2011/11/30

Primary Credit Analyst	Andrea Lin; (886) 2 8722-5853 andrea_lin@taiwanratings.com.tw
Secondary Contact	Aaron Lei; (886) 2 8722-5852 aaron_lei@taiwanratings.com.tw

This presale report is based on information as of Nov. 16, 2011. The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings.

* The rating is preliminary and subject to change at any time. We expect to assign final credit rating on the closing date subject to a satisfactory review of the transaction documents and legal opinion.

Rationale
Taiwan Ratings Corp. today assigned its 'twA (sf)' preliminary rating to the Class A revolving credit facility (RCF) of Chimei Innolux AR-backed Syndication, for which Chinatrust Commercial Bank (twAA/Stable/twA-1+) acts in the capacity as agent bank and holds the collateralized assets for the benefit of Participating Syndication Banks. The RCF will be backed by a revolving portfolio of US dollar (USD) denominated trade receivables (receivables) originated by Chimei Innolux Corp. (CMI; twBBB/Stable/twA-3). The rating assigned to the Class A RCF reflects our opinion of:

• The credit quality of underlying receivables observed from the originator's historical performance data and Eligibility Criteria of Receivables stipulated in the transaction documents;
  
• The dynamically reset credit enhancements based on portfolio performance, which requires sufficient performing assets to support the payment obligations to the Class A RCF under the respective rating scenario;
  
• The cash reserve set aside at closing to mitigate servicer transition risk and asset-liability payment mismatch, to cover the shortfall of senior fee/expense, and interest payment of the Class A RCF, if any;
  
• The embedded amortization triggers that will accelerate the repayment of the Class A RCF outstanding balance if the performances of underlying receivables deteriorate to certain levels;
  
• The payment structure that provides timely interest payment every month and ultimate principal repayments to the Class A RCF by the legal final maturity date;
  
• The rating requirement on the agent bank and account bank in transaction documents; and
  
• The legal framework of the transaction and provisions under related Taiwan laws.

Strengths, Concerns, And Mitigating Factors
Strengths:

• The credit enhancement is adjusted every month during the reinvestment period to provide coverage for a stressed level of historical portfolio losses and dilutions, and meet the rated RCF's interests and transaction fees/expenses payments. If pool performance deteriorates, the credit enhancement will increase accordingly.
  
• The deal structure is arranged to cover the timely interest payment and ultimate repayment of principal on the RCF.
  
• The servicer and agent bank are experienced in managing receivables portfolio in similar transactions.
  
• The receivables pool backing the RCF will be partially insured through certain obligor-specific insurance agreements. This will benefit the transaction by extra cash flows from insurance proceeds, although we do not take any such insurance proceeds into account in our rating analysis due to the uncertainty on coverage and cash flow timeframe.

Concerns And Mitigating Factors:

• The transaction does not have a special purpose vehicle to hold the asset and issue the liabilities, or any other mechanisms that could ensure the bankruptcy remoteness nature of the asset holder. Instead, the agent bank will hold the assets on behalf of the Participating Syndication Banks (the investors). As a result, Taiwan Ratings believes that if the agent bank fails, the collateralized assets in this transaction could be deemed to be the bankruptcy estate of the bank or subject to the stay. We therefore will weak link our ratings on Class A to the creditworthiness of the agent bank.
  
• The portfolio may be exposed to concentration over certain receivables obligors, raising its vulnerability to the event risk. To address the risk of certain obligors' default effecting large reduction in cash flows to the transaction, a loss reserve floor is incorporated into the decision of reset credit enhancements to cover certain number of obligors default. The transaction also set exposures limits for obligors based on their creditworthiness.
  
• The dynamic credit enhancement is mainly provided via overcollateralization of receivables, and there could be liquidity risk arising due to the potential mismatch of the receivables collection and the RCF interest payments, as there are no committed liquidity lines in this transaction. To mitigate this risk, a cash reserve was funded at closing and thereafter topped up according to the relevant priority of payment. This reserve covers 3-month of the senior fees/expenses payments and interests on the Class A RCF.
  
• The credit quality of the underlying receivables may be adversely affected by new receivables transferred from the seller during the reinvestment 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 RCF subsequently.
  
• The receivable collections will go into the seller/servicer's account before being remitted to agent bank's collection and distribution accounts. If the seller/servicer is insolvent, the money in the servicer account could be subject to stay, and the agent bank may experience a delay in receiving the collections due to the commingling. We believe this risk is largely mitigated by the escrow account nature of the servicer's account and the daily sweep mechanism of the collection proceeds into agent bank's accounts. In addition, the transaction has a direct remittance mechanism that require all receivable collections to go into agent bank's accounts directly upon the occurrence of seller/servicer's downgrade from the current rating level at 'twBBB', which in our viewpoint will help prevent commingling due to the failure of the servicer.

Transaction Structure
This is an asset-backed transaction collateralized by trade receivables that CMI has originated. At closing, CMI will enter into a non-recourse Factoring Agreement with a few syndication banks and transfer the assets, composed of trade receivables along with their related legal rights as of the cut-off date, to the agent bank. The agent bank will fund the eligible receivables through the receivables-backed revolving credit facility (RCF) from the Participating Syndication Banks.

The RCF includes a Class A facility line of USD[1.5 billion] due Jan. 2017, and a Class B facility line of USD[300 million] due Jan. 2013 but renewable every year. Taiwan Ratings is assigning a rating on Class A to address the likelihood of timely interest payment and ultimate principal repayment.

The structure incorporates an initial reinvestment period of four years and three months after closing. During this period, collections from receivables and any new draw-down from the RCF (if any) will be used to buy new eligible receivables generated by the seller. The receivable collections may also be used to repay the outstanding principal of the Class A during the reinvestment period, but only in the circumstances where there are not sufficient new receivables for reinvestment or the Class A needs to be partially paid down to maintain the overcollateralization levels.

Upon the occurrence of any stop-reinvestment triggers (early amortization triggers) or after the scheduled end of the reinvestment period (whichever happens earlier), an amortization period will follow and collections of underlying receivables will be used to pay down the Class A principal according to the relevant priority of payment.

All payments on the RCF are limited to the cash flows from the underlying receivables, and not recourse to either the seller or the agent bank. The agent bank, on behalf of the Participating Syndication Banks, will possess the ownership of the underlying receivables and reinvest or allocate the receivables collections every month as per the transaction documents.

The structure of the transaction is shown in the chart below.

The Originator/Seller/Servicer

CMI, the originator, seller, and servicer in this transaction, was established in 2003. CMI is a result of the merger of Innolux Display, Chi Mei Optoelectronics Corp. (CMO), and TPO Displays Corp. in March 2010. The company is currently the Taiwan's largest and the world's third-largest thin film transistor-liquid crystal display (TFT-LCD) panel maker in terms of revenue share.

As the servicer in this transaction, CMI is responsible for the day-to-day administration and ongoing servicing of the trade receivables and for producing all reports and calculations in connection with the performance of the receivables.

No Special Purpose Vehicle
The transaction does not have a special purpose vehicle to hold the asset and issue the liabilities. Instead, Chinatrust Commercial Bank acting in the capacity as agent bank for Chimei Innolux AR-backed Syndication will hold the assets on behalf of the Participating Syndication Banks (the investors) and make principal and interest payments on the Class A RCF. The agent bank itself is not bankruptcy remote and there is no other mechanism in the transaction to ensure the bankruptcy remoteness of the asset holder. The agent bank has no obligations to pay on the RCF with its own assets, and the RCF will fully rely on the cash flows from collateralized receivables for the interest and principal payments.

Eligible Receivables
Receivables must meet the Eligible Criteria of Receivables, which includes certain restrictions to the origination country, obligors, products, and receivables attributes and performance, to be considered for the borrowing base. They could be denominated in USD, NTD, EUR, or JPY, but only USD receivables will be considered eligible assets for Class A RCF funding. The maximum contractual payment term of any receivable may not exceed [6] months and, in particular, the weighted average payment terms must be no more than 90 days.

Based on historical receivables performance data, a receivable that is over 121 days past due is deemed defaulted by Taiwan Ratings, but the transaction has set more stringent Eligible Criteria of Receivables to exclude any receivables that are over 60-day past due from the funding base.

All underlying receivables transferred to the agent bank must comply with the Eligibility Criteria of Receivables. 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 agent bank.

Reinvestment Of Receivables
The initial proceeds of RCF issuance will be applied to purchase eligible receivables from the seller. Once collections from those receivables are received, the agent bank will reinvest the amounts in new eligible receivables generated by the seller on each of the three settlement days in a month during the reinvestment period. For the interim settlements (twice every month), the full amount of collection proceeds, after satisfying senior expenses and reserve top-up, will be applied for reinvestment. On the monthly settlement day the reinvestment amount will be further subject to the reset dynamic credit enhancement levels. In the circumstance where credit enhancement levels rise from the previous month, partial receivables collection proceeds may be used to pay down the principal of RCF to maintain the overcollateralization levels consistent with the rating scenario.

Terms And Conditions Of The RCF
Interest Payment On The RCF
The rated RCF will carry floating-rate interest payable every month in arrears, which is based on "3-month USD LIBOR" with a floor. The payment for RCF interests mainly comes from asset collections. As trade receivables are not interest-generating assets, a carrying cost reserve is sized every month to cover the transaction's related tax items, senior fees and expenses, as well as Class A interests throughout an assumed asset amortization period.

The transaction arrangement allows the interest rate on the RCF to be raised beyond the stated coupons rate if agreed by the Seller and the Participating Syndication Banks, upon significant market volatility. This additional interest obligation however ranks junior in the payment waterfall and failure to meet this will not constitute a default of the RCF. Our rating does not address any step-up margin on the Class A RCF arising under such a circumstance.

Principal Payment On The RCF
During the reinvestment period, the Class A RCF can be repaid or redrawn within the limit of USD[1.5 billion] by the necessary amount for receivables funding, as long as there are sufficient performing receivables to support the funding after considering rating-stressed monetary loss. Following the end of the reinvestment period, the principal of the Class A will start being paid down from the then-current outstanding balance by gradual receivables collections. The legal final maturity for complete principal repayment in this transaction is five years after the deal closing.

Credit And Cash Flow Analysis
Credit Risk Analysis
Taiwan Ratings applied Standard & Poor's trade receivable criteria in analyzing the credit risk of this transaction. Under this approach, the credit support required is the higher of the dynamic credit support calculation and the reserve floor, plus an additional carrying cost reserve. The dynamic credit support, which decides the credit enhancement level, is the aggregate of three reserves -- a loss reserve, a dilution reserve, and a carrying cost reserve.

• Loss Reserve
  The required protection against reductions in receivables as a result of credit losses is represented by the loss reserve percentage. The loss reserve percentage is calculated on a dynamic and monthly basis.
  
  A loss ratio measures the defaulted receivables as a percentage of sales at the time the defaulted receivable (121-150 day in arrears as deemed default bucket) was generated. Then this sales-based loss ratio is stressed by a rating multiple for a 'twA' rating scenario, which is 'two' in our analysis. The resulting figure is then multiplied by a loss horizon ratio that equals the cumulative amount of receivables generated in the loss horizon divided by the current month's net eligible receivables balance.
  
  The transaction also sets delinquency and loss ratio triggers at 6.36% and 1.96% for asset performance alert respectively, either of which if breached will stop the reinvestment of new receivables.
  
  
• Dilution Reserve
  The required protection against reductions in receivables as a result of noncredit losses, otherwise known as dilution, is referred to as the required dilution reserve. Dilution could arise due to the return of products, cash discount, volume rebates, advertising allowance, or disputes over price or quality, short shipments, or billing errors.
  
  The foundation of the dilution reserve is a ratio that measures average dilution as a percentage of sales over the previous 12-month period. This sales-based dilution ratio is then stressed by a rating multiple for a 'twA' rating scenario, which is 'two' in our analysis, and modified for volatility. The resulting number is then multiplied by a dilution horizon ratio that equals the cumulative amount of receivables generated in the dilution horizon divided by current month's net eligible receivables balance.
  
  The transaction also sets a dilution ratio trigger at 7.60% for asset performance alert, which if breached will stop the reinvestment of new receivables.
  
  
• Reserve Floor
  The loss and dilution reserves will be subject to a reserve floor, which is meant to address obligor (group) concentration and event risk that may not be well captured by dynamic loss and dilution reserve calculation.
  
  For the credit loss coverage part of the reserve floor, with the exception of the receivables from the two largest obligors (groups) rated 'A-'/'twAA+' or above, the loss reserve floor should be sufficient to withstand the complete loss of a certain number of obligors of various rating levels.
  
  The transaction has set a maximum concentration limit for the two largest obligors (groups) rated 'A-'/'twAA+' or above at 20% for each. Default risk in these two obligors has been taken into account in our rating analysis via the weak-link approach. The stipulated concentration limits and the reserve floor coverage requirement applied to other obligors (groups) are listed below.
  
  

  Stipulated Concentration Limit & Reserve Floor Coverage Requirement
  Receivables Obligors' Rating	Concentration Limit (%)	Number Of Obligors (Groups) to be covered in the Reserve Floor Calculation
  'BBB+' to 'BBB' or above issuer credit rating under Standard & Poor's Ratings Services / 'twAA' to 'twAA-' or above issuer credit rating under Taiwan Ratings Corp.	15	1
  'BBB-' to 'BB+ issuer credit rating under Standard & Poor's Ratings Services / 'twA+' to 'twA- issuer credit rating under Taiwan Ratings Corp.	7.5	2
  'BB' to 'B+' issuer credit rating under Standard & Poor's Ratings Services / 'twBBB+' to 'twBBB-' issuer credit rating under Taiwan Ratings Corp.	5	3
  'B' or lower issuer credit rating under Standard & Poor's Ratings Services / 'twBB+' or lower issuer credit rating under Taiwan Ratings Corp. / Unrated	The largest 7 obligors: 3	5
  	Others: 1.5

  
  
  
• Carrying Cost Reserve
  The carrying cost reserve is composed of yield reserve and transaction fee reserve. It is sized to cover interest on the Class A RCF, as well as the transaction's tax items, senior fees/expenses over a period equal to two times the day's sales outstanding (the assumed amortization period for a static pool of trade receivables). The carrying cost reserve also takes into account the index rate reset risk and foreign exchange rate volatility as US dollar receivable collections are used to pay Taiwan Dollar senior fees/expenses.
  
  A part of the carrying cost reserve is in the form of cash collateral (the cash reserve) to provide immediate liquidity support upon servicer transition or to mitigate asset and liability payment mismatch risk for a three-month period.

Cash Flow Analysis
The transaction's dynamic reserve setting mechanism requires sufficient performing assets to support the payment obligations to the Class A RCF, after possible dilution, loss, and carrying costs are taken into account. Based on our analysis, we believe the transaction's payment structure is strong enough to ensure timely rated interest payment every month and ultimate principal repayments to the Class A RCF by the legal final maturity date, under the 'twA' rating scenario.

Operational And Structural Risks Analysis
Servicer Evaluation
The seller of the transaction also acts as the servicer of this transaction. Taiwan Ratings has conducted a servicer review on CMI for receivables origination and collections, administration policies, record keeping, arrear management, as well as systems support. Based on the review and CMI's performance in past transactions, we believe the company could support the receivable management as a servicer under the proposed rating level.

Servicer Transition Risk
The transaction may be exposed to operational risk upon the failure of CMI in acting as the transaction's servicer. To mitigate the risk, the transaction has a back-up servicer, Chinatrust Commercial Bank (twAA/ Stable/ twA-1+) to immediately take over the servicer role once servicer termination is triggered. The transaction also has a cash reserve in place to mitigate the liquidity risk upon a servicer transition event.

Complicated Operation
The transaction involves a complicated operation to dynamically reset the credit enhancement level for the RCF. Our final rating on the Class A RCF will be subject to our satisfactory review on the dynamic reserve operation.

Liquidity Risk
There may be a mismatch on the asset collection and the payment obligations on the Class A RCF as the underlying receivables have a weighted average payment term of 90 days while the interest payment frequency on the rated RCF is monthly. Such liquidity risk can be mitigated by the aforementioned cash reserve (the carrying cost reserve held in cash), which will be sized to cover the transaction's senior fees/expenses and Class A interest payments for three months. The cash reserve will be set aside at closing and, if falling under the required amount, will be topped up through waterfall on each settlement day.

Interest Rate Risk
The Class A RCF carries a floating interest rate, which will be reset every month along with movement of the index rate. To mitigate the risk that the floating rate of Class A interest will increase over the course of the assumed amortization period, a yield reserve, sized by stressing the index rate and the period that receivables remains outstanding, is consolidated into the dynamic reserves.

Currency Risk
The underlying USD-denominated receivables will support the interest and principal payment of the USD-denominated RCF as well as the transaction's expenses and fees payments in Taiwan dollars. To mitigate the currency risk resulting from Taiwan dollar appreciation and the increased payment amount in USD to support the transaction's senior fees and expenses, the transaction fee reserve will be sized by stressing the foreign exchange rate during the assumed amortization period.

Commingling Risk
After closing, if CMI is rated 'twBBB' or above, all receivable payments will go into the servicer account in the name of CMI. Money in the servicer account will be swept to the collection and distribution accounts in the name of the agent bank every day. The transaction therefore has an intra-day commingling risk under the severest circumstances.

Such risk however can be largely offset by the escrow account nature of the servicer account, which ensures cash in the collection accounts is for restricted debt payment purpose only and CMI can not have access to it.

In addition, the transaction has a servicer downgrade direct-pay mechanism, which requires all obligors' payment proceeds made directly to the agent bank's (back-up servicer) accounts if CMI's rating is lower than 'twBBB'. This mechanism, in our viewpoint, will help prevent commingling due to the failure of the servicer.

Account Payable Set-off Risk
Some of the receivables obligors are also suppliers to CMI. This leads to opportunities for offsetting trade payables against trade receivables. Through arrangements of set-off waiver in sale contracts or in separate agreements, as well as the legal right constraints in certain jurisdictions that the transaction counsel opined, some of this set-off risk is addressed directly. For the remaining set-off risk from account payables, an account payable reserve is netted off against the eligible receivables pool. The reserve is monthly sized based on historical data to quantify the magnitude of potential set-off against underlying receivables. For any set-off incurred during transaction life, it will not adversely affect the cash flow from the eligible funding base. In other words, such set-off risk will be born by the seller within the amount of account payable reserve.

Dilution risk
Dilution routinely arises in companies and may be attributable to product returns or reduced pricing or claims under warranties. Evidenced by historical data, dilution risk is much higher than credit risk in this transaction. To mitigate the dilution risk, a dilution reserve will be dynamically sized every month and added to the dynamic reserve during the reinvestment period to cover potential dilution that will result in reduction in the receivable balance. The dilution risk can also be mitigated by the seller portion of the receivable pool, although in our rating analysis we do not take such extra protection into account.

Prepayment Risk
During the reinvestment period, receivables collections, no matter the scheduled ones or prepayments, will be used to purchase new eligible receivables originated by the seller. If underinvestment occurs due to insufficient new receivables, the collection proceeds will be used to pay down the outstanding principal of the rated RCF on the monthly payment date.

During the amortization period, all repayment of the receivables will be distributed every month to pay down the RCF principal. Taiwan Ratings believes that the negative carry risk in this transaction is very low, due to the embedded high payment rates of trade receivables assets, the high payment frequency of the RCF in this transaction, and the dynamic sizing of carrying costs.

Sovereign Risk
Foreign obligors' payment capability could be negatively affected by foreign exchange controls employed by respective countries. This risk is mitigated through eligibility criteria in respect of eligible countries and the loss reserve floor.

Counterparty Analysis
The counterparty risk in this transaction includes the reliance on the account banks for cash holding and distribution, and on the agent bank for its legal ownership on the underlying receivables. The current ratings of the account banks and the agent bank can support a 'twA (sf)' rated deal under the weak-link approach.

Legal And Tax Analysis
The Asset Holder Is Not Bankruptcy Remote
The agent bank will hold the assets on behalf of the Participating Syndication Banks. If the agent bank fails, the collateralized assets in this transaction could be deemed to be the bankruptcy estate of the bank or subject to stay. With these concerns and as the agent bank is not a bankruptcy-remote entity, our rating on the Class A RCF will be weak-linked to the creditworthiness of the agent bank.

This is not a securitization transaction subject to FASL
The transaction is not structured in accordance with the Financial Asset Securitization Law of Taiwan (FASL). Nevertheless, it still possesses securitization features given its asset transfer and purely asset-backed structure, and we believe it is appropriate to apply the trade receivables securitization rating criteria to this transaction.

Legal and Tax Opinions
Transaction legal counsel will request qualified law firms in each jurisdiction where the obligors of receivables are domiciled to issue legal opinions under each jurisdiction. Then, based upon those legal opinions and other typically required documents, the transaction legal counsel will issue its closing legal opinion.

Taiwan Ratings will assign a final rating to the transaction after a satisfactory review of relevant legal and tax opinions on a variety of matters, including the asset transfer perfection.

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/1111305.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
• General Criteria: Methodology: Credit Stability Criteria, published on www.standardandpoors.com on May 3, 2010
• Servicer Evaluation Criteria: Australia and New Zealand, published on www.standardandpoors.com on Aug. 7, 2008
• Trade Receivable Criteria: The Rating Process For Trade Receivables, published on www.standardandpoors.com on Sept. 1, 2004
• Trade Receivable Criteria: Evaluating Trade Receivable Credit-Related Risks, published on www.standardandpoors.com on Sept. 1, 2004
• Trade Receivable Criteria: Measuring Performance: The Sales-Based Approach For Trade Receivables, published on www.standardandpoors.com on Sept. 1, 2004
• Trade Receivable Criteria: Calculating Credit Enhancement For Trade Receivables, published on www.standardandpoors.com on Sept. 1, 2004
• Trade Receivable Criteria: Structural Considerations For Trade Receivables, published on www.standardandpoors.com on Sept. 1, 2004
  

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