description of the representations, warranties and enforcement mechanisms available to investors and a description of how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. Taiwan Ratings Corp., as a rating affiliate of Standard & Poor's Ratings Services under its annual NRSRO filing, will also comply with the Rule for its rating analysis on all structured finance transactions.

The Standard & Poor's 17g-7 Disclosure Report included in this credit rating report is available at http://standardandpoorsdisclosure-17g7.com/1111203.pdf.

Related Criteria And Research

• Principles Of Credit Ratings, published on www.standardandpoors.com on Feb. 16, 2011
• Counterparty And Supporting Obligations Methodology And Assumption, published on www.standardandpoors.com on Dec. 6, 2010
  
• Media Release: Taiwan Ratings Corp. To Apply Identifier To Structured Finance Ratings From Aug. 23, 2010, published on www.taiwanratings.com/en on Aug. 23, 2010
  
• Taiwan Ratings' Ratings Definitions, published on www.taiwanratings.com/en on Aug. 6, 2010
  
• Understanding TRC Rating Definitions, published on www.taiwanratings.com/en on Aug. 6, 2010
  
• Methodology And Assumptions: Update To The Criteria For Rating European SME Securitizations, published on www.standardandpoors.com on Jan. 6, 2009
  
• Servicer Evaluation Criteria: Australia and New Zealand, published on www.standardandpoors.com on Aug. 7, 2008
  
• Equipment Leasing Criteria: Credit Risks Evaluated In Lease-Backed Securitizations, published on www.standardandpoors.com on Sept. 1, 2004